<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 23, 1999
REGISTRATION NO. 333-70717
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 6
TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
---------------------
USINTERNETWORKING, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7379 52-2078325
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
ONE USI PLAZA
ANNAPOLIS, MARYLAND 21401-7478
(410) 897-4400
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------
WILLIAM T. PRICE, ESQ.
VICE PRESIDENT, SECRETARY AND GENERAL COUNSEL
ONE USI PLAZA
ANNAPOLIS, MARYLAND 21401-7478
(410) 897-4400
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
JAMES F. ROGERS, ESQ. WILLIAM B. GANNETT, ESQ.
LATHAM & WATKINS CAHILL GORDON & REINDEL
1001 PENNSYLVANIA AVENUE, N.W., SUITE 1300 80 PINE STREET
WASHINGTON, DC 20004 NEW YORK, NY 10005-1702
(202) 637-2200 (212) 701-3000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of the Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /____
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /____
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /____
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 23, 1999
5,000,000 Shares
[LOGO]
USINTERNETWORKING, INC.
Common Stock
-----------
Prior to this offering, there has been no public market for our common
stock. The initial public offering price is expected to be between $11.00 and
$13.00 per share. Our common stock has been approved for quotation on the Nasdaq
National Market under the symbol "USIX."
The underwriters have an option to purchase a maximum of 750,000 additional
shares to cover over-allotments of shares.
Investing in our common stock involves risk. See "Risk Factors" beginning on
page 4.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds
Public Commissions to USI
----------------- ----------------- -----------------
<S> <C> <C> <C>
Per Share............................................. $ $ $
Total................................................. $ $ $
</TABLE>
Neither the Securities and Exchange Commission nor any other state
securities commission has approved or disapproved these securities or determined
if this prospectus is truthful or complete. Any representation to the contrary
is a criminal offense.
Credit Suisse First Boston
Bear, Stearns & Co. Inc.
BT Alex. Brown
Legg Mason Wood Walker
Incorporated
Prospectus dated , 1999
<PAGE>
The inside front cover contains the text:
"At last, running enterprise applications doesn't require you to run
anything but your business."
Lower right hand corner contains the USI logo.
Description of Cover Graphics Inside 2 Page Front Cover Fold-Out
Text across the top of both pages:
"USInternetworking offers all the functionality of leading business
applications for a fixed monthly fee"
Upper right hand corner contains a picture of systems operators and EDC
consoles.
Left page of the front cover fold out contains the following text and logos:
"A Compelling Value Proposition/USI provides leading applications. . .
- Enterprise Relationship Management -- [Seibel logo]
- Human Resources Financial Management -- [PeopleSoft logo]
- Electronic Commerce -- [Broadvision logo]
- Enterprise Intelligence -- [Sagent logo]"
Lower right hand corner contains a picture of a console operator
Right page of the front cover fold out contains a graphic of the Northern
Hemisphere depicting the connectivity of USI's far EDCs followed by the text:
". . . delivered over a dedicated global network . . .
-- Reduced technology and integration risks
-- Faster implementation
-- Enhanced network response time, reliability, and security
. . . enabling our customers to focus more resources on their customers,
instead of their systems."
Lower right hand corner contains the USI logo.
<PAGE>
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PROSPECTUS SUMMARY........................... 2
RISK FACTORS................................. 4
USE OF PROCEEDS.............................. 13
DIVIDEND POLICY.............................. 13
CAPITALIZATION............................... 14
DILUTION..................................... 15
SELECTED HISTORICAL CONSOLIDATED FINANCIAL
DATA....................................... 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................. 18
BUSINESS..................................... 24
MANAGEMENT................................... 36
<CAPTION>
PAGE
---------
<S> <C>
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS............................... 47
PRINCIPAL STOCKHOLDERS....................... 51
DESCRIPTION OF CAPITAL STOCK................. 54
SHARES ELIGIBLE FOR FUTURE SALE.............. 56
UNDERWRITING................................. 58
NOTICE TO CANADIAN RESIDENTS................. 59
LEGAL MATTERS................................ 60
EXPERTS...................................... 60
WHERE YOU CAN FIND MORE INFORMATION.......... 61
INDEX TO FINANCIAL STATEMENTS................ F-1
</TABLE>
--------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY BE USED ONLY WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY BE ACCURATE ONLY
ON THE DATE OF THIS DOCUMENT.
Delivery of the shares of common stock will be made on or about ,
1999 against payment in immediately available funds.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 1999 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
We have applied for federal registration of the marks "USINTERNETWORKING,"
"USI," "Internet Managed Application Provider," "IMAP" and "USIView." This
prospectus also includes trademarks, service marks and trade names of other
companies.
This prospectus contains forward-looking statements and information relating
to us, our industry and the U.S. and international Internet and systems
integration businesses. These forward-looking statements are based on the
beliefs of our management, as well as assumptions made by and information
currently available to our management. When used in this prospectus, the words
"estimate," "project," "believe," "anticipate," "intend," "expect" and similar
expressions are intended to identify forward-looking statements. These
statements reflect our current views with respect to future events and are
subject to risks and uncertainties that could cause our actual results to differ
materially from those contemplated in our forward-looking statements. We caution
you not to place undue reliance on these forward-looking statements, which speak
only as of the date of this prospectus. We do not undertake any obligation to
publicly release any revisions to these forward-looking statements to reflect
events or circumstances after the date of this prospectus or to reflect the
occurrence of unanticipated events.
1
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT MAY BE IMPORTANT TO
YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING THE FINANCIAL DATA AND
RELATED NOTES, BEFORE MAKING AN INVESTMENT DECISION. UNLESS OTHERWISE INDICATED,
ALL INFORMATION IN THIS PROSPECTUS (1) ASSUMES NO EXERCISE OF THE OVER-ALLOTMENT
OPTION TO PURCHASE ADDITIONAL SHARES OF COMMON STOCK GRANTED TO THE UNDERWRITERS
AND (2) REFLECTS A 1 FOR 8 STOCK SPLIT WHICH WILL BECOME EFFECTIVE PRIOR TO THE
CONSUMMATION OF THIS OFFERING.
ABOUT USINTERNETWORKING
USI implements, operates, and supports packaged software applications that
can be accessed and used over the Internet. These IMAP, or Internet Managed
Application Provider, services are based on packaged applications from leading
software vendors and are designed to meet the needs of middle market companies
for business functions such as sales force automation, customer support,
e-commerce, and human resource and financial management. We implement these
applications in our data centers, configure them to meet the needs of our
clients, and package them with security, Internet access, back-up and
operational support. Our clients purchase these products as services, paying us
on a monthly basis as the services are delivered. USI also allows clients to
host their own software applications in our highly reliable and secure data
centers.
The advantages our clients realize by purchasing our IMAP services rather
than purchasing the application software directly and implementing it themselves
include:
- FASTER TIME TO BENEFIT. Because we have pre-configured our products and
operate them in an established environment, we can reduce implementation
time significantly.
- REDUCED TECHNICAL AND INTEGRATION RISK. A single vendor, USI, takes full
responsibility for delivering the service, including ongoing upgrades.
- REDUCED RELIANCE ON INTERNAL INFORMATION TECHNOLOGY PROFESSIONAL
RESOURCES. USI employees implement and operate our applications and
provide client support twenty-four hours a day, seven days a week.
- LOWER COSTS. USI offers its services at a lower cost than its clients
would otherwise bear to implement these applications on a traditional
basis, and we also reduce our clients' up-front investment.
We implement and manage applications for our clients that are developed by
others. To execute this strategy, we have established agreements with leading
software vendors in key application areas, including:
- Siebel in sales force automation, customer service and enterprise
marketing;
- PeopleSoft in human resources and financials;
- Sagent in decision-making support; and
- BroadVision in e-commerce.
These agreements provide USI with an initial software portfolio that can
meet a broad range of clients' enterprise resource planning, e-commerce and
communication needs. Some of these agreements also provide USI with an
advantageous market position. For example, USI is the exclusive outsource
provider of Siebel application hosting and rental services for direct customers
of Siebel headquartered in North America.
To deliver its services, USI has built a network of four Enterprise Data
Centers located in Annapolis, Silicon Valley, Amsterdam and Tokyo. Our
specialized network incorporates a high level of redundancy, bypasses Internet
congestion points, and enables real time back-up of client sites across
dispersed geographies. As a result, we believe our clients benefit from superior
response time, reliability
and security.
USI introduced its IMAP services in late 1998. Accordingly, most of our
revenue to date has come from traditional information technology services
provided by IIT and ACR, two companies we acquired to support our implementation
capabilities. We have generated less than $1 million of IMAP revenues as of
March 22, 1999. Because we sell a service and not the underlying technology, our
IMAP clients sign contracts that provide for fixed monthly payments. By March
22, 1999 we had signed contracts with 17 clients for our IMAP services and the
total expected revenue from our current IMAP contracts exceeds $16 million,
which we expect to recognize over the next one to five years.
Once an IMAP contract is signed, we invest in the hardware, software and
implementation needed to deliver client service. This will require a substantial
investment in the early years to build our client base. We expect to benefit
from rapidly growing recurring revenue, which we believe will generate
substantial positive cash flow in later years.
2
<PAGE>
THE OFFERING
The calculation of the shares of common stock outstanding after the offering
in the table below is based on the number of shares outstanding on December 31,
1998. The calculation does not include:
- 4,682,250 shares reserved for issuance under our stock option plan, of
which:
-- 1,682,250 were subject to outstanding options on December 31, 1998
-- 424,063 were subject to outstanding options granted on March 22, 1999
-- 1,320,556 will be subject to options we have granted contingent on
this offering
- 1,482,648 shares issuable upon the exercise of warrants outstanding on
December 31, 1998
<TABLE>
<S> <C>
Common stock offered by USI.................. 5,000,000 shares
Common stock to be outstanding after this
offering.................................... 37,868,276 shares
Over-allotment option........................ 750,000 shares
Use of proceeds.............................. The continued expansion and enhancement of
our network and facilities, the addition of
services to our IMAP offerings, payment of
preferred stock dividends, working capital
and other general corporate purposes.
Proposed Nasdaq National Market Symbol....... "USIX"
</TABLE>
SUMMARY PRO FORMA AND HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table summarizes the pro forma unaudited consolidated
statement of operations data giving effect to the acquisition of ACR and IIT as
if they occurred as of January 1, 1998. The table does not include historical
financial data of our predecessor IIT, which can be found in Selected Historical
Consolidated Financial Data.
<TABLE>
<CAPTION>
PRO FORMA FOR THE
YEAR ENDED
DECEMBER 31, 1998
-----------------
(in thousands)
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenues....................................................................................... $ 13,938
Operating expenses............................................................................. 47,482
Net loss....................................................................................... (35,898)
</TABLE>
The following table summarizes consolidated balance sheet data as of
December 31, 1998 and as adjusted to give effect to the conversion of our
preferred stock into common stock and the receipt of $54.9 million in net
proceeds from this offering.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
----------------------------
ACTUAL AS ADJUSTED
---------- ----------------
(in thousands)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................................... $ 43,802 $ 97,199
Working capital..................................................................... 22,551 75,948
Total assets........................................................................ 106,516 159,913
Short-term obligations expected to be refinanced.................................... 5,282 5,282
Long-term debt and capital lease obligations, excluding current portion............. 8,659 8,659
Series B Convertible Redeemable Preferred Stock..................................... 62,242 --
Common stock subject to repurchase.................................................. 4,145 --
Stockholders' (deficit) equity...................................................... (2,467) 118,821
</TABLE>
USI was incorporated in Delaware in January 1998. In this prospectus, we
will refer to USINTERNETWORKING, Inc. and its subsidiaries, collectively, as
"USI," "we" and "us." Our principal executive offices are located at One USI
Plaza, Annapolis, Maryland 21401-7478. Our telephone number is (410) 897-4400.
Our web site is located at www.usi.net. The information on our web site is not
part of this prospectus.
3
<PAGE>
RISK FACTORS
INVESTING IN OUR COMMON STOCK INVOLVES RISK. YOU SHOULD CAREFULLY CONSIDER
THE RISKS AND UNCERTAINTIES DESCRIBED BELOW BEFORE MAKING AN INVESTMENT
DECISION. THESE RISKS AND UNCERTAINTIES ARE NOT THE ONLY ONES FACING USI OR
WHICH MAY ADVERSELY AFFECT OUR BUSINESS. IF ANY OF THE FOLLOWING RISKS OR
UNCERTAINTIES ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF
OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED. IN THIS EVENT, THE TRADING
PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU COULD LOSE ALL OR PART OF YOUR
INVESTMENT. THIS PROSPECTUS ALSO CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER FROM THOSE
DESCRIBED IN THE FORWARD-LOOKING STATEMENTS. THIS COULD OCCUR BECAUSE OF THE
RISKS DESCRIBED BELOW AND ELSEWHERE IN THIS PROSPECTUS.
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE HAVE A LIMITED OPERATING
HISTORY.
We began operating in January 1998. Our limited operating history makes
predicting future results difficult. Since our inception, we have focused on
developing our business and only since September 1998 have we begun to contract
with customers for our IMAP offerings. Revenues to date for our IMAP offerings
have not been material. Because of our limited operating history and the
emerging nature of our markets, our historical financial information is of
limited value in projecting our future results. Therefore, it is difficult to
evaluate our business and prospects.
OUR HISTORICAL REVENUES WERE DERIVED PRIMARILY FROM SERVICES THAT WE DO NOT
EXPECT TO BE THE FOCUS OF
OUR BUSINESS IN THE FUTURE.
Because our IMAP offerings are at an early stage, we currently derive the
overwhelming majority of our revenue primarily from professional services
provided by IIT and ACR. These businesses were acquired on September 1998 and
October 1998, respectively, and their services are substantively different than
our IMAP offerings. As a result, historical financial information of IIT and ACR
does not reflect the results we expect from our core business offering in the
future.
WE EXPECT TO CONTINUE TO INCUR LOSSES AND EXPERIENCE NEGATIVE CASH FLOW.
We expect to have significant operating losses and to record significant net
cash outflow before financing in the near term. Our business has not generated
sufficient cash flow to fund our operations without resorting to external
sources of capital. Starting up our company and building our network required
substantial capital and other expenditures. As a result, we reported an
operating loss before interest of approximately $30.9 million for the period
from our date of inception through December 31, 1998, and net cash outflow
before financing of approximately $58.3 million for the same period. Further
developing our business and expanding our network will require significant
additional capital and other expenditures.
WE MAY NEED ADDITIONAL CAPITAL TO FUND OUR OPERATIONS AND FINANCE OUR GROWTH,
AND WE MAY NOT BE ABLE TO OBTAIN IT ON TERMS ACCEPTABLE TO US OR AT ALL.
We believe that the estimated net proceeds from this offering, together with
our existing assets, anticipated debt and capital lease financing and expected
revenue growth will be sufficient to fund our operations for at least the next
two years. However, if we expand more rapidly than currently anticipated, if our
working capital needs exceed our current expectations or if we make
acquisitions, we will need to raise additional capital from equity or debt
sources. If we cannot obtain financing on terms acceptable to us or at all, we
may be forced to curtail our planned business expansion and may be unable to
fund our ongoing operations.
4
<PAGE>
OUR SUCCESS DEPENDS ON THE ACCEPTANCE AND INCREASED USE OF INTERNET-BASED
BUSINESS SOFTWARE SOLUTIONS, AND WE CANNOT BE SURE THAT THIS WILL HAPPEN.
Our business model depends on the adoption of Internet-based business
software solutions by commercial users. Our business could suffer dramatically
if Internet-based solutions are not accepted or not perceived to be effective.
The market for Internet services, private network management solutions and
widely distributed Internet-enabled packaged application software has only
recently begun to develop. It is now evolving rapidly.
The growth of Internet-based business software solutions could also be
limited by:
- Concerns over transaction security and user privacy.
- Inadequate network infrastructure for the entire Internet.
- Inconsistent performance of the Internet.
We cannot be certain that this market will become viable or, if it becomes
viable, that it will grow.
THE GROWTH IN DEMAND FOR OUTSOURCED BUSINESS SOFTWARE APPLICATIONS BY MIDDLE
MARKET COMPANIES IS HIGHLY UNCERTAIN.
Growth in demand for and acceptance of outsourced business software
applications, including our IMAP offerings, by middle market companies is highly
uncertain. We believe that many of our potential customers are not fully aware
of the benefits of outsourced solutions. It is possible that these solutions may
never achieve market acceptance. If the market for our products does not grow or
grows more slowly than we currently anticipate, our business, financial
condition and operating results would be materially adversely affected.
OUR BUSINESS STRATEGY MAY NOT EFFECTIVELY ADDRESS OUR MARKET AND WE MAY NEVER
REALIZE A RETURN ON THE RESOURCES WE HAVE INVESTED TO EXECUTE OUR STRATEGY.
We have made substantial investments to pursue our strategy. These
investments include:
- Building a global network of data centers.
- Allying with particular software providers.
- Investing to develop unique product features.
- Developing implementation resources around specific applications.
These investments may not be successful. More cost effective strategies may
be available to compete in this market. We may have chosen to focus on the wrong
application areas or to work with the wrong partners. Potential customers may
not value the specific product features in which we have invested. There is no
assurance that our strategy will prove successful.
OTHERS MAY SEIZE THE MARKET OPPORTUNITY WE HAVE IDENTIFIED BECAUSE WE MAY NOT
EFFECTIVELY EXECUTE OUR STRATEGY.
If we fail to execute our strategy in a timely or effective manner, our
competitors may be able to seize the marketing opportunities we have identified.
Our business strategy is complex and requires that we successfully and
simultaneously complete many tasks. In order to be successful, we will need to:
- Build and operate a highly-reliable, complex global network.
- Negotiate effective partnerships and develop economically attractive
products.
- Attract and retain IMAP customers.
5
<PAGE>
- Attract and retain highly-skilled employees.
- Integrate acquired companies into our operations.
- Evolve our business to gain advantages in an increasingly competitive
environment.
- Expand our international operations.
In addition, our management team has worked together for less than one year.
There can be no assurance that we will be able to successfully execute all
elements of our strategy.
WE PLAN TO EXPAND VERY RAPIDLY AND MANAGING OUR GROWTH MAY BE DIFFICULT.
We have rapidly expanded our operations since USI was founded in January
1998. We expect our business to continue to grow both geographically and in
terms of the number of products and services we offer. We cannot be sure that we
will successfully manage our growth. In order to successfully manage our growth
we must:
- Enlarge our network and infrastructure.
- Improve our management, financial and information systems and controls.
- Expand, train and manage our employee base effectively.
There will be additional demands on our customer service support and sales,
marketing and administrative resources as we increase our service offerings and
expand our target markets. The strains imposed by these demands are magnified by
the start-up nature of our operations. If we cannot manage our growth
effectively, our business, financial condition or results of operations could be
adversely affected.
OUR GROWTH COULD BE LIMITED IF WE ARE UNABLE TO ATTRACT AND RETAIN QUALIFIED
PERSONNEL.
We believe that our short- and long-term success depends largely on our
ability to attract and retain highly skilled technical, managerial and marketing
personnel. We particularly require additional management personnel in the areas
of application integration and technical support. Individuals with information
technology skills are in short supply and competition for application
integration personnel is particularly intense. We may not be able to hire the
necessary personnel to implement our business strategy, or we may need to pay
higher compensation for employees than we currently expect. We cannot be sure
that we will succeed in attracting and retaining the personnel we need to
continue to grow.
WE DEPEND ON A LIMITED NUMBER OF KEY PERSONNEL WHO WOULD BE DIFFICULT TO
REPLACE.
Our success also depends in significant part on the continued services of
our key technical, sales and senior management personnel. Losing one or more of
our key employees could have a material adverse effect on our business, results
of operations and financial condition. We have employment agreements with
certain key employees, including Christopher R. McCleary, Stephen E. McManus,
Jeffery L. McKnight and Andrew A. Stern, but few other officers or key employees
are party to employment agreements.
WE WILL HAVE BROAD DISCRETION TO ALLOCATE THE PROCEEDS OF THIS OFFERING AND IF
WE DO NOT ALLOCATE THESE PROCEEDS WISELY YOUR INVESTMENT COULD SUFFER.
Our management will retain broad discretion to allocate the proceeds of this
offering. Management's failure to apply these funds effectively could have a
material adverse effect on our business, results of operations and financial
condition. We estimate the net proceeds to us from this offering to be
approximately $54.9 million, after deducting estimated offering expenses. We
plan to use these
6
<PAGE>
proceeds mainly to continue expanding and enhancing our network and facilities,
to add services to our IMAP offerings, and for working capital and other general
corporate purposes. In addition, we will use some of the prceeds to pay accrued
dividends on our shares of convertible preferred stock. Some of the net proceeds
may also be used to repay current or future debts, fund acquisitions or acquire
complementary products or the right to use complementary technologies.
WE MAY NOT BE ABLE TO DELIVER OUR IMAP SERVICES IF THIRD PARTIES DO NOT PROVIDE
US WITH KEY COMPONENTS OF OUR INFRASTRUCTURE.
We depend on other companies to supply key components of our
telecommunications infrastructure and system and network management solutions.
Any failure to obtain needed products or services in a timely fashion and at an
acceptable cost could have a material adverse effect on our business, results of
operations and financial condition. Although we lease redundant capacity from
multiple suppliers, a disruption in telecommunications capacity could prevent us
from maintaining our standard of service. Some of the key components of our
system and network are available only from sole or limited sources in the
quantities and quality we demand. For example, the hardware we use to support
our real-time mirroring and disaster recovery functions is supplied only by EMC
Corporation. We buy these components from time to time, do not carry significant
inventories of them and have no guaranteed supply arrangements with our vendors.
OUR ABILITY TO PROVIDE OUR IMAP SERVICES DEPENDS ON STRATEGIC RELATIONSHIPS WITH
SOFTWARE VENDORS THAT WE MAY NOT BE ABLE TO MAINTAIN.
Our IMAP offerings are central to our business strategy. We obtain software
products under license agreements with PeopleSoft USA, Inc.; Siebel Systems
Inc.; Sagent Technology, Inc. and BroadVision, Inc. and package them as part of
our IMAP solutions. The agreements are for terms ranging from one to three
years. All the agreements may be terminated upon a breach of the agreement,
subject to cure periods. The agreement with PeopleSoft may be terminated by
either party for convenience upon 90 days notice. However, if we terminate the
agreement for convenience, we would still be obligated to make the required
payments under the agreement. PeopleSoft has, in fact, on one occasion notified
us of its intention to terminate the agreement. After significant discussion,
the issues in dispute were resolved, our agreement with PeopleSoft was
renegotiated and PeopleSoft retracted its notification of its intent to
terminate the agreement. However, we cannot be sure that one or more of our
agreements with software vendors will not be terminated in the future. If these
agreements were to be terminated or not renewed or we otherwise could not
continue to use this software, we might have to discontinue products or services
or delay or reduce their introduction unless we could find, license and package
equivalent technology.
All but one of our agreements with software vendors are non-exclusive. Our
competitors may also license and utilize the same technology in competition with
us. We cannot be sure that the vendors of technology used in our products will
continue to support this technology in its current form. Nor can we be sure that
we will be able to adapt our own products to changes in this technology. In
addition, we cannot be sure that the financial or other difficulties of our
vendors will not have a material adverse effect upon the technologies
incorporated in our products, or that, if these technologies become unavailable,
we will be able to find suitable alternatives.
IF WE CANNOT OBTAIN ADDITIONAL APPLICATION SOFTWARE WE WILL BE UNABLE TO EXPAND
OR ENHANCE OUR IMAP SERVICE OFFERINGS.
Our business strategy also depends on obtaining additional application
software. We cannot be sure, however, that we will be able to obtain the new or
enhanced applications we may need to keep
7
<PAGE>
our IMAP solutions competitive. If we cannot obtain these applications and as a
result must discontinue, delay or reduce the availability of our IMAP solutions
or other products or services, our business, results of operations and financial
condition may be materially adversely affected.
DEVELOPING AND EXPANDING OUR OPERATIONS WILL DEPEND, AMONG OTHER THINGS, ON OUR
MANAGEMENT'S ABILITY TO SUCCESSFULLY INTEGRATE THE COMPANIES WE HAVE ACQUIRED.
In September and October of 1998, we acquired IIT and ACR. We cannot be sure
that we will be able to continue to successfully integrate the businesses of IIT
and ACR into our own, or that these businesses will perform as expected. In
addition, we cannot be sure that we will be able to successfully integrate any
business acquired in the future into our own. Our failure to successfully
integrate an acquired company or its subsequent underperformance could have a
material adverse effect on our business, results of operations and financial
condition.
WE MAY UNDERTAKE ADDITIONAL ACQUISITIONS WHICH POSE RISKS TO OUR BUSINESS.
Our business plan contemplates additional acquisitions which we may or may
not undertake. If we do, our risks may increase because:
- We may pay more than the acquired company is worth.
- We may not fully understand the business we acquire.
- We may be entering markets in which we have little or no direct prior
experience.
- Our ongoing business may be disrupted and resources and management time
diverted.
- Our accounting for acquisitions could require us to amortize substantial
goodwill, adversely affecting our reported results of operations.
In addition, once we have made an acquisition we will face additional risks:
- It may be difficult to assimilate acquired operations and personnel.
- We may not be able to retain the management and other key personnel of the
acquired business.
- We may not be able to maintain uniform standards, controls, procedures and
policies.
- Changing management may impair relationships with an acquired business's
employees or customers.
WE COULD BE REQUIRED TO USE OUR FINANCIAL RESOURCES TO REPURCHASE SHARES OF
COMMON STOCK FROM U S WEST.
We could be required to repurchase shares of our capital stock owned by U S
WEST for cash. This would require us to divert our resources at a time of rapid
growth. U S WEST can force us to repurchase these shares if we engage in
activities which U S WEST would be prohibited from engaging in and we were
considered an affiliate of U S WEST under regulations of the Federal
Communications Commission. See "Certain Relationships and Related
Transactions--Purchases of Series A Preferred Stock." Although we believe the
possibility of this occuring is remote, repurchasing the shares held by U S WEST
could be costly.
TECHNOLOGY MAY CHANGE FASTER THAN WE CAN UPDATE OUR NETWORK AND TECHNOLOGY.
The markets we serve are characterized by rapidly changing technology,
evolving industry standards, emerging competition and the frequent introduction
of new services, software and other products. Our success depends partly on our
ability to enhance existing or develop new products, software and services that
meet changing customer needs in a timely and cost-effective way. We cannot be
sure,
8
<PAGE>
however, that we will do some or all of these things. For example, if software
application architecture changes in significant ways, the software for which we
have licenses could become obsolete, we may be forced to update our hardware and
network configurations or we may be forced to replace our mirroring technology.
This may require substantial time and expense, and even then we cannot be sure
that we will succeed in adapting our businesses to these and other technological
developments.
WE COULD BE HARMED IF OUR SYSTEMS ARE NOT COMPATIBLE WITH OTHER PRODUCTS AND
SERVICES.
We believe that our ability to compete successfully also depends on the
continued compatibility of our services with products, services and
architectures offered by various vendors. Our failure to conform to a prevailing
standard, or the failure of a common standard to emerge, could have a material
adverse effect on our business, results of operations and financial condition.
Although we will work with vendors to test new products, we cannot be sure that
their products will be compatible with ours or that they will adequately address
changing customer needs. Although we currently plan to support emerging
standards, we cannot be sure what new industry standards will develop. We also
cannot be sure that we will be able to conform to these new standards quickly
enough to stay competitive. In addition, we cannot be sure that products,
services or technologies developed by others will not make ours noncompetitive
or obsolete.
THE MARKETS WE SERVE ARE HIGHLY COMPETITIVE AND MANY OF OUR COMPETITORS HAVE
MUCH GREATER RESOURCES.
Our current and potential competitors include systems integrators, national
and regional Internet Service Providers, software and hardware vendors, and
global, regional and local telecommunications companies and Regional Bell
Operating Companies. Our competitors, which may operate in one or more of these
areas, include companies such as GTE Corporation; MCI WorldCom, Inc.;
International Business Machines Corporation; Frontier Corporation; PSINet, Inc.;
DIGEX, Inc.; Exodus Communications, Inc.; Andersen Consulting;
PricewaterhouseCoopers; AT&T Corporation; and Sprint Corporation. Our strategic
partners and suppliers could also become competitors.
Many of our competitors have substantially greater financial, technical and
marketing resources, larger customer bases, longer operating histories, greater
name recognition and more established relationships in the industry than we do.
We cannot be sure that we will have the resources or expertise to compete
successfully in the future. Our competitors may be able to:
- More quickly develop and expand their network infrastructures and service
offerings.
- Better adapt to new or emerging technologies and changing customer needs.
- Take advantage of acquisitions and other opportunities more readily.
- Negotiate more favorable licensing agreements with software application
vendors.
- Devote greater resources to the marketing and sale of their products.
- Adopt more aggressive pricing policies.
Some of our competitors may also be able to provide customers with
additional benefits at lower overall costs. We cannot be sure that we will be
able to match cost reductions by our competitors. In addition, we believe that
there is likely to be consolidation in our markets, which could increase price
and other competition in ways that materially adversely affect our business,
results of operations and financial condition. Finally, there are few
substantial barriers to entry, and we have no patented technology that would bar
competitors from our market.
9
<PAGE>
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS AGAINST US, EVEN WITHOUT MERIT, COULD
COST A SIGNIFICANT AMOUNT OF MONEY TO DEFEND AND DIVERT MANAGEMENT'S ATTENTION
AWAY FROM OUR BUSINESS.
As the number of software products in our target markets increases and the
functionality of these products further overlap, software industry participants
may become increasingly subject to infringement claims. Someone may even claim
that our technology infringes their proprietary rights. Any infringement claims,
even if without merit, can be time consuming and expensive to defend. They may
divert management's attention and resources and could cause service
implementation delays. They also could require us to enter into costly royalty
or licensing agreements. If successful, a claim of product infringement against
us and our inability to license the infringed or similar technology could
adversely affect our business.
BECAUSE WE HAVE INTERNATIONAL OPERATIONS, WE FACE ADDITIONAL RISKS RELATED TO
FOREIGN POLITICAL AND ECONOMIC CONDITIONS.
We have established Enterprise Data Centers in Europe and Japan as well as
operations in Venezuela. We intend to expand further into international markets.
We cannot be sure that we will be able to obtain the necessary
telecommunications infrastructure in a cost-effective manner or compete
effectively in international markets. In addition, there are risks inherent in
conducting business internationally. These include:
- Unexpected changes in regulatory requirements.
- Export restrictions.
- Tariffs and other trade barriers.
- Challenges in staffing and managing foreign operations.
- Differing technology standards.
- Employment laws and practices in foreign countries.
- Political instability.
- Fluctuations in currency exchange rates.
- Imposition of currency exchange controls.
- Potentially adverse tax consequences.
Any of these could adversely affect our international operations. We cannot
be sure that one or more of these factors will not have a material adverse
effect on our current or future international operations and, consequently, on
our business, results of operations and financial condition.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD ADD ADDITIONAL COSTS TO
DOING BUSINESS ON THE INTERNET AND COULD LIMIT OUR CLIENTS' USE OF THE INTERNET.
Laws and regulations directly applicable to communications or commerce over
the Internet are becoming more prevalent. The adoption or modification of laws
or regulations relating to the Internet could adversely affect our business. The
last session of the United States Congress resulted in Internet laws regarding
children's privacy, copyrights, taxation and the transmission of sexually
explicit material. The European Union recently enacted its own privacy
regulations. The law of the Internet, however, remains largely unsettled, even
in areas where there has been some legislative action. It may take years to
determine whether and how existing laws such as those governing intellectual
property, privacy, libel and taxation apply to the Internet. In addition, the
growth and development of the market for online commerce may prompt calls for
more stringent consumer protection laws, both in the United States
10
<PAGE>
and abroad, that may impose additional burdens on companies conducting business
online. For example, Germany, and the European Union have enforced laws and
regulations on content distributed over the Internet that are more strict than
those currently in place in the United States.
FAILURE OF COMPUTER SYSTEMS AND SOFTWARE PRODUCTS TO BE YEAR 2000 COMPLIANT
COULD INCREASE OUR COSTS, DISRUPT OUR SERVICE AND REDUCE DEMAND FROM OUR
CLIENTS.
We confront the Year 2000 problem in three contexts.
OUR CUSTOMERS. Many of our customers and potential customers maintain their
Internet operations on UNIX-based servers, which may be impacted by Year 2000
complications. The failure of our customers to ensure that their servers are
Year 2000 compliant could have a material adverse effect on them, which in turn
could have a material adverse effect on our business, results of operations and
financial condition.
OUR SUPPLIERS. Our business could be adversely affected if we cannot obtain
products, services or systems that are Year 2000 compliant when we need them. In
addition, if vendors and service providers cannot deliver their products because
of Year 2000 compliance problems our business, results of operations and
financial condition could be materially adversely affected.
OUR SERVICES. We sell computer-related services, so our risk of lawsuits
relating to Year 2000 issues is likely to be greater than that of companies in
some other industries. Because computer products and services may incorporate
components from different providers, it may be difficult to determine which
component may cause a Year 2000 problem. As a result, we may be subjected to
Year 2000-related lawsuits whether or not our products and services are Year
2000 compliant. Our acquired subsidiaries have several contracts which make Year
2000 warranties. Some of these contracts make broader warranties than those made
by the manufacturers of the software provided. The potential liability arising
from these warranties is not capped. We cannot be certain at this time what the
outcomes or impact of any lawsuits may be.
THE OUTCOME OF PROPOSALS PUT TO A VOTE OF STOCKHOLDERS WILL BE DETERMINED BY OUR
EXISTING PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS, WHO WILL
CONTINUE TO CONTROL USI AFTER THIS OFFERING.
When this offering is completed, our executive officers, directors, existing
5% or greater stockholders and their affiliates will, in the aggregate, own
shares representing approximately 73.53% of our outstanding voting capital
stock. As a result, these persons, acting together, will be able to control all
matters submitted to our stockholders for approval and to control our management
and affairs. For example, these people, acting together, will control the
election and removal of directors and any merger, consolidation or sale of all
or substantially all of our assets.
THE MARKET PRICE OF OUR COMMON STOCK COULD BE AFFECTED BY THE SUBSTANTIAL NUMBER
OF SHARES THAT ARE ELIGIBLE FOR FUTURE SALE.
After this offering is completed, 37,868,276 shares of common stock will be
issued and outstanding, assuming no exercise of the underwriters' over-allotment
option. We cannot be sure what effect, if any, future sales of shares or the
availability of shares for future sale will have on the market price of the
common stock. The market price of our common stock could drop due to sales of a
large number of shares in the market after this offering or the perception that
sales of large numbers of shares could occur. These factors could also make it
more difficult to raise funds through future offerings of common stock. All of
the shares of common stock sold in this offering will be freely tradeable under
the Securities Act unless purchased by our "affiliates," as that term is defined
in the Securities Act. In connection with this offering, our officers and
directors and some of our stockholders will be required not to sell any shares
of common stock for a period of 180 days after the date of this prospectus
without the written consent of Credit Suisse First Boston Corporation.
11
<PAGE>
OUR STOCK PRICE COULD BE VOLATILE.
The trading price of our common stock is likely to be volatile. The stock
market in general, and the market for technology and Internet-related companies
in particular, has experienced extreme volatility. This volatility has often
been unrelated to the operating performance of particular companies. We cannot
be sure that an active public market for our common stock will develop or
continue after this offering. Investors may not be able to sell their common
stock at or above our initial public offering price. Prices for the common stock
will be determined in the marketplace and may be influenced by many factors,
including variations in our financial results, changes in earnings estimates by
industry research analysts, investors' perceptions of us and general economic,
industry and market conditions.
PURCHASERS IN THIS OFFERING WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION OF
THEIR INVESTMENT.
Purchasers of common stock in this offering will pay a price per share which
substantially exceeds the per share value of our assets after subtracting our
liabilities. In addition, purchasers of common stock in this offering will have
contributed approximately 38.6% of the aggregate price paid by all purchasers of
our stock but will own only approximately 13.2% of the common stock outstanding
after this offering. See "Dilution."
WE HAVE ANTI-TAKEOVER DEFENSES THAT COULD DELAY OR PREVENT AN ACQUISITION AND
COULD ADVERSELY AFFECT
THE PRICE OF OUR COMMON STOCK.
Provisions of our certificate of incorporation and bylaws and the provisions
of Delaware law could delay, defer or prevent an acquisition or change of
control of USI or otherwise adversely affect the price of our common stock. For
example, our board of directors is staggered in three classes, so that only
one-third of the directors could be replaced at any annual meeting.
Additionally, our bylaws limit the ability of stockholders to call a special
meeting. Our certificate of incorporation also permits our board to issue shares
of preferred stock without stockholder approval. In addition to delaying or
preventing an acquisition, the issuance of a substantial number of preferred
shares could adversely affect the price of the common stock. Please refer to
"Description of Capital Stock" for a more detailed discussion of these
provisions.
THE RELIABILITY OF MARKET DATA INCLUDED IN THIS PROSPECTUS IS UNCERTAIN.
Since we are a new company and operate in a new and rapidly changing market,
we have included market data from industry publications. The reliability of
these data cannot be assured. Market data used throughout this prospectus were
obtained from internal company surveys and industry publications. Industry
publications generally state that the information contained in these
publications has been obtained from sources believed to be reliable, but that
its accuracy and completeness is not guaranteed. Although we believe market data
used in this prospectus to be reliable, it has not been independently verified.
Similarly, internal company surveys, while believed by us to be reliable, have
not been verified by any independent sources.
12
<PAGE>
USE OF PROCEEDS
We will receive net proceeds from the sale of 5,000,000 shares of common
stock, at an assumed public offering price of $12.00 per share, estimated to be
approximately $54.9 million. This amount will be approximately $63.3 million if
the underwriters exercise their over-allotment option in full, after deducting
the underwriting discounts and commissions and estimated offering expenses we
will owe. We intend to use these proceeds:
- To continue expanding and enhancing our network and facilities,
- To add additional services to our IMAP offerings, and
- For working capital and other general corporate purposes.
In addition, we will use some of the proceeds to pay accrued dividends on
our shares of convertible preferred stock. Some of the net proceeds may also be
used:
- To repay current or future debts,
- To fund acquisitions or acquire complementary products, or
- To obtain the right to use complementary technologies.
The amounts and timing of our actual expenditures will depend upon numerous
factors, including the status of our product development efforts, marketing and
sales activities, the amount of cash generated by our operations and
competition. Actual expenditures may vary substantially from these estimates. We
may find it necessary or advisable to use portions of the proceeds for other
purposes. Pending application of the net proceeds as described above, we intend
to invest the net proceeds of this offering in short-term, investment-grade,
interest-bearing securities.
DIVIDEND POLICY
We have never paid cash dividends on our common stock and have no plans to
do so in the foreseeable future. The declaration and payment of any dividends in
the future will be determined by the board of directors and will depend on a
number of factors, including our earnings, capital requirements and overall
financial condition.
13
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1998.
We have presented our capitalization:
- On an actual basis,
- On a pro forma basis to give effect to both the automatic conversion of
all outstanding shares of preferred stock into common stock and the
reclassification of common stock subject to repurchase to permanent equity
upon consummation of this offering, and
- On a pro forma as adjusted basis to reflect our receipt of the estimated
net proceeds from the sale of 5,000,000 shares of common stock in this
offering, after deducting underwriting discounts and commissions and
estimated offering expenses.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT FOR SHARE
AMOUNTS)
Cash and cash equivalents...................................................... $ 43,802 $ 43,802 $ 97,199
--------- ----------- -----------
--------- ----------- -----------
Long-term liabilities:
Short-term obligations expected be refinanced................................ 5,282 5,282 5,282
Long-term debt and capital lease obligations................................. 8,659 8,659 8,659
Dividends payable............................................................ 1,503 1,503 --
--------- ----------- -----------
Total long-term liabilities.................................................. 15,444 15,444 13,941
Series B Cumulative Convertible Redeemable Preferred Stock, $.01 par value;
115,000 shares authorized; 59,279 shares issued and outstanding actual, no
shares issued and outstanding pro forma and pro forma as adjusted............ 62,242 -- --
Common stock subject to repurchase, 1,343,750 shares issued and outstanding
actual, no shares issued and outstanding pro forma and pro forma as
adjusted..................................................................... 4,145 -- --
Stockholders' equity (deficit):
Series A Cumulative Convertible Preferred Stock, $.01 par value; 110,000
shares authorized; 55,000 shares issued and outstanding actual, no shares
issued and outstanding pro forma and pro forma as adjusted................. 1 -- --
Common stock, $.001 par value; 75,000,000 shares authorized; 625,000 shares
issued and outstanding actual, 32,868,276 issued and outstanding pro forma
and 37,868,276 shares issued and outstanding pro forma as adjusted......... 1 33 38
Additional paid-in capital..................................................... 30,754 97,157 152,052
Due from stockholders.......................................................... -- (47) (47)
Accumulated deficit............................................................ (33,222) (33,222) (33,222)
--------- ----------- -----------
Total stockholders' equity (deficit)......................................... (2,466) 63,921 118,821
--------- ----------- -----------
Total capitalization....................................................... $ 79,365 $ 79,365 $ 132,762
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
The share numbers in the table exclude:
- 1,682,250 shares of common stock issuable upon exercise of stock options
outstanding as of December 31, 1998 at an exercise price of $2.64 per
share, and
- 424,063 shares of common stock issuable upon exercise of stock options
granted on March 22, 1999, 49,063 at an exercise price of $3.36 per share
and 375,000 at an exercise price of $6.00 per share. We will record
compensation expense related to these option grants of approximately $2.7
million over the next four years in accordance with our accounting policy
as stated in Note 1 to the consolidated financial statements.
- 1,320,556 shares of common stock issuable upon exercise of stock options
granted contingent on this offering at an exercise price of $6.00 per
share, which is equal to 50% of the mid-point of the proposed price range.
We will record compensation expense related to these option grants of
approximately $7.9 million over the next four years in accordance with our
accounting policy as stated in Note 1 to the consolidated financial
statements.
- 1,482,665 shares of common stock reserved for issuance upon exercise of
warrants exercisable as of December 31, 1998 at a weighted average
exercise price of $4.37.
We have not presented our Series B Preferred Stock as part of our
stockholders' equity because it is mandatorily redeemable on the eighth
anniversary of its issuance. All of these shares will automatically convert into
common stock upon consummation of this offering.
We have not presented 1,343,750 shares of issued and outstanding common
stock as part of our stockholders' equity because we are required to repurchase
these shares, which are held by three of our officers, if these officers die or
become disabled. These provisions will terminate upon the consummation of this
offering.
Please read this capitalization table together with the sections of this
prospectus entitled "Use of Proceeds," "Dividend Policy," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the financial statements of USI, ACR and IIT included in this prospectus.
14
<PAGE>
DILUTION
You will experience immediate and substantial dilution in the net pro forma
tangible book value per share of your common stock.
We calculate dilution to new investors by subtracting pro forma net tangible
book value per share of common stock after this offering from the per share
price paid by new investors in this offering. We calculate net pro forma
tangible book value per share by subtracting total liabilities from total
tangible assets and then dividing that number by the number of shares of common
stock outstanding at December 31, 1998, after giving effect to the automatic
conversion of preferred stock upon consummation of this offering.
The following table illustrates the per share dilution to investors in this
offering:
<TABLE>
<CAPTION>
PER SHARE
-----------
<S> <C> <C>
Assumed offering price........................................................... $ 12.00
Net tangible book value as of December 31, 1998.................................. $ 1.18
Pro forma increase attributable to new investors in this offering................ 1.29
-----------
Pro forma net tangible book value after this offering 2.47
-----------
Pro forma dilution to new investors in this offering............................. $ 9.53
-----------
-----------
</TABLE>
The following table summarizes on a pro forma basis as of December 31, 1998,
after giving effect to this offering, the number of shares of common stock
purchased from us, the total consideration paid to us and the average
consideration paid per share by existing stockholders and by new investors in
this offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
AMOUNT
(IN AVERAGE PRICE
NUMBER PERCENT THOUSANDS) PERCENT PER SHARE
------------ ----------- ------------- ----------- -------------
Existing stockholders............................. 32,868,276 86.8% $ 95,258 61.4% $ 2.90
Investors in this offering........................ 5,000,000 13.2% 60,000 38.6 12.00
------------ ----- ------------- ----- ------
Total........................................... 37,868,276 100.0% $ 155,258 100.0% $ 4.10
------------ ----- ------------- ----- ------
------------ ----- ------------- ----- ------
</TABLE>
The calculations on this page are based on shares outstanding as of December
31, 1998. These calculations exclude from the number of outstanding shares of
common stock:
- 1,682,250 shares of common stock issuable upon exercise of stock options
outstanding as of December 31, 1998 at an exercise price of $2.64 per
share,
- 424,063 shares of common stock issuable upon exercise of stock options
granted on March 22, 1999, 49,063 at an exercise price of $3.36 per share
and 375,000 at an exercise price of $6.00 per share,
- 1,320,556 shares of common stock issuable upon exercise of stock options
granted contingent on this offering at an exercise price of $6.00 per
share, which is equal to 50% of the mid-point of the proposed price range,
and
- 1,482,648 shares of common stock reserved for issuance upon exercise of
warrants exercisable as of December 31, 1998 at a weighted average
exercise price of $4.37.
If all of the options and warrants outstanding as of December 31, 1998, had
been exercised at that date, dilution to new investors in this offering would be
$9.72 per share.
15
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
On September 8, 1998, we acquired I.I.T. Holding, Inc. and its two
wholly-owned subsidiaries, International Information Technology Inc., a U.S.
subsidiary, and International Information Technology IIT, C.A., a Venezuelan
subsidiary. We refer to these businesses collectively as IIT. IIT's operations
commenced on May 20, 1994 upon the incorporation of the U.S. subsidiary. The
Venezuelan subsidiary was formed on March 6, 1996. For accounting purposes, IIT
is a predecessor of USI, which was incorporated in January 1998.
The following table summarizes:
- the historical consolidated financial data of IIT for the period from May
20, 1994, its date of inception, through December 31, 1994 and for the
fiscal years ended December 31 1995, 1996 and 1997 and as of December 31
1994, 1995, 1996 and 1997,
- the historical consolidated financial data of IIT for the period from
January 1, 1998 through September 7, 1998, the date we acquired IIT,
- our historical consolidated financial data for the period from our date of
inception, January 14, 1998, through December 31, 1998 and as of December
31, 1998, and
- the historical consolidated financial data of IIT and USI on a combined
basis for the year ended December 31, 1998.
The periods prior to 1996 have been derived from the unaudited financial
statements of IIT. The selected financial data for 1996 and 1997 has been
derived from, and is qualified by reference to, the audited consolidated
financial statements of IIT included elsewhere in this prospectus. The selected
financial data for 1998 has been derived from, and is qualified by reference to,
our audited consolidated financial statements for the period from January 14,
1998 (inception) through December 31, 1998, and the unaudited consolidated
financial statements of IIT for the period from January 1, 1998 through
September 7, 1998. Our audited consolidated financial statements for the period
from our inception through December 31, 1998 include the results of IIT from
September 8, 1998 through December 31, 1998 and the results of Advanced
Communication Resources, Inc., or ACR, from October 2, 1998 through December 31,
1998. You should also read "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and related
notes of USI, ACR and IIT included in this prospectus.
In the table below:
- Series B Preferred Stock is not presented as a part of our stockholders'
equity because it is mandatorily redeemable upon the eighth anniversary of
its issuance.
- We do not present 1,343,750 shares of common stock held by three officers
as part of our stockholders' equity because we could be required to
repurchase these shares at fair value if any of these officers die or
become disabled prior to this offering. See Note 11 of the Notes to USI's
Consolidated Financial Statements. These provisions will terminate upon
the consummation of this offering.
16
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR PREDECESSOR USI
PERIOD FROM --------------------------------- PREDECESSOR PERIOD FROM
MAY 20, 1994 PERIOD FROM JANUARY 14, 1998
(DATE OF INCEPTION) YEAR ENDED DECEMBER 31, JANUARY 1, 1998 (DATE OF INCEPTION)
TO --------------------------------- TO SEPTEMBER 7, TO
DECEMBER 31, 1994 1995 1996 1997 1998 DECEMBER 31, 1998
-------------------- --------- --------- ----------- ------------------ -------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue........................... $ 156 $ 801 $ 747 $ 2,812 $ 4,406 $ 4,122
---------- --------- --------- ----------- ------- --------
Costs and expenses
Cost of sales and services...... 108 613 519 1,881 2,976 6,658
Selling, general and
administrative expenses....... 290 77 204 1,844 1,809 25,193
Depreciation and amortization... 3 7 14 30 28 3,179
---------- --------- --------- ----------- ------- --------
Total costs and expenses...... 401 697 737 3,755 4,813 35,030
---------- --------- --------- ----------- ------- --------
Operating (loss) income........... (245) 104 10 (943) (407) (30,908)
Other income (expense):
Interest income............... -- -- -- -- -- 367
Interest expense.............. -- (5) (3) (9) (17) (2,681)
Provision (benefit) for income
taxes........................... -- 28 15 (58) -- --
---------- --------- --------- ----------- ------- --------
Net income (loss)................. $ (245) $ 71 $ (8) $ (894) $ (424) $ (33,222)
---------- --------- --------- ----------- ------- --------
Basic and diluted income (loss)
per common share attributable to
common stockholders............. $ (2,578.95) $ 747.37 $ (84.21) $ (9,410.53)
---------- --------- --------- -----------
---------- --------- --------- -----------
<CAPTION>
PREDECESSOR AND
USI COMBINED
FOR THE YEAR
ENDED
DECEMBER 31,
1998
----------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenue........................... $ 8,528
--------
Costs and expenses
Cost of sales and services...... 9,634
Selling, general and
administrative expenses....... 27,002
Depreciation and amortization... 3,207
--------
Total costs and expenses...... 39,843
--------
Operating (loss) income........... (31,315)
Other income (expense):
Interest income............... 367
Interest expense.............. (2,698)
Provision (benefit) for income
taxes........................... --
--------
Net income (loss)................. $ (33,646)
--------
Basic and diluted income (loss)
per common share attributable to
common stockholders............. $ (53.83)
--------
--------
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR
------------------------------------------
AS OF DECEMBER 31,
------------------------------------------
1994 1995 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
AMOUNTS IN THOUSANDS
BALANCE SHEET DATA:
Cash and cash equivalents............................................................... $ -- $ -- $ 70 $ 14
Working capital (deficit)............................................................... (15) 70 14 42
Total assets............................................................................ 40 147 348 769
Short-term obligations expected to be refinanced........................................ -- -- -- --
Long-term debt and capital lease obligations, excluding current portion................. 25 47 11 16
Series B Convertible Redeemable Preferred Stock......................................... -- -- -- --
Common stock subject to repurchase...................................................... -- -- -- --
Stockholders equity (deficit)........................................................... 2 66 45 132
<CAPTION>
USI
----------
1998
----------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 43,802
Working capital (deficit).............................. 22,551
Total assets........................................... 106,516
Short-term obligations expected to be refinanced....... 5,282
Long-term debt and capital lease obligations, excluding 8,659
Series B Convertible Redeemable Preferred Stock........ 62,242
Common stock subject to repurchase..................... 4,145
Stockholders equity (deficit).......................... (2,467)
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ TOGETHER WITH THE
FINANCIAL STATEMENTS AND RELATED NOTES OF USI, ACR AND IIT INCLUDED IN THIS
PROSPECTUS. IN THE FOLLOWING DISCUSSION, REFERENCES TO "WE" SHOULD BE READ TO
MEAN OUR PREDECESSOR IIT FOR ALL PERIODS PRIOR TO THE FISCAL YEAR ENDED DECEMBER
31, 1998. FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998, REFERENCES TO "WE" SHOULD
BE READ TO MEAN THE COMBINED OPERATIONS OF IIT AND USI AND, AFTER OCTOBER 2,
1998, ALSO INCLUDE ACR. THE DISCUSSION IN THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS
STATEMENTS OF OUR PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. THE CAUTIONARY
STATEMENTS MADE IN THIS PROSPECTUS APPLY TO ALL RELATED FORWARD-LOOKING
STATEMENTS WHEREVER THEY APPEAR IN THIS PROSPECTUS. OUR ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO DIFFERENCES INCLUDE THOSE DISCUSSED IN
"RISK FACTORS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS. THE
FORWARD-LOOKING STATEMENTS CONTAINED IN THIS PROSPECTUS ARE MADE AS OF THE DATE
OF THIS PROSPECTUS, AND WE ASSUME NO OBLIGATION TO UPDATE THESE FORWARD-LOOKING
STATEMENTS OR TO UPDATE THE REASONS ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS. SEE "RISK FACTORS."
OVERVIEW
I.I.T. Holding, Inc., a predecessor of USI, specializes in systems analysis
and design and systems integration solutions. IIT is a provider of PeopleSoft
human resource management and financial system implementation. IIT's consulting
professionals have expertise in human resource management as well as accounting
and financial systems.
We acquired IIT in September 1998 as a part of our program to develop a new
Internet-based service offering. IIT provides implementation capabilities that
enable us to provide human resource and financial management functionality as
part of our IMAP offerings.
We have developed an advanced, integrated service offering that provides our
clients the ability to use leading business software applications through our
state-of-the-art Internet-based network. Since our inception in January 1998, we
have devoted substantially all of our efforts to developing our network
infrastructure, recruiting and training personnel, establishing strategic
business partnerships with application software providers, completing two
strategic acquisitions and raising capital. We have incurred a cumulative net
loss since inception and expect to incur additional losses for at least the next
twelve months, due primarily to additional start-up costs related to
implementation of our services and the continued expansion and enhancement of
our network. As of December 31, 1998, we had accumulated net losses of
approximately $33.2 million.
REVENUE. We expect that future revenue will be generated primarily from the
delivery of IMAP services. Revenue from IMAP services will consist of monthly
recurring fees from ongoing services and will be recognized ratably as earned
over the contract term. Non-refundable client deposits, if any, will be
recognized as revenue ratably over the contract term. Revenue from the delivery
of professional information technology services not included in IMAP solutions
will be recognized as the services are performed.
COSTS AND EXPENSES. We will incur operating costs and expenses related to
the delivery of IMAP services. Costs and expenses will include product
development, network and data center support, selling and marketing, and general
and administrative expenses. Since inception, we have incurred expenses
consisting primarily of compensation and benefits, recruiting, occupancy and
consulting. We have expensed all start-up costs as incurred.
We will incur up-front costs related to the delivery of IMAP services.
Product development costs and the cost to operate our network and data centers
will be recognized as period costs. Costs related to the acquisition of hardware
will be capitalized and depreciated over the estimated useful life of the
hardware of five years. Costs related to the acquisition of software licenses
will be capitalized and
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amortized over either the term of the license agreement, or the term of the
individual client contract, depending on the nature of the software license
agreement. Amortization will be based on current and future revenue from each
product and annual amortization will not be less than that computed on a
straight-line basis over the remaining useful life. Direct costs related to the
integration of software applications for a client on our network will be
capitalized and amortized over the related contract period.
HISTORICAL RESULTS OF OPERATIONS
REVENUE. Revenues for 1998 increased 203% over 1997, and 276% from 1996 to
1997. The significant increase in 1998 is attributable to several factors,
including the acquisition of ACR in October 1998. ACR contributed $2.0 million
of revenue in 1998 or 35% of the increase over 1997. The remaining increase in
1998 over 1997, and the increase in 1997 over 1996, is attributable to growth in
IIT's PeopleSoft implementation services.
GROSS MARGIN, COSTS OF SALES AND SERVICES. We incurred $0.5, $1.9 and $5.7
million of expenses in the delivery of professional information technology
services for the years ended December 31, 1996, 1997 and 1998, respectively. As
a result, our professional information technology services generated gross
margins of 30.5%, 32.1% and 32.9% for the years ended December 31, 1996, 1997
and 1998, respectively. The improved gross margins from year to year is
attributable to a reduction in the use of subcontractors, an increase in IIT's
staff utilization, and improving market conditions for the professional
information technology services industry during this period.
The remaining costs of revenues for the period ending December 31, 1998 were
costs associated with the delivery of our IMAP products. These costs which
include the operations of our network, data centers and client care
organization, totaled $4.2 million for the period. We anticipate that the gross
margin for the IMAP services will improve over time as our data centers and
network are more fully utilized.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. We incurred $0.2, $1.8 and
$27.0 million in selling, general and administrative expenses for the years
ended December 31, 1996, 1997 and 1998, respectively. The primary factor in the
$1.7 million increase from 1996 to 1997 is due to $1.0 million of non-cash
compensation expense related to the issuance of stock to three of IIT's
officers. The remaining increase is attributable to the additional support
required to support IIT's growing customer base. The majority of our selling,
general and administrative expense for 1998 relates to USI's development stage
activities and consists principally of compensation, benefits, recruiting,
occupancy, consulting services and network costs prior to the implementation of
the first IMAP client. Included in these expenses is $1 million in non-cash
compensation related to the issuance of common stock to two of our executive
officers. To the extent that we grant stock or options to purchase stock at less
than the fair market value of the stock, we may be required to record additional
non-cash compensation expense. In March 1999, we granted options to purchase
424,063 shares of common stock, 49,063 with an exercise price of $3.36 per share
and 375,000 with an exercise price of $6.00 per share. Accordingly, we will
recognize a non-cash compensation expense in connection with this issuance over
the applicable vesting periods of these options. We also granted options to
acquire 1,320,556 shares of common stock. These options have an exercise price
of $6.00 per share, which is equal to 50% of the mid-point of the proposed price
range. We will recognize a non-cash compensation expense in connection with this
issuance over the four-year period that the employees earn the right to exercise
the options and retain the shares without regard to continued employment. Based
on an assumed offering price of $12.00, the compensation expense for all of
these options would total approximately $10.6 million.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the year
ended December 31, 1998 totaled $3.2 million, a significant increase over the
depreciation and amortization expenses of $14,000 and $30,000 for the years
ended December 31, 1996 and 1997, respectively. This increase is attributable to
depreciation expense of $1.5 million related to the significant infrastructure
built in 1998
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to support future IMAP services. Additionally, $1.6 million of this amount in
1998 is the amortization of the goodwill created through the acquisitions of IIT
and ACR in 1998.
INTEREST INCOME AND EXPENSE. For the year ended December 31, 1998, we
incurred $2.7 million in interest expense and generated interest income of $0.4
million. The significant increase in interest expense over 1996 and 1997 of
$3,000 and $9,000, respectively, is primarily due to $2.0 million of interest
expense in 1998 recorded through the write-off of an unamortized debt discount.
This debt discount originated from the value assigned to the warrants issued in
conjunction with the $9.1 million bridge loan to USI, which was converted to
Series B Preferred Shares on December 31, 1998. The remaining increase in
interest expense is attributable to higher levels of debt in 1998. The interest
income generated for the year ended December 31, 1998 is attributable to our
investment of the excess cash available from the Series A Preferred Shares
investment.
We recorded a deferred tax asset of $11.2 million as of December 31, 1998.
This deferred tax asset consisted principally of start-up costs capitalized for
income tax purposes and employee compensation not currently deductible for
income tax purposes. We have established a valuation allowance for the entire
amount of our deferred tax asset due to uncertainties regarding future taxable
income.
ACQUIRED COMPANIES
The acquisitions of IIT and ACR were made primarily with cash and were
accounted for using the purchase method of accounting. The assets and
liabilities of the acquired companies have been recorded at their fair market
value as of the acquisition closing date. The excess of the purchase price over
the fair market value of the identifiable net assets of IIT and ACR has been
accounted for as goodwill, which is being amortized over its estimated useful
life of 5 years.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, we had cash and cash equivalents of $43.8 million
primarily generated through the sale of $32.8 million of Series A Preferred
Stock and $62.0 million of Series B Preferred Stock, after deducting issuance
costs. Through December 31, 1998, we have used $20.6 million through operating
activities and $37.7 million in investing activities. The principal investing
activities were the acquisitions of ACR and IIT for $16.9 million and the
purchase of property and equipment totaling $20.1 million.
USI has used debt and capital leases to partially finance its capital
purchases and plans to continue this practice for the foreseeable future. As of
December 31, 1998, we had obtained commitments for secured financing from
several sources including: Cisco System Capital Corporation ($10.0 million),
Venture Lending & Leasing II, Inc. ($10.0 million), Transamerica Business Credit
Corporation ($5.0 million), Leasing Technologies International, Inc. ($2.0
million) and Hewlett Packard Company ($1.0 million), among others. The total of
the secured financing commitments at December 31, 1998 was $30.1 million, of
which $13.7 had been funded. Since the end of 1998, we have continued to seek
secured financing. At February 28, 1999, we had secured financing commitments
totaling $36.5 million, of which approximately $24.5 million had been utilized.
We are also exploring the possibility of obtaining mortgage financing in
connection with possible expansion of our facilities in Annapolis. As of March
1999, we had entered into forward looking commitments for the purchase of
software and advertising totaling $22.5 million.
We believe that these resources, together with the estimated net proceeds
from this offering and anticipated debt and capital lease financing, will be
sufficient to fund our operations for at least the next two years. If we expand
more rapidly than currently anticipated, if our working capital needs exceed our
current expectations or if we make acquisitions, we will need to raise
additional capital from equity or debt sources. We cannot be sure that we will
be able to obtain the additional financing to satisfy our cash requirements or
to implement our growth strategy on acceptable terms or at all. If we cannot
obtain such financing on terms acceptable to us, we may be forced to curtail our
planned business expansion and may be unable to fund our ongoing operations.
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RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
DEVELOPED FOR OR OBTAINED FOR INTERNAL USE (SOP 98-1). This SOP requires the
capitalization of costs to purchase or develop internal-use software, including
external direct costs of materials and services, payroll and payroll related
costs for employees who are directly associated with and devote time to an
internal-use software development project. Allocations of overhead to
capitalized costs are not permitted. Computer software costs related to research
and development are expensed as incurred, as are training and maintenance costs.
SOP 98-1 is effective for years beginning after December 15, 1998 and
application is prospective. Through December 31, 1998, approximately $1 million
of costs related to the implementation of internal use software were expensed.
We will adopt SOP 98-1 in the first quarter of 1999.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, REPORTING THE COSTS OF START-UP ACTIVITIES (SOP
98-5). This SOP requires that start-up costs and organizational costs be
expensed as incurred. Start-up activities include one-time activities related to
opening a new facility, introducing a new product or service, conducting
business in a new territory, conducting business with a new class of customer,
initiating new process in an existing facility, or commencing some new
operation. SOP 98-5 is effective for years beginning after December 15, 1998. We
currently expense the costs of all start-up and organizational activities.
YEAR 2000 COMPLIANCE
YEAR 2000 ISSUE. The Year 2000 issue is a result of computer programs or
systems which store or process date-related information using only two digits to
represent the year. These programs or systems may not be able to properly
distinguish between a year in the 1900's and a year in the 2000's. Failure of
these programs or systems to distinguish between the two centuries could cause
the programs or systems to yield erroneous results or even to fail.
STATE OF READINESS. Since its inception in January 1998, USI has been
cognizant of the Year 2000 issue. Hardware and software selections, network
architecture, and client contract terms have all been designed with the Year
2000 issue in mind.
We have established a Year 2000 compliance team to carry out a program of
testing and remediation on our information technology and
non-information-technology systems, for systems used by USI as well as those
provided by USI to its clients. The compliance team includes members from all
levels of management and is led by our engineering and operations organization.
The compliance team meets as a group on a regular basis and subgroups of the
team will meet as needed to address specific issues.
The compliance team will carry out a program consisting of the following
phases.
- Inventory of all potentially affected software products and
software-related services.
- Analysis of such products and services to identify any areas that require
change or replacement.
- Development of appropriate changes or replacements for the identified
areas.
- Testing.
- Implementation of the changes or replacements.
- Contingency planning.
Because USI is not only a user of software products and software-related
services, but also provides software products and software-related services to
its clients, the compliance program will address both software products and
software-related services used by USI and those provided by USI to its clients.
While different areas of USI face different Year 2000 problems, USI has given
priority to software products and software-related services that it provides to
its clients.
Our compliance team has completed the following tasks under our compliance
program:
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- Conducted in depth discussions with all of its software suppliers. We have
received assurances from all our software suppliers that the programs
provided to us are in compliance, and we do not believe that any of the
software applications provided to our clients requires remediation.
- Inventoried existing hardware and software used in our systems. Our
hardware and software purchases were made beginning in March 1998 and no
systems were in service before then, excluding systems maintained by the
acquired companies. Systems manufactured and released after 1996 are
generally believed to be free of Year 2000 compliance problems.
- Although the companies we recently acquired have been in existence longer
than we have and have older systems in place, we concluded, based on Year
2000 assessments performed for the acquired companies, that there are no
material exposures related to the hardware or software used by the
acquired companies.
- We have performed Year 2000 and subsequent leap year roll-over tests up to
the year 2008 on each of our server platforms. During these tests only one
system was found to be non-compliant. This system was brought into
compliance with an operating system upgrade in October 1998.
- Our network infrastructure units, like routers and switches, were put
through a Year 2000 roll-over test and found to be compliant.
- We have inventoried our internally developed source code and determined
that there is a minimal amount, consisting primarily of custom web scripts
and UNIX shell scripts, which require testing.
The Year 2000 compliance team has the following tasks to complete:
- Determine if additional analysis, remediation, testing or implementation
of new or existing systems, including software developed by the acquired
companies, are required.
- Complete implementation of any necessary changes and replacements to
software products and software-related services used and provided by USI.
- Implement procedures to ensure that any future software products and
software-related services, as well as enhancements to existing software
products and software-related services, are developed in accordance with
USI's Year 2000 compliance program. We anticipate that inventory and
analysis of our existing systems will be completed by the second quarter
of 1999. We anticipate that implementation of any required changes or
replacements to existing systems as well as contingency planning for
systems identified as having a high risk of non-compliance will be
completed by the third quarter of 1999.
- Design contingency and business continuation plans in the event of the
failure of the systems used by USI due to the Year 2000 millennium change.
COSTS. As of December 31, 1998, USI has not incurred material expenses in
connection with its Year 2000 compliance program. All expenses relating to Year
2000 compliance to date have been incurred in the normal course of our business,
as we have developed our products, network, and implemented specific client
applications. The cost of completing the Year 2000 compliance program is
expected to be principally in the form of the opportunity costs of employees'
time. USI may also need to purchase replacement products or hire consultants or
other providers to assist in Year 2000 compliance efforts, though it does not
currently expect that this will prove necessary. Currently, the estimated cost
of the Year 2000 compliance program is approximately $0.7 million, which
includes internal labor costs and reserves for outside consulting and additional
hardware and software. We expect that this estimate will be refined as the
inventory and analysis phase is completed.
RISKS. Should we fail to solve a Year 2000 compliance problem to one of our
systems the result could be a failure or interruption of normal business
operations. We believe that, due to the relative newness of our systems and the
tasks undertaken and completed by our compliance team, the potential for
significant interruptions to normal operations should be minimized. Our primary
risks with regard
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to Year 2000 failures are those which impact our IMAP business. The reasonably
likely worst-case risks inherent in our business are as follows:
- Significant and protracted interruption of electrical power to our data
center operations could materially and negatively impact our ability to
provide data center operations. To mitigate this risk, we have deployed
back-up power systems at our data systems and have the capability to
transfer all of the operations of one data center to another. However,
electrical power interruptions that impact Internet connectivity providers
could adversely impact us because of our reliance upon Internet-based
operations for our day-to-day business.
- Significant and protracted interruption of telecommunications and data
network services in any of our data centers could materially and
negatively impact our ability to provide data center operations. We have
conducted detailed assessments of the components of our telecommunications
infrastructure and are working to identify appropriate system testing
guidelines. In addition, we have plans to seek additional assurances and a
better understanding of the compliance programs of its telecommunications
and data circuit providers.
- The failure of components of our systems used in the data centers could
materially and negatively impact our business. However, based on the time
period in which the data centers were developed we believe the risk of
failure is small. In addition, we have conducted a technical assessment of
the current systems and believe them to be compliant.
- If a product or service provided by USI is found to cause damage or injury
to a client because of Year 2000 noncompliance, USI could be liable to the
client for breach of warranty. USI's client contracts generally limit
USI's liability. USI cannot accurately predict what legal claims may be
brought against it. In addition, USI cannot predict the outcome of any
legal claims. USI's acquired subsidiaries have several contracts which
make Year 2000 warranties. Some of these contracts make broader warranties
than those made by the manufacturers of the software provided. The
potential liability arising from some of these warranties is not capped.
- In the course of our business, USI uses software products provided by
other companies, and some of USI's products and services interface to
other companies' systems. USI has received information from various other
third-party providers regarding the Year 2000 readiness of their products
and it continues to review such information. USI is also sending requests
to other third parties for information regarding the Year 2000 readiness
of their products and systems. As USI does not have any control over these
third parties, it cannot guarantee that such third-party products and
systems will not suffer any adverse effects due to the Year 2000 issue
which may result in a material adverse effect on our business.
- USI has not yet completed its Year 2000 contingency plans. If USI does not
complete its contingency plans, its potential Year 2000 liabilities may be
increased. The lack of a contingency plan could result in USI responding
late or not at all to problems caused by the date changeover at the end of
1999. In addition, any response USI does make may be poorly conceived or
executed. However, USI's compliance program includes the development of a
contingency plan. The development of the plan is currently underway.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
USI is exposed to market risk related to changes in interest rates. USI
invests excess cash balances in cash equivalents. In addition, USI's borrowing
arrangements are on fixed rate terms of varying maturities. USI believes that
the effect, if any, of reasonably possible near-term changes in interest rates
on USI's financial position, results of operations and cash flows is not
material.
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BUSINESS
ABOUT USI
USI's service offerings integrate leading packaged software applications
with back-up, security, and operational support to meet the needs of middle
market companies for business functions such as sales force automation, customer
support, e-commerce, and human resources and financial management. We implement
these applications in our data centers and enable our clients to access and
utilize the applications over the Internet. We take full responsibility for
providing these services to our clients, freeing them from the need to own and
manage related computer systems, networks and software.
MARKET TRENDS
We believe that there are four key market trends that drive the business
opportunity for USI:
- The rapid growth of Internet-based communications and the outsourcing of
web sites.
- The competitive need of middle market enterprises to automate key business
processes.
- The availability of Internet-enabled packaged software applications.
- The need for an integrated approach to providing these services.
THE RAPID GROWTH OF INTERNET-BASED COMMUNICATIONS AND THE OUTSOURCING OF WEB
SITES.
An increasing number of companies use the Internet to enable fast and
efficient communications between various constituents of their enterprises. For
example:
- E-commerce is becoming a critical element of many businesses' strategies.
Companies increasingly demand that their vendors communicate ordering,
invoicing and payment transactions through Internet-enabled applications.
Forrester Research, Inc. forecasts that Internet commerce revenues will
grow from approximately $10 billion in 1997 to $183 billion by 2001.
- Enterprises are relying on the Internet to communicate with employees who
are increasingly dispersed due to globalization and the development of
alternative workplaces. According to Forrester Research, Inc. there are
between 30 and 40 million telecommuters or home-based workers in the
United States.
- To interact with customers, suppliers and remote employees efficiently, an
increasing number of businesses are implementing mission-critical
applications over intranets and extranets rather than through dedicated
private networks. Forrester Research, Inc. forecasts that the increasing
demand for corporate intranets and extranets will fuel growth rates in
excess of 30% in distributed infrastructure services resulting in a $140
billion market in 2002.
As more companies implement mission-critical business applications on the
Internet, the demand for the outsourced provision of key Internet infrastructure
and services, or web hosting, has significantly increased. The outsourcing of
web sites is occurring because businesses recognize that they do not have an
infrastructure sufficient to ensure reliable and responsive deployment of
mission-critical applications on the Internet. In an April 1998 report,
Forrester Research, Inc. cited scalability, speed and availability as the key
network concerns among Fortune 1000 companies. Web site hosting providers
address these concerns by building substantial redundancy and capacious network
bandwidth into their facilities. Moreover, they provide a physically secure data
center environment, which helps to address businesses' security concerns as they
begin to move proprietary business information over the Internet.
THE COMPETITIVE NEED OF MIDDLE MARKET ENTERPRISES TO AUTOMATE KEY BUSINESS
PROCESSES.
Middle market enterprises increasingly face competitive demands to automate
business processes, but they have frequently not been able to afford the
functionality available to their larger competitors. This has been exacerbated
by the shortage of information technology professionals. We believe that these
enterprises have a significant need for packaged application software to improve
core business processes and reduce costs and enhance their global competitive
position.
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We believe that many of the leading enterprise resource planning software
packages remain too complex and too costly to be effective solutions for middle
market companies. While many enterprise resource planning providers have begun
offering products that are targeted for the middle market, implementation of
these packages generally still requires specialized skill sets and frequently
takes three to twelve months. In addition, the infrastructure required to
support these packages once implemented is also beyond the capabilities of many
middle market businesses. Faced with these costs and time frames, many middle
market companies choose to forgo the capabilities of leading enterprise resource
planning packages in favor of less functional products. We believe that a lower
cost, more easily implemented approach would allow these middle market
businesses to capitalize on the functionality of leading enterprise resource
planning packages and better position these businesses against larger
competitors.
THE AVAILABILITY OF INTERNET-ENABLED PACKAGED SOFTWARE APPLICATIONS.
Until recently, companies wanting to implement Internet applications had to
develop their own software applications or customize existing packages. This
made each implementation unique and costly. It also made implementation time
frames and costs unpredictable. Over the past two years, however, major packaged
application providers, such as Oracle, J.D. Edwards, Siebel, PeopleSoft, Lawson
and others, have released versions of their software which can be accessed and
used over the Internet. Internet-enabled software is becoming an increasingly
common offering of providers of applications for distributed users such as
e-commerce, enterprise resource planning applications, and sales force
automation, where the increasing ubiquity of the Internet makes it a
cost-efficient mechanism for implementing distributed functions.
We believe that the availability of Internet-enabled packaged software makes
it possible, for the first time, to implement these applications on the Internet
in predictable time frames, with predictable costs, and without writing custom
code.
THE NEED FOR AN INTEGRATED APPROACH TO PROVIDING THESE SERVICES.
Forrester Research, Inc. reports that the overall market for outsourcing
packaged software applications will grow from approximately $1 billion in 1997
to over $21 billion by 2001. Furthermore, according to Forrester Research, Inc.,
U.S. firms are now spending approximately a quarter of their overall information
technology budgets on outsourcing services. These services include packaged
application software implementation and support, customer support and network
development and maintenance. Reasons for the growth in outsourcing include:
- The scarcity of information technology professionals.
- The challenges faced by a non-technical company in hiring, motivating and
retaining qualified application engineers and information technology
employees.
- The desire by companies to focus on their core business.
- The difficulties that businesses experience in developing and maintaining
their networks and software applications.
- The fast pace of technical change that shortens time to obsolescence and
forces increases in capital expenditures as companies attempt to keep up
with leading technologies.
Enterprises faced with these problems have traditionally sought solutions from a
variety of information technology providers including system integrators, ISPs,
hardware and software vendors, and telecommunication companies. Thus, these
companies have had to deal with at least three independent suppliers - a
software applications provider, a systems integrator, and a site hosting
provider - or have had to support implementation with in-house resources. There
are inherent conflicts and difficulties with this
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approach, because each supplier is dedicated to providing its own specific
product or service with only limited knowledge of the bundle of products and
services required to provide the complete business solution. USI believes that
these trends create a substantial market opportunity for a single-source
solution that combines software from multiple vendors, hardware, systems
integration and Internet-based communications in an integrated service offering.
THE USI SOLUTION
USI believes that it is well positioned to take advantage of these trends.
We have established our IMAP services as a leading single-source solution for
the Internet-enabled application software needs of middle market enterprises. We
take responsibility for the deployment and maintenance of the IMAP best-of-breed
packaged software applications. This allows our clients to focus on their core
competencies without mediating among disparate vendors. USI's IMAP solutions
enable clients to buy these mission-critical functions as a service from a
single vendor, rather than as a collection of technologies from multiple
vendors.
USI has teamed with major packaged application software providers to
implement its IMAP offerings. USI has built a network of EDCs through which its
clients' business software applications are deployed. The network offers fast,
reliable and secure access to USI-managed client application web sites, which
serve as the "Internet gateways" for enterprises and their employees, customers
and partners to access and use business application software and data. The
servers are generally procured and maintained by USI and dedicated to specific
clients. Clients can define specific groups, such as their sales force,
customers, or investors, to have full or limited access to their web sites.
Because USI's network is deployed globally, access to customer applications can
be equally responsive in North America, Europe, and Asia. Moreover,
geographically dispersed backup is designed to ensure reliability and data
integrity. USI provides packaged application software and support along with its
services on the basis of multi-year contracts paid on a monthly basis. We
believe that the combination of our Internet communications capability along
with Internet-enabled software applications makes our IMAP offerings the first
truly integrated Internet communications and computing solution.
DELIVER INTEGRATED SERVICE OFFERINGS AROUND BUSINESS PROCESSES
We have built and acquired expert product teams that specialize in
implementing IMAP solutions to support specific business processes. USI's
consulting and implementation teams have specific expertise in implementing our
IMAP solutions for sales force automation, supply chain management, human
resource management, e-commerce, decision support, customer service and core
financials. Each team has the capability to integrate a specific application
software package and the required Internet communications services, which
together provide a total solution for a specific business process. These teams
can implement applications and generate value for customers very quickly. For
example, our typical implementation of Siebel technology is designed to be
completed in 45 days. We believe that this provides a competitive advantage over
a more conventional implementation which requires six months to more than a year
for completion. The consulting and implementation teams hand off the implemented
application to USI's Operations group, which runs and maintains the application
as well as provides ongoing support to USI's customer through its client care
organization.
LEVERAGE STRATEGIC RELATIONSHIPS WITH LEADING SOFTWARE APPLICATION PROVIDERS
USI has established relationships with vendors in key application areas,
including Siebel in sales force automation, customer service and enterprise
marketing; PeopleSoft in human resources and financials; Sagent in
decision-making support; and BroadVision in e-commerce. USI is the exclusive
outsource provider of Seibel enterprise relationship management application
hosting and rental services for direct customers of Siebel headquartered in
North America and is one of nine currently certified outsourcing partners for
PeopleSoft. The agreements with software providers generally enable us to
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<PAGE>
deploy the applications as a service, without the need to establish a separate
licensing arrangement for each client. The agreements also enable us to provide
our clients with an economically attractive service offering, and afford us
co-marketing and co-branding opportunities. These agreements provide us with an
initial software portfolio that can meet a broad range of our clients'
enterprise resource planning, e-commerce, and communication needs. In addition,
the agreements provide us with an accelerated path to developing our expert
product teams around the software applications and business processes these
applications support.
OPERATE A SPECIALIZED GLOBAL NETWORK
USI has constructed a highly reliable, fully redundant, global network
specifically designed to support its IMAP solutions. The USI network is designed
to provide the fastest possible response time, the highest level of security and
99.9% availability to its clients. USI has EDCs in Annapolis, Silicon Valley,
Amsterdam and Tokyo. These EDCs are monitored and managed from our Global
Enterprise Management Center in Annapolis and a remote back-up GEMC in Silicon
Valley. The network is designed around dual primary backbones connecting our
EDCs and GEMCs. Our dedicated network is linked to the Internet in North America
via six major backbone providers, allowing our clients to bypass congested
public exchange points. Large storage arrays in Annapolis and Silicon Valley can
provide real-time back-up of North American client sites, enabling us to provide
an unusually high level of data integrity. We use our proprietary network
operations platform, USIView, to proactively manage and monitor our network
systems, telecommunications hardware, network connectivity, operating systems
and applications software.
IMPLEMENT SERVICES-BASED BUSINESS MODEL
We sell our IMAP solutions as a service, not as a technology. Accordingly,
our clients sign long-term contracts with fixed monthly payments made as the
service is delivered. We believe that selling our IMap solutions as a service
reduces our clients' initial capital expenditures and makes it easier for
non-technical executives to purchase our products.
THE USI STRATEGY
The focus of our strategy is to deliver timely, reliable and secure IMAP
services to each of our clients. We believe that by doing so we will rapidly
build our client base and secure long-term relationships with those clients. We
will also continue investing to maintain a value advantage over our competitors
and to capitalize on our first mover advantages, as follows:
- INCREASE THE NUMBER OF SOFTWARE RELATIONSHIPS--USI plans to enter into
strategic partnerships with additional application software vendors. This
will enable us to expand our portfolio of IMAP solutions and reduce our
reliance on any one software provider. USI sees opportunities in
additional application areas, such as supply chain management, as well as
in specific vertical market segments.
- ENHANCE THE CAPACITY AND FUNCTIONALITY OF OUR GLOBAL NETWORK OF
EDCS--Today, we provide European and Asian mirror sites to our clients
from co-located EDCs in Amsterdam and Tokyo. As our client base expands,
we intend to build dedicated EDCs in Europe and Asia to increase our
capacity. Once these EDCs are built, we also intend to begin soliciting
European and Asian source business. We also view the Latin American market
as holding substantial potential.
- ACQUIRE ADDITIONAL SYSTEMS INTEGRATORS--As we expand our offerings, we may
acquire additional systems integrators to support the introduction of
these service offerings. We have found that the easiest way to enter new
application areas is to acquire existing businesses that focus on those
applications. This approach not only brings a team with immediately
relevant experience, it
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<PAGE>
also brings reference accounts and the potential for cross-selling USI
products to the acquired company's customer base.
IMAP OFFERINGS
Our current IMAP offerings provide integrated solutions to meet the needs of
middle market clients implementing distributed business functions. These
solutions encompass four elements:
- LEADING PACKAGED APPLICATION SOFTWARE. USI'S application packages address
major business process areas including e-commerce, sales force automation,
human resource management, decision support, supply chain management, and
core financials. USI has chosen to focus on mission-critical business
processes that serve distributed users. These processes can gain maximum
value from Internet implementations and from USI's infrastructure.
- USI-MANAGED CLIENT APPLICATION WEB SITES AVAILABLE VIA USI's GLOBAL
NETWORK. USI-managed client application web sites are housed on dedicated
USI-managed servers and available via a reliable, high-performance and
secure global Internet network. Our network architecture is designed to
ensure responsiveness and allows clients to define which groups will have
full or limited access to the web site or the server.
- CONSULTING AND SYSTEMS INTEGRATION SERVICES. IMAP consulting and system
integration services define, develop and deliver the combination of
hardware, network services, and application software that meet a specific
customer's needs. Within the IMAP solutions, USI does not develop software
nor does it implement substantial customization of existing packages.
Rather, modular packages applications are configured to meet a customer's
requirements.
- INTEGRATED CLIENT SERVICE. Once implemented, IMAP solutions are
efficiently managed in USI's network of EDCs. We provide client support
twenty four hours a day, seven days a week, from dedicated teams with
specific knowledge of each client implementation.
In addition to the specific application areas that USI supports, USI allows
clients to host their own software applications in our highly reliable and
secure data center environment. Clients for this complex web site hosting
realize all the reliability, security, and responsiveness benefits of USI's
network; however, USI takes no responsibility for the application itself. We
believe that many of USI's complex web site hosting clients intend to migrate to
a USI-supported application over time.
Most of our IMAP contracts, including our contracts for complex web site
hosting, provide for a modest initial payment and are generally not less than
three years in length. However, client contracts signed under our agreement with
Siebel may have a term as short as six months and we foresee that some web site
hosting contracts may also have shorter terms. Our contracts provide for
prospective payment reductions in the event that agreed service levels, as
measured and quantified by system performance benchmarks, are not met. As an
inducement to attract several of our earliest clients, we agreed to early
termination clauses without substantial penalties. We pursue non-terminable
contracts and do not intend that these inducements to "lighthouse accounts"
become our standard practice.
STRATEGIC SOFTWARE VENDOR RELATIONSHIPS
In developing our IMAP solutions, we have formed relationships with some of
the market-leading software providers whose applications support critical
business processes. These application providers include Siebel, PeopleSoft,
BroadVision, and Sagent. We believe that USI has proven to be an attractive
partner for these software companies because of our strategy to deliver
integrated solutions to middle market enterprises in a cost-effective service
model. Each of our software agreements is unique, but most allow us to deploy
packaged application software as a service without the need to establish a
separate licensing arrangement for each client. The agreements also generally
include co-marketing,
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<PAGE>
specialized product training and preferred pricing on the licenses to the
software. USI plans to enter into additional agreements with other software
vendors over time.
Each of USI's key application software relationships is described below.
SIEBEL. Siebel is the recognized leader in providing enterprise
relationship management applications, a range of product offerings that includes
sales force automation, customer service/help desk, and enterprise marketing.
USI and Siebel have entered into an agreement in which USI is the exclusive
outsource provider of Siebel enterprise relationship management application
hosting and rental services for direct customers of Siebel headquartered in
North America.
Our agreement with Siebel establishes a joint program in which the Siebel
sales force will offer outsourcing as a product option. While Siebel will, in
most instances, retain control of the application licensing, USI will implement
the application in its data center, provide on-going management and support, and
may provide its consulting and implementation services. Enterprise relationship
management opportunities identified by USI's sales force will be handled in the
same manner. In return for the exclusivity of this relationship, USI has agreed
not to offer any competing enterprise relationship management applications as
part of its IMAP solutions. The agreement mandates joint marketing programs,
joint oversight of, and agreement on, the program to sell enterprise
relationship management application outsourcing services, and commissioning of
both Siebel and USI sales representatives participating in each sale.
PEOPLESOFT. USI and PeopleSoft have agreed to offer PeopleSoft human
resource and core financial applications as IMAP solutions. PeopleSoft is an
established leader in the enterprise resource planning software industry and the
recognized leader in human resource management solutions. USI is one of nine
currently certified PeopleSoft outsourcing partners.
PeopleSoft, on one occasion, notified us of its intention to terminate its
agreement with us. After significant discussion, the issues in dispute were
resolved, our agreement with PeopleSoft was renegotiated and PeopleSoft
retracted its notification of intent to terminate the agreement.
Our agreement with PeopleSoft provides that outsourcing opportunities
identified by USI's sales force be jointly marketed and quoted. Opportunities
identified by the PeopleSoft sales force will be jointly marketed and quoted
with one of its certified outsourcing partners. Customers who elect outsourcing
through USI will purchase USI's IMAP solutions. We have committed to acquire a
specified minimum dollar value of licenses for distribution from PeopleSoft to
be paid ratably over eight fiscal quarters, commencing with the first quarter of
1999. We have also committed to support certain PeopleSoft advertising. The
agreement also provides for the sharing of rapid deployment methodologies,
complete software support, the ability to joint market products and services,
shared visibility at industry events, sharing of sales leads and joint training
efforts.
BROADVISION. USI and BroadVision have agreed to offer BroadVision's
e-commerce application as an IMAP solution. BroadVision's e-commerce application
has been adopted by enterprises across a broad range of industries. The
agreement with BroadVision allows USI to offer a robust set of e-commerce
solutions for business-to-business and business-to-consumer commerce.
Our agreement with BroadVision allows for attractive discounts on licenses.
Our arrangement with BroadVision also provides for flexible use of licenses
worldwide, sharing of development methodology, technical support, joint sales
activity and co-marketing.
SAGENT. USI and Sagent have agreed to offer Sagent Enterprise Decision
Support Systems applications as an IMAP solution. Sagent is currently fully
prepared to service the emerging data warehousing market with its turnkey, fully
Internet-enabled, data warehousing solution. Oracle and Siebel have selected
Sagent as the exclusive data modeling and data movement technology upon which
their data warehouse products are based.
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<PAGE>
Our agreement with Sagent allows for attractive discounts on licenses and
services and grants us the right to distribute the software as part of our IMAP
solutions without the need to establish a separate licensing arrangement for
each client. The agreement also provides for flexible use of the licenses
worldwide, access to rapid deployment methodology, software support, joint
marketing, visibility as a Sagent Premier Partner at industry events, shared
training resources, and sharing of sales leads.
OTHER RELATIONSHIPS. In addition to the applications described above, we
implement some e-commerce solutions based on Microsoft Site Server, pursuant to
a licensing agreement with Microsoft Corporation. We also implement many of our
IMAP solutions utilizing Oracle databases, pursuant to a licensing agreement
with Oracle. We have agreed to make Oracle our standard database for most of our
enterprise resource planning implementations.
USI'S NETWORK
We designed our global network specifically to provide superior performance
for the IMAP offerings. The USI global network was engineered around three core
design principles:
- Provide uptime of 99.9% or better to the entire network, which includes
the dedicated customer server.
- Provide fast and predictable response time and access to customer content
globally.
- Provide reliable and customized network security.
NETWORK UPTIME
The USI global network is designed to ensure 99.9% uptime by following four
specific principles:
- Avoiding incompatibility through standardization.
- Utilizing redundant components.
- Offering the ability to mirror client servers in separate EDCs.
- Implementing USIView, USI's global end-to-end network management system.
USI's network is designed around Cisco networking hardware, which minimizes
multi-vendor integration and reduces the risks of hardware incompatibility and
implementation delay. Cisco has designated USI's network as a Cisco Powered
Network, indicating that Cisco has reviewed and approved the network design.
USI's network architecture relies on redundancy of network hardware, facilities
infrastructure like power supplies, and telecommunications circuits, which
maximize the network availability. In addition, we have redundant EDCs, GEMCs,
and wide-area networks connecting our EDCs. The wide-area network connection can
be used to dynamically mirror or provide a duplicate site for each client at an
alternative EDC location. This mirroring feature protects the site from downtime
resulting from catastrophic failure at a specific geographic location. For
clients requiring real time disaster recovery, USI utilizes storage arrays that
enable real time data mirroring and are designed to maintain the integrity of
data to within one second.
The GEMC staff manages and monitors the network systems environment,
telecommunications hardware and data content servers in all of USI's EDCs, both
domestic and international, using USIView, USI's global network operations
technology, an end-to-end network management platform. USIView consists of an
integrated suite of scaleable software tools that allow the GEMC staff to
proactively monitor systems-level events, processes and thresholds. USIView is
the foundation of USI's systems and operations management strategy, providing us
with:
- A unified configuration and change management method.
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<PAGE>
- An event correlation facility that collects, processes, and responds to
management event information from a variety of sources.
- A central repository for inventory and asset management information.
FAST RESPONSE TIME
In order to facilitate the faster response time, USI has designed its
network to avoid congestion areas on the Internet and has specifically designed
its primary GEMC to support its integrated network. USI seeks to avoid the known
Internet congestion points at the Metro Area Exchanges and at the network access
points. In order to bypass the MAEs and network access points, USI's network in
North America connects directly with six major Internet service providers'
backbones, which carry about 85% of all the traffic on the Internet today.
Client data is routed directly over an ISP's network to USI's network, bypassing
congested public exchange points.
NETWORK SECURITY
Each EDC features multiple levels of security to isolate private information
from public information. Private network infrastructure is physically isolated
with cabling, switches, and routers separately maintained from the hardware for
the public network infrastructure. In addition, access to the EDCs and GEMCs is
restricted to authorized personnel by hand scan readers, which also monitor and
record entrances and departures. The public network and the private network have
minimal electronic or logical interconnection and are connected only through a
redundant firewall. The network also includes firewall products that enforce
data security and policy-based routing for clients who prefer secure access to
server resources. USI believes that these measures ensure complete separation
and security between its public and private networks.
SALES & MARKETING
USI offers its products and services through a direct sales organization
based in the U.S. Each sales representative is responsible for a limited number
of client relationships. USI believes this approach enables its sales
representatives to understand each client's specific business needs thoroughly
and to provide top quality ongoing support. USI currently has 23 sales
representatives located throughout the United States. We intend to expand our
sales organization into all major U.S. markets.
The USI sales teams target medium-sized enterprises based in the U.S. with
annual revenues ranging from $50.0 million to $1.0 billion and selected
divisions of larger multi-national organizations. Our sales strategy emphasizes
that IMAP solutions enable clients to avoid extensive initial capital outlays,
maintain focus on their core businesses, reduce technical and integration risks,
and shorten implementation time for software applications.
USI has developed programs to attract and retain high quality, motivated
sales representatives that have the technical skills and consultative selling
experience necessary to sell USI's IMAP solutions. In addition, USI's
acquisitions have augmented the sales and technical team, and have created
opportunities for more rapid market penetration in their geographic region and
access to established business relationships for cross selling.
USI has established a marketing communications organization that is
responsible for the branding and marketing of all USI's IMAP solutions and for
distinguishing IMAP as a branded product offering. The marketing organization is
responsible for all new service launches to ensure both internal execution and
marketplace acceptance. The marketing organization has developed cooperative
marketing and trade show participation programs in conjunction with USI's
strategic software and hardware partners.
USI has entered into a marketing agreement with U S WEST Communications,
Inc., the incumbent local exchange carrier in fourteen western states. By the
terms of that agreement, U S WEST
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gains exclusive rights to market USI's IMAP products in its fourteen-state
region. USI makes its products available to U S WEST at a discount, and provides
technical support during the sales process. The agreement with respect to any
IMAP offering can be canceled in the event that U S WEST does not achieve an
agreed quota of sales for that offering. Moreover, the exclusive arrangement is
not binding on any successor organization to USI.
ACQUISITION STRATEGY
USI's strategy for growth includes both internal development of its
operations and strategic acquisitions. The goal of our acquisition strategy is
to accelerate market penetration, build upon our core competencies and expand
our technical staff and sales force. USI targets acquisition candidates based on
their fit in USI's overall business plan with a particular focus on the
development of expert product teams around specific business processes. Once a
candidate is acquired, USI integrates its IMAP products with the existing
service offerings of the acquired company and leverages the acquired sales force
and customer base to expand market opportunities. In this way, USI accelerates
its market penetration and gains established customer relationships,
complementary skill sets and operational core competencies.
To implement its acquisition strategy, USI has sought acquisition candidates
with experienced technical professionals supported by project managers, training
personnel and a direct sales force. The ideal candidate is a small to mid-sized,
high-growth company with a focus toward service revenues, a business
relationship with one or more of our packaged application software providers and
a management team that shares our vision.
RECENTLY ACQUIRED COMPANIES
USI acquired IIT, our predecessor company, in September 1998, and ACR in
October 1998. These two companies provide USI with an existing PeopleSoft
business partner relationship and Oracle and Sybase database integration and
implementation expertise. The companies add expert product teams in enterprise
resource planning and add core competencies in network integration, systems
integration and Internet services. The acquired companies also provide a
marketing, sales, training and operational presence in the Florida, California,
Chicago and New York/New Jersey regions.
The table below sets forth information regarding the acquired companies as
of December 31, 1998.
<TABLE>
<CAPTION>
TECHNICAL 1998
AND SALES PRIMARY EXPERT CORE NUMBER OF REVENUE
COMPANY PERSONNEL LOCATIONS PRACTICES COMPETENCIES CUSTOMERS ($ MILLION)
- -------------- ------------- -------------- -------------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
IIT 35 Miami PeopleSoft Application 15 $ 6.9
Chicago Integration,
Los Angeles Systems
Integration
ACR 45 New York Oracle Systems 25 $ 7.5
Sybase Integration
</TABLE>
INTERNATIONAL INFORMATION TECHNOLOGY, INC. IIT is a comprehensive provider
of PeopleSoft human resources management and system implementation. The
company's consulting professionals possess expertise in human resources
management as well as accounting and financial systems. IIT specializes in
systems analysis and design, and systems integration solutions. IIT is a
PeopleSoft Global Implementation Partner. IIT's clients represent a wide variety
of industries, including manufacturing, utility, banking, government, food and
services. IIT provides USI with a regional expert practice focused on PeopleSoft
applications and a team of approximately 35 technical consultants dispersed
across the
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United States. IIT was purchased for $12.8 million and warrants to purchase
50,000 shares of common stock at an exercise price of $16.00 per share. In
addition, based on IIT's performance with respect to 1998 revenue, EBITDA and
employee retention goals, the total cash purchase price was increased by $2.3
million.
ADVANCED COMMUNICATION RESOURCES, INC. ACR, a New York based systems
integration services company, specializes in Oracle and Sybase database
application integration and business consulting services focused on the
financial services industry. ACR is a Sybase Training Partner and a Microsoft
Authorized Training Center. ACR provides USI with a market presence in the New
York/New Jersey region, as well as approximately 40 technical consultants and 4
sales representatives. ACR was acquired for $2.5 million in cash, a $3.5 million
note which was repaid on January 6, 1999 and warrants to purchase 62,500 shares
of common stock at an exercise price of $16.00 per share. In addition, because
ACR met or exceeded agreed to revenue, EBITDA and employee retention goals, the
total cash purchase price was increased by $5.0 million.
IIT and ACR are the primary providers of the traditional information
technology services we sell. In addition, our other implementation teams
occasionally sell these services on a time and materials basis. Both IIT and ACR
are being successfully integrated into USI, with minimal loss of staff. Sales,
accounting, and administrative functions have been combined. Both companies are
also now supporting the implementation of specific IMAP offerings.
CLIENTS
USI targets North American-based middle market enterprises and selected
divisions of larger multinational organizations. We believe that these
organizations will gain the most competitive advantage from IMAP solutions and
that they provide the greatest opportunity for the outsourcing of information
technology operations. Currently, business software application vendors are
providing software predominantly to larger organizations. Historically, attempts
to market to middle market enterprises have generally been unsuccessful due to
the high up-front costs to obtain the required software, the long lead time to
integrate the software into the specific business process, and the competition
for and shortage of information technology resources in middle market companies.
USI currently has clients for both its IMAP offerings and the traditional
information technology services sold by IIT and ACR. As of March 22, 1999, USI
had 17 IMAP clients representing over $16.0 million of total expected revenue
and over $5.0 million of 12-month backlog, which we define as revenue under
contract expected to be recognized in the next 12 months. USI and its acquired
entities are currently serving in excess of 35 customers with traditional
information technology services, many of whom are candidates for cross-selling
IMAP offerings. As of March 22, 1999, selected clients of USI included:
<TABLE>
<CAPTION>
IMAP CLIENTS TRADITIONAL IT SERVICES CLIENTS
- ------------------------------------- -------------------------------------
<S> <C>
GE Capital Retirement Deutsche Bank
Hershey Foods Kaiser Permanente
Legg Mason Lockheed Martin
Sotheby's Nike
Sunburst Hospitality Prudential Insurance
U S WEST Southern California Edison
</TABLE>
CLIENT CARE
A central element of the IMAP solution is a high level of responsive
personalized service, referred to as client care. Through the USI client care
process, a specific technical account manager is assigned
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to each client and support teams are designated to back up the account managers.
This structure is designed to ensure service is available twenty four hours a
day, seven days a week. Assigned support teams comprise senior client support
specialists, network engineers, and packaged application engineers. The teams
have further support from a group of product specific application engineers who
are trained in the specific software applications offered by USI.
COMPETITION
The market for Internet-related services is extremely competitive. We
anticipate that competition will continue to intensify as the use of the
Internet grows. The tremendous growth and potential market size of the Internet
market have attracted many start-ups as well as extensions of existing
businesses from different industries. In the market for Internet-enabled
application software and network solutions, we compete on the basis of
performance, price, software functionality and overall network design. While
USI's competition comes from many industry segments, we believe no single
segment provides the integrated, single-source solution provided by USI. Current
and prospective competitors include systems integrators; national, regional and
local ISPs; hardware and software suppliers; and telecommunications companies.
SYSTEMS INTEGRATORS. We compete with national, regional, and local
commercial systems integrators who bundle their services with software and
hardware providers and perform a facilities management outsourcing role for the
customer. These competitors generally have greater name recognition or more
extensive experience than we do. EDS, Andersen Consulting,
PricewaterhouseCoopers and MCI Systemhouse, among others, provide professional
consulting services in the use and integration of software applications in
single-project client engagements. Large systems integrators may establish
strategic relationships with software vendors to offer services similar to our
IMAP offerings. We expect that regional systems integrators are likely to
compete with us based on local customer awareness and relationships with
hardware and software companies. Additionally, regional systems integrators may
align themselves with ISPs to offer complex web site management combined with
professional implementation services.
ISPS. Our current primary competitors include business-focused ISPs with a
significant national presence, such as UUNet Technologies, Inc., GTE
Internetworking Incorporated, PSINet, Inc., Concentric Network Corporation,
DIGEX, Frontier Corporation and Exodus Communications, Inc., among others. While
we believe that our level of service, support and targeted business focus
distinguish us from these competitors, some of these competitors have
significantly greater market presence, brand recognition, and financial,
technical and personnel resources than we do, and have extensive coast-to-coast
Internet networks.
HARDWARE AND SOFTWARE COMPANIES. We compete with hardware and software
companies in providing packaged application solutions as well as network
infrastructure. In order to build market share, both hardware and software
providers may establish strategic relationships in order to enhance their
service offerings. IBM Solutions currently provides applications outsourcing
around its Lotus Notes products and delivers the service via the IBM network
infrastructure. J.D. Edwards & Company, a developer of enterprise resource
planning software, has announced that it will offer its software in an
outsourced model. SAP Aktiengesellschaft has formed an outsourcing organization
to develop key partnerships with leading consulting firms with the intent of
offering SAP software. We believe that additional hardware and software
providers, potentially including our strategic partners, may enter the
outsourcing market in the future.
TELECOMMUNICATIONS COMPANIES. All of the major long distance companies,
including AT&T, MCI WorldCom, and Sprint, offer Internet access services. In
order to address the Internet connectivity requirements of the current business
customers of long distance and local carriers, we believe that
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<PAGE>
there is a move toward horizontal integration through acquisitions of, joint
ventures with, and purchasing connectivity from, ISPs. Accordingly, USI expects
that it will experience increased competition from the traditional
telecommunications carriers. Many of these telecommunications carriers, in
addition to their substantially greater network coverage, market presence, and
financial, technical and personnel resources, also have large existing
commercial customer bases. We believe that our local presence, our strong
technical and data-oriented sales force and our offering of branded software
applications are important features distinguishing us from the
telecommunications companies.
OTHER POTENTIAL COMPETITORS. It is possible that new competitors or
alliances may emerge and gain market share. Such competitors could materially
affect our ability to obtain new contracts. Further, competitive pressure could
require us to reduce the price of our products and services thus affecting our
business, financial condition and results from operations.
PROPERTIES
USI is headquartered in Annapolis, Maryland, where it currently leases its
principal executive office. USI's training and conference facilities are located
in a building it owns in Annapolis, Maryland. Due to our rapid expansion, we are
currently examining a number of alternatives for increasing the space available
to us in the Annapolis area.
We lease space in a number of other locations, primarily for EDC and GEMC
installations and to house our consulting and implementation staff. Outside of
Annapolis, we believe that our leased facilities are adequate to meet our
current needs in the markets in which we have begun to deploy our services, and
that additional facilities are available to meet our expansion needs in our
target markets for the foreseeable future.
Our leases are for terms varying from 30 to 60 months and generally contain
renewal options of two to three years as well as rent escalation clauses. During
1998 we incurred approximately $720,000 in rent expense.
EMPLOYEES
As of March 22, 1999, we employed approximately 450 people, including
full-time and part-time employees at our corporate headquarters, our GEMCs and
EDCs and at our subsidiaries. We consider our employee relations to be good.
None of our employees are covered by a collective bargaining agreement.
LEGAL PROCEEDINGS
From time to time we may be involved in litigation that arises in the normal
course of business operations. As of the date of this prospectus, we are not a
party to any litigation that we believe could reasonably be expected to have a
material adverse effect on our business or results of operations.
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<PAGE>
MANAGEMENT
The following sets forth certain information regarding our current directors
and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Christopher R. McCleary(1)........................... 46 Chief Executive Officer and Chairman of the Board
Stephen E. McManus................................... 49 President and Director
Jeffery L. McKnight.................................. 55 Executive Vice President of Operations and Client
Services
Andrew A. Stern...................................... 41 Executive Vice President and Chief Financial Officer
Vincent L. Romano.................................... 52 Senior Vice President World Wide Sales
R. Dean Meiszer(3)................................... 42 Director
Benjamin Diesbach(2)................................. 52 Director
David J. Poulin(3)................................... 40 Director
Ray A. Rothrock(1)(3)................................ 44 Director
Frank A. Adams(1)(2)................................. 53 Director
William F. Earthman(1)(2)............................ 47 Director
John H. Wyant(1)..................................... 52 Director
Joseph R. Zell....................................... 38 Director
Michael C. Brooks (1)(2)(3).......................... 54 Director
</TABLE>
- ------------------------
(1) Member of the executive committee
(2) Member of the compensation committee
(3) Member of the audit committee
CHRISTOPHER R. MCCLEARY is a co-founder of USI and has served as the
Chairman and Chief Executive Officer of USI since January 1998. Prior to
founding USI, he was the Chairman and Chief Executive Officer of DIGEX, Inc.
from January 1996 to December 1997. Prior to serving at DIGEX, Mr. McCleary
served as Vice President and General Manager of Satellite Telephone Service, a
satellite communications company, from October 1990 to January 1996.
STEPHEN E. MCMANUS is a co-founder of USI and has served as its President
and a Director since April 1998. Prior to joining USI, Mr. McManus was Director
of U.S. Sales for the telecommunications unit of Data General Corporation from
January 1998 to March 1998. From June 1995 to December 1998 Mr. McManus served
as a Branch Manager for Silicon Graphics. Prior to joining Silicon Graphics, Mr.
McManus held several positions at Data General Corporation from June 1988 to May
1995, including District Manager for Distributor Sales, VAR District Manager and
Branch Manager.
JEFFERY L. MCKNIGHT has been Executive Vice President of Operations and
Client Services since December 1998. He originally joined USI in June of 1998 as
Senior Vice President of Client Care. Previously, he held senior marketing and
operations positions with Aeronautical Radio, Inc., ARINC, the communications
arm of all of the domestic airlines from May 1989 to July 1997. Prior to ARINC,
he held senior operations positions with System One, Inc. from February 1963 to
April 1989.
ANDREW A. STERN has been Executive Vice President and Chief Financial
Officer of USI since July 24, 1998. Prior to joining USI, Mr. Stern held
positions at USF&G Corporation, an insurance company, from May 1993 to July
1998, most recently as Executive Vice President, Strategic Planning and
Reinsurance Operations. In addition, Mr. Stern was a partner of Booz Allen &
Hamilton, an international management and technology consulting firm with whom
he was employed from August 1981 to May 1993.
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<PAGE>
VINCENT L. ROMANO, JR. has served as USI's Senior Vice President, Worldwide
Sales since he joined USI in July 1998. Prior to joining USI, Mr. Romano served
in various positions at Motorola, Inc. from March 1989 to July 1998, including
Vice President and Director of Worldwide Sales Operations for its computer
group. Prior to Motorola, he held senior sales positions with Data General, Inc.
from March 1988 to 1989.
R. DEAN MEISZER has been a director of USI since it was founded. He has been
President and Managing Director of The Crisler Company, a Cincinnati-based
investment firm, since May 1989. Prior to Crisler, Mr. Meiszer was Senior Vice
President of Society Bank from March 1978 to May 1989.
BENJAMIN DIESBACH was elected as a director of USI in May 1998 as a designee
of Mr. McCleary in his role as Chief Executive Officer of USI. He has been
President of Midwest Research, Inc., a consulting firm, since he formed it in
January 1995. Prior to forming Midwest Research, Mr. Diesbach was Chief
Executive Officer of Continental Broadcasting, Ltd., a broadcasting company,
from September 1993 to January 1995.
DAVID J. POULIN was elected as a director of USI in May 1998 as a designee
of Mr. McCleary in his role as Chief Executive Officer. He has been the head
hockey coach at the University of Notre Dame since May 1995. Prior to joining
Notre Dame as hockey coach, Mr. Poulin played in the National Hockey League for
13 years.
RAY A. ROTHROCK was elected as a director of USI in June 1998 as a designee
of the Venrock Group. He has been a General Partner of Venrock Associates, the
high technology venture capital investment firm of the Rockefeller Family and
Associates, since June 1988. Mr. Rothrock serves on the boards of directors of
CheckPoint Software Technology and several private companies including Qpass,
Rights Exchange, Appliant, Inc., Sbyn Technology and Simba Technology.
FRANK A. ADAMS was elected as a director of USI in June 1998 as a designee
of the Grotech Group. He is the President and Chief Executive Officer of Grotech
Capital Group, which he co-founded in August 1984. Mr. Adams has served as
President of the Mid-Atlantic Venture Association since July 1985. He has served
on the board of directors of a number of technology companies including
Thunderbird Technologies, Inc. and EPIC Therapeutics, Inc.
WILLIAM F. EARTHMAN was elected as a director of USI in June 1998 as a
designee of the Massey Burch Group. He has been a Partner of Massey Burch
Capital Corporation since January 1994. Prior to becoming a Partner at Massey
Burch Capital Corporation, Mr. Earthman served from January 1990 as a Vice
President of Massey Burch Investment Group. Prior to Massey Burch, he worked for
the investment banks J.C. Bradford & Co. from September 1975 to October 1981,
Prudential-Bache Securities from October 1981 to November 1985 and First
Nashville Corp. from December 1985 to December 1989. He currently serves on the
board of directors of Intellivoice Communications, Inc. and Legal Technologies
Network, Inc.
JOHN H. WYANT was elected as a director of USI in June 1998 as a designee of
the Blue Chip Group. He is the Managing Partner and President of Blue Chip
Venture Company, which he founded in 1990. Mr. Wyant is currently a director of
Regent Communications, Inc., Zaring Homes, Inc., Delicious Brands, Inc. and Ciao
Cucina Corporation. He previously served as a director of DIGEX.
JOSEPH R. ZELL was elected as a director of USI in July 1998 as a designee
of U S WEST. Since December 1991, he has held several positions with the
!NTERPRISE Networking division of U S WEST Communications, Inc., including
Director of Product Development for !NTERPRISE, Executive Director of
Applications Innovation, President of US WEST's Wholesale Division and Vice
President of Markets and innovation at !NTERPRISE. He has been President of the
division since March 1997.
MICHAEL C. BROOKS was elected as a director of USI in December 1998 as a
designee of the Whitney Group. He has been a general partner of J. H. Whitney &
Co. since 1984. He is also a director of
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SunGard Data Systems, Inc., Pegasus Communications, Inc., Nitinol Medical
Technology, Inc. and various other private companies.
OTHER KEY EMPLOYEES
In addition, we employ the following other key employees:
L. SEBASTIAN ALEGRETT has served as USI's Vice President and General
Manager, PeopleSoft Implementation Group, since September 1998. From February
1994 to September 1998 he was the President and CEO of IIT, a PeopleSoft Global
Alliance Partner founded by Mr. Alegrett. USI acquired IIT in September 1998.
L. GARRETT BROWN has been Vice President of Product Development for USI
since joining USI in July 1998. Mr. Brown most recently served as Product
Manager of Collocation Services and Managed Hosting for UUNet Technologies
overseeing product introduction from December 1997 to June 1998. Prior to that
he served as the Manager of WWW Major Opportunities, a Server Hosting Division
of UUNet Technologies from February 1997 to December 1997. Mr. Brown originally
joined UUNet Technologies in August 1995 as the Product Manager of Radius Server
Network Resale and Multicast.
LAWRENCE BRUNELLE has been Vice President and General Manager of Siebel
Implementations Group since November 1998. He joined USI in June 1998 as USI's
Vice President of Consulting and Implementation Services. Prior to joining USI,
Mr. Brunelle worked as a Managing Associate with Coopers & Lybrand Consulting
from August 1997 to June 1998. Prior to working at Coopers & Lybrand Consulting,
he was a senior technical manager with Andersen Consulting from June 1996 to
August 1997. In addition, from June 1990 to June 1996, Mr. Brunelle served in
various project management and technical consulting positions with Booz Allen &
Hamilton, Inc.
DAVID L. COLLIER has been Vice President, Pricing & Business Planning since
March 1999. Mr. Collier joined USI in April 1998 as the Director of Business
Planning and Financial Management. Previously, Mr. Collier was the Director of
Business Development at PICO, Inc., from September 1997 until joining the
Company. Prior to PICO, Inc., he was with ARINC from August 1990 to September
1997. While at ARINC, Mr. Collier served as the Director of Business Planning
and Financial Management and Manager, Financial Planning & Analysis.
S. NELSON FRENCH, JR., has been Vice President, Western Sales Region since
joining the Company in August 1998. Mr. French joins USI with over 30 years
experience in the computer hardware and software industry. Previously Mr. French
was with Sun Microsystems, Inc. from July 1988 to August 1998. Since December
1993 he served as the Director, SunSoft Sales & Channels Development. Prior to
that position he held various management positions including; Director of Market
Development, Director of Area Tactical Marketing, Strategic Account Executive
and as a National Account Executive.
MICHAEL HARPER joined USI in April 1998 as Vice President of Product
Marketing. He has been Vice President and General Manager of PeopleSoft Business
Unit since January 1999. Mr. Harper joins USI with over 13 years experience in
systems management, marketing and sales. He recently served as the Mid-Atlantic
Region Systems Manager for Silicon Graphics, Inc. from July 1997 to April 1998
with responsibility for pre-sales and professional services to federal and
commercial customers. Prior to Silicon Graphics, Mr. Harper was with IBM in
various marketing, sales and professional service capacities. Mr. Harper was
with IBM from July 1989 to July 1994.
RICHARD A. HRONICEK has been Vice President and General Manager of Siebel
Business Unit since January 1999. He joined USI in June 1998 as its Vice
President and General Manager of North America West. Previously, he was a
consultant from August 1997 to June 1998 providing telecommunications expertise
in mergers and acquisitions, business strategy, and the acquisition and sale of
Internet service providers. Before that he served as the President and CEO of
Javelin Internet Group from
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<PAGE>
January 1997 to July 1997. Mr. Hronicek was also President, CEO, and founder of
Pacific Bell Internet Services from April 1995 to December 1996.
MATTHEW D. KANTER has served as the Company's Vice President and General
Manager of Web Hosting/E-Commerce since October 1998. He joined USI after USI's
aquisition of ACR, where he was President, CEO, and Technical Director from
January 1993 to October 1998. ACR delivers applications development and systems
integration services to the financial services community in the Northeastern
United States. Before joining ACR, Mr. Kanter was Director of Technical Services
at Simpson, Thacher and Bartlett from January 1989 to February 1990.
WILLIAM G. KARPOVICH has been Vice President of Product Development
E-Commerce and Complex Web Hosting since he joined USI in May 1998. Prior to
joining USI, he was Director of Internet Products, a division of the NDC Group,
Inc. from July 1997 to July 1998. Prior to that, Mr. Karpovich was Director of
Product Management at DIGEX from July 1996 to July 1997.
JOHN W. LICCIONE has served as Vice President of Advanced Products
Engineering since December 1998. He joined USI as Vice President of Research and
Development. Prior to joining USI he was Director of System Development in the
Network Services Division of ARINC, Inc. from February 1997 to March 1998. Mr
Liccione served as the Advanced Research and Development Director from April
1994 to February 1997 where he developed and implemented the infrastructure and
strategy for ARINC's Internet infrastructure.
MARK J. MCENEANEY has been Vice President and Controller of USI since
joining USI in April 1998. Prior to joining USI, he was Chief Financial Officer
of Questar Builders, Inc. from November 1997 to March 1998 and of William Ryan
Homes, Inc. from April 1995 to October 1997. Mr. McEneaney is a CPA and was with
Ernst & Young LLP from January 1987 to March 1995, most recently as a Senior
Manager in the accounting and auditing division.
MICHELE PERRY has been Vice President, Marketing for USI since joining USI
in July 1998. Previously, she was Senior Vice President of Marketing and Vice
President of Product Management for Versatility, Inc. from March 1997 to May
1998. Prior to Versatility, Inc., Ms. Perry was with Software AG from May 1994
to December 1996. While at Software AG Ms. Perry served in various management
positions.
CHRISTOPHER M. POELMA is a co-founder of USI and has served as a Senior Vice
President and General Manager since November 1998. He originally joined USI in
April 1998 as its Executive Vice President, Chief Technology Officer. Prior to
joining USI, Mr. Poelma was Vice President of the Enterprise Solutions division
of MICROS Systems, Inc., a technology company, from October 1997 to March 1998.
From January 1996 to October 1997 Mr. Poelma served as an Engagement Manager for
telecommunications and healthcare at Sun Microsystems, Inc. From January 1994 to
December 1995, Mr. Poelma served as Director of the Enterprise Solutions Group
at Unisys, Inc. Prior to his position at Unisys, Inc., Mr. Poelma held various
positions at Electronic Data Systems, Inc. from January 1987 to January 1994
including Systems Engineering Supervisor and Systems Engineering Manager.
WILLIAM T. PRICE has been Vice President, Secretary and General Counsel of
USI since joining USI in April 1998. Prior to joining USI, Mr. Price was the
senior trial associate in the Baltimore-based law firm of Albright, Brown &
Goertemiller from April 1997 to April 1998, where he represented major corporate
clients in antitrust, copyright, intellectual property and other commercial
matters in various state and federal courts. Prior to joining Albright, Brown &
Goertemiller, Mr. Price was a litigator and Managing Attorney for the New York
based law firm of Finklestein and Levine. Mr. Price was with Finklestein and
Levine from April 1993 to October 1996.
L. DEAN RICH has been Vice President, Internetworking Security since joining
USI in June of 1998. Previously Mr. Rich served as a Regional Director for
Internet Security Systems, Inc., from December 1997 until June 1998. In this
capacity Mr. Rich was responsible for managing a team of security
39
<PAGE>
professionals that specialized in vulnerability and threat detection. Prior to
Internet Security Systems, Inc., he was the President of Strategic Security
Solutions, Inc. from June 1997 until November 1997. He has also served as a
Management Consultant for Booz-Allen Hamilton Inc., from July 1995 until
November 1996 and as a Programmer specializing in ISP issues from January 1991
to July 1995.
JAY W. ROBERTSON is our Vice President of Operations. He joined USI in May
1998 as Vice President Support Services. Prior to joining USI, Mr. Robertson was
the Senior Director of Network Services for the ARINC Corporation Radio Division
from June 1996 to May 1998. Prior to ARINC, Mr. Robertson was with Sprint
Corporation where he held several management and director positions, including
Director of America On-Line Service Center and Program Office. Mr. Roberston was
with Sprint Corporation from June 1985 to June 1996.
JAMES R. STALDER has been Senior Vice President, Strategic Development of
USI since joining the Company in March 1999. Prior to joining USI, Mr. Stalder
was with DIGEX from June 1996 to February 1999. While at DIGEX, he served as the
Vice President, Professional Services, Web Site Management Group from January
1998. Prior to that position, Mr. Stalder was Vice President, Strategic
Planning, Web Site Management Group from January 1997 to December 1997. He also
served as Director, Product Management, Web Site Management Group from June 1996
to December 1996. Prior to DIGEX, Mr. Stalder was with Andersen Consulting from
June 1990 to June 1996, where he served as Manager, Communications Industry
Group; Senior Consultant, Advanced Technology Group and Staff Consultant.
LEE TANNER has been Vice President of Siebel Products since February 1999.
He joined the company in May 1998 as its Director of Business Development. Prior
to joining USI, Mr. Tanner served as a Business Development Manager for Sun
Microsystems from June 1996 until May 1998. Prior to that, Mr. Tanner was with
VISIX SOFTWARE Inc. as a Business Development Manager from June 1994 to June
1996 and prior to that Mr. Tanner was an Account Manager for GE Information
Services from November 1991 to May 1994.
RICHARD B. TERHORST has been Vice President, Eastern Sales Region since
joining the Company in October 1998. Mr. Terhorst joins USI with over 30 years
experience in Sales and Executive Management positions. Prior to joining USI,
Mr. Terhorst was President & CEO of Government Systems, Inc. (GSI). Mr. Terhorst
joined GSA, an International Telecommunications Integrator, in March 1994 and
served as President & CEO until joining USI in October 1998. From April 1998
until March 1994 Mr. Terhorst served as an Executive Vice President of Infonet
Services Corporation.
JOHN TOMLJANOVIC has been Vice President, Client Care since November 1998.
He joined the company in June 1998 as its Director of Application Engineering.
Prior to joining USI, Mr. Tomljanovic was with Andersen Consulting from June
1992 to May 1998, most recently as a Manager in the telecommunications group.
JOHN P. STREETEN has been Vice President, Finance of USI since November
1998. He originally joined USI in July 1998 as Vice President, Mergers and
Acquisitions. Prior to joining USI, Mr. Streeten was with IBM as a Finance
Manager of Acquisitions and Alliances from October 1996 to July 1998. Prior to
that, Mr. Streeten was District Sales Manager of Lotus Development Corporation,
an IBM subsidiary from January 1991 to September 1996. Mr. Streeten was also
Regional Sales Manager at CalComp, Inc., a $520 million manufacturer of computer
graphics hardware and peripherals, from July 1983 to December 1990.
BRENDA WOODSMALL has been Vice President Human Resources and Staff Services
for USI since joining USI in May 1998. Prior to joining USI, Ms. Woodsmall was
an independent consultant, from May 1993 to October 1997, based in the Annapolis
and Washington, D.C. areas performing recruiting, customer service training
programs, and other human resources work with startup companies. Her last
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corporate role was Senior Vice President of Human Resources at System One
Corporation from September 1983 to October 1991.
COMMITTEES OF THE BOARD OF DIRECTORS
In June 1998, the board of directors established a compensation committee,
an audit committee and an executive committee. The compensation committee makes
recommendations concerning salaries and incentive compensation of our employees
and consultants and administers our stock option plan. The audit committee
reviews, acts on and reports to the board of directors with respect to various
auditing and accounting matters, including reviewing our audit policies,
overseeing the engagement of our independent auditors and developing our
financial strategies. The executive committee is empowered to conduct all
activities that may be conducted by the board of directors, subject only to
limitations imposed by applicable Delaware corporate laws.
COMPENSATION OF DIRECTORS
All non-employee directors are reimbursed for travel and other related
expenses incurred in attending meetings of the board of directors. In addition,
each non-employee director then serving on the board of directors will receive
upon the date of the first board meeting in the second calendar quarter of each
year an option granted pursuant to our option plan to purchase 3,750 shares of
our common stock. The options will vest immediately and will have an exercise
price equal to the fair market value of the common stock on the date of grant.
The shares of common stock purchased pursuant to these options will be subject
to repurchase by us as described in "--Stock Option Plan".
EMPLOYMENT AGREEMENTS
We have entered into the following employment agreements with our executive
officers.
<TABLE>
<CAPTION>
OFFICER TERM SALARY POSITION
- ---------------------------- ----------------------- ---------- ----------------------------
<S> <C> <C> <C>
Christopher R. McCleary May 1998-May 2001 $ 175,000 Chairman and Chief Executive
Officer
Stephen E. McManus June 1998-June 2001 $ 175,000 President
Andrew A. Stern July 1998-July 2001 $ 175,000 Chief Financial Officer and
Executive Vice President
Jeffery L. McKnight December 1998 $ 175,000 Executive Vice President of
-December 2001 Operations and Client
Services
</TABLE>
Mr. McCleary's agreement also provides for:
- Automatic renewal for subsequent one year terms unless either party elects
not to renew prior to 90 days from the end of the then current term of the
agreement.
- A bonus to be determined based on his meeting established management
objectives with a minimum of $250,000 in the second year of the agreement
and $500,000 in the third year of the agreement.
- The right to terminate him for cause upon a vote of two-thirds of the
board of directors preceded by a finding by the compensation committee or
executive committee that he has breached the agreement.
- The payment of his full salary for the term of the agreement if he is
terminated without cause.
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- The payment of his full salary for the term of the agreement if he
terminates the agreement because:
--we breach the agreement
--there is a material adverse change in his job responsibilities, duties,
function or reporting
relationships
--he is required to travel more than 50 miles to a relocated office
- The payment of his bonus after he terminates the agreement for other than
the reasons described above if its amount had already been determined by
the compensation committee.
Mr. McManus, Mr. McKnight and Mr. Stern's agreements all provide for:
- No obligation to pay salary after a termination for cause due to:
--a breach of the agreement by the officer
-- engaging in illegal or immoral practices or activities which can
reasonably be expected to be materially detrimental to our reputation
--being dishonest, disloyal, or fraudulent in performing his duties
--willful misconduct or dereliction of his duties
--using, possessing, selling or delivering illegal drugs
if the action giving rise to the termination is not cured within 60 days
and an arbitrator finds the termination to be valid.
Mr. McManus and Mr. Stern's agreements provide for:
- The right to purchase 625,000 shares of our common stock-each of them has
exercised this right.
- A life insurance policy provided by us in an amount equal to twice his
salary less the amount of any group insurance he selects as part of our
standard group insurance plan.
- Our right to repurchase the 625,000 shares of stock, for $100 in Mr.
McManus' case or the total tax liability incurred by Mr. Stern as a result
of his purchase in his case, if the officer is terminated for cause or if
he terminates the agreement on or before May 30, 2000, unless, in the case
of Mr. Stern, it is a termination for good reason.
- Our obligation to repurchase the 625,000 shares of stock at the then fair
market value if the officer's employment is terminated due to death or
disability at any time prior to our initial public offering of our stock.
- Our obligation to register the 625,000 shares of stock for sale under the
Securities Act as soon as practicable in the event the officer's
employment is terminated due to death or disability at any time after our
initial public offering of our stock.
- The obligation to pay the officer's full salary for the remainder of the
term of the agreement or one year, if longer, in the case of Mr. Stern,
and a bonus pro rated for the remaining term of the agreement if we
terminate one of them without cause.
Mr. McKnight's agreement also provides for:
- The grant of an option to purchase 375,000 shares of common stock under
our stock option plan.
- The termination of our right to repurchase his shares under the option
plan 24 hours before any termination of his employment without cause.
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All of the agreements provide for the termination of our right to repurchase
shares held by the officers upon a change in control of the company. All of the
agreements also provide for review of the salary and bonus terms by our
compensation committee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to June 1998, we had no separate compensation or stock option
committee or other board committee performing equivalent functions, and these
functions were performed by our board of directors. Both Mr. McCleary and Mr.
McManus were members of the board of directors during that period. In June 1998,
we established compensation, audit and executive committees of our board of
directors. The compensation committee is composed of non-employee directors. See
"--Committees of the Board of Directors."
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION. The following table provides summary information
concerning compensation paid or accrued by USI to or on behalf of our "Named
Executive Officers," which are our Chief Executive Officer and each of the other
executive officers of USI who earned more than $100,000, in salary and bonus,
for all services rendered in all capacities during the fiscal year ended
December 31, 1998. The aggregate amount of perquisites and other personal
benefits, securities or property received by each of the Named Executive
Officers was less than either $50,000 or 10% of the total annual salary and
bonus reported for that Named Executive Officer:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------------------
--------------------- SHARES UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS
- ---------------------------------------------------------------- ---------- --------- ------------------------
<S> <C> <C> <C>
Christopher R. McCleary
Chairman of the Board, Chief Executive Officer................ $ 131,250 $ 0 --
Stephen E. McManus
President..................................................... $ 131,250 $ 0 --
Jeffery L. McKnight,
Executive Vice President of Operations and Client Services.... $ 75,962 $ 50,000 375,000
</TABLE>
STOCK OPTIONS. The following table contains information concerning the
stock option grants made to each of the Named Executive Officers during the
fiscal year ended December 31, 1998:
OPTION GRANTS IN LAST FISCAL YEAR
- The options described in the table below are immediately exercisable and
expire on the tenth anniversary of the date of grant. Shares of common
stock purchased pursuant to these options will be subject to our right to
repurchase them at the option exercise price upon the termination of the
holder's employment or business relationship with us. The repurchase right
will lapse with respect to one-third of the shares purchasable upon
exercise of an option on the first anniversary of the date of grant of the
option. The repurchase right with respect to the remainder of the shares
purchasable upon exercise of an option will lapse in equal quarterly
installments over the subsequent eight calendar quarters.
- The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by the rules of the SEC. There can be no assurance that the
actual stock price appreciation over the ten-year option term will be at
the assumed 5% and 10% levels or at any other defined level. Unless the
market price of the common stock appreciates over the option term, no
value
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<PAGE>
will be realized from the option grants. The potential realizable value is
calculated by assuming that the fair market value of the common stock on
the date of grant of the options appreciates at the indicated rate for the
entire term of the option and that the option is exercised at the exercise
price and sold on the last day at the appreciated price.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES
-------------------------------------------------------------------- OF STOCK PRICE
NUMBER OF SHARES OF % OF TOTAL APPRECIATION
COMMON STOCK OPTIONS GRANTED EXERCISE FOR OPTION TERM
UNDERLYING OPTIONS TO EMPLOYEES IN PRICE EXPIRATION ------------------------
NAME GRANTED 1998 PER SHARE DATE 5% 10%
- ---------------------- ------------------- ------------------- ------------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Christopher R.
McCleary............ 0 -- -- -- -- --
Stephen E. McManus.... 0 -- -- -- -- --
Jeffery L. McKnight... 375,000 22.3% $ 2.64 12/2008 $ 622,606 $ 1,577,805
</TABLE>
YEAR-END OPTION VALUES. The following table sets forth information
concerning option holdings through December 31, 1998 by each of the Named
Executive Officers:
- "Exercisable" refers to those options which will be vested and exercisable
immediately upon completion of this offering, while "Unexercisable" refers
to those options which will be unvested at such time.
- Value is determined by subtracting the exercise price from the fair market
value of the common stock based on an assumed initial public offering
price of $12.00, multiplied by the number of shares underlying the
options.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES OF COMMON VALUE OF UNEXERCISED
STOCK UNDERLYING IN-THE-MONEY
OPTIONS AT YEAR END OPTIONS AT YEAR END
-------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------------------------------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Christopher R. McCleary.................................. -- -- -- --
Stephen E. McManus....................................... -- -- -- --
Jeffery L. McKnight...................................... 375,000 -- 3,510,000 --
</TABLE>
STOCK OPTION PLAN
Our 1998 Stock Option Plan, approved by the board of directors in July 1998,
and amended and restated in February 1999, provides for the issuance of up to
4,682,250 shares of common stock pursuant to the grant of stock options, both
nonqualified stock options and incentive stock options, as defined in our option
plan, to independent directors, employees and consultants. As of December 31,
1998, options to purchase 1,682,250 shares of common stock had been awarded,
each with an exercise price of $2.64 per share. Of these, options to purchase
1,652,250 shares of common stock are intended to qualify as Incentive Stock
Options, or ISOs. The remaining options to purchase 30,000 shares of common
stock are nonqualified stock options, or NSOs, granted to our independent
directors.
On March 22, 1999, we granted options to purchase 1,320,556 shares of common
stock contingent on the completion of this offering at an exercise price of
$6.00 per share, which is equal to 50% of the mid-point of the proposed price
range. In addition, on March 22, 1999, we granted options to purchase 49,063
shares of common stock at an exercise price of $3.36 per share and an option to
purchase 375,000 shares of common stock at an exercise price of $6.00 per share
granted to our chief executive
44
<PAGE>
officer, Christopher McCleary. All of the options granted in March 1999 are
NSOs. The options will vest immediately upon the date of grant.
Shares of common stock purchased pursuant to options under our option plan
will be subject to our right to repurchase them at the option exercise price
upon the termination of the holder's employment or business relationship with
us. Other than with respect to the option granted to Mr. McCleary the repurchase
right will lapse with respect to one-third of the shares purchasable upon
exercise of an option on the first anniversary of the date of grant of the
option. The repurchase right with respect to the remainder of the shares
purchasable upon exercise of an option will lapse in equal quarterly
installments over the subsequent eight calendar quarters. Our repurchase right
with respect to shares held by any particular employee will lapse completely if
there is a change in control of USI and the employee's employment is terminated
within 12 months of the change of control. The repurchase right with respect to
the option grant to Mr. McCleary will lapse in full four years from the date of
grant. The lapse of this repurchase right can be accelerated if USI meets
certain performance objectives established by the compensation committee.
The compensation committee appointed to administer our option plan has
discretion to determine which employees and consultants will be granted stock
options, the number of shares to be optioned, and the terms and conditions of
such options. The full board of directors conducts the administration of the
option plan with respect to options granted to independent directors or to
officers subject to section 16 of the Securities and Exchange Act. During the
term of our option plan, each independent director serving on the date of the
first board meeting during the second calendar quarter of each year will
automatically be granted an option to purchase 3,750 shares of common stock on
such date. The exercise price of such shares will be the fair market value on
the date of grant as determined under the terms of our option plan. The
compensation committee, or the board of directors, as applicable, also has
discretion to make adjustments to options in the event of a change in control or
other corporate event, including without limitation, the discretion to
accelerate the vesting of options or waive our repurchase right.
The federal income tax consequences, in general, of the grant and exercise
of an ISO under our option plan are as follows:
- In general, an employee will not recognize taxable income upon the grant
or exercise of an ISO and we will not be entitled to any business expense
deduction with respect to the grant or exercise of an ISO.
- If the employee holds the shares for at least two years after the date of
grant and for at least one year after the date of exercise, the
difference, if any, between the sales price of the shares and the exercise
price of the option will be treated as long-term capital gain or loss upon
subsequent disposition of the shares.
- If the employee disposes of the shares prior to satisfying the holding
period requirements, the employee will recognize ordinary income at the
time of the disposition, generally in an amount equal to the excess of the
fair market value of the shares at the time the option was exercised over
the exercise price of the option. Generally, we will be allowed a business
expense deduction to the extent an employee recognizes ordinary income.
The balance of the gain realized, if any, will be short-term or long-term
capital gain, depending upon whether the shares have been held for at
least twelve months after the date of exercise.
The federal income tax consequences, in general, of the grant and exercise
of an NSO under our Option Plan are as follows.
- In general, a recipient who receives a NSO will recognize no income at the
time of the grant of the option.
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- Upon exercise of an NSO, a recipient will recognize ordinary income in an
amount equal to the excess of the fair market value of the shares on the
date of exercise over the exercise price of the option. Generally, we will
be entitled to a business expense deduction in the amount and at the time
the recipient recognizes ordinary income.
- The basis in shares acquired upon exercise of an NSO will equal the fair
market value of such shares at the time of exercise, and the holding
period of the shares, for capital gain purposes, will begin on the date of
exercise.
401(K) PLAN
In 1998, we adopted a 401(k) plan covering substantially all of our
employees. Under the plan, eligible employees may elect to reduce their current
compensation and have the amount of the reduction contributed to the plan on the
employee's behalf as salary deferral contributions. Beginning in 1999, we will
make matching contributions to the plan on behalf of our employees in the
amounts equal to 50 percent of the first six percent of an employee's salary
contributed to the plan. We will make the contribution in the form of our common
stock and not in cash. The first contribution will not be made until after
completion of this offering. All contributions to the plan by or on behalf of
employees are subject to aggregate annual limits prescribed by the Internal
Revenue Code.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PURCHASES OF SERIES A PREFERRED STOCK
On May 31, 1998, pursuant to an agreement dated May 13, 1998, Blue Chip
Capital Fund II Limited Partnership; Miami Valley Venture Fund L.P.; Grotech
Partners IV L.P.; Grotech Partners V L.P.; Southern Venture Fund SBIC, L.P.;
Southern Venture Fund II, L.P.; Venrock Associates; and Venrock Associates II,
L.P., a group we refer to as the Initial Series A Purchasers, purchased, in the
aggregate, 38,333.33 shares of Series A Preferred Stock for an aggregate
purchase price of $23.0 million.
In connection with the issuance of the shares to the Initial Series A
Purchasers, we issued 1,666.67 shares of Series A Preferred Stock to Christopher
R. McCleary, in exchange for the cancellation of $1 million of debt that we owed
to Mr. McCleary.
In an agreement dated June 18, 1998, we issued an additional 5,000 shares of
Series A Preferred Stock to certain of the Initial Series A Purchasers for an
aggregate purchase price of $3.0 million.
In an agreement dated June 18, 1998, we issued 5,833.33 shares of Series A
Preferred Stock to U S WEST for $3.5 million.
In agreements dated June 19, 1998, we issued 3,000 shares of Series A
Preferred Stock to HAGC Partners, Chris Horgan, who later transferred his
interest to his affiliate, Southeastern Technology Fund, L.P., and a series of
purchasers represented by Account Management Corporation, a group we refer to as
the Account Management Purchasers, for an aggregate purchase price of $1.8
million. Also on June 19, 1998, 1,166.67 shares of Series A Preferred Stock were
sold to USI Partners, Ltd. for $700,002.
Each holder of Series A Preferred Stock will receive on conversion the
number of shares of common stock arrived at by dividing the aggregate purchase
price for the holder's shares of Series A Preferred Stock by the conversion
price which will equal $2.66 upon the closing of this offering.
BRIDGE FINANCINGS AND PURCHASES OF SERIES B PREFERRED STOCK
In agreements dated September 8, 1998, all of the existing holders of Series
A Preferred Stock, other than Southern Venture Fund SBIC, L.P., HAGC Partners,
Christopher McCleary and two of the Account Management Purchasers, purchased our
convertible promissory notes in the aggregate principal amount of $9,095,000,
together with warrants to purchase 974,450 shares of common stock for $.08 per
share. Each note was convertible into preferred stock of USI having an aggregate
fair market value equal to the principal amount of the note. The principal
amount of these notes was converted into Series B Convertible Preferred Stock on
December 31, 1998 at a conversion price equal to the $1,050 per share purchase
price of the Series B Preferred Stock, and the accrued interest was paid in
cash.
On December 16, 1998, Blue Chip Capital Fund II, L.P. lent us $1.0 million,
which was repaid with interest, in cash, as of December 31, 1998.
In an agreement dated December 16, 1998, Grotech Partners V L.P.; Southern
Venture Fund II, L.P.; Venrock Associates; Venrock Associates II, L.P.; USI
Partners, Ltd.; and Siebel Systems, Inc. purchased our convertible promissory
notes in the aggregate amount of $8.0 million. Each note was convertible into
preferred stock of USI having an aggregate fair market value equal to the
principal amount of the note. The principal amount of these notes was converted
into Series B Preferred Stock on December 31, 1998 at a conversion price equal
to the $1,050 per share purchase price of the Series B Preferred Stock, and the
accrued interest was paid in cash.
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In an agreement dated December 29, 1998, U S WEST purchased our convertible
promissory note in the amount of $5.0 million. Each note was convertible into
preferred stock of USI having an aggregate fair market value equal to the
principal amount of the note. The principal amount of this note was converted
into Series B Preferred Stock on December 31, 1998, at a conversion price equal
to the $1,050 per share purchase price of the Series B Preferred Stock, and the
accrued interest was paid in cash.
On December 31, 1998, the principal amount of all of our outstanding
convertible promissory notes, $22,095,000, was converted into 21,042 shares of
Series B Preferred Stock with a purchase price of $1,050 per share. The accrued
interest on these notes was paid in cash. In addition, the warrants we issued in
connection with the issuance of our convertible promissory notes were exchanged
for otherwise identical warrants having an exercise price of $3.44 per share.
In an agreement dated December 31, 1998, we issued 59,278.56 shares of
Series B Preferred Stock for an aggregate purchase price of $62,242,500,
$22,095,000 of which was paid by conversion of the convertible promissory notes
identified above, to the holders of the convertible promissory notes described
above and J. H. Whitney III, L.P.; Whitney Strategic Partners III, L.P.;
Waller-Sutton Media Partners, L.P.; Arbor Venture Partners, L.L.C.; Southeastern
Technology Fund, L.P.; PNC Bank, N.A., Trustee; PNC Bank, N.A., Custodian; AEH
Profit Sharing Trust; Castellini Management Company; and all of the holders of
Series A Preferred Stock except Southern Venture Fund SBIC, L.P.; HAGC Partners;
and two of the Account Management Purchasers. Each holder of Series B Preferred
Stock will receive on conversion the number of shares of common stock arrived at
by dividing the aggregate purchase price for the holder's shares of Series B
Preferred Stock by the conversion price which will equal $3.36 upon the closing
of this offering.
The agreement in which we issued the Series B Preferred Stock includes a
repurchase requirement. In the event that we become an "Affiliate" of U S WEST,
as that term is defined in Section 3(1) of the Communications Act of 1934, and
we are also providing services that an Affiliate of U S WEST would be prohibited
from providing, then U S WEST can require us to purchase, and we can require U S
WEST to sell to us, the minimum number of our shares needed to prevent us from
being deemed an Affiliate of U S WEST. The repurchase price, in either instance,
would be the last reported price on the Nasdaq National Market, or as determined
by the board of directors if we are not publicly traded.
AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT
TERMINATION. The provisions of the Amended and Restated Stockholders'
Agreement, other than those relating to registration rights and the right of the
Whitney Group to designate a director will terminate upon consummation of this
offering.
REGISTRATION RIGHTS. According to the terms of the Amended and Restated
Stockholders' Agreement, the holders of the Preferred Stock together referred to
as the investors, have rights to register shares of our capital stock. At any
time 90 days after the effective date of the first registration statement that
we file under the Securities Act, holders of at least 33% of the Registrable
Securities, as defined in the Stockholders' Agreement, may require us to effect
registration under the Securities Act of their registrable securities, subject
to the board of directors' right to defer the registration for a period of up to
180 days. The investors also have the right to cause us to register their
securities on Form S-3 when it becomes available to us if they propose to
register securities having a value of at least $10 million. In addition, if we
propose to register securities under the Securities Act, other than
registrations on Form S-4 or Form S-8, then any of the investors has a right,
subject to quantity limitations we determine, or determined by underwriters if
this offering involves an underwriting, to request that we register such
holder's registrable securities. We will bear all registration expenses incurred
in connection with registrations. We have agreed to indemnify the investors
against liabilities
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<PAGE>
related to the accuracy of the registration statement used in connection with
any registration effected pursuant to the foregoing.
RESTRICTIONS ON TRANSFER. Subject to certain exceptions, we have a right of
first refusal if any stockholder receives and accepts a bona fide offer to
purchase our securities, as defined in the Stockholders' Agreement, then owned
by such shareholder. In addition, each party to the Stockholders' Agreement has
the right to participate on a pro rata basis in any sale of our securities by
any party to the Stockholders' Agreement. Subject to certain exceptions, upon
our proposed issuance of any common stock or any other equity securities, each
party to the Stockholders' Agreement has the preemptive right to purchase that
number of new securities, as defined in the Shareholders' Agreement, proposed to
be issued to maintain the shareholder's relative proportional equity interest in
USI.
GOVERNANCE PROVISIONS. The Stockholders' Agreement requires that the board
of directors consist of eleven members, six of whom are to be designated by each
of the Blue Chip Group, the Grotech Group, the Venrock Group, the Massey Burch
Group, the Whitney Group and U S WEST; and five of whom, including three persons
who are not our employees and are not affiliated with any of the Blue Chip
Group, the Grotech Group, the Venrock Group, the Massey Burch Group, the Whitney
Group and U S WEST, are designated by Christopher R. McCleary as long as he is
the Chief Executive Officer of USI. The designation of the three independent
directors is subject to the reasonable consent of the holders of two-thirds of
each series of preferred stock. Siebel Systems, Inc. has the right to designate
a director if it so chooses, in which case McCleary designates only four
directors, and Waller-Sutton Media Partners, L.P. has the right to designate an
observer to the board of directors. The Stockholders' Agreement also requires
that the board of directors have an executive committee that has the right to
exercise all powers of the board of directors to the maximum extent permitted by
the Delaware General Corporation Law and which will consist of at least the
Chief Executive Officer and a person designated by each of the Blue Chip Group,
the Grotech Group, the Venrock Group, the Massey Burch Group, the Whitney Group
and U S WEST. The Stockholders' Agreement also requires that the board of
directors have an audit committee and a compensation committee, each of which
will have one member named by the Whitney Group. The Stockholders' Agreement
provides that a director may be removed only by the person entitled to appoint
such director.
IMAP AGREEMENT WITH U S WEST
USI and U S WEST entered into an agreement on January 15, 1999 in which USI
grants to U S WEST a limited, nontransferable, non-exclusive license to use the
IMAP solution. The agreement has an initial term of three years. After the end
of the initial three year term, the agreement will automatically be extended on
the same terms for an additional 24 months. After the first extension term, the
agreement may be extended by mutual written agreement. After the initial term,
the agreement may be terminated by U S WEST if it pays a termination fee. U S
WEST will pay USI a total of $4,121,250 in thirty-six monthly installments for
use of the IMAP solution for up to 1,000 users. For more than 1,000 users, U S
WEST will pay USI an additional monthly installment amount per user. The amount
payable to USI under the agreement will be reduced if USI does not provide U S
WEST with agreed upon service levels. The agreement contains standard warranty,
limitation of liability and indemnity provisions.
MARKETING AGREEMENT WITH U S WEST
USI entered into a marketing agreement on January 30, 1999 with U S WEST
Communications Services, Inc. and U S WEST Enterprise America, Inc. The
agreement establishes a contractual teaming arrangement for the creation and
distribution of network services, IMAP services, system integration services and
comprehensive customer service. The agreement provides U S WEST with the
exclusive rights to market IMAP services in U S WEST's fourteen-state service
region and to some of U S WEST's existing customers and other customers as
mutually agreed to by U S WEST and USI. USI is
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prohibited from entering into similar agreements within U S WEST's
fourteen-state region with competitors of U S WEST. USI will make its IMAP
services, including consultation and implementation services, available to U S
WEST at discounted prices. USI will also provide U S WEST with training and
technical support during the term of the agreement. U S WEST will pay the
current rates for such training and support beginning in the thirteenth month of
the agreement's terms. U S WEST will provide USI with favorable pricing and
terms on U S WEST's services used to deliver USI's IMAP services. The agreement
may be terminated for cause upon 90 days notice. USI can terminate U S WEST's
exclusivity if U S WEST fails to meet established sales quotas for the IMAP
services. The exclusivity provisions will also terminate upon an acquisition or
change in control of USI.
PROPERTY SALE BETWEEN CHRISTOPHER R. MCCLEARY AND USI
On July 21, 1998 Christopher R. McCleary sold USI real property located in
Anne Arundel County, Maryland for a purchase price of $220,000. The property is
used by USI for housing, transferring executives, summer interns and corporate
guests.
LOAN FROM CHRISTOPHER R. MCCLEARY TO USI
In April 1998, Christopher R. McCleary loaned USI $1.0 million pursuant to a
short-term non interest bearing loan. We repayed this loan by issuing 1,666.67
shares of Series A Preferred Stock to Mr. McCleary in May 1998.
IMAP AGREEMENT WITH LATTICE PARTNERS, LTD.
USI and Lattice Partners, Ltd. entered into an agreement on December 14,
1998 in which USI grants Lattice Partners, Ltd. a limited, nontransferable,
non-exclusive license to use the IMAP Solution. The agreement expires in three
years unless terminated earlier in a manner consistent with the agreement or
unless extended by mutual written agreement. Lattice Partners, Ltd. will pay USI
a total of $120,000--an initial payment of $30,000 and $90,000 paid in
thirty-six monthly installments. The agreement contains standard warranty,
limitation of liability and indemnity provisions. R. Dean Meiszer, a member of
our board of directors, is also a director of Lattice Partners, Ltd.
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PRINCIPAL STOCKHOLDERS
The table below sets forth, as of January 15, 1999, information with respect
to the beneficial ownership of our common stock as adjusted to reflect the
consummation of this offering by (1) each person who we know to be the
beneficial owner of more than 5% of our outstanding common stock; (2) each of
the directors and Named Executive Officers individually; and (3) all directors
and executive officers as a group. Except as otherwise indicated, each of the
stockholders has sole voting and investment power with respect to the shares
beneficially owned. The address of each executive officer and director is c/o
USINTERNETWORKING, Inc. One USI Plaza, Annapolis, MD 21401-7478.
<TABLE>
<CAPTION>
PERCENTAGE OF
OWNERSHIP(1)(2)
NUMBER OF SHARES --------------------------
NAMED EXECUTIVE OFFICERS BENEFICIALLY BEFORE THIS AFTER THIS
AND DIRECTORS OWNED(1)(2) OFFERING OFFERING
- ------------------------------------------------------------------ ---------------------- ------------- -----------
<S> <C> <C> <C>
Christopher R. McCleary(3)........................................ 1,297,618 3.95% 3.43%
Stephen E. McManus................................................ 625,000 1.90 1.65
Andrew A. Stern................................................... 625,000 1.90 1.65
Jeffery L. McKnight(4)............................................ 375,000 1.13 *
DIRECTOR
R. Dean Meiszer(5)................................................ 470,981 1.43 1.24
Ray A. Rothrock(6)................................................ 2,674,224 8.10 7.04
Frank A. Adams(7)................................................. 8,348,985 25.07 21.80
William F. Earthman(8)............................................ 1,412,676 4.30 3.73
John H. Wyant(9).................................................. 3,813,269 11.53 10.01
Benjamin Diesbach(10)............................................. 3,750 * *
David J. Poulin(11)............................................... 3,750 * *
Michael C. Brooks(12)............................................. 5,952,381 18.11 15.72
Joseph Zell(13)................................................... 0 * *
All Executive Officers and Directors as a group (14 persons)...... 28,866,502 75.19 65.59
BENEFICIAL OWNERS OF 5% OR MORE OF THE OUTSTANDING COMMON STOCK OF
USI
Blue Chip Group(14)............................................... 3,809,519 11.52 10.00
c/o Blue Chip Venture Company, Ltd.
2000 PNC Center
201 East Fifth Street
Cincinnati, Ohio 45202
Grotech Capital Group(15)......................................... 8,345,235 25.06 21.79
9690 Deereco Road, Suite 800
Timonium, Maryland 21093
Venrock Group(16)................................................. 2,670,474 8.09 7.03
c/o Venrock Associates
Room 5506
30 Rockefeller Plaza
New York, New York 10112
Whitney Group(17)................................................. 5,952,381 18.11 15.72
c/o J.H. Whitney & Co.
177 Broad Street
Stamford, CT 06901
U S WEST Communications, Inc.(18)................................. 3,188,868 9.67 8.40
1801 California Street
Denver, Colorado 80202
</TABLE>
- ------------------------
* less than one percent
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Except where community property laws
apply or as indicated in the footnotes of this
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<PAGE>
table, to our knowledge, each stockholder identified in the table possesses
sole voting and investment power with respect to all shares of common stock
shown as beneficially owned by the stockholder. The number of shares
beneficially owned by a person includes shares of common stock subject to
options and warrants held by that person that are currently exercisable
within 60 days of January 15, 1999. Shares issuable pursuant to options and
warrants are deemed outstanding for computing the percentage ownership of
the person holding the options and warrants but are not deemed outstanding
for the purposes of computing the percentage ownership of any other person.
(2) For purposes of this table, the number of shares of common stock outstanding
prior to this offering is deemed to be 32,868,276. This number includes
1,968,750 shares of common stock outstanding on January 15, 1999 and an
additional 30,899,526 shares issuable upon conversion of our preferred
stock. For purposes of calculating the percentage beneficially owned by any
person, shares of common stock issuable to such person upon the exercise of
any options exercisable within 60 days of January 15, 1999 are also assumed
to be outstanding. The number of shares of common stock deemed outstanding
after this offering includes the additional underwriters' over-allotment
option.
(3) Includes 297,618 shares of common stock held by the McCleary Children's
Trust of which Christopher McCleary is trustee.
(4) Includes options to purchase 375,000 shares of common stock exercisable
within 60 days of January 15, 1999.
(5) Includes 452,231 shares of common stock owned by USI Partners, Ltd. Mr.
Meiszer is a general partner of USI Partners, Ltd. Mr. Meiszer disclaims
beneficial ownership in the common stock except to the extent of his general
partner interest in USI Partners, Ltd. Also includes options to purchase
3,750 shares of common stock and warrants to purchase 15,000 shares of
common stock each exercisable within 60 days of January 15, 1999.
(6) Includes 1,098,958 shares of common stock owned by Venrock Associates and
1,439,731 shares of common stock owned by Venrock Associates II, L.P. Mr.
Rothrock is a general partner of Venrock Associates and Venrock Associates
II, L.P. and as such shares voting and investment power with other general
partners. Mr. Rothrock disclaims beneficial ownership in the common stock
except to the extent of his general partner interests in Venrock Associates
and Venrock Associates II, L.P. Also includes options to purchase 3,750
shares of common stock and warrants to purchase 131,785 shares of common
stock each exercisable within 60 days of January 15, 1999.
(7) Includes 2,767,857 shares of common stock owned by Grotech Partners IV, L.P.
and 5,148,808 shares of common stock owned by Grotech Partners V L.P. Mr.
Adams is a member of the general partner of Grotech Partners IV L.P. and
Grotech Partners V, L.P. and as such shares voting and investment power with
other members of the general partner. Mr. Adams disclaims beneficial
ownership of the shares owned by Grotech Partners IV L.P. and Grotech
Partners V L.P. Also includes options to purchase 3,750 shares of common
stock and warrants to purchase 428,570 shares of common stock each
exercisable within 60 days of January 15, 1999.
(8) Includes 749,999 shares of common stock owned by Southern Venture Fund SBIC,
L.P. and 642,856 shares of common stock owned by Southern Venture Fund II,
L.P. Mr. Earthman is a general partner of both Southern Venture Fund SBIC,
L.P. and Southern Venture Fund II, L.P. and as such shares voting and
investment power. Mr. Earthman disclaims beneficial ownership in the shares
owned by Southern Venture Fund SBIC, L.P. and Southern Venture Fund II,
L.P., except to the extent of his interests in the general partnerships of
Southern Venture Fund SBIC, L.P. and Southern Venture Fund II, L.P. Also
includes options to purchase 3,750 shares of common stock and warrants to
purchase 16,071 shares of common stock each exercisable within 60 days of
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January 15, 1999. Southern Venture Fund SBIC, L.P. and Southern Venture Fund
II, L.P. are part of an affiliated group of investment partnerships and are
collectively referred to as the Massey Burch Group.
(9) Includes 3,055,954 shares of common stock owned by Blue Chip Capital Fund II
Limited Partnership and 539,281 shares of common stock owned by Miami Valley
Venture Fund L.P. Mr. Wyant is the founder and president of Blue Chip
Venture Co., which manages both Blue Chip Capital Fund II Limited
Partnership and Miami Valley Venture Fund L.P. Mr. Wyant disclaims
beneficial ownership of the shares owned by Blue Chip Capital Fund II
Limited Partnership and Miami Valley Venture Fund L.P. Also includes options
to purchase 3,750 shares of common stock or warrants to purchase 214,284
shares of common stock each exercisable within 60 days of January 15, 1999.
(10) Includes options to purchase 3,750 shares of common stock exercisable
within 60 days of January 15, 1999.
(11) Includes options to purchase 3,750 shares of common stock exercisable
within 60 days of January 15, 1999.
(12) Includes 5,812,268 shares of common stock owned by J.H. Whitney III, L.P.
and 140,056 shares of common stock owned by Whitney Strategic Partners III,
L.P. Mr. Brooks is a general partner of J.H. Whitney & Co. and a Managing
Member of J.H. Whitney Equity Partners III, L.L.C. which is the general
partner of J.H. Whitney III, L.P. and Whitney Strategic Partners III, L.P.
Mr. Brooks disclaims beneficial ownership of the shares owned by J.H.
Whitney III, L.P and Whitney Strategic Partners III, L.P.
(13) Mr. Zell transferred options to purchase 3,750 shares of common stock which
he received under our option plan to U S WEST. U S WEST policy prevents Mr.
Zell from exercising these options for his own benefit.
(14) Includes 3,055,954 shares of common stock owned by Blue Chip Capital Fund
II Limited Partnership and 539,281 shares of common stock owned by Miami
Valley Venture Fund, L.P. Blue Chip Capital Fund II Limited Partnership and
Miami Valley Venture Fund, L.P. are part of an affiliated group of
investment partnerships commonly controlled by Blue Chip Venture Company and
are collectively referred to as the Blue Chip Group. Also includes warrants
to purchase 214,284 shares of common stock exercisable within 60 days of
January 15, 1999.
(15) Includes 2,767,857 shares of common stock owned by Grotech Partners IV,
L.P. and 5,148,808 shares of Common Stock owned by Grotech Partners V, L.P.,
Grotech Partners IV, L.P. and Grotech Partners V, L.P. are part of an
affiliated group of investment partnerships commonly controlled by Grotech
Capital Group and are collectively referred to as the Grotech Capital Group.
Also includes warrants to purchase 428,570 shares of common stock
exercisable within 60 days of January 15, 1999.
(16) Includes 1,098,958 shares of common stock owned by Venrock Associates and
1,439,731 shares of common stock owned by Venrock Associates II, L.P.,
Venrock Associates and Venrock Associates II, L.P. are affiliated entities
collectively referred to as the Venrock Group. Also includes warrants to
purchase 131,785 shares of common stock within 60 days of January 15, 1999.
(17) Includes 5,812,325 shares of common stock owned by J.H. Whitney III, L.P.
and 140,056 shares of common stock owned by Whitney Strategic Partners III,
L.P., J.H. Whitney III, L.P and Whitney Strategic Partners III, L.P. are
affiliated entities collectively referred to as the Whitney Group.
(18) Includes warrants to purchase 101,785 shares of common stock and options to
purchase 3,750 shares of common stock exercisable within 60 days of January
15, 1999.
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DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock is only a summary and is
qualified in its entirety by reference to the actual terms and provisions of the
capital stock contained in our Second Amended and Restated Certificate of
Incorporation which will become effective immediately prior to the consummation
of this offering and our bylaws, as they will be amended at the same time.
Our certificate of incorporation will authorize 75,000,000 shares of common
stock, par value $.001 per share and 1,000,000 shares of preferred stock, par
value $.001 per share, the rights and preferences of which may be designated by
the board of directors. As of the date of this prospectus there will be
37,868,276 shares of common stock issued and outstanding.
COMMON STOCK
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive ratably
such dividends, if any, as may be declared by the board of directors out of
funds legally available therefor, subject to any preferential dividend rights of
outstanding preferred stock. Upon the liquidation, dissolution or winding up of
USI, the holders of common stock are entitled to receive ratably the net assets
of USI available after the payment of all debts and other liabilities and
subject to the prior rights of any outstanding preferred stock. Holders of the
common stock have no preemptive, subscription, redemption or conversion rights.
The outstanding shares of common stock are, and the shares that we offer in this
offering will be, when issued and paid for, validly issued, fully paid and
nonassessable. The rights, preferences and privileges of holders of common stock
are subject to, and may be adversely affected by, the rights of the holders of
shares of any series of preferred stock which we may designate and issue in the
future. Upon the closing of this offering, there will be no shares of preferred
stock outstanding.
PREFERRED STOCK
The board of directors is authorized, subject to certain limitations
prescribed by law, without further stockholder approval, to issue from time to
time up to an aggregate of 1,000,000 shares of preferred stock in one or more
series and to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions of the shares of each such series
thereof, including the dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption, including sinking fund provisions,
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of such series. The issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change of control of USI. We have no present plans to issue any shares of
preferred stock.
WARRANTS
At January 15, 1999, there were warrants outstanding to purchase a total of
1,482,648 shares of common stock. Warrants to purchase 974,450 shares at $3.44
per share will expire in September 2008, warrants to purchase 112,500 shares at
$16.00 per share will expire in September and October 2008, warrants to purchase
92,261 shares at $3.36 per share will expire in September 2005, and warrants to
purchase 303,437 shares at $3.36 per share will expire in June 2004.
REGISTRATION RIGHTS
The holders of 30,899,526 shares of common stock issued upon conversion of
the Series A Preferred Stock and Series B Preferred Stock and 974,450 shares of
common stock issuable upon the exercise of warrants to purchase common stock are
entitled to rights with respect to registration of such shares under the
Securities Act described at "Certain Relationship and Related Transactions--
Amended and Restated Stockholder Agreement." The holders of warrants to purchase
433,794 shares of common stock are entitled to rights with respect to
registration of such shares under the Securities
54
<PAGE>
Act. Under these registration rights, in the event we elect to register any of
our shares of common stock for purposes of effecting any public offering after
the completion of the offering described in this prospectus, the holders of the
warrants or the shares issued upon exercise of the warrants are entitled to
include their shares of common stock in the registration, subject however to the
right of USI or the underwriters of the proposed offering, if any, to reduce the
number of shares proposed to be registered in view of market conditions. All
expenses in connection with any registration other than underwriting discounts
and commissions will be borne by USI.
We have agreed to register up to 1,343,750 shares held by officers of USI in
the event the officer's employment is terminated due to his death or disability
after the consumation of our initial public offering.
CERTAIN ANTI-TAKEOVER, LIMITED LIABILITY AND INDEMNIFICATION PROVISIONS
As noted above, our board of directors, without stockholder approval, will
have the authority under our certificate of incorporation to issue preferred
stock with rights superior to the rights of the holders of common stock. As a
result, preferred stock could be issued quickly and easily, could adversely
affect the rights of holders of common stock and could be issued with terms
calculated to delay or prevent a change of control of USI or make removal of
management more difficult.
ELECTION AND REMOVAL OF DIRECTORS. The certificate and bylaws will provide
for the division of our board of directors into three classes, as nearly equal
in number as possible, with the directors in each class serving for a three-year
term, and one class being elected each year by our stockholders. Directors may
be removed only for cause. This system of electing and removing directors may
tend to discourage a third party from making a tender offer or otherwise
attempting to obtain control of USI and may maintain the incumbency of the board
of directors, as it generally makes it more difficult for stockholders to
replace a majority of directors.
STOCKHOLDER MEETINGS. Our bylaws will provide that the stockholders may not
call a special meeting of the stockholders of USI. Rather, only the board of
directors, the chairman of the board or the president will be able to call
special meetings of stockholders.
REQUIREMENTS FOR ADVANCE NOTIFICATION OF STOCKHOLDER NOMINATIONS AND
PROPOSALS. Our bylaws will establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the board of
directors or one of its committees.
DELAWARE ANTI-TAKEOVER LAW. We are a Delaware corporation subject to
Section 203 of the Delaware General Corporation Law. Under Section 203, certain
"business combinations" between a Delaware corporation whose stock generally is
publicly traded or held of record by more than 2,000 stockholders and an
"interested stockholder" are prohibited for a three-year period following the
date that such stockholder became an interested stockholder, unless:
- The corporation has elected in its certificate of incorporation not to be
governed by Section 203. We have not made such an election,
- The business combination or the transaction which resulted in the
stockholder becoming an interested stockholder was approved by the board
of directors of the corporation before such stockholder became an
interested stockholder,
- Upon consummation of the transaction that made such stockholder an
interested stockholder, the interested stockholder owned at least 85% of
the voting stock of the corporation outstanding at the commencement of the
transaction excluding voting stock owned by directors who are also
officers or held in employee benefit plans in which the employees do not
have a confidential right to tender stock held by the plan in a tender or
exchange offer, or
- The business combination is approved by the board of directors of the
corporation and authorized at a meeting by two-thirds of the voting stock
which the interested stockholder did not own.
55
<PAGE>
The three-year prohibition also does not apply to some business combinations
proposed by an interested stockholder following the announcement or notification
of an extraordinary transaction involving the corporation and a person who had
not been an interested stockholder during the previous three years or who became
an interested stockholder with the approval of a majority of the corporation's
directors. The term "business combination" is defined generally to include
mergers or consolidations between a Delaware corporation and an interested
stockholder, transactions with an interested stockholder involving the assets or
stock of the corporation or its majority-owned subsidiaries, and transactions
which increase an interested stockholder's percentage ownership of stock. The
term "interested stockholder" is defined generally as those stockholders who
become beneficial owners of 15% or more of a Delaware corporation's voting
stock, together with the affiliates or associates of that stockholder.
LIMITATION OF OFFICER AND DIRECTOR LIABILITY AND INDEMNIFICATION
ARRANGEMENTS. Our certificate limits the liability of our directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
will not be personally liable for monetary damages for breach of their fiduciary
duties as directors, except liability for:
- any breach of their duty of loyalty to the corporation or its
stockholders,
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
- unlawful payments of dividends or unlawful stock repurchases or
redemptions, or
- any transaction from which the director derived an improper personal
benefit.
This charter provision has no effect on any non-monetary remedies that may be
available to us or our stockholders, nor does it relieve us or our officers or
directors from compliance with federal or state securities laws. The certificate
also generally provides that we shall indemnify, to the fullest extent permitted
by law, any person who was or is a party or is threatened to be made a party to
any threatened, pending or completed action, suit, investigation, administrative
hearing or any other proceeding by reason of the fact that he is or was a
director or officer of ours, or is or was serving at our request as a director,
officer, employee or agent of another entity, against expenses incurred by him
in connection with such proceeding. An officer or director shall not be entitled
to indemnification by us if:
- The officer or director did not act in good faith and in a manner
reasonably believed to be in, or not opposed to, our best interests, or
- With respect to any criminal action or proceeding, the officer or director
had reasonable cause to believe his conduct was unlawful.
These charter and bylaw provisions and provisions of Delaware law may have
the effect of delaying, deterring or preventing a change of control of USI.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company will be the transfer agent and
registrar for the common stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this offering, USI will have 37,868,276 shares of
common stock outstanding assuming no exercise of the underwriters'
over-allotment option. All of the shares of common stock sold in this offering
will be freely tradeable under the Securities Act, unless purchased by our
"affiliates," as the Securities Act defines that term. Upon the expiration of
lock-up agreements among USI, certain of our stockholders, our executive
officers and directors and the underwriters, which will occur 180 days after the
date of this prospectus and exercise of outstanding options or common stock
purchase warrants, 19,340,386 shares of common stock will become eligible for
sale, subject to compliance with Rule 144 or Rule 701 of the Securities Act as
described below. In addition, we intend to register under the Securities Act all
of the shares of common stock usuable under our option plan. We expect to
complete this registration on Form S-8 either at the same time as our initial
public offering
56
<PAGE>
or immediately afterwards. Once this registration is complete, up to 2,601,869
shares of our common stock will become eligible for sale upon the exercise of
outstanding options.
In general, under Rule 144, a person, or persons whose shares are
aggregated, who has beneficially owned common stock for at least one year will
be entitled to sell in any three-month period a number of shares that does not
exceed the greater of:
- One percent of the number of shares of common stock then outstanding, or
- The average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks immediately preceding the
date on which the notice of sale is filed with the Securities and Exchange
Commission.
Sales under Rule 144 are subject to certain requirements relating to manner
of sale, notice and availability of current public information about USI. A
person, or persons whose shares are aggregated, who is not deemed to have been
our affiliate at any time during the three months immediately preceding the sale
and who has beneficially owned "Restricted Shares," as defined in Rule 144, for
at least two years is entitled to sell the shares pursuant to Rule 144(k)
without regard to the limitations and requirements described above.
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period requirement,
of Rule 144. Any employee, officer or director of USI who purchased shares
pursuant to a written compensatory plan or contract may be entitled to rely on
the resale provisions of Rule 701. Rule 701 permits affiliates to sell their
Rule 701 shares under Rule 144 without complying with the holding period
requirements of Rule 144. Rule 701 further provides that non-affiliates may sell
such shares in reliance on Rule 144 without having to comply with the holding
period, public information, volume limitation or notice provisions of Rule 144.
All holders of Rule 701 shares who have not executed lock-up agreements in
connection with this offering will be able to sell such shares beginning 90 days
after the date of this prospectus.
Some of our stockholders and our executive officers and directors will agree
with the underwriters that until 180 days after the date of this prospectus,
they will not offer, sell, contract to sell, announce their intention to sell,
pledge or otherwise dispose of, directly or indirectly, or file with the
Securities and Exchange Commission a registration statement under the Securities
Act relating to, any additional shares of common stock or securities convertible
or exchangeable or exercisable for any shares of our common stock, without the
prior written consent of Credit Suisse First Boston Corporation, subject to
certain exceptions. We will also agree that we will not offer, sell, contract to
sell, announce our intention to sell, pledge or otherwise dispose of, directly
or indirectly, or file with the Securities and Exchange Commission a
registration statement under the Securities Act relating to, any additional
shares of common stock or securities convertible or exchangeable or exercisable
for any shares of our common stock for a period of 180 days after the date of
this prospectus, without the prior written consent of Credit Suisse First Boston
Corporation, subject to certain limited exceptions, including issuance by us
pursuant to the conversion of all the outstanding shares of Series A Preferred
Stock and Series B Preferred Stock or the exercise of employee stock options
outstanding on the date of this prospectus. The lock-up agreements may be
released at any time as to all or any portion of the shares subject to such
agreements at the sole discretion of Credit Suisse First Boston Corporation. See
"Risk Factors--Shares Eligible for Future Sale."
Some of our stockholders have rights to require us to register shares of
common stock that they hold. See "Certain Relationships and Related
Transactions--Amended and Restated Stockholders' Agreement."
57
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 1999, the underwriters named below, for whom
Credit Suisse First Boston Corporation, Bear, Stearns & Co. Inc., BT Alex. Brown
Incorporated and Legg Mason Wood Walker Incorporated, are acting as
representatives, have severally but not jointly agreed to purchase from us the
following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
-----------------
<S> <C>
Credit Suisse First Boston Corporation.....................................
Bear, Stearns & Co. Inc....................................................
BT Alex. Brown Incorporated................................................
Legg Mason Wood Walker Incorporated........................................
-----------------
Total.................................................................. 5,000,000
-----------------
-----------------
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to certain conditions and that they will be obligated to purchase
all the shares of common stock offered hereby if any are purchased (other than
those shares covered by the over-allotment option described below). The
underwriting agreement provides that, in the event of a default, in certain
circumstances, the purchase commitments may be increased or the underwriting
agreement may be terminated.
We have granted to the underwriters a 30-day option to purchase, on a pro
rata basis, up to 750,000 additional shares of common stock at the initial
public offering price, less the underwriting discounts and commissions. This
option may be exercised only to cover over-allotments.
The underwriters will offer the common stock initially at the public
offering price on the cover page of this prospectus and to certain dealers at
such price less a concession of $ per share. The underwriters and such
dealers may allow a discount of $ per share on sales to certain other
dealers. After the initial public offering, the public offering price and
concession and discount may be changed by the representatives.
The following table summarizes the compensation that we will pay the
underwriters and the expenses we will pay:
<TABLE>
<CAPTION>
TOTAL
------------------------------
<S> <C> <C> <C>
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
----------- -------------- --------------
Underwriting discounts and commissions paid by USI.................... $ $ $
Expenses payable by USI............................................... $ $ $
</TABLE>
The representatives have informed us that they do not expect discretionary
sales by the underwriters to exceed 5% of the shares now offered.
USI, our officers and directors and certain other stockholders will agree
that they will not offer, sell, contract to sell, announce their intention to
sell, pledge or otherwise dispose of, directly or indirectly, or file with the
Commission a registration statement under the Securities Act relating to, any
additional shares of common stock or securities convertible into or exchangeable
or exercisable for any shares of our common stock without the prior written
consent of Credit Suisse First Boston Corporation for a period of 180 days after
the date of this prospectus, except in limited circumstances, including the case
of issuances by us pursuant to the conversion of all the outstanding shares of
Series A Preferred Stock and Series B Preferred Stock, the grant of additional
employee stock options or the exercise of employee stock options outstanding on
the date of this prospectus.
We have reserved for purchase from the underwriters up to shares of
common stock which employees and friends of ours may purchase through a directed
share program. Such sales will be at
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<PAGE>
the initial public offering price. The number of shares of common stock
available to the general public will be reduced to the extent these persons
purchase the reserved shares.
We have agreed to indemnify the underwriters against certain liabilities,
including civil liabilities under the Securities Act, or to contribute to
payments which the underwriters may be required to make in connection with civil
liabilities under the Securities Act.
Our common stock has been approved for listing on The Nasdaq National Market
under the symbol "USIX."
Before this offering, there has been no public market for the common stock.
The initial public offering price will be determined by negotiation between USI
and the representatives. The principal factors to be considered in determining
the public offering price include:
- the information set forth in this prospectus and otherwise available to
the representatives;
- the history and the prospects for the industry in which we will compete;
the ability of our management;
- our prospects for future earnings;
- the present state of our development and our current financial condition;
- the general condition of the securities markets at the time of this
offering;
- and the recent market prices of, and the demand for, publicly traded
common stock of generally comparable companies.
The representatives, on behalf of the underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act.
Over-allotment involves syndicate sales in excess of this offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
securities in the open market after the distribution has been completed in order
to cover syndicate short positions. Penalty bids permit the representatives to
reclaim a selling concession from a syndicate member when the securities
originally sold by such syndicate members are purchased in a syndicate covering
transaction to cover syndicate short positions. Such stabilizing transactions,
syndicate covering transactions and penalty bids may cause the price of the
common stock to be higher than it would otherwise be in the absence of such
transactions. These transactions may be effected on The Nasdaq National Market
or otherwise and, if commenced, may be discontinued at any time.
BT Alex. Brown Incorporated has from time to time provided investment
banking services to us for which it has charged us customary fees. Legg Mason
Wood Walker Incorporated is an IMAP client of USI.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that USI prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the Common Stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to USI and the dealer from whom such
purchase confirmation is received that (1) such purchaser is entitled under
applicable provincial securities laws to purchase such common stock without
59
<PAGE>
the benefit of a prospectus qualified under such securities laws, (2) where
required by law, that such purchaser is purchasing as principal and not as
agent, and (3) such purchaser has reviewed the text above under "Resale
Restrictions".
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the SECURITIES ACT (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or recession or rights of action under
the civil liability provisions of the U.S. federal securities law.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the SECURITIES ACT (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from USI. Only one such report
must be filed in respect of common stock acquired on the same date and under the
same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
Legislation.
LEGAL MATTERS
The validity of the issuance of the common stock being offered hereby will
be passed upon for USI by Latham & Watkins, Washington, D.C. and, for the
underwriters, by Cahill Gordon & Reindel, a partnership including a professional
corporation, New York, New York.
EXPERTS
The consolidated financial statements of USINTERNETWORKING, Inc. at December
31, 1998 and for the period from January 14, 1998 (date of inception) through
December 31, 1998, appearing in this prospectus and registration statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere in this prospectus and registration
statement, and are included in reliance upon the report given upon the authority
of Ernst & Young LLP as experts in accounting and auditing.
The consolidated financial statements of I.I.T. Holding, Inc. at December
31, 1996 and 1997, and for each of the two years in the period ended December
31, 1997, appearing in this prospectus and registration statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
on these statements appearing elsewhere in this prospectus and registration
statement which, as to the years 1996 and 1997, are based in part on the report
of Bassan & Associates S.C., independent auditors. The consolidated financial
statements referred to above are included in reliance upon the reports given
upon the authority of the named firms as experts in accounting and auditing.
60
<PAGE>
The financial statements of ACR as of September 30, 1998, December 31, 1997
and 1996 and for the eight months ended September 30, 1998 and for each of the
two years then ended December 31, 1997 included in this prospectus have been
audited by Mahoney Cohen & Company, CPA, P.C., independent auditors, as stated
in their report appearing in this prospectus and registration statement.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.,
20549, a registration statement on Form S-1 under the Securities Act of 1933, as
amended, with respect to the common stock offered under this prospectus. This
prospectus does not contain all of the information contained in the registration
statement and the exhibits and schedules to the registration statement. Some
items are omitted in accordance with the rules and regulations of the Securities
and Exchange Commission. For further information about USI and the common stock
offered under this prospectus, you should review the registration statement and
the exhibits and schedules filed as a part of the registration statement.
Descriptions of contracts or other documents referred to in this prospectus are
not necessarily complete. If the contract or document is filed as an exhibit to
the registration statement, you should review that contract or document. You
should be aware that when we discuss these contracts or documents in the
prospectus we are assuming that you will read the exhibits to the registration
statement for a more complete understanding of the contract or document. The
registration statement and its exhibits and schedules may be inspected without
charge at the public reference facilities maintained by the Securities and
Exchange Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C.,
20549, and the Securities and Exchange Commission's regional offices located at
500 West Madison Street, Suite 1400, Chicago, Illinois, 60661 and Seven World
Trade Center, 13th Floor, New York, New York, 10048. Copies may be obtained from
the Securities and Exchange Commission after payment of fees prescribed by the
Securities and Exchange Commission. The Securities and Exchange Commission also
maintains a web site that contains reports, proxy and information statements and
other information regarding registrants, including us, that file electronically
with the Securities and Exchange Commission. The address of this web site is
http://www.sec.gov. You may also contact the Securities and Exchange Commission
by telephone at (800) 732-0330.
61
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF USINTERNETWORKING, INC.
Report of Independent Auditors..................................................... F-2
Consolidated Balance Sheet as of December 31, 1998................................. F-3
Consolidated Statement of Operations for the period January 14, 1998 (date of
inception) through December 31, 1998............................................. F-4
Consolidated Statement of Stockholders' Equity (Deficit) for the period January 14,
1998 (date of inception) through December 31, 1998............................... F-5
Consolidated Statement of Cash Flows for the period January 14, 1998 (date of
inception) through December 31, 1998............................................. F-6
Notes to Consolidated Financial Statements......................................... F-7
FINANCIAL STATEMENTS OF ADVANCED COMMUNICATION RESOURCES, INC.
Independent Auditor's Report....................................................... F-25
Balance Sheets as of December 31, 1997 and 1996 and September 30, 1998............. F-26
Statements of Operations for the years ended December 31, 1997 and 1996 and for the
nine months ended September 30, 1998............................................. F-27
Statements of Stockholders' Equity for the years ended December 31, 1997 and 1996
and for the nine months ended September 30, 1998................................. F-28
Statements of Cash Flows for the years ended December 31, 1997 and 1996 and for the
nine months ended September 30, 1998............................................. F-29
Notes to Financial Statements...................................................... F-30
CONSOLIDATED FINANCIAL STATEMENTS OF I.I.T. HOLDING, INC. AND SUBSIDIARIES
Report of Independent Auditors..................................................... F-36
Report of Independent Auditors..................................................... F-37
Consolidated Balance Sheets as of December 31, 1997 and 1996 and as of September 7,
1998 (unaudited)................................................................. F-38
Consolidated Statements of Operations for the years ended December 31, 1997 and
1996 and for the periods ended August 31, 1997 and September 7, 1998
(unaudited)...................................................................... F-39
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1997 and 1996 and for the period ended September 7, 1998 (unaudited)............. F-40
Consolidated Statements of Cash Flows for the years ended December 31, 1997 and
1996 and for the periods ended August 31, 1997 and September 7, 1998
(unaudited)...................................................................... F-41
Notes to Consolidated Financial Statements......................................... F-42
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS
ENDED DECEMBER 31, 1998.......................................................... P-1
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
USINTERNETWORKING, Inc.
We have audited the accompanying consolidated balance sheet of
USINTERNETWORKING, Inc. ("the Company") as of December 31, 1998, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the period January 14, 1998 (date of inception) through December 31,
1998. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
USINTERNETWORKING, Inc. as of December 31, 1998, and the consolidated results of
its operations and its cash flows for the period January 14, 1998 (date of
inception) through December 31, 1998, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Baltimore, Maryland
January 22, 1999, except as to Note 21,
as to which the date is March 22, 1999
The foregoing report is in the form that will be signed upon the completion of
the restatement of capital accounts described in Note 21 to the consolidated
financial statements.
/s/ Ernst & Young LLP
Baltimore, Maryland
March 22, 1999
F-2
<PAGE>
USINTERNETWORKING, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 43,802,465 $ 43,802,465
Restricted cash................................................................ 581,712 581,712
Accounts receivable, less allowance of $142,000................................ 2,882,119 2,882,119
Prepaid expenses and other current assets...................................... 2,436,247 2,436,247
-------------- --------------
Total current assets............................................................. 49,702,543 49,702,543
Software licenses................................................................ 9,596,760 9,596,760
Property and equipment, net of accumulated depreciation of $1,567,885............ 21,640,145 21,640,145
Goodwill, net of accumulated amortization of $1,611,763.......................... 25,137,296 25,137,296
Other assets..................................................................... 439,734 439,734
-------------- --------------
Total assets..................................................................... $ 106,516,478 $ 106,516,478
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................................................... $ 6,571,767 $ 6,571,767
Accrued compensation........................................................... 4,870,690 4,870,690
Other accrued expenses......................................................... 1,569,570 1,569,570
Deferred revenue............................................................... 51,247 51,247
Due to former shareholders of acquired businesses.............................. 10,826,735 10,826,735
Current portion of capital lease obligations................................... 1,503,947 1,503,947
Current portion of long-term debt.............................................. 1,757,588 1,757,588
-------------- --------------
Total current liabilities........................................................ 27,151,544 27,151,544
Short-term obligations expected to be refinanced................................. 5,282,450 5,282,450
Capital lease obligations, less current portion.................................. 3,427,254 3,427,254
Long-term debt, less current portion............................................. 5,231,794 5,231,794
Dividends payable................................................................ 1,503,004 1,503,004
-------------- --------------
Total liabilities................................................................ 42,596,046 42,596,046
Series B Convertible Redeemable Preferred Stock, $.01 par value, 115,000 shares
authorized, 59,279 shares issued and outstanding actual, none pro forma;
$62,242,500 aggregate liquidation preference................................... 62,242,500 --
Common stock subject to repurchase, 1,343,750 shares actual, none pro forma...... 4,145,000 --
Commitments and contingent liabilities........................................... -- --
Stockholders' equity (deficit):
Series A Convertible Preferred Stock, $.01 par value, 110,000 shares
authorized, 55,000 shares issued and outstanding; $33,000,000 aggregate
liquidation preference....................................................... 550 --
Common stock, $.001 par value, 75,000,000 shares authorized, 625,000 shares
issued and outstanding actual, 32,868,276 shares issued pro forma............ 625 32,868
Additional paid-in capital..................................................... 30,753,934 97,157,241
Due from stockholders.......................................................... -- (47,500)
Accumulated deficit............................................................ (33,222,177) (33,222,177)
-------------- --------------
Total stockholders' equity (deficit)........................................... (2,467,068) 63,920,432
-------------- --------------
Total liabilities and stockholders' equity (deficit)............................. $ 106,516,478 $ 106,516,478
-------------- --------------
-------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
USINTERNETWORKING, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD JANUARY 14, 1998 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1998
<TABLE>
<S> <C>
Revenue........................................................ $ 4,122,449
Costs and expenses:
Direct costs of revenue...................................... 6,658,004
General and administrative................................... 25,193,297
Depreciation and amortization................................ 3,179,648
-----------
Total costs and expenses....................................... 35,030,949
-----------
Operating loss................................................. (30,908,500)
Other income (expense):
Interest income.............................................. 367,411
Interest expense............................................. (2,681,088)
-----------
(2,313,677)
-----------
Net loss....................................................... (33,222,177)
Dividends accrued on Series A Convertible Preferred Stock...... (1,503,004)
Accretion of common stock subject to repurchase to fair
value........................................................ (3,135,000)
Accretion of Series B Convertible Redeemable Preferred Stock to
fair value................................................... (236,991)
-----------
Net loss attributable to common stockholders................... $(38,097,172)
-----------
-----------
Basic and diluted loss per common share attributable to common
stockholders................................................. $ (60.96)
-----------
-----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
USINTERNETWORKING, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD JANUARY 14, 1998 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE
PREFERRED STOCK COMMON STOCK
------------------------ ----------------------
SHARES PAR VALUE SHARES PAR VALUE
--------- ------------- --------- -----------
<S> <C> <C> <C> <C>
Balance at January 14, 1998..................................................... -- $ -- -- $ --
Issuance of common stock to founder upon inception............................ -- -- 625,000 625
Issuance of Series A Convertible Preferred Stock on May 28, 1998 for cash..... 38,333 383 -- --
Issuance of Series A Convertible Preferred Stock on May 28, 1998 in exchange
for $1,000,000 note......................................................... 1,667 17 -- --
Issuance of Series A Convertible Preferred Stock on June 22, 1998 for cash.... 6,167 62 -- --
Issuance of Series A Convertible Preferred Stock on July 2, 1998 for cash..... 5,833 58 -- --
Issuance of Series A Convertible Preferred Stock on July 30, 1998 for cash.... 3,000 30 -- --
Transaction costs associated with the issuance of Series A Convertible
Preferred Stock............................................................. -- -- -- --
Issuance of warrants to purchase 50,000 shares of common stock associated with
the acquisition of IIT on September 8, 1998................................. -- -- -- --
Issuance of warrants to purchase 974,450 shares of common stock in connection
with $9,095,000 of debt on September 7, 1998................................ -- -- -- --
Issuance of warrants to purchase 74,404 shares of common stock in connection
with a $5,000,000 financing commitment on September 22, 1998................ -- -- -- --
Issuance of warrants to purchase 971 shares of Series B Convertible Redeemable
Preferred Stock in connection with a $10,000,000 financing commitment on
September 30, 1998.......................................................... -- -- -- --
Issuance of warrants to purchase 62,500 shares of common stock associated with
the acquisition of ACR on October 2, 1998................................... -- -- -- --
Issuance of warrants to purchase 17,857 shares of common stock in connection
with a $2,000,000 financing commitment on December 18, 1998................. -- -- -- --
Dividends accrued on Series A Convertible Preferred Stock..................... -- -- -- --
Accretion of common stock subject to repurchase to fair value................. -- -- -- --
Accretion of Series B Convertible Redeemable Preferred Stock to fair value.... -- -- -- --
Net loss for the period January 14, 1998 through December 31, 1998............ -- -- -- --
--------- ----- --------- -----------
Balance at December 31, 1998.................................................... 55,000 $ 550 625,000 $ 625
--------- ----- --------- -----------
--------- ----- --------- -----------
<CAPTION>
TOTAL
ADDITIONAL STOCKHOLDERS'
PAID-IN ACCUMULATED EQUITY
CAPITAL DEFICIT (DEFICIT)
---------- ------------ ------------
<S> <C> <C> <C>
Balance at January 14, 1998..................................................... $ -- $ -- $ --
Issuance of common stock to founder upon inception............................ 4,375 -- 5,000
Issuance of Series A Convertible Preferred Stock on May 28, 1998 for cash..... 22,999,617 -- 23,000,000
Issuance of Series A Convertible Preferred Stock on May 28, 1998 in exchange
for $1,000,000 note......................................................... 999,983 -- 1,000,000
Issuance of Series A Convertible Preferred Stock on June 22, 1998 for cash.... 3,699,938 -- 3,700,000
Issuance of Series A Convertible Preferred Stock on July 2, 1998 for cash..... 3,499,942 -- 3,500,000
Issuance of Series A Convertible Preferred Stock on July 30, 1998 for cash.... 1,799,970 -- 1,800,000
Transaction costs associated with the issuance of Series A Convertible
Preferred Stock............................................................. (205,225) -- (205,225)
Issuance of warrants to purchase 50,000 shares of common stock associated with
the acquisition of IIT on September 8, 1998................................. 40,000 -- 40,000
Issuance of warrants to purchase 974,450 shares of common stock in connection
with $9,095,000 of debt on September 7, 1998................................ 1,948,930 -- 1,948,930
Issuance of warrants to purchase 74,404 shares of common stock in connection
with a $5,000,000 financing commitment on September 22, 1998................ 148,810 -- 148,810
Issuance of warrants to purchase 971 shares of Series B Convertible Redeemable
Preferred Stock in connection with a $10,000,000 financing commitment on
September 30, 1998.......................................................... 606,875 -- 606,875
Issuance of warrants to purchase 62,500 shares of common stock associated with
the acquisition of ACR on October 2, 1998................................... 50,000 -- 50,000
Issuance of warrants to purchase 17,857 shares of common stock in connection
with a $2,000,000 financing commitment on December 18, 1998................. 35,714 -- 35,714
Dividends accrued on Series A Convertible Preferred Stock..................... (1,503,004) (1,503,004)
Accretion of common stock subject to repurchase to fair value................. (3,135,000) (3,135,000)
Accretion of Series B Convertible Redeemable Preferred Stock to fair value.... (236,991) (236,991)
Net loss for the period January 14, 1998 through December 31, 1998............ (33,222,177) (33,222,177)
---------- ------------ ------------
Balance at December 31, 1998.................................................... $30,753,934 ($33,222,177) $(2,467,068)
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
USINTERNETWORKING, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD JANUARY 14, 1998 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1998
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net loss....................................................................... $(33,222,177)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation................................................................. 1,567,885
Amortization................................................................. 1,611,763
Non-cash compensation expense related to the issuance of common stock........ 1,000,000
Non-cash interest expense.................................................... 2,011,904
Changes in operating assets and liabilities:
Accounts receivable........................................................ 43,293
Prepaid expenses and other current assets.................................. (2,470,745)
Accounts payable........................................................... 4,333,579
Accrued compensation....................................................... 4,287,023
Accrued expenses and other current liabilities............................. 234,800
-----------
Net cash used in operating activities.......................................... (20,602,675)
INVESTING ACTIVITIES
Purchases of property and equipment............................................ (20,127,849)
Increase in restricted cash.................................................... (581,712)
Acquisition of IIT and ACR, net of cash acquired of $398,581................... (16,899,991)
Increase in other assets....................................................... (59,080)
-----------
Net cash used in investing activities.......................................... (37,668,632)
FINANCING ACTIVITIES
Proceeds from issuance of Series A Convertible Preferred Stock................. 31,794,775
Proceeds from loan from officer, subsequently converted into Series A
Convertible Preferred Stock.................................................. 1,000,000
Proceeds from issuance of Series B Convertible Redeemable Preferred Stock...... 39,910,509
Proceeds from issuance of common stock and common stock subject to
repurchase................................................................... 15,000
Proceeds from issuance of long-term debt....................................... 9,486,969
Proceeds from issuance of notes, subsequently converted into Series B
Convertible Redeemable Preferred Stock....................................... 22,095,000
Payments on long-term debt..................................................... (1,804,876)
Payments on capital lease obligations.......................................... (423,605)
-----------
Net cash provided by financing activities...................................... 102,073,772
-----------
Cash and cash equivalents at end of period..................................... $43,802,465
-----------
-----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
USINTERNETWORKING, Inc., (the "Company") was incorporated on January 14,
1998 principally to provide clients the ability to use leading business software
applications through the Company's Internet-based network. The Company is an
"Internet Managed Application Provider.-SM-" Our IMAP services integrate
Internet communications, data center management and packaged software
applications implementation and support to meet the technology needs of business
in a number of business process areas including sales force automation, customer
support, e-commerce, and human resource and financial systems. The Company also
makes its infrastructure available to clients who want to run their own
applications in a highly reliable and secure Internet environment and provides
information technology consulting services.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. Intercompany transactions and
balances have been eliminated.
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 amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
The Company considers all money market accounts and all other investments
with a maturity of three months or less when purchased to be cash equivalents.
The carrying value of cash equivalents approximates fair value.
RESTRICTED CASH
At December 31, 1998, $581,712 of cash was pledged as collateral on
outstanding letters of credit related to an operating lease for certain office
space ($400,000), and as security for other obligations ($181,712). These
amounts have been classified as restricted cash in the accompanying consolidated
balance sheet.
SOFTWARE LICENSES
The Company capitalizes the costs associated with the purchase of licenses
for major business process application software used in providing IMAP services.
These licenses specify the number of users permitted to utilize the license in
connection with the Company's service. Transferrable licenses will be amortized
over their estimated useful life of three years. Non-transferrable licenses will
be amortized over the lesser of the minimum contract period for IMAP clients
subject to these licenses, or three years. Amortization commenced in January
1999, the date the licenses were first available to generate revenue, and the
average amortization period is expected to be three years.
F-7
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is computed for owned assets using the straight-line method over
estimated useful lives of the assets. Assets under capital leases are amortized
using the straight-line method over the lesser of the lease term or the
estimated useful life of the assets.
Estimated useful lives for all depreciable assets other than a building and
leasehold improvements range from three to seven years. The building is
depreciated over 25 years and leasehold improvements are depreciated over the
term of the related lease.
INCOME TAXES
The Company uses the liability method in accounting for income taxes. Under
this method, deferred income tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
REVENUE RECOGNITION
Substantially all revenues since inception have been earned from information
technology consulting services. Revenues are recognized as services are
provided.
During 1998, the Company recognized $69,467 of revenue from IMAP services,
and expects to recognize significant revenue from IMAP services in future
periods. IMAP revenues consist of monthly recurring fees for services, which
generally include internet access to the Company's network of Enterprise Data
Centers hosting application software, and the implementation and management of
that software. Payment for services is generally received monthly over a two to
five year contract term, and revenues are recognized ratably as earned over the
contract term. Payments received in advance of revenue recognition, even if
non-refundable, are recorded as deferred revenue. Some contracts permit
termination without cause by the clients. Contracts permitting termination
without cause may provide for termination payments to the Company that will be
recognized as revenue when collectibility is assured.
GOODWILL AMORTIZATION
The Company amortizes goodwill arising from certain purchase business
combinations on a straight-line basis over its estimated useful life of 5 years.
ADVERTISING COSTS
The Company expenses advertising as incurred. Advertising expense totaled
approximately $700,000 in 1998.
F-8
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, consisting principally of property and equipment and
goodwill, are evaluated for possible impairment through a review of undiscounted
expected future cash flows. If the sum of the undiscounted expected future cash
flows is less than the carrying amount of the asset, an impairment loss is
recognized.
STOCK OPTIONS
The Company records compensation expense for all stock-based compensation
plans using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB No. 25"). Under
APB No. 25, if the exercise price of the Company's employee stock options equals
or exceeds the estimated fair value of the underlying stock on the date of
grant, no compensation expense is generally recognized.
Financial Accounting Standards Board Statement No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION ("Statement No. 123") encourages companies to recognize
expense for stock-based awards based on their estimated value on the date of
grant. Statement No. 123 requires the disclosure of pro forma net income or loss
in the notes to the financial statements if the fair value method is not
elected. The Company accounts for its stock-based compensation using the
intrinsic value method, and has determined that the use of the fair value method
to record compensation expense would have no effect on the reported net loss in
1998.
PENDING ACCOUNTING PRONOUNCEMENTS
In March 1998, the AICPA issued Statement of Position 98-1, ACCOUNTING FOR
THE COSTS OF COMPUTER SOFTWARE DEVELOPED FOR OR OBTAINED FOR INTERNAL USE (SOP
98-1). SOP 98-1 requires the capitalization of costs to purchase or develop
internal-use software, including external direct costs of materials and
services, and payroll and payroll related costs for employees who are directly
associated with and devote time to an internal use software development project.
Allocations of overhead and capitalized costs are not permitted. Computer
software costs related to research and development are expensed as incurred, as
are training and maintenance costs. SOP 98-1 is effective for 1999, and
application is prospective. In 1998, the Company expensed approximately $1
million of costs related to the implementation of internal use software. Future
costs subject to capitalization under SOP 98-1 in 1999 and beyond are not
expected to materially affect reported results of operations.
In April 1998, the AICPA issued Statement of Position 98-5, REPORTING THE
COSTS OF START-UP ACTIVITIES (SOP 98-5). SOP 98-5 requires that start-up costs
and organization costs be expensed as incurred. Start-up activities include
one-time activities related to opening a new facility, including a new product
or service, conducting business in a new territory, conducting business with a
new class of customer, initiating a new process in an existing facility, or
commencing some new operation. SOP 98-5 is effective in 1999. All start-up and
organizational costs of the Company are currently expensed; therefore, adoption
of this new standard will have no effect on the consolidated financial
statements.
F-9
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
2. ACQUISITIONS
On September 8, 1998, the Company acquired all of the outstanding common
stock of I.I.T. Holding, Inc. (IIT), a provider of Internet and intranet
consulting, integration and support services principally to commercial companies
located throughout the United States and South America. The initial purchase
price consisted of cash of $12,887,000 and warrants to purchase 50,000 shares of
common stock for $16.00 per share valued at $40,000. Direct acquisition costs of
$394,968 were also incurred. The acquisition was accounted for using the
purchase method of accounting, and the results of operations of IIT are included
in the accompanying consolidated statement of operations for the period from
September 8, 1998 through December 31, 1998. At the acquisition date,
$14,131,788 of goodwill was recorded.
Additional contingent consideration is payable to the former shareholders of
IIT to the extent that defined amounts of revenue, earnings before interest,
income taxes, depreciation and amortization (EBITDA), and employee retention
percentages (as related to the operations of IIT) in 1998 are exceeded. The
maximum amount of contingent consideration payable to the sellers is $3,799,999.
At December 31, 1998, the Company has preliminarily determined that the likely
amount of additional consideration due to the sellers is $2,326,735, subject to
final audit results, and therefore has recorded that amount as additional
goodwill.
On October 2, 1998, the Company acquired all of the outstanding common stock
of Advanced Communication Resources, Inc. (ACR), a New York based systems
integrator focused on the financial services industry. The initial purchase
price aggregated $6,050,000, consisting of cash of $2,500,000, a $3,500,000
secured promissory note bearing interest at 8.25%, and warrants to purchase
62,500 shares of common stock for $16.00 per share valued at $50,000. Direct
acquisition costs of $338,916 were also incurred. The acquisition was accounted
for using the purchase method of accounting, and the results of operations of
ACR are included in the accompanying consolidated statement of operations for
the period from October 2, 1998 through December 31, 1998. At the acquisition
date, $5,290,535 of goodwill was recorded.
Additional contingent consideration is payable to the former shareholders of
ACR to the extent that defined amounts of revenue, EBITDA, and employee
retention percentages (as related to the operations of ACR) in 1998 are
exceeded. The maximum amount of contingent consideration payable to the sellers
is $5,000,000. At December 31, 1998, the Company has determined that the amount
of additional consideration due to the sellers is $5,000,000, and therefore has
recorded that amount as additional goodwill.
The following summarizes unaudited pro forma consolidated results of
operations for 1998 assuming the IIT and ACR acquisitions had occurred at the
beginning of the year. The results are not necessarily indicative of what would
have occurred had these transactions been consummated as of the beginning of the
year presented, or of future operations of the Company (in thousands):
<TABLE>
<CAPTION>
PRO FORMA (UNAUDITED)
---------------------
<S> <C>
Revenue................................................................ $ 13,938
Net loss............................................................... $ (35,898)
Basic and diluted loss per common share................................ $ (57.44)
</TABLE>
F-10
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
3. LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss per
common share for the period from January 14, 1998 (date of inception) through
December 31, 1998:
HISTORICAL:
<TABLE>
<S> <C>
Numerator:
Net loss..................................................................... $(33,222,177)
Dividends on Series A Convertible Preferred Stock............................ (1,503,004)
Accretion of common stock subject to repurchase to fair value................ (3,135,000)
Accretion of Series B Convertible Redeemable Preferred Stock to fair value... (236,991)
-----------
$(38,097,172)
-----------
-----------
Denominator:
Weighted-average number of shares of common stock outstanding and not subject
to repurchase during the period............................................ 625,000
-----------
Basic and diluted loss per common share........................................ $ (60.96)
-----------
-----------
</TABLE>
Basic loss per share is based upon the average number of shares of common
stock outstanding during the period. The computation excludes 1,343,750 shares
of common stock subject to repurchase at December 31, 1998.
Dilutive loss per common share is equal to basic loss per common share
because if potentially dilutive securities were included in the computation, the
result would be anti-dilutive. These potentially dilutive securities consist of
common stock subject to repurchase, convertible preferred stocks, stock options
and warrants.
SUPPLEMENTAL PRO FORMA:
Pro forma basic and diluted loss per common share attributable to common
stockholders is presented to disclose the effect on loss per share of the
assumed conversion of securities which will convert into common stock upon the
closing of the proposed initial public offering and the lapse upon closing of
the proposed initial public offering of the Company's repurchase obligation with
respect to 1,343,750 shares of common stock held by officers. For purposes of
the pro forma computation, the convertible securities are assumed to have been
converted or modified on the issuance date.
The following table summarizes the computations of supplemental pro forma
basic and diluted loss per share presented in the accompanying consolidated
statement of operations for the period January 14, 1998 (date of inception)
through December 31, 1998:
<TABLE>
<S> <C>
Numerator:
Net loss..................................................................... $(33,222,177)
Dividends on Series A Convertible Preferred Stock............................ (1,503,004)
Accretion of common stock subject to repurchase to fair value................ (3,135,000)
Accretion of Series B Convertible Redeemable Preferred Stock to fair value... (236,991)
-----------
$(38,097,172)
-----------
-----------
</TABLE>
F-11
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
3. LOSS PER SHARE (CONTINUED)
<TABLE>
<S> <C>
Denominator:
Shares used in historical calculation........................................ 625,000
Add:
Pro forma effect of lapse of repurchase obligation for common stock subject
to repurchase............................................................ 1,184,028
Pro forma conversion of Series A Convertible Preferred Stock............... 7,366,026
Pro forma conversion of Series B Convertible Redeemable Preferred Stock.... 50,837
-----------
Denominator for pro forma loss per share................................... 9,225,891
-----------
-----------
Supplemental pro forma basic and diluted loss per common share................. $ (4.13)
-----------
-----------
</TABLE>
4. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During the period from January 14, 1998 (date of inception) through December
31, 1998, the Company acquired equipment totaling $5,188,489 under leases
classified as capital leases. The Company also acquired $7,500,000 of equipment
in 1998 that was included in accounts payable and short-term obligations
expected to be refinanced at December 31, 1998.
Interest paid during the period was approximately $368,000.
In December 1998, $22,095,000 of notes payable and a $1,000,000 loan from an
officer of the Company were converted into Series B Convertible Redeemable
Preferred Stock.
The Company purchased all of the capital stock of IIT and ACR for
approximately $27.8 million. In conjunction with these acquisitions, assets with
a fair market value of approximately $30.8 million were acquired and liabilities
of approximately $3.0 million were assumed.
In July 1998, the Company sold 625,000 shares of common stock to an
executive officer for $5,000. The common stock at the date of issuance had an
appraised estimated fair value of $1.60 per share, or $1,000,000. The difference
between the estimated fair value of the common stock of $1,000,000 and the
amount paid of $5,000 ($995,000) was recorded as non-cash compensation expense.
Other non-cash compensation of $5,000 related to common stock issuances was also
recorded in 1998.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1998:
<TABLE>
<S> <C>
Building and land............................................................. $ 1,007,499
Furniture and fixtures........................................................ 779,332
Equipment and automobiles..................................................... 2,800,742
Computers and software........................................................ 15,321,325
Leasehold improvements........................................................ 3,299,132
-----------
23,208,030
Accumulated depreciation...................................................... (1,567,885)
-----------
Total......................................................................... $21,640,145
-----------
-----------
</TABLE>
F-12
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
5. PROPERTY AND EQUIPMENT (CONTINUED)
Substantially all property and equipment is collateralized under financing
arrangements.
6. CAPITAL LEASE OBLIGATIONS
The Company has entered into capital lease agreements to acquire certain
equipment. Property and equipment in the accompanying consolidated balance sheet
includes this equipment which has a cost of $5,188,489 and accumulated
amortization of $349,716. Amortization of the leased property is included in
depreciation and amortization expense.
Future minimum payments under capital lease obligations consist of the
following at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................................ $1,965,377
2000............................................................................ 1,941,590
2001............................................................................ 1,789,256
2002............................................................................ 91,995
2003............................................................................ 80,420
----------
Total minimum lease payments.................................................... 5,868,638
Amounts representing interest................................................... (937,437)
----------
Present value of capital lease obligations...................................... 4,931,201
Current portion................................................................. (1,503,947)
----------
Capital lease obligations, non-current.......................................... $3,427,254
----------
----------
</TABLE>
7. DUE TO FORMER SHAREHOLDERS OF ACQUIRED BUSINESSES
In connection with the acquistion of ACR in October 1998, the Company issued
to the sellers a $3,500,000 note bearing interest at 8.25% per annum. The note,
including accrued interest, was due and was paid in January 1999.
As more fully disclosed in Note 2, the Company estimates that additional
consideration related to the acquisitions of ACR and IIT in 1998 will be
required to be paid in 1999 in the aggregate amount of $7,326,735.
8. LONG-TERM DEBT
Long-term debt at December 31, 1998 consists of the following:
<TABLE>
<S> <C>
Note payable to a bank due June 30, 2001 and bearing interest at 9.0% per
annum. The note is payable in monthly installments of principal and interest
of $6,644 with all unpaid principal and interest due at maturity. The note is
secured by a mortgage on the real property purchased with the proceeds and
with a $79,929 letter of credit pledged as additional security............... $ 639,517
</TABLE>
F-13
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
8. LONG-TERM DEBT (CONTINUED)
<TABLE>
<S> <C>
Note payable to a bank due July 21, 2001 and bearing interest at 9.0% per
annum. The note is payable in monthly installments of principal and interest
of $2,249 with all unpaid principal and interest due at maturity. The note is
secured by a mortgage on the property purchased with the proceeds and with a
$26,984 letter of credit pledged as additional security...................... 217,689
Notes payable due on August 1, 2001 and bearing interest at 13.1% per annum.
The notes are payable in monthly installments of principal and interest of
$77,429 and are collateralized by certain furniture, fixtures, equipment and
software purchased by the Company............................................ 2,081,563
Note payable due on September 1, 2001 and bearing interest at 13.0% per annum.
The note is payable in monthly installments of principal and interest of
$4,868 and is collateralized by certain furniture, fixtures, equipment and
software purchased by the Company............................................ 134,519
Note payable due on October 1, 2001 and bearing interest at 17.1% per annum.
The note is payable in monthly installments of principal and interest of
$158,000 with all unpaid principal and interest due at maturity. This note is
collateralized by certain software licenses purchased by the Company......... 4,501,175
Notes payable due between February 28, 2003 and February 19, 2004 and bearing
interest at rates ranging from 9.25% to 9.99% per annum. The notes are
payable in monthly installments of principal and interest ranging from $542
to $1,274 and are secured by automobiles purchased with the proceeds......... 107,630
----------
Total.......................................................................... 7,682,093
Less: current portion.......................................................... 1,757,588
Less: discounts................................................................ 692,711
----------
$5,231,794
----------
----------
</TABLE>
Aggregate maturities of long-term debt at December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999........................................................................... $2,009,483
2000........................................................................... 2,342,948
2001........................................................................... 3,283,700
2002........................................................................... 25,337
2003 and thereafter............................................................ 20,625
----------
Total.......................................................................... $7,682,093
----------
----------
</TABLE>
At December 31, 1998, the fair value of long-term debt approximates its
carrying value.
F-14
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
9. SHORT-TERM OBLIGATIONS EXPECTED TO BE REFINANCED
At December 31, 1998, the Company had outstanding current liabilities for
the purchase of fixed assets of $7,500,000, for which the Company had
outstanding commitments to finance on a long-term basis. The Company intends to
utilize these commitments in early 1999, and has therefore classified
$5,282,450, or the portion of the $7,500,000 financing that will be due after
1999, of the obligations as long-term. The remaining $2,217,550, which will be
due in 1999, is included in accounts payable at December 31, 1998. These
obligations will bear interest at rates from 9% to 17% per annum, and will
mature in varying installments through January 2002.
Expected maturities of the short-term debt expected to be refinanced are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31:
- ---------------------------------------------------------------------------------------------------
<S> <C>
1999............................................................................................... $ 2,217,550
2000............................................................................................... 2,270,033
2001............................................................................................... 2,420,664
2002............................................................................................... 591,753
-------------
$ 7,500,000
-------------
-------------
</TABLE>
10. PREFERRED STOCK
The Company has authorized the issuance of up to 225,000 shares of preferred
stock, par value $.01 per share, of which 110,000 has been designated Series A
Convertible Preferred Stock ("Series A") and 115,000 has been designated Series
B Convertible Redeemable Preferred Stock ("Series B"). During 1998, the Company
issued 55,000 shares of Series A for a total aggregate purchase price of $33
million, and 59,279 shares of Series B for a total aggregate purchase price of
$62.2 million, including $22.1 million of Series B issued upon conversion of
notes payable. Upon the conversion of notes payable with a face value of
$9,095,000 into Series B, unamortized debt discount of approximately $1,350,000
was recorded as additional interest expense.
SERIES A:
CONVERSION RIGHTS
The Series A is convertible into common stock at the option of the holder at
any time. In addition, the Series A will convert automatically into shares of
common stock upon the closing of an underwritten public offering of at least $50
million of net proceeds to the Company with a minimum valuation of fully-diluted
common equity (pre-offering) of $300 million. Each share of Series A is
convertible into 225 shares of common stock. This conversion ratio is subject to
adjustment upon the occurrence of certain specified dilutive events.
DIVIDENDS
The holders of the Series A are entitled to receive cumulative quarterly
dividends at the annual rate of $48 per share with payments commencing on
January 1, 2000. All accrued but unpaid dividends are payable at the closing of
an underwritten public offering of at least $50 million of net proceeds to
F-15
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
10. PREFERRED STOCK (CONTINUED)
the Company with a minimum valuation of fully-diluted common equity
(pre-offering) of $300 million, or upon the conversion of the Series A into
common stock.
LIQUIDATION
Each share of Series A has a preference on liquidation equal to $600 per
share plus all accrued and unpaid dividends. The holders of the Series A may
also be entitled to an additional distribution based on the fair market value of
the net assets of the Company as determined by the Board of Directors.
VOTING RIGHTS
Each share of Series A has substantially the same voting rights as the
number of shares of common stock into which it can be converted. In addition,
certain corporate actions require the consent of two-thirds of the outstanding
shares of Series A.
SERIES B:
CONVERSION RIGHTS
The Series B is convertible into common stock at the option of the holder at
any time. In addition, the Series B will convert automatically into shares of
common stock upon the closing of an underwritten public offering of at least $50
million of net proceeds to the Company with a minimum valuation of fully-diluted
common equity (pre-offering) of $300 million. Each share of Series B is
convertible into 312.5 shares of common stock. This conversion ratio is subject
to adjustment upon the occurrence of certain specified dilutive events.
REDEMPTION RIGHTS
Each share of Series B is mandatorily redeemable on December 31, 2006, if
still outstanding, for an amount equal to the liquidation preference.
DIVIDENDS
The holders of the Series B are entitled to receive cumulative quarterly
dividends at the annual rate of $84 per share with payments commencing on
January 1, 2000. All accrued but unpaid dividends are payable at the closing of
an underwritten public offering of at least $50 million of net proceeds to the
Company with a minimum valuation of fully-diluted common equity (pre-offering)
of $300 million, or upon the conversion of the Series B into common stock. No
dividends may be paid on the Series A unless dividends due to Series B holders
have been paid.
LIQUIDATION
Each share of Series B has a preference on liquidation equal to the greater
of $1,050 per share plus all accrued and unpaid dividends or the amount that
would be received on an as-converted basis.
F-16
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
10. PREFERRED STOCK (CONTINUED)
VOTING RIGHTS
Each share of Series B has substantially the same voting rights as the
number of shares of common stock into which it can be converted
11. COMMON STOCK SUBJECT TO REPURCHASE
The Company sold 1,343,750 shares of common stock to three officers that at
December 31, 1998 required the Company to repurchase the common stock at fair
value in the event of disability or death. The Company also has the option to
repurchase 718,750 shares of common stock sold to two officers for an aggregate
purchase price of $200, if the officers owning the shares are terminated for
cause, and has the option to repurchase 625,000 shares of common stock sold to
another officer for approximately $350,000, if that officer is terminated for
cause. All of the shares of common stock subject to repurchase may be
repurchased by the Company for an aggregate purchase price of approximately
$350,000 if the officers owning the shares terminate their employment prior to
May 2000. These agreements were amended on February 25, 1999 to void the
repurchase obligation upon death or disability upon the closing of an initial
public offering of the common stock.
The Company initially recorded the common stock subject to repurchase at an
amount equal to the consideration received of $1,010,000 (purchase price of
$1,057,500, less $47,500 represented by notes receivable). The common stock
subject to repurchase has been accreted to its estimated fair value at December
31, 1998 of $3.12 per share, less the related notes receivable, or an aggregate
amount of $4,145,000, through charges to additional paid-in capital. The
estimated value per share of $3.12 at December 31, 1998 was determined through
an independent appraisal of the Company's common stock.
12. STOCK WARRANTS
In 1998, in connection with the issuance of debt or capital leases, the
Company issued warrants to purchase 1,066,711 shares of common stock and
warrants to purchase 971 shares of Series B. The common stock warrants expire
from 2003 through 2008, and are exerciseable for $3.36 or $3.44 per share. The
warrants to purchase Series B expire in 2004 and are exerciseable for $1,050 per
share (or $3.36 per common equivalent share).
Upon issuance, the Company estimated the fair value of the warrants using a
Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rate of 5.50%, dividend yield of 0%; volatility
factor of the expected market price of the Company's common stock of .40; and a
weighted-average expected life of the warrant of 10 years. The range of values
assigned to the warrants was $.80 to $2.08 per share, and the total value
assigned was $2,740,329. This amount was recorded as additional paid-in capital,
and a corresponding debt discount was recorded that is being recognized as
additional interest expense over the term of the related debt or capital lease.
Also, as discussed in Note 2, the Company issued warrants to purchase
112,500 shares of common stock in connection with the acquisition of IIT and
ACR. These warrants expire in 2008 and are exerciseable for $16.00 per share.
The Company estimated the value of these warrants considering the various terms,
including the exercise price of the warrants, the estimated fair value of the
Company's common stock, and the length of time the warrants are exercisable. The
aggregate value assigned to these warrants was $90,000.
F-17
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
12. STOCK WARRANTS (CONTINUED)
During 1998, no warrants issued were exercised. A summary of warrants
outstanding at December 31, 1998 is as follows:
<TABLE>
<CAPTION>
EXERCISE
NUMBER OF SHARES PRICE EXPIRATION DATE
- ---------------------------- ------------- ------------------
<S> <C> <C>
COMMON STOCK:
17,857 $ 3.36 December 2003
74,404 $ 3.36 June 2004
974,450 $ 3.44 September 2008
50,000 $ 16.00 September 2008
62,500 $ 16.00 October 2008
SERIES B PREFERRED STOCK:
971 $ 1,050 June 2004
</TABLE>
13. SHARES RESERVED FOR FUTURE ISSUANCE
As of December 31, 1998, the Company has reserved 12,374,994 shares and
18,524,532 shares of common stock for future issuance upon the conversion of the
Series A and Series B, respectively. In addition, the Company has reserved
1,682,250 shares of common stock for future issuance upon the exercise of stock
options eligible for granting under the 1998 Stock Option Plan (see Note 14),
and 1,482,648 shares of Common Stock attributable to outstanding warrants issued
in 1998.
14. STOCK COMPENSATION PLAN
Effective July 2, 1998, the Company adopted the 1998 Stock Option Plan of
USINTERNETWORKING, Inc. ("the Plan") which is administered by the Compensation
Committee of the Board of Directors. The Plan provides for the granting of
either qualified or non-qualified options to purchase an aggregate of up to
1,682,250 shares of common stock to eligible employees, officers, directors and
consultants of the Company.
A summary of the Company's stock option activity, and related information
for the year ended December 31, 1998 follows:
<TABLE>
<CAPTION>
NUMBER
OF
OPTIONS EXERCISE PRICE
------------ ---------------
<S> <C> <C>
Granted.............................................................................. 1,709,125 $ 2.64
Forfeited............................................................................ (26,875) 2.64
Outstanding at end of year........................................................... 1,682,250
Exercisable at end of year........................................................... 1,682,250
</TABLE>
The exercise price for all options outstanding as of December 31, 1998 is
$2.64. These options vested immediately upon the date of grant. Shares of common
stock purchased pursuant to these options will be subject to the Company's right
to repurchase them at the option exercise price upon the termination of the
holder's employment or business relationship with the Company. The repurchase
right will lapse with respect to one-third of the shares purchasable upon
exercise of an option on the
F-18
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
14. STOCK COMPENSATION PLAN (CONTINUED)
first anniversary of the date of grant of the option. The repurchase right with
respect to the remainder of the shares purchasable upon exercise of an option
will lapse in equal quarterly installments over the subsequent eight calendar
quarters. The options expire 10 years from the date of issuance. At December 31,
1998, the weighted-average remaining contractual life of outstanding options is
9.7 years.
For the year ended December 31, 1998, pro forma net loss and loss per share
information required by Statement No. 123 has been determined using the minimum
value method. The minimum value method calculates the fair value of options as
the excess of the estimated fair value of the underlying stock at the date of
grant over the present value of both the exercise price and the expected
dividend payments, each discounted at the risk-free rate, over the expected life
of the option. In determining the estimated fair value of granted stock options
under the minimum value method, the risk-free interest rate was assumed to be
5.50%, the dividend yield was estimated to be 0% and the expected life of
granted options was assumed to be four years.
Because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the minimum value method and
other methods prescribed by Statement No. 123 do not necessarily provide a
single measure of the fair value of its employee stock options.
The grant-date fair value of all options granted during 1998 using the
minimum value method was less than $.01, thus no pro forma information has been
presented. The exercise price at the grant-date of all options granted through
December 31, 1998 was greater than the market value of the underlying common
stock on the grant-date, as determined by independent appraisal. As a result,
the Company has not recognized compensation expense related to these options.
15. INCOME TAXES
At December 31, 1998, the Company has a U.S. federal net operating loss
carryforward of $20 million. This carryforward expires in 2013. The amount
available to be used in any given year will be limited by operation of certain
provisions of the Internal Revenue Code. The Company also has U.S.
F-19
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
15. INCOME TAXES (CONTINUED)
state net operating loss carryforwards available, the utilization of which will
be similarly limited. The Company has established a valuation allowance with
respect to these federal and state carryforwards.
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards............................................. $ 8,163,105
Start-up and organizational costs capitalized for tax purposes............... 3,632,867
Other........................................................................ 192,230
-----------
Total deferred tax assets...................................................... 11,988,202
Deferred tax liabilities:
Tax over book depreciation................................................... 314,930
Other........................................................................ 467,169
-----------
Total deferred tax liability................................................... 782,099
-----------
Net future income tax benefit.................................................. 11,206,103
Valuation allowance for net deferred tax assets................................ (11,206,103)
-----------
Net deferred tax assets........................................................ $ --
-----------
-----------
</TABLE>
The reconciliation of the reported income tax expense to the amount that
would result by applying the U.S. federal statutory rate to net loss during the
development stage is as follows:
<TABLE>
<S> <C>
Tax benefit at U.S. statutory rate............................................. $(11,627,761)
State income taxes, net of federal benefit..................................... (1,007,505)
Non-deductible goodwill........................................................ 526,336
Non-deductible interest expense................................................ 704,166
Non-deductible transactions costs.............................................. 154,777
Other.......................................................................... 43,884
Valuation allowance............................................................ 11,206,103
-----------
Total.......................................................................... $ --
-----------
-----------
</TABLE>
16. OPERATING LEASES
The Company conducts primarily all of its operations from leased facilities
under operating leases that have terms of up to five years and generally contain
renewal options of two to three years and rent
F-20
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
16. OPERATING LEASES (CONTINUED)
escalation clauses. Future minimum payments under noncancelable operating leases
with initial terms of one year or more consist of the following at December 31,
1998:
<TABLE>
<S> <C>
1999............................................................ $1,441,681
2000............................................................ 1,402,328
2001............................................................ 954,563
2002............................................................ 684,799
2003............................................................ 158,549
---------
$4,641,920
---------
---------
</TABLE>
The Company incurred rent expense of $718,416 during the period from January
14, 1998 (date of inception) through December 31, 1998.
17. EMPLOYEE BENEFIT PLAN
The Company established a defined contribution benefit plan effective July
1, 1998. The plan covers substantially all employees who have 30 days of service
with the Company. Participants may contribute from 1% to 15% of their annual
compensation to the plan. In addition, the Company may make discretionary
matching and profit-sharing contributions to the plan. No contributions were
made by the Company in 1998.
18. RELATED PARTY TRANSACTIONS
During 1998, the Company received a non-interest bearing loan from an
officer in the amount of $1,000,000. The loan was subsequently converted into
1,667 shares of Series A Convertible Preferred Stock.
19. BUSINESS AND GEOGRAPHIC SEGMENT INFORMATION
The Company is organized into two business units. The Company's IMAP
division provides an Internet-based network which enables clients to use leading
business software applications without the burden of owning or managing the
underlying technology. These services are delivered to customers through a
network of Enterprise Data Centers located in Maryland, California, Amsterdam
and Tokyo. The Professional IT Services division provides focused software
implementation services on a traditional time and materials basis.
The Company evaluates the performance of its segments based primarily on
operating profit before depreciation, amortization and interest. The accounting
policies used by the reportable segments are the same as those used by the
Company as described in Note 1 to the consolidated financial statements.
F-21
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
19. BUSINESS AND GEOGRAPHIC SEGMENT INFORMATION (CONTINUED)
The Company's reportable segments are business units that offer distinct
services. The segments are managed separately as they have different customer
bases and delivery channels. The following table sets forth information on the
Company's reportable segments:
<TABLE>
<CAPTION>
FOR THE PERIOD JANUARY 14, 1998
(INCEPTION) THROUGH
DECEMBER 31, 1998
----------------------------------------------
<S> <C> <C> <C>
PROFESSIONAL
IT
IMAP SERVICES CONSOLIDATED
-------------- -------------- --------------
Revenues.......................................................... $ 69,467 $ 4,052,982 $ 4,122,449
Segment operating (loss) profit................................... (28,071,239) 342,387 (27,728,852)
Total assets...................................................... 100,112,279 6,404,199 106,516,478
Capital expenditures.............................................. 21,358,476 38,752 21,397,228
</TABLE>
A reconciliation of segment operating loss for both segments to net loss
during the development stage is as follows:
<TABLE>
<S> <C>
Segment operating loss for all segments........................ $(27,728,852)
Depreciation and amortization.................................. (3,179,648)
Interest income................................................ 367,411
Interest expense............................................... (2,681,088)
-----------
Net loss during the development stage.......................... $(33,222,177)
-----------
-----------
</TABLE>
Revenues from foreign countries and assets located in foreign countries were
each less than $200,000.
20. PRO FORMA BALANCE SHEET (UNAUDITED)
In January 1999 the Board of Directors approved the filing of a registration
statement for the sale of common stock with the Securities and Exchange
Commission that, upon closing, would meet the criteria for the automatic
conversion of the outstanding Series A Convertible Preferred Stock and Series B
Redeemable Convertible Preferred Stock into common stock. Additionally, in
February 1999, employment contracts of certain officers requiring the repurchase
of 1,343,750 shares of common stock upon death or disability were amended to
void the repurchase obligation upon the closing of an initial public offering.
F-22
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
20. PRO FORMA BALANCE SHEET (UNAUDITED) (CONTINUED)
The following table summarizes the components of the pro forma balance
sheet:
<TABLE>
<CAPTION>
ASSUMED
CONVERSION OR
HISTORICAL RECLASSIFICATION
DECEMBER 31, OF SECURITIES PRO
1998 UPON IPO FORMA
-------------- -------------- --------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 43,802,465 $ -- $ 43,802,465
Other current assets.......................................... 5,900,078 -- 5,900,078
-------------- -------------- --------------
Total current assets............................................ 49,702,543 -- 49,702,543
Property and equipment, net..................................... 21,640,145 -- 21,640,145
Other noncurrent assets......................................... 35,173,790 -- 35,173,790
-------------- -------------- --------------
Total assets.................................................... $ 106,516,478 $ -- $ 106,516,478
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses......................... $ 13,012,027 $ -- $ 13,012,027
Other current liabilities..................................... 14,139,517 -- 14,139,517
-------------- -------------- --------------
Total current liabilities....................................... 27,151,544 -- 27,151,544
Other noncurrent liabilities.................................... 15,444,502 -- 15,444,502
Series B Preferred Stock........................................ 62,242,500 (62,242,500) --
Common Stock subject to repurchase.............................. 4,145,000 (4,145,000) --
Stockholders' equity (deficit):
Series A Preferred Stock...................................... 550 (550) --
Common Stock.................................................. 625 32,243 32,868
Additional paid-in capital.................................... 30,753,934 66,403,307 97,157,241
Due from stockholders......................................... -- (47,500) (47,500)
Accumulated deficit........................................... (33,222,177) -- (33,222,177)
-------------- -------------- --------------
Total stockholders' equity (deficit)............................ (2,467,068) -- 63,920,432
-------------- -------------- --------------
Total liabilities and stockholders' equity (deficit)............ $ 106,516,478 $ -- $ 106,516,478
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
F-23
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
21. SUBSEQUENT EVENTS
In February 1999, the Company's Board of Directors approved an 8 for 1
reverse stock split of common stock, options and warrants which becomes
effective on the date the Company's registration statement is declared
effective. Accordingly, all share and per share data including stock option,
warrant and loss per share information have been restated in the consolidated
financial statements to retroactively reflect the stock split.
In February 1999, the Company increased the authorized shares under its
stock option plan by 3,000,000 shares and in February and March 1999 granted
non-qualified stock options to purchase 49,063 shares of common stock for $3.36
per share and 375,000 shares of common stock for $6.00 per share. The Company
also granted in March 1999 non-qualified stock options to purchase 1,320,556
shares of common stock at $6.00 per share, contingent upon the closing of the
Company's initial public offering. These options vested immediately, but any
shares exercised will be subject to the Company's right to repurchase them at
the option exercise price upon the termination of employment. The repurchase
right will lapse with respect to one-third of the shares purchasable upon
exercise of an option in March 2000, and the remainder of the shares purchasable
upon exercise of an option will lapse in equal quarterly installments over the
subsequent eight calendar quarters.
The options were granted at exercise prices less than the fair market value
of the Company's common stock at the date of grant. The Company expects to
record stock compensation expense of approximately $10.6 million as a result of
these option grants that will be recognized ratably over the four-year period
that the employees earn the right to retain the shares obtained upon exercise of
the stock options without regard to continued employment.
As of March 1999, the Company had entered into forward looking commitments
to purchase software and advertising totaling $22.5 million.
F-24
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Advanced Communication Resources, Inc.
We have audited the accompanying balance sheets of Advanced Communication
Resources, Inc. as of September 30, 1998 and December 31, 1997 and 1996, and the
related statements of operations, stockholders' equity and cash flows for the
years ended December 31, 1997 and 1996 and the nine months ended September 30,
1998. 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 audits 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 financial statements referred to above present fairly,
in all material respects, the financial position of Advanced Communication
Resources, Inc. as of September 30, 1998 and December 31, 1997 and 1996, and the
results of its operations and its cash flows for the years ended December 31,
1997 and 1996 and the nine months ended September 30, 1998, in conformity with
generally accepted accounting principles.
/s/ Mahoney Cohen & Company, CPA, P.C.
New York, New York
March 3, 1999
F-25
<PAGE>
ADVANCED COMMUNICATION RESOURCES, INC.
BALANCE SHEETS
ASSETS (NOTE 5)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1997 1998
------------ ------------ -------------
<S> <C> <C> <C>
Current assets:
Cash............................................................... $ 34,204 $ 179,982 $ 28,317
Accounts receivable, net of allowance for uncollectible accounts of
$81,050 in 1996, $50,000 in 1997 and 1998 (Note 3)............... 817,803 1,559,330 1,550,942
Other current assets............................................... 26,584 40,447 25,526
Due from stockholders (Note 9)..................................... -- 43,570
Due from affiliate (Note 9)........................................ 342,994 -- --
------------ ------------ -------------
Total current assets........................................... 1,221,585 1,779,759 1,648,355
Property and equipment, net (Note 4)................................. 144,190 110,857 180,026
Other assets......................................................... 20,360 6,788 167,278
------------ ------------ -------------
$1,386,135 $1,897,404 $ 1,995,659
------------ ------------ -------------
------------ ------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (Note 5)............................................. $ 725,000 $ 525,000 $ 400,000
Accounts payable and accrued expenses.............................. 366,372 435,998 462,914
Deferred income taxes (Note 7)..................................... 50,000 117,000 118,000
Due to stockholders (Note 9)....................................... 4,850 120,000 --
------------ ------------ -------------
Total current liabilities...................................... 1,146,222 1,197,998 980,914
Commitments and contingencies (Note 10)
Stockholders' equity (Note 6):
Common stock, no par value:
Authorized--200 shares
Issued and outstanding--150 shares as of December 31, 1996 and
1997; 100 shares as of September 30, 1998........................ 1,500 1,500 1,000
Retained earnings.................................................. 288,413 747,906 1,013,745
------------ ------------ -------------
289,913 749,406 1,014,745
Less: Treasury stock, at cost...................................... 50,000 50,000 --
------------ ------------ -------------
Total stockholders' equity..................................... 239,913 699,406 1,014,745
------------ ------------ -------------
$1,386,135 $1,897,404 $ 1,995,659
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
See accompanying notes.
F-26
<PAGE>
ADVANCED COMMUNICATION RESOURCES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
--------------------------- -------------
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1997 1998
------------- ------------ -------------
<S> <C> <C> <C>
Net revenue (Note 3)................................................. $ 4,848,112 $6,646,245 $ 5,416,982
Direct costs (Notes 6 and 9)......................................... 3,768,134 4,230,576 3,536,404
------------- ------------ -------------
Gross margin......................................................... 1,079,978 2,415,669 1,880,578
Operating expenses (Note 9):
Selling............................................................ 545,251 377,783 371,511
General and administrative......................................... 1,470,758 1,499,654 1,152,228
------------- ------------ -------------
Total operating expenses......................................... 2,016,009 1,877,437 1,523,739
------------- ------------ -------------
Income (loss) before provision for (benefit from) income taxes....... (936,031) 538,232 356,839
Provision for (benefit from) income taxes............................ (86,947) 78,739 41,500
------------- ------------ -------------
Net income (loss).................................................... $ (849,084) $ 459,493 $ 315,339
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
See accompanying notes.
F-27
<PAGE>
ADVANCED COMMUNICATION RESOURCES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON RETAINED TREASURY
STOCK EARNINGS STOCK TOTAL
----------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Balance, January 1, 1996....................................... $ 1,500 $ 1,137,497 $ -- $ 1,138,997
Purchase of treasury stock (Note 6)............................ -- -- (50,000) (50,000)
Net loss....................................................... -- (849,084) -- (849,084)
----------- ------------ ---------- ------------
Balance, December 31, 1996..................................... 1,500 288,413 (50,000) 239,913
Net income..................................................... -- 459,493 -- 459,493
----------- ------------ ---------- ------------
Balance, December 31, 1997..................................... 1,500 747,906 (50,000) 699,406
Retirement of treasury stock (Note 1).......................... (500) (49,500) 50,000 --
Net income..................................................... 315,339 -- 315,339
----------- ------------ ---------- ------------
Balance, September 30, 1998.................................... $ 1,000 $ 1,013,745 $ 0 $ 1,014,745
----------- ------------ ---------- ------------
----------- ------------ ---------- ------------
</TABLE>
See accompanying notes.
F-28
<PAGE>
ADVANCED COMMUNICATION RESOURCES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
-------------------------- -------------
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1997 1998
------------ ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................................. $ (849,084) $ 459,493 $ 315,339
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization.................................... 101,480 80,062 100,681
Deferred income taxes............................................ (90,000) 67,000 1,000
Change in assets and liabilities:
Accounts receivable............................................ 903,600 (741,527) 8,388
Other current assets........................................... (9,509) (13,863) 14,921
Accounts payable and accrued expenses.......................... (88,006) 69,626 26,916
------------ ------------ -------------
Net cash provided by (used in) operating activities.......... (31,519) (79,209) 467,245
------------ ------------ -------------
Cash flows from investing activities:
Purchase of property and equipment................................. (55,995) (33,157) (162,882)
Payments for software development.................................. -- -- (167,278)
------------ ------------ -------------
Cash used in investing activities............................ (55,995) (33,157) (330,160)
------------ ------------ -------------
Cash flows from financing activities:
Proceeds from (repayments of) notes payable........................ 225,000 (200,000) (125,000)
Proceeds from (repayments of) loans from stockholders.............. -- 120,000 (120,000)
Repayments of (advances to) loans to stockholders.................. 88,850 70,150 (43,750)
Repayments from (advances to) affiliates........................... (213,668) 267,994 --
Purchase of common stock for treasury.............................. (50,000) -- --
------------ ------------ -------------
Net cash provided by (used in) financing activities.......... 50,182 258,144 (288,750)
------------ ------------ -------------
Net increase (decrease) in cash...................................... (37,332) 145,778 (151,665)
Cash, beginning of year.............................................. 71,536 34,204 179,982
------------ ------------ -------------
Cash, end of year/period............................................. $ 34,204 $ 179,982 $ 28,317
------------ ------------ -------------
------------ ------------ -------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the year/period for:
Interest........................................................... $ 60,421 $ 6,132 $ 23,047
Income taxes....................................................... $ 10,093 $ 14,414 $ 10,715
Supplemental Schedule of Non-Cash Investing and Financing Activities
</TABLE>
In connection with the retirement of 50 shares of treasury stock, $500 was
charged against common stock and $49,500 was offset against retained earnings.
See accompanying notes.
F-29
<PAGE>
ADVANCED COMMUNICATION RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY
Advanced Communication Resources, Inc. (the "Company") provides computer
consulting services, including consultation to Fortune 500, financial services
and other companies located in the New York metropolitan area.
On October 2, 1998, 100% of the Company's stock was acquired by
USinternetworking, Inc.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Machinery and equipment and
furniture and fixtures are depreciated by the straight-line method over
estimated useful lives ranging from three to five years. Leasehold improvements
are amortized over the shorter of the term of the lease or their estimated
useful life. Major additions and betterments are capitalized, and repairs and
maintenance are charged to operations in the period incurred.
INCOME TAXES
The Company, with the consent of its stockholders, elected treatment as a
small business corporation under Subchapter S of the Internal Revenue Code and
the corresponding provisions of the New York State Franchise Tax law. Under the
aforementioned provisions, corporate income or loss and any tax credits earned
are included in the stockholders' individual income tax returns. The provision
for income taxes represents New York State Subchapter S and New York City
corporation taxes.
The Company reports on a cash basis for income tax purposes. Deferred state
and local taxes are provided for the differences between the cash basis of
accounting and the accrual basis of accounting utilized in the preparation of
these financial statements. Pursuant to the cash method of accounting, revenue
is recorded when received, rather than when earned, and expenses are recorded
when paid, rather than when incurred.
In connection with the sale of the Company's stock, the subchapter S status
for both federal and state purposes was technically terminated.
REVENUE RECOGNITION
The Company recognizes revenue as professional services are performed. On
fixed fee engagements, which historically have not been material, revenue is
recognized as earned in accordance with the contract.
F-30
<PAGE>
ADVANCED COMMUNICATION RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPUTER SOFTWARE COSTS
Pursuant to Statement of Financial Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
issued by the Financial Accounting Standards Board, the Company is required to
capitalize certain software development and production costs once technological
feasibility has been achieved. Software development costs incurred prior to
achieving technological feasibility as well as certain licensing costs are
charged to research and development expense as incurred. Computer software costs
of $207,997 at September 30, 1998 and $40,719 at December 31, 1997 and 1996,
included in other assets, are recorded at cost and amortized by the
straight-line method over three years. Amoritization expense for the nine months
ended September 30, 1998 and the years ended December 31, 1997 and 1996 amounted
to $6,788, $6,786 and $6,877, respectively. Accumulated amortization amounted to
$40,719, $33,931, and $26,359 at September 30, 1998, December 31, 1997 and
December 31, 1996, respectively.
Capitalized software development and purchased software costs are reported
at the lower of unamortized cost or net realizable value. Commencing upon
initial product release, these costs are amortized based on the straight-line
method over the estimated life, generally one year for internal software
development costs and twelve to thirty-six months for purchased software. Fully
amortized software costs are removed from the financial records.
ADVERTISING EXPENSES
Advertising expenses amounting to approximately $7,600 and $20,500 for the
years ended December 31, 1997 and 1996, respectively, are charged to operations
during the period in which they are incurred.
NOTE 3--CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
The Company provides consulting services to companies in the financial
services industry, primarily located in the New York metropolitan area. In the
normal course of business, payment for the Company's services is due generally
within thirty days of invoicing. Management's credit evaluation process and the
reasonably short collection terms help mitigate any risks. At September 30,
1998, three customers comprised approximately 8% ($124,000), 10% ($155,000) and
13% ($202,000) of the Company's outstanding accounts receivable. These same
three customers accounted for approximately 16% ($867,000), 12% ($650,000) and
11% ($596,000) of net revenue for the nine months ended September 30, 1998. At
December 31, 1997, two customers comprised approximately 17% ($265,000) and 21%
($327,000) of the Company's outstanding accounts receivable. These same two
customers accounted for approximately 23% ($1,529,000) and 19% ($1,263,000) of
net revenue for the year ended December 31, 1997. Additionally, three customers
accounted for approximately 26% ($1,261,000), 14% ($679,000) and 12% ($582,000)
of net revenue for the year ended December 31, 1996.
The Company places its cash with financial institutions. Accounts are
insured by the Federal Deposit Insurance Corporation up to $100,000.
F-31
<PAGE>
ADVANCED COMMUNICATION RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 4--PROPERTY AND EQUIPMENT
Property and equipment is comprised of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1996 1997 1998
---------- ---------- -------------
<S> <C> <C> <C>
Machinery and equipment............................... $ 247,047 $ 280,204 $ 313,318
Furniture and fixtures................................ 45,042 45,042 65,528
Leasehold improvements................................ 57,079 57,079 68,742
---------- ---------- -------------
349,168 382,325 447,588
Less: Accumulated depreciation and amortization....... 204,978 271,468 267,562
---------- ---------- -------------
$ 144,190 $ 110,857 $ 180,026
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
NOTE 5--NOTES PAYABLE
Notes payable consists of:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1997 1998
------------ ------------ -------------
<S> <C> <C> <C>
Bank credit facility providing for a $750,000 line of credit.
Borrowings for advances under the line bear interest at 1% above
the prime rate (9.5% at December 31, 1997). The line is
collateralized by substantially all of the Company's assets and is
personally guaranteed by the Company's stockholders................ $ -- $ 400,000 $ 400,000
Demand note payable to a commercial bank which bore interest at 1% in
excess of the bank's prime lending rate (9.75% at December 31,
1996); the note was collateralized by all of the assets of the
Company and was personally guaranteed by the Company's
stockholders....................................................... 500,000 -- --
------------ ------------ -------------
Totals carried forward............................................... $ 500,000 $ 400,000 $ 400,000
------------ ------------ -------------
</TABLE>
F-32
<PAGE>
ADVANCED COMMUNICATION RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 5--NOTES PAYABLE (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1997 1998
------------ ------------ -------------
<S> <C> <C> <C>
Totals brought forward............................................... $ 500,000 $ 400,000 $ 400,000
Installment note payable to a former stockholder which bears interest
at 75% of the prime lending rate of a commercial bank (6.37% at
December 31, 1997). The note is collateralized by fifty shares of
the Company's treasury stock held in escrow by the former
stockholder and subordinated to the Company's bank debt. Principal
payments in the amount of $25,000 are to be made quarterly through
March 1, 1999 (A).................................................. 225,000 125,000 --
------------ ------------ -------------
$ 725,000 $ 525,000 $ 400,000
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
On October 2, 1998 the credit facility was paid in full.
- ------------------------
(A) The note contains provisions for minimum working capital, current ratio and
stockholders' equity. The arrangement also limits compensation to the
officers of the Company. At December 31, 1997 and 1996, the Company was in
violation of certain financial covenants. Accordingly, the entire balance
outstanding as of December 31, 1997 and 1996 has been classified as a
current liability.
NOTE 6--STOCKHOLDERS' EQUITY
TREASURY STOCK
On December 13, 1995, the Company entered into a stock purchase agreement to
purchase a stockholder's 33.3% common stock interest in the Company. The
purchase price for the stock was $50,000, paid upon execution of the purchase
agreement. The transaction was consummated during 1996.
During September 1998, the Company retired 50 shares of treasury stock.
In connection with the stock purchase agreement, the Company entered into a
one year $350,000 consulting agreement with the former stockholder with $50,000
payable upon closing and $25,000 per quarter payable over three years. In
addition, the Company entered into a non-compete agreement with the stockholder
covering one year for which the former stockholder was paid $100,000. The
amounts related to the above agreements were charged to operations in 1996 and
are included in the accompanying statement of operations.
F-33
<PAGE>
ADVANCED COMMUNICATION RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 7--INCOME TAXES
The provision for (benefit from) state and local income taxes for the
periods ended consists of:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1997 1998
------------ ------------ -------------
<S> <C> <C> <C>
Current.......................................... $ 3,053 $ 11,739 $ 40,500
Deferred......................................... (90,000) 67,000 1,000
------------ ------------ -------------
$ (86,947) $ 78,739 $ 41,500
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
The Company's provision for local income taxes for the nine months ended
September 30, 1998 and for the years ended December 31, 1997 and 1996 was
determined under the alternative tax method.
The Company's effective state and local tax rate for the nine months ended
September 30, 1998 and the years ended December 31, 1997 and 1996 was 11.6%, 17%
and 13.6%, respectively.
Deferred state and local income taxes arise from the difference in the
amount of revenue and expenses reported on the accrual method of accounting for
financial statement reporting and the cash method of accounting for income tax
purposes.
NOTE 8--RETIREMENT PLAN
The Company formed an IRS approved 401(k) plan during 1996, covering all
eligible full-time employees. Contributions to the plan are based upon a
matching contribution of 50% of employee contributions limited to 3% of salary.
For the nine months ended September 30, 1998 and years ended December 31, 1997
and 1996, 401(k) expense amounted to approximately $35,000, $45,000 and $47,000,
respectively.
NOTE 9--RELATED PARTY TRANSACTIONS
CONSULTING SERVICES
The Company subcontracts the consulting services of two companies affiliated
through common minority ownership interests. For the year ended December 31,
1997, fees incurred and paid to these companies amounted to $125,000. There were
no fees incurred during the year ended December 31, 1996.
RENT EXPENSE
The Company occupies office space leased by an affiliate. Total rent charged
to operations for the years ended December 31, 1997 and 1996 were approximately
$90,000 and $75,000, respectively. For the nine months ended September 30, 1998
total rent expense charged to operations was approximately $71,000. These
amounts will not be repaid.
DUE FROM AFFILIATE
During 1996, the Company made non-interest bearing advances to an affiliate.
These advances were repaid in full during 1997.
F-34
<PAGE>
ADVANCED COMMUNICATION RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 9--RELATED PARTY TRANSACTIONS (CONTINUED)
DUE TO/FROM STOCKHOLDERS
Advances to and from the Company's stockholders are non-interest bearing and
are due (payable) on demand.
NOTE 10--COMMITMENTS AND CONTINGENCIES
LETTER OF CREDIT
At December 31, 1997, the Company is contingently liable pursuant to a
letter of credit in the amount of $10,000 in favor of a trade organization's
legal defense fund. A certificate of deposit in the amount of $10,000
collateralizes the Company's obligation and is included in other current assets
in the accompanying balance sheets.
ASSIGNMENT OF LEASE
On October 2, 1998, the Company assumed the lease obligation of an
affiliate. Future minimum lease payments, excluding escalation charges, are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ----------------------------------------------------------------------------------
<S> <C>
1998-Remainder.................................................................... $ 29,000
1999.............................................................................. 120,000
2000.............................................................................. 124,000
2001.............................................................................. 128,000
2002.............................................................................. 131,000
Thereafter........................................................................ 33,000
----------
$ 565,000
----------
----------
</TABLE>
EMPLOYEE AND CONTRACTOR AGREEMENTS
The Company executes agreements with all technical employees and contractors
which contain certain provisions designed to protect the Company's intellectual
property. The agreements provide for an indefinite term, cancellable by either
party upon ten days written notice.
F-35
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
I.I.T. Holding, Inc.
We have audited the accompanying consolidated balance sheets of I.I.T.
Holding, Inc. and subsidiaries as of December 31, 1996 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. 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 did not audit the financial
statements of International Information Technology IIT, C.A., a wholly-owned
subsidiary, which statements reflect total assets of $68,247 and $76,361 as of
December 31, 1996 and 1997, respectively, and total revenues of $3,336 and
$147,797, for the period from March 6, 1996 (inception) through December 31,
1996 and the year ended December 31, 1997, respectively. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to data included for International Information
Technology IIT, C.A., is based solely on the report of the other auditors.
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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of I.I.T. Holding, Inc.
and subsidiaries as of December 31, 1996 and 1997, and the consolidated results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Miami, Florida
March 1, 1999
F-36
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
U.S. INTERNETWORKING, INC.
We have audited the accompanying balance sheets of International Information
Technology IIT, C.A., at December 31, 1997 and for the period from March 5, 1996
(date of inception) through December 31, 1996, and the related statements of
operations, changes in stockholders' equity and cash flows for the years then
ended (not presented separately herein). 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 U.S. 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 financial statements referred to above present fairly,
in all material respects, the financial position of International Information
Technology IIT, C.A. at December 31, 1997 and for the period from March 5, 1996
(date of inception) through December 31, 1996, and the results of its operations
and its cash flows for the years then ended in conformity with U.S. generally
accepted accounting principles.
At December 31, 1997 and 1996, the accompanying financial statements have
been prepared assuming that the Company will continue its ongoing operations,
despite of the negative stockholder's equity, which shows uncertainty about the
Company's ability to continue in operation. These financial statements do not
include any adjustments that could result as a consequence of this uncertainty.
BASSAN & ASOCIADOS S.C.
Ana Escudero de D'Aguiar
Certified Public Accountant
CPA D.F. Venezuela No. 7558
August 20, 1998
F-37
<PAGE>
I.I.T. HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1996 1997 SEPTEMBER 7, 1998
---------- ------------ -----------------
<S> <C> <C> <C>
(UNAUDITED)
<CAPTION>
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.......................................... $ 69,563 $ 14,443 $ 331,013
Accounts receivable--trade, less allowance of $50,000 in 1998...... 225,500 634,215 1,299,469
Other current assets............................................... 2,451 13,902 68,799
---------- ------------ -----------------
Total current assets................................................. 297,514 662,560 1,699,281
Equipment and vehicles:
Computer equipment................................................. 30,407 116,850 161,449
Vehicles........................................................... 45,119 45,119 --
---------- ------------ -----------------
75,526 161,969 161,449
Less: accumulated depreciation..................................... (25,831) (56,084) (55,700)
---------- ------------ -----------------
49,695 105,885 105,749
Other assets......................................................... 654 618 --
---------- ------------ -----------------
Total assets......................................................... $ 347,863 $ 769,063 $ 1,805,030
---------- ------------ -----------------
---------- ------------ -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft..................................................... $ -- $ 157,056 $ --
Accounts payable................................................... 13,899 7,162 53,787
Accrued expenses................................................... 60,000 366,685 1,974,395
Current portion of note payable.................................... 4,443 10,036 --
Current portion of capital lease obligations....................... -- 18,230 9,803
Unsecured demand note payable to stockholder, non-interest
bearing.......................................................... 99,951 62,160 8,500
Client advances.................................................... 55,824 -- --
Current deferred income taxes...................................... 49,270 -- --
---------- ------------ -----------------
Total current liabilities............................................ 283,387 621,329 2,046,485
Note payable......................................................... 10,676 -- --
Capital lease obligations, net of current portion.................... -- 15,953 8,596
Deferred income taxes................................................ 9,103 -- --
Commitments and contingent liabilities............................... -- -- --
Stockholders' equity (deficit):
Common stock....................................................... 2,724 3,197 475
Additional paid-in capital......................................... -- 1,001,843 1,004,565
Accumulated other comprehensive income............................. 835 (20,918) 21,365
Retained earnings (deficit)........................................ 41,138 (852,341) (1,276,456)
---------- ------------ -----------------
44,697 131,781 (250,051)
---------- ------------ -----------------
Total liabilities and stockholders' equity........................... $ 347,863 $ 769,063 $ 1,805,030
---------- ------------ -----------------
---------- ------------ -----------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-38
<PAGE>
I.I.T. HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
EIGHT MONTHS FOR THE PERIOD
YEAR ENDED DECEMBER 31 ENDED JANUARY 1, 1998
--------------------------- AUGUST 31, THROUGH
1996 1997 1997 SEPTEMBER 7, 1998
------------ ------------- -------------- -----------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Consulting revenue............................... $ 747,023 $ 2,812,011 $ 1,499,262 $ 4,405,560
Cost of revenue.................................. 519,261 1,881,031 1,111,872 2,976,499
------------ ------------- -------------- -----------------
Gross profit..................................... 227,762 930,980 387,390 1,429,061
Operating expenses:
General and administrative..................... 131,037 778,342 219,366 1,803,611
Sales and marketing............................ 73,305 62,943 38,989 4,632
Stock compensation expense..................... -- 1,002,316 1,002,316 --
Depreciation................................... 13,556 30,253 15,101 27,580
------------ ------------- -------------- -----------------
217,898 1,873,854 1,275,772 1,835,823
------------ ------------- -------------- -----------------
Income (loss) from operations.................... 9,864 (942,874) (888,382) (406,762)
Interest expense................................. (2,917) (8,977) (480) (17,353)
------------ ------------- -------------- -----------------
Income (loss) before provision for income
taxes.......................................... 6,947 (951,851) (888,862) (424,115)
Provision (benefit) for income taxes............. 14,832 (58,372) (58,372) --
------------ ------------- -------------- -----------------
Net loss......................................... $ (7,885) $ (893,479) $ (830,490) $ (424,115)
------------ ------------- -------------- -----------------
------------ ------------- -------------- -----------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-39
<PAGE>
I.I.T. HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
ADDITIONAL ACCUMULATED RETAINED
COMMON PAID-IN OTHER COMPREHENSIVE EARNINGS
STOCK CAPITAL INCOME (DEFICIT) TOTAL
----------- ------------ -------------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1996................. $ 1,000 $ -- $ -- $ 49,023 $ 50,023
Issuance of common stock.................. 1,724 -- -- -- 1,724
Comprehensive income:
Net loss................................ -- -- -- (7,885) (7,885)
Other comprehensive income--
translation adjustment................ -- -- 835 -- 835
-------------
Total comprehensive income................ -- -- -- -- (7,050)
----------- ------------ -------- ------------- -------------
Balances at December 31, 1996............... 2,724 -- 835 41,138 44,697
Stock grant to employees for no
consideration........................... 473 1,001,843 -- -- 1,002,316
Comprehensive income:
Net loss................................ -- -- -- (893,479) (893,479)
Other comprehensive income--
translation adjustment................ -- -- (21,753) -- (21,753)
-------------
Total comprehensive income................ -- -- -- -- (915,232)
----------- ------------ -------- ------------- -------------
Balances at December 31, 1997............... 3,197 1,001,843 (20,918) (852,341) 131,781
Corporate reorganization.................. (2,722) 2,722 -- -- --
Comprehensive income:
Net income.............................. -- -- -- (424,115) (424,115)
Other comprehensive income--
translation adjustment................ -- -- 42,283 -- 42,283
-------------
Total comprehensive income................ -- -- -- -- (381,832)
----------- ------------ -------- ------------- -------------
Balances at September 7, 1998 (Unaudited)... $ 475 $ 1,004,565 $ 21,365 $ (1,276,456) $ (250,051)
----------- ------------ -------- ------------- -------------
----------- ------------ -------- ------------- -------------
</TABLE>
- ------------------------
SEE ACCOMPANYING NOTES.
F-40
<PAGE>
I.I.T. HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED EIGHT MONTHS FOR THE PERIOD
DECEMBER 31 ENDED JANUARY 1, 1998
------------------------- AUGUST 31, THROUGH
1996 1997 1997 SEPTEMBER 7, 1998
---------- ------------- -------------- -----------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net loss........................................... $ (7,885) $ (893,479) $ (830,490) $ (424,115)
Adjustments to reconcile net loss to net cash (used
in) provided by operating activities:
Non-cash compensation expense.................... -- 1,002,316 1,002,316 --
Depreciation..................................... 13,556 30,253 15,101 27,580
Deferred taxes................................... 14,832 (58,372) (58,372) --
Change in assets and liabilities:
Accounts receivable............................ (72,937) (408,715) 6,223 (665,254)
Other current assets........................... (1,655) (11,415) (11,402) (54,897)
Other assets................................... -- -- -- 618
Accounts payable............................... 13,899 (6,737) (11,839) 46,625
Accrued expenses............................... 59,200 306,685 268,265 1,607,710
Client advances................................ 55,824 (55,824) (55,824) --
---------- ------------- -------------- -----------------
Net cash provided by (used in) operating
activities....................................... 74,834 (95,288) 323,978 538,267
INVESTING ACTIVITIES
Acquisition of equipment and vehicle............... (19,989) (41,779) (22,671) (44,948)
Sale of vehicle.................................... -- -- -- 17,504
---------- ------------- -------------- -----------------
Net cash used in investing activities.............. (19,989) (41,779) (22,671) (27,444)
FINANCING ACTIVITIES
Issuance of common stock........................... 1,724 -- -- --
Proceeds (repayments) from note payable to
stockholder...................................... 68,890 (37,791) (68,369) (53,660)
Bank overdraft..................................... (50,733) 157,056 -- (157,056)
Repayments of note payable......................... (5,998) (5,083) (2,241) (10,036)
Repayments of capital leases....................... -- (10,482) (2,530) (15,784)
---------- ------------- -------------- -----------------
Net cash provided by (used in) financing
activities....................................... 13,883 103,700 (73,140) (236,536)
Effect of exchange rate charges on cash............ 835 (21,753) 2,573 42,283
---------- ------------- -------------- -----------------
Net increase (decrease) in cash and cash
equivalents...................................... 69,563 (55,120) 230,740 316,570
Cash and cash equivalents at beginning of year..... -- 69,563 69,563 14,443
---------- ------------- -------------- -----------------
Cash and cash equivalents at end of year........... $ 69,563 $ 14,443 $ 300,303 $ 331,013
---------- ------------- -------------- -----------------
---------- ------------- -------------- -----------------
SUPPLEMENTAL INFORMATION
Interest paid...................................... $ 2,917 $ 8,977 $ 480 $ 19,735
---------- ------------- -------------- -----------------
---------- ------------- -------------- -----------------
SCHEDULE OF NONCASH INVESTING ACTIVITIES
Property and equipment acquired under capital
leases........................................... $ -- $ 44,465 $ 25,257 $ --
---------- ------------- -------------- -----------------
---------- ------------- -------------- -----------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-41
<PAGE>
I.I.T. HOLDING, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIODS ENDED AUGUST 31, 1997 AND SEPTEMBER 7,
1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REORGANIZATION AND BASIS OF PRESENTATION
I.I.T. Holding, Inc. and subsidiaries ("the Company") provides internet
consulting, integration, and support services to commercial companies in the
United States and South America. I.I.T. Holding, Inc. was formed in February
1998 when the shareholders of International Information Technology Inc. and
International Information Technology IIT, C.A., enterprises under common
control, exchanged their stock for 100% of the stock of I.I.T. Holding, Inc. The
accompanying consolidated financial statements for all periods presented include
the combined financial position and results of operations of the companies
previously under common control. All significant intercompany transactions have
been eliminated in preparation of the consolidated financial statements.
INTERIM FINANCIAL INFORMATION
The accompanying September 7, 1998 and August 31, 1997 consolidated
financial statements are unaudited. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the financial position, results of operations and cash flows with
respect to the interim financial statements, have been included. The results of
operations for the period ended September 7, 1998 is not necessarily indicative
of results for the entire fiscal year.
CONVERSION TO U.S. DOLLARS
The financial information for a Venezuelan subsidiary includes financial
information converted from Venezuelan Bolivares to U.S. Dollars. A summary of
the conversion method used to convert the financial statements to U.S. Dollars
is as follows:
- monetary assets and liabilities were converted at the rate in effect at
the balance sheet date.
- non-monetary assets and liabilities were converted at their historical
rates.
- the statement of operations was converted at the average rate during the
periods.
USE OF ESTIMATES
The preparation of the combined 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 amount of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-42
<PAGE>
I.I.T. HOLDING, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIODS ENDED AUGUST 31, 1997 AND SEPTEMBER 7,
1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly-liquid instruments, including certificates of deposit, purchased with a
maturity of three months or less to be cash equivalents.
EQUIPMENT AND VEHICLES
Equipment and vehicle are stated at cost. Depreciation is calculated on a
straight-line basis over the assets' estimated useful lives which range from
three to five years.
CONCENTRATION OF CREDIT RISK
Financial instruments that subject the Company to concentrations of credit
risk consist primarily of accounts receivable. The Company grants credit in the
normal course of business to their clients. As part of this ongoing procedure,
the Company monitors the creditworthiness of their clients. The Company does not
believe that they are subject to any unusual credit risk beyond the normal
credit risk inherent in their business.
For the period ended September 7, 1998, two customers accounted for 24%
($1,042,674), and 10% ($457,784) of total revenue, and three customers accounted
for 38% ($508,212), 13% ($177,874) and 10% ($139,758) of accounts receivable at
September 7, 1998.
For the year ended December 31, 1997, three clients accounted for 33%
($927,964), 17% ($478,042), and 11% ($309,321) of total revenues, and three
clients accounted for 44% ($279,055), 16% ($101,474), and 11% ($69,764) of
accounts receivable at December 31, 1997. For the year ended December 31, 1996,
three clients accounted for 57% ($425,803), 29% ($216,637), and 11% ($82,173) of
total revenues, and three clients accounted for 42% ($94,710), 24% ($54,120),
and 11% ($24,805) of accounts receivable at December 31, 1996.
REVENUE RECOGNITION
Revenue is recognized in the period the services are performed.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expense was
approximately $73,000 and $30,000 in 1997 and 1996, respectively. Advertising
expense was approximately $19,000 and $16,000 for the period ended September 7,
1998 and August 31, 1997, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME (SFAS No.
130). SFAS No. 130 establishes standards for reporting and displaying
comprehensive income and its components. SFAS No. 130 only impacts display as
opposed to actual amounts recorded. Comprehensive income includes net income and
all other non-owner changes in equity that are excluded from net income, such as
foreign currency translation adjustments. SFAS No. 130 was adopted in 1998.
F-43
<PAGE>
I.I.T. HOLDING, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE PERIODS ENDED AUGUST 31, 1997 AND SEPTEMBER 7,
1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION (SFAS No. 131). This Statement requires that
public business enterprises report certain information about operating segments
in complete sets of financial statements of the enterprise and in condensed
financial statements of interim periods issued to shareholders. It also requires
that public business enterprises report certain information about their product
and services, the geographic areas in which they operate, and their major
customers. The Company adopted the provisions of SFAS No. 131 in 1998 which did
not have a significant impact on the Company's definition of operating segments
and related disclosures.
2. LEASES
The Company has entered into various capital leases for computer equipment
during 1997. Computer equipment acquired under capital lease obligations was
approximately $44,000. Depreciation expense was $11,116, $1,265 and $6,000 for
the period ended September 7, 1998 and August 31, 1997 and for the year ended
December 31, 1997, respectively.
Future lease payments under capital and operating leases are summarized as
follows:
<TABLE>
<CAPTION>
CAPITAL
LEASES OPERATING LEASES
------------- ----------------
<S> <C> <C>
Four months ended December 31, 1998......................... $ 3,703 $ 14,884
1999........................................................ 13,503 54,454
2000........................................................ 5,844 39,165
2001........................................................ -- 517
------------- --------
Total minimum lease payments.............................. 23,050 $ 109,020
--------
--------
Less amounts representing interest.......................... 4,651
-------------
Present value of minimum lease payments (including current
portion of $9,803)........................................ $ 18,399
-------------
-------------
</TABLE>
Rent expense was $32,969, $14,000, $32,000 and $17,000 for the period ended
September 7, 1998 and August 31, 1997 and for the year ended December 31, 1997
and 1996, respectively.
Capital leases have effective interest rates which range primarily from 6% to
25%.
3. ACCRUED EXPENSES
Accrued expenses are comprised of the following
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 7,
1996 1997 1998
---------- ---------- ------------
<S> <C> <C> <C>
Accrued bonuses, payroll and payroll taxes............. $ 60,000 $ 287,120 $1,763,891
Accrued consulting..................................... -- 67,965 124,236
Accrued expenses....................................... -- 11,600 86,268
---------- ---------- ------------
Total accrued expenses............................... $ 60,000 $ 366,685 $1,974,395
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
F-44
<PAGE>
I.I.T. HOLDING, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE PERIODS ENDED AUGUST 31, 1997 AND SEPTEMBER 7,
1998 IS UNAUDITED)
4. EMPLOYEE BENEFIT PLAN
The Company has established a defined contribution benefit plan effective
January 1, 1998. The plan covers substantially all employees of the Company who
are 21 years of age or older. Participants may contribute up to 15% of their
annual compensation to the plan, and the Company matches up to 3% of annual
compensation.
5. NOTE PAYABLE
The note payable, which matured in 1997, was due to a financing
organization, and required monthly installments of $552, including interest at
9.90%.
6. COMMON STOCK
Upon reorganization in February 1998, the Company was authorized to issue
100 shares of common stock with a par value of $5.00 per share. At September 7,
1998, 95 shares were issued and outstanding.
7. STOCK COMPENSATION EXPENSE
In August 1997, the sole stockholder of the Company transferred 473 shares
of the outstanding common stock to management employees for no consideration. An
independent appraisal was obtained which estimated the fair value of the shares
on the date of transfer at $1,002,316. This transfer was treated as a
contribution to additional paid-in capital by the sole stockholder, with an
offsetting charge to compensation expense. In 1997, the Company recorded
compensation expense of $1,002,316 relating to the transfer of these shares.
8. INCOME TAXES
Deferred income tax assets and liabilities are determined based upon
differences between financial reporting and the tax basis of assets and
liabilities and are measured using the enacted tax rate and laws that will be in
effect when the differences are expected to reverse.
The components of the income tax provision are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER EIGHT MONTHS
31 ENDED
--------------------- AUGUST 31, PERIOD ENDED
1996 1997 1997 SEPTEMBER 7, 1998
--------- ---------- -------------- -----------------
<S> <C> <C> <C> <C>
Current................ $ -- $ -- $ -- $ --
Deferred............... 14,832 (58,372) -- --
--------- ---------- ------- --------
Total................ $ 14,832 $ (58,372) $ -- $ --
--------- ---------- ------- --------
--------- ---------- ------- --------
</TABLE>
F-45
<PAGE>
I.I.T. HOLDING, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE PERIODS ENDED AUGUST 31, 1997 AND SEPTEMBER 7,
1998 IS UNAUDITED)
8. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
net deferred income taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------
<S> <C> <C> <C>
PERIOD ENDED
1996 1997 SEPTEMBER 7, 1998
---------- ----------- -----------------
Deferred tax assets:
Payroll accrual........................... $ 23,964 $ 71,734 $ 53,801
Bonus accrual............................. -- 30,934 365,395
Other accruals............................ 5,239 40,537 50,849
Contributions............................. 40 -- --
U.S. net operating loss carryforward...... 11,871 382,242 143,267
---------- ----------- --------
Total deferred tax assets................. 41,114 525,447 613,312
Valuation allowance for deferred tax
assets.................................. -- (279,506) (431,882)
---------- ----------- --------
Net deferred tax assets................... 41,114 245,941 181,430
Deferred tax liabilities:
Accounts receivable....................... (90,065) (235,744) (176,808)
Depreciation.............................. (9,103) (9,570) (3,995)
Other..................................... (319) (627) (627)
---------- ----------- --------
(99,487) (245,941) (181,430)
---------- ----------- --------
Total net deferred tax liability........ $ (58,373) $ -- $ --
---------- ----------- --------
---------- ----------- --------
</TABLE>
At September 7, 1998 the Company's U.S. subsidiary has net operating loss
carryforwards of approximately $359,000 available to offset future taxable
income of the U.S. operations. These carryforwards will expire in 2013.
The Company's Venezuelan subsidiary has experienced net operating losses in
the amount of $82,000 and $28,000 for the year ended December 31, 1997 and for
the period from March 6, 1996 (inception) through December 31, 1996,
respectively. These net operating losses result in deferred tax assets of
approximately $23,000 at December 31, 1997 and $5,000 at December 31, 1996. Net
operating losses of $28,000 will expire in 1999 and $82,000 will expire in 2000.
Management has determined that it is more likely than not that these net
operating losses will not be utilized, and therefore has determined that a full
valuation allowance of $23,000 and $5,000 is needed at December 31, 1997 and
December 31, 1996, respectively.
9. GEOGRAPHIC SEGMENT INFORMATION
The Company is engaged in one business segment. This segment includes
providing internet consulting, integration, and support services principally to
commercial companies located throughout the United States and South America. The
following table presents information regarding geographic segments for the
period from January 1, 1998 through September 7, 1998 and the years ended
December 31, 1997 and 1996. There were no service transfers between the United
States and South America.
F-46
<PAGE>
I.I.T. HOLDING, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE PERIODS ENDED AUGUST 31, 1997 AND SEPTEMBER 7,
1998 IS UNAUDITED)
9. GEOGRAPHIC SEGMENT INFORMATION (CONTINUED)
Operating profit is total service revenue less cost of service revenue, general
and administrative expenses, sales and marketing and depreciation.
<TABLE>
<CAPTION>
UNITED
STATES SOUTH AMERICA TOTAL
------------ ------------- ------------
<S> <C> <C> <C> <C>
Consulting revenue: 1998 $3,896,502 $ 509,058 $ 4,405,560
1997 2,664,214 147,797 2,812,011
1996 743,687 3,336 747,023
Depreciation: 1998 $ 21,819 $ 5,761 $ 27,580
1997 26,919 3,334 30,253
1996 12,720 836 13,556
Operating profit (loss): 1998 $ (382,361) $ (24,401) $ (406,762)
1997 (844,036) (98,838) (942,874)
1996 39,481 (29,617) 9,864
Interest expense: 1998 $ 5,420 $ 11,933 $ 17,353
1997 4,782 4,195 8,977
1996 2,345 572 2,917
Identifiable assets: 1998 $1,646,768 $ 158,262 $ 1,805,030
1997 692,702 76,361 769,063
1996 279,616 68,247 347,863
</TABLE>
10. IMPACT OF YEAR 2000 (UNAUDITED)
Some older computer programs were written using two digits rather than four
to define the applicable year. As a result, those computer programs have
time-sensitive software that recognize a date using "00" as the year 1900 rather
than the year 2000. This could cause a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
The Company is assessing the modifications or replacement of its software
that may be necessary for its computer systems to function properly with respect
to the dates in the year 2000 and thereafter. The Company does not believe that
the cost of either modifying existing software or converting to new software
will be significant or that the year 2000 issue will pose significant
operational problems for its computer systems.
11. SUBSEQUENT EVENTS
On August 28, 1998, the stockholders of the Company entered into an
agreement to exchange 100% of their outstanding shares for cash and warrants of
the acquiring entity on September 8, 1998.
F-47
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
The following Unaudited Pro Forma Consolidated Statement of Operations is
based on the historical consolidated financial statements of USI and the
historical financial statements of ACR and IIT during the periods presented,
adjusted to give effect to those acquisitions.
The Unaudited Pro Forma Consolidated Statement of Operations for the year
ended December 31, 1998 gives effect to the acquisitions as if they had occurred
as of January 1, 1998. The pro forma adjustments are described in the
accompanying notes and are based upon available information and certain
assumptions that management believes are reasonable.
The Unaudited Pro Forma Consolidated Statement of Operations does not
purport to represent what USI's results of operations would actually have been
had the acquisitions in fact occurred on such dates or to project USI's results
of operations for any future date or period. The Unaudited Pro Forma
Consolidated Statement of Operations should be read in conjunction with the
consolidated financial statements of USI, ACR and IIT, and the related notes
thereto, included elsewhere in this Prospectus and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
IIT was purchased in September 1998 and ACR was purchased in October 1998
and have been accounted for under the purchase method of accounting. The total
purchase price for each of the acquisitions has been allocated to the
identifiable tangible and intangible assets and liabilities of the applicable
acquired business based upon their fair values with the remainder allocated to
goodwill.
P-1
<PAGE>
USINTERNETWORKING, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
USI(1) ACR IIT TOTAL ADJUSTMENTS(2) CONSOLIDATED
--------- --------- --------- ----------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues.................................. $ 119 $ 7,489 $ 6,900 $14,508 $ (570)(a) $13,938
--------- --------- --------- ----------- --------------- ------------
Expenses:
Cost of sales and services.............. 4,158 4,868 3,781 12,807 -- 12,807
Selling, general and administrative
expenses.............................. 26,466 2,172 2,299 30,937 3,738(b) 34,675
--------- --------- --------- ----------- --------------- ------------
Operating income (loss)................. (30,505) 449 820 (29,236) (4,308) (33,544)
Interest expense........................ 2,675 24 6 2,705 -- 2,705
Interest income......................... (365) -- -- (365) -- (365)
--------- --------- --------- ----------- --------------- ------------
Income (loss) before income taxes......... (32,815) 425 814 (31,576) (4,308) (35,884)
Provision for income taxes................ -- 14 -- 14 -- 14
--------- --------- --------- ----------- --------------- ------------
Net (loss) income......................... $ (32,815) $ 411 $ 814 $ (31,590) $ (4,308) $ (35,898)
--------- --------- --------- ----------- --------------- ------------
--------- --------- --------- ----------- --------------- ------------
Basic and diluted loss per common share
attributable to common stockholders..... $ (57.44)
------------
</TABLE>
- ------------------------
(1) For the period from inception, January 14, 1998, to December 31, 1998.
(2) Pro forma adjustments to the unaudited consolidated statement of operations
for the twelve months ended December 31, 1998 are made to reflect the
following:
(a) To record the elimination of intercompany revenue.
(b) To record amortization of goodwill related to the acquisitions over the
estimated useful life of 5 years. This additional amortization is not
deductible for income tax purposes.
P-2
<PAGE>
[LOGO]
<PAGE>
The back cover contains the USI logo centered in the middle of the page.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses, all of which will be
borne by the Registrant, in connection with the sale and distribution of the
securities being registered, other than the underwriting discounts and
commissions. All amounts shown are estimates except for the Securities and
Exchange Commission registration fee, the NASD filing fee and the Nasdaq
National Market Listing Fee.
<TABLE>
<S> <C>
SEC Registration Fee.................................................... $ 23,978
NASD Filing Fee......................................................... 9,125
Nasdaq National Market Listing Fee...................................... 50,000
Transfer Agent Fees..................................................... 10,000
Accounting Fees and Expenses............................................ 100,000
Legal Fees and Expenses................................................. 250,000
Printing and Mailing Expenses........................................... 300,000
Miscellaneous........................................................... 156,897
---------
Total............................................................... $ 900,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware
("Section 145") permits a Delaware corporation to indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending, or
completed action, suit, or proceeding, whether civil, criminal, administrative,
or investigative (other than an action by or in the right of the corporation) by
reason of the fact that such person is or was a director, officer, employee, or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee, or agent of another corporation, partnership,
joint venture, trust, or other enterprise, against expenses (including
attorneys' fees), judgments, fines, and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit, or
proceeding if such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such person's conduct was unlawful.
In the case of an action by or in the right of the corporation, Section 145
permits the corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that such person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against expenses (including attorneys'
fees) actually and reasonably incurred by such person in connection with the
defense or settlement of such action or suit if he acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interest of the corporation. No indemnification may be made in respect of any
claim, issue, or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
II-1
<PAGE>
To the extent that a present or former director or officer of a corporation
has been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in the preceding two paragraphs, Section 145 requires
that such person be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection therewith.
Section 145 provides that expenses (including attorneys' fees) incurred by
an officer or director in defending any civil, criminal, administrative, or
investigative action, suit or proceeding may be paid by the corporation in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of such director or officer to repay such
amount if it shall ultimately be determined that such person is not entitled to
be indemnified by the corporation as authorized in Section 145.
Our Certificate provides that one of our officers or directors will not be
personally liable to us or our stockholders for monetary damages for any breach
of his fiduciary duty as an officer or director, except in certain cases where
liability is mandated by the DGCL. The provision has no effect on any
non-monetary remedies that may be available to us or our stockholders, nor does
it relieve us or our officers or directors from compliance with federal or state
securities laws. The Certificate also generally provides that we will indemnify,
to the fullest extent permitted by law, any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit, investigation, administrative hearing or any other proceeding (each, a
"Proceeding") by reason of the fact that he is or was our director or officer,
or is or was serving at our request as a director, officer, employee or agent of
another entity, against expenses incurred by him in connection with such
Proceeding. An officer or director shall not be entitled to indemnification from
us if (i) the officer or director did not act in good faith and in a manner
reasonably believed to be in, or not opposed to, our best interests, or (ii)
with respect to any criminal action or proceeding, the officer or director had
reasonable cause to believe his conduct was unlawful.
Our Bylaws provide that we will indemnify any person who is made a party to
any threatened, pending or completed action, suit or proceeding by reason of the
fact that he or she is or was our director or officer, and may indemnify any of
our employees or agents in those circumstances, against expenses, including
attorneys' fees, judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or her in connection with such action, suit or
proceeding. No indemnification may be provided for any person who shall have
been finally adjudicated not to have acted honestly or in the reasonable belief
that his or her action was in or not opposed to our best interests or who had
reasonable cause to believe that his or her conduct was unlawful.
Indemnification must be provided to any of our directors, officers, employees or
agents to the extent the person succeeded, on the merits or otherwise, in
defense of any action or claim described above. Any indemnification under this
provision of the Bylaws, unless required under the Bylaws or ordered by a court,
can be made only as authorized in each specific case upon a determination by a
majority of disinterested directors or by independent legal counsel or by the
shareholders that such indemnification is appropriate under the standard set
forth in the preceding sentence.
The underwriting agreement to be filed as Exhibit 1.1 to the Registration
Statement provides for indemnification by the underwriters of USI and its
directors and certain officers, and by USI of the underwriters, for certain
liabilities arising under the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth in chronological order is information regarding all securities
sold and employee stock options granted by the Registrant since January 14,
1998. Further included is the consideration, if any, received by the Registrant
for such securities, and information relating to the section of the Securities
Act of 1933, as amended (the "Securities Act"), and the rules of the Securities
and Exchange Commission under which exemption from registration was claimed. All
awards of options did not involve any
II-2
<PAGE>
sale under the Securities Act. None of these securities were registered under
the Securities Act. Except as described below, no sale of securities involved
the use of an underwriter and no commissions were paid in connection with the
sales of any securities.
1. At various times during the period from January 1998 through January 5,
1999, we have granted to employees and directors options to purchase an
aggregate of 1,682,250 shares of Common Stock with an exercise price of
$2.64. The issuance of these securities were not registered under the
Securities Act in reliance upon Rule 701 of the rules promulgated under the
Securities Act.
2. On January 14, 1998, we issued 625,000 shares of Common Stock to Christopher
R. McCleary for $5,000 in cash.
3. On April 1, 1998, we issued 718,750 shares of Common Stock to Stephen E.
McManus and Christopher Poelma for an aggregate purchase price of $57,500.
The purchase price for the Common Stock was paid with cash and notes payable
to the Company.
4. On May 31, 1998, we issued 38,333.33 shares of Series A Preferred Stock for
an aggregate purchase price of $23 million to the Initial Series A
Investors. The purchase price for such shares was paid in cash at the time
of the issuance. We simultaneously issued 1,666.67 shares of Series A
Preferred Stock for an aggregate purchase price of $1 million to Christopher
R. McCleary. The purchase price for such shares was paid by the forgiveness
by Mr. McCleary of $1 million of debt that we owed him.
5. On June 18, 1998, we issued 5,000 shares of Series A Preferred Stock for an
aggregate purchase price of $3 million to certain of the Initial Series A
Purchasers. We simultaneously issued 5,833.33 shares of Series A Preferred
Stock for $3.5 million to U S WEST. The purchase price for such shares was
paid in cash at the time of issuance.
6. On June 19, 1998, we issued 3,000 shares of Series A Preferred Stock for an
aggregate purchase price of $1.6 million to HAGC Partners, Chris Horgan (who
later transferred his interest to his affiliate, Southeastern Technology
Fund, L.P.) and the Account Management Purchasers. The purchase price for
such shares was paid in cash at the time of issuance. We simultaneously
issued 1,166.67 shares of Series A Preferred Stock for a purchase price of
$700,002 to USI Partners. The purchase price for such shares was paid in
cash at the time of issuance.
7. On July 27, 1998, we issued to Andrew A. Stern 625,000 shares of Common
Stock with a fair market value of $1,000,000. Mr. Stern paid $5,000 in cash
for these shares, and the remainder was recorded as a compensation expense
to the Company.
8. On September 8, 1998, we issued convertible promissory notes in the
aggregate amount of $9,095,000, together with warrants to purchase 974,450
shares of Common Stock for $3.44 per share, to certain of the existing
holders of the Series A Preferred Stock. The purchase price for such notes
and warrants was paid in cash at the time of issuance. We also issued
warrants to purchase 50,000 shares of Common Stock for $16.00 per share, to
IIT as part of the purchase price paid in the acquisition of IIT.
9. On September 22, 1998, we issued warrants to purchase 74,404 shares of
Common Stock for $3.36 per share to Trans America Business Credit in
connection with loans we obtained from it.
10. On September 30, 1998, we issued warrants to purchase 971 shares of Series B
Preferred Stock for $1,050.00 per share, to Venture Lending and Leasing in
connection with loans we obtained from it.
11. On October 2, 1998, we issued warrants to purchase 50,000 shares of Common
Stock for $16.00 per share, to ACR as part of the purchase price paid in the
acquisition of ACR.
II-3
<PAGE>
12. On December 16, 1998, we issued convertible promissory notes in the
aggregate amount of $8 million to certain of the existing holders of the
Series A Preferred Stock. The purchase price for such notes was paid in cash
at the time of issuance.
13. On December 18, 1998, we issued warrants to purchase 17,857 shares of Common
Stock for $3.36 per share, to Leasing Technology, Inc. in connection with
loans we obtained from it.
14. On December 24, 1998, we issued convertible promissory notes in the amount
of $5 million to U S WEST. The purchase price for such notes was paid in
cash at the time of issuance.
15. On December 31, 1998, we issued 59,278.56 shares of Series B Preferred Stock
for an aggregate purchase price of $62,242,500 to certain holders of the
convertible promissory notes described above, certain holders of Series A
Preferred Stock, and a number of new investors. Of the total purchase price
for such shares $40,147,500 was paid in cash and $22,095,000 was paid by
conversion of outstanding convertible promissory notes with an equivalent
aggregate principal amount, all at the time of issuance.
16. On March 22, 1999 we granted options to purchase an aggregate of 1,744,619
shares of Common Stock. Options with respect to 49,063 shares have an
exercise price of $3.36. Options with respect to 375,000 have an exercise
price of $6.00. Options with respect to 1,320,556 shares were granted
contingent upon the completion of our initial public offering and have an
exercise price equal to 50% of the midpoint of the proposed price range. The
issuance of these securities were not registered under the Securities Act in
reliance on Rule 701 of the rules promulgated under the Securities Act.
All of the shares of preferred stock described in paragraphs 3 through 15
above are being exchanged for shares of Common Stock prior to completion of this
offering. The issuances of the securities above were made in reliance on one or
more exemptions from registration under the Securities Act, including those
provided by Section 4(2) and Rule 701 thereunder. The purchasers of these
securities represented that they had adequate access, through their employment
with us or otherwise, to information about us.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------------ ----------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
3.1+ Amended and Restated Certificate of Incorporation of the Registrant
3.2+ Form of Second Restated Certificate of Incorporation of the Registrant
3.3+ Bylaws of the Registrant
3.4+ Form of Amended and Restated Bylaws of the Registrant
4.1 Specimen Certificate for shares of Common Stock, $.001 par value, of the Registrant
5.1 Opinion of Latham & Watkins with respect to the validity of the securities being offered
10.1+ Stock Purchase Agreement between USI and the Initial Series A Purchasers dated May 13, 1998
10.2+ Stock Purchase Agreement between USI and certain of the Initial Series A Purchasers dated June 18,
1998
10.3+ Stock Purchase Agreement between USI and U S WEST dated June 18, 1998
10.4+ Stock Purchase Agreement between USI and the Account Management Purchasers dated June 19, 1998
10.5+ Stock Purchase Agreement between USI and HAGC Partners dated June 19, 1998
10.6+ Stock Purchase Agreement between USI and Chris Horgen dated June 19, 1998
10.7+ Stock Purchase Agreement between USI and USI Partners, Ltd. dated June 19, 1998
10.8+ Stock Purchase Agreement among USI, IIT Holding, Inc., Luis Sebastian Alegrett, Michael Mai, Carlos
E. Bravo, and Vicente Perez de Tudela dated August 28, 1998
10.9+ Amended and Restated Stock Purchase Agreement among USI, Advanced Communication Resources, Inc.,
Matthew D. Kanter, The Benjamin Kanter 1997 QSST Trust, The Ronald Kanter 1997 QSST Trust and David
S. Walden dated October 2, 1998
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------------ ----------------------------------------------------------------------------------------------------
10.10+ Stock Purchase Agreement between USI and certain other parties dated December 31, 1998
<C> <S>
10.11 Amended and Restated Stockholders Agreement between USI and certain other parties dated December 31,
1998
10.12 Employment Agreement between USI and Christopher R. McCleary dated May 29, 1998
10.13 Employment Agreement between USI and Stephen E. McManus dated June 2, 1998
10.14 Employment Agreement between USI and Andrew A. Stern dated July 27, 1998
10.15 Employment Agreement between USI and Jeffrey L. McKnight dated December 15, 1998
10.16Section# First Amendment to Outsourcer Alliance Agreement between USI and PeopleSoft USA, Inc. dated March
21, 1999, and original Outsourcer Alliance Agreement dated September 28, 1998
10.17Section# iMAP Agreement between USI and U S WEST, Inc. dated January 15, 1999
10.18+# Software License Agreement between USI and Sagent Technology, Inc. dated June 25, 1998
10.19+# Software License and Service Agreement between USI and Broadvision, Inc. dated July 22, 1998
10.20++ Note Purchase Agreement among USI and the Account Management Purchasers dated September 8, 1998
10.21++ Note Purchase Agreement between USI and Southeastern Technology Fund, L.P. dated September 8, 1998
10.22+ Note Purchase Agreement among USI and certain other parties dated September 8, 1998
10.23++ Note Purchase Agreement between USI and U S WEST dated September 8, 1998
10.24+ Note Purchase Agreement between USI and certain other parties dated December 16, 1998
10.25+ Note Purchase Agreement between USI and U S WEST dated December 29, 1998
10.26Section# SiebelNet Agreement between USI and SiebelNet, Inc. dated January 31, 1999
10.27Section# Marketing Services Agreement by and between USI, and U S WEST Communications Services, Inc. and U S
WEST Interprise America, Inc. dated January 31, 1999
10.28+ Lease Agreement between Consortium One -- Annapolis, LLC and USI dated April 3, 1998
10.29+ Amended and Restated Stock Option Plan
10.30 Nonqualified Stock Option Agreement between USI and Christopher McCleary dated March 19, 1999
21.1+ Subsidiaries of the Registrant
23.1 Consent of Mahoney Cohen & Company, P.C.
23.2 Consent of Bassan & Associados S.C.
23.3 Consent of Ernst & Young LLP regarding IIT financial statements
23.4 Consent of Ernst & Young LLP regarding USI financial statements
23.5 Consent of Latham & Watkins (included in Exhibit 5.1)
24.1+ Power of Attorney (included on signature page)
27.1+ Financial Data Schedule
99.1+ Report of Independent Auditors
</TABLE>
- ------------------------
+ Previously filed.
++ Not filed, in accordance with Instruction No. 2 to Item 601 of Regulation
S-K, because the contract is substantially identical to Exhibit 10.22 except as
to the parties thereto and the principal amount of the note.
# Confidential treatment requested as to certain portions.
Section Superseding exhibit.
(b) Schedules
All schedules have been omitted because they are not required or because the
required information is given in the Consolidated Financial Statements or Notes
thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions contained in the Articles of
Incorporation, as amended, and By-Laws, as amended, of the Registrant and the
laws of the State of Delaware or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities
II-5
<PAGE>
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matters have been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and this offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
USINTERNETWORKING, INC. HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN ANNAPOLIS,
MARYLAND ON MARCH 23, 1999.
<TABLE>
<S> <C> <C>
USINTERNETWORKING, INC.
By: /s/ ANDREW A. STERN
-----------------------------------------
Andrew A. Stern
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- --------------------------------------------- --------------------------------------- --------------------
<S> <C> <C>
* Chairman of the Board and Chief
- ------------------------------------ Executive Officer March 23, 1999
Christopher R. McCleary (Principal Executive Officer)
*
- ------------------------------------ President and Director March 23, 1999
Stephen E. McManus
/s/ ANDREW A. STERN Executive Vice President and Chief
- ------------------------------------ Financial Officer (Principal March 23, 1999
Andrew A. Stern Financial and Accounting Officer)
*
- ------------------------------------ Director March 23, 1999
R. Dean Meiszer
*
- ------------------------------------ Director March 23, 1999
Benjamin Diesbach
*
- ------------------------------------ Director March 23, 1999
Ray A. Rothrock
*
- ------------------------------------ Director March 23, 1999
Frank A. Adams
*
- ------------------------------------ Director March 23, 1999
William F. Earthman
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
- --------------------------------------------- --------------------------------------- --------------------
- ------------------------------------
John H. Wyant Director
<S> <C> <C>
- ------------------------------------
Joseph R. Zell Director
*
- ------------------------------------ Director March 23, 1999
Michael C. Brooks
*
- ------------------------------------ Director March 23, 1999
David J. Poulin
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ ANDREW A. STERN
-------------------------
Andrew A. Stern
ATTORNEY-IN-FACT
</TABLE>
<PAGE>
Exhibit 1.1
_____________ SHARES
USINTERNETWORKING, INC.
COMMON STOCK, $.001 PAR VALUE
UNDERWRITING AGREEMENT
, 1999
CREDIT SUISSE FIRST BOSTON CORPORATION
BEAR, STEARNS & CO. INC.
BT ALEX. BROWN INCORPORATED
LEGG MASON WOOD WALKER INCORPORATED
As Representatives of the Several Underwriters,
c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue,
New York, N.Y. 10010-3629
Dear Sirs:
1. INTRODUCTORY. USINTERNETWORKING, Inc., a Delaware corporation
("COMPANY"), proposes to issue and sell shares ("FIRM SECURITIES") of its
Common Stock, $.001 par value ("SECURITIES"), and also proposes to issue and
sell to the Underwriters, at the option of the Underwriters, an aggregate of
not more than additional shares ("OPTIONAL SECURITIES") of its Securities as
set forth below. The Firm Securities and the Optional Securities are herein
collectively called the "OFFERED SECURITIES". The Company hereby agrees with
the several Underwriters named in Schedule I hereto ("UNDERWRITERS") as
follows:
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to, and agrees with, the several Underwriters that:
(a) A registration statement (No. 333-70717) relating to the Offered
Securities, including a form of prospectus, has been filed with the
Securities and Exchange Commission ("COMMISSION") and either (i) has
been declared effective under the Securities Act of 1933 ("ACT") and is
not proposed to be amended or (ii) is proposed to be amended by
amendment or post-effective amendment. If such registration statement
("INITIAL REGISTRATION STATEMENT") has been declared effective, either
(i) an additional registration statement ("ADDITIONAL REGISTRATION
STATEMENT") relating to the Offered Securities may have been filed with
the Commission pursuant to Rule 462(b) ("RULE
<PAGE>
-2-
462(b)") under the Act and, if so filed, has become effective upon
filing pursuant to such Rule and the Offered Securities all have been
duly registered under the Act pursuant to the initial registration
statement and, if applicable, the additional registration statement or
(ii) such an additional registration statement is proposed to be filed
with the Commission pursuant to Rule 462(b) and will become effective
upon filing pursuant to such Rule and upon such filing the Offered
Securities will all have been duly registered under the Act pursuant to
the initial registration statement and such additional registration
statement. If the Company does not propose to amend the initial
registration statement or if an additional registration statement has
been filed and the Company does not propose to amend it, and if any
post-effective amendment to either such registration statement has been
filed with the Commission prior to the execution and delivery of this
Agreement, the most recent amendment (if any) to each such registration
statement has been declared effective by the Commission or has become
effective upon filing pursuant to Rule 462(c) ("RULE 462(c)") under the
Act or, in the case of the additional registration statement, Rule
462(b). For purposes of this Agreement, "EFFECTIVE TIME" with respect
to the initial registration statement or, if filed prior to the
execution and delivery of this Agreement, the additional registration
statement means (i) if the Company has advised the Representatives that
it does not propose to amend such registration statement, the date and
time as of which such registration statement, or the most recent
post-effective amendment thereto (if any) filed prior to the execution
and delivery of this Agreement, was declared effective by the
Commission or has become effective upon filing pursuant to Rule 462(c),
or (ii) if the Company has advised the Representatives that it proposes
to file an amendment or post-effective amendment to such registration
statement, the date and time as of which such registration statement,
as amended by such amendment or post-effective amendment, as the case
may be, is declared effective by the Commission. If an additional
registration statement has not been filed prior to the execution and
delivery of this Agreement but the Company has advised the
Representatives that it proposes to file one, "EFFECTIVE TIME" with
respect to such additional registration statement means the date and
time as of which such registration statement is filed and becomes
effective pursuant to Rule 462(b). "EFFECTIVE DATE" with respect to the
initial registration statement or the additional registration statement
(if any) means the date of the Effective Time thereof. The initial
registration statement, as amended at its Effective Time, including all
information contained in the additional registration statement (if any)
and deemed to be a part of the initial registration statement as of the
Effective Time of the additional registration statement pursuant to the
General Instructions of the Form on which it is filed and including all
information (if any) deemed to be a part of the initial registration
statement as of its Effective Time pursuant to Rule 430A(b) ("RULE
430A(b)") under the Act, is hereinafter referred to as the "INITIAL
REGISTRATION STATEMENT". The additional registration statement, as
<PAGE>
-3-
amended at its Effective Time, including the contents of the initial
registration statement incorporated by reference therein and including
all information (if any) deemed to be a part of the additional
registration statement as of its Effective Time pursuant to Rule
430A(b), is hereinafter referred to as the "ADDITIONAL REGISTRATION
STATEMENT". The Initial Registration Statement and the Additional
Registration Statement are herein referred to collectively as the
"REGISTRATION STATEMENTS" and individually as a "REGISTRATION
Statement". The form of prospectus relating to the Offered Securities,
as first filed with the Commission pursuant to and in accordance with
Rule 424(b) ("RULE 424(b)") under the Act or (if no such filing is
required) as included in a Registration Statement, is hereinafter
referred to as the "PROSPECTUS". No document has been or will be
prepared or distributed in reliance on Rule 434 under the Act.
(b) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement: (i) on the
Effective Date of the Initial Registration Statement, the Initial
Registration Statement conformed in all respects to the requirements of
the Act and the rules and regulations of the Commission ("RULES AND
REGULATIONS") and did not include any untrue statement of a material
fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, (ii) on the
Effective Date of the Additional Registration Statement (if any), each
Registration Statement conformed, or will conform, in all respects to
the requirements of the Act and the Rules and Regulations and did not
include, or will not include, any untrue statement of a material fact
and did not omit, or will not omit, to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading and (iii) on the date of this Agreement, the Initial
Registration Statement and, if the Effective Time of the Additional
Registration Statement is prior to the execution and delivery of this
Agreement, the Additional Registration Statement each conforms, and at
the time of filing of the Prospectus pursuant to Rule 424(b) or (if no
such filing is required) at the Effective Date of the Additional
Registration Statement in which the Prospectus is included, each
Registration Statement and the Prospectus will conform, in all respects
to the requirements of the Act and the Rules and Regulations, and
neither of such documents includes, or will include, any untrue
statement of a material fact or omits, or will omit, to state any
material fact required to be stated
<PAGE>
-4-
therein or necessary to make the statements therein not misleading. If
the Effective Time of the Initial Registration Statement is subsequent
to the execution and delivery of this Agreement: on the Effective Date
of the Initial Registration Statement, the Initial Registration
Statement and the Prospectus will conform in all respects to the
requirements of the Act and the Rules and Regulations, neither of such
documents will include any untrue statement of a material fact or will
omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, and no
Additional Registration Statement has been or will be filed. The two
preceding sentences do not apply to statements in or omissions from a
Registration Statement or the Prospectus based upon written
information furnished to the Company by any Underwriter through the
Representatives specifically for use therein, it being understood and
agreed that the only such information is that described as such in
Section 7(b) hereof.
(c) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware,
with power and authority (corporate and other) to own its properties
and conduct its business as described in the Prospectus; and the
Company is duly qualified to do business as a foreign corporation in
good standing in all other jurisdictions in which its ownership or
lease of property or the conduct of its business requires such
qualification, except where the failure to be so qualified or in good
standing would not have, individually or in the aggregate, a material
adverse effect on the condition (financial or other), business,
properties or results of operations of the Company and its subsidiaries
taken as a whole ("MATERIAL ADVERSE EFFECT").
(d) Each subsidiary of the Company has been duly incorporated or
organized and is an existing corporation in good standing under the
laws of the jurisdiction of its incorporation or organization, with
power and authority (corporate and other) to own its properties and
conduct its business as described in the Prospectus; and each
subsidiary of the Company is duly qualified to do business as a foreign
corporation in good standing in all other jurisdictions in which its
ownership or lease of property or the conduct of its business requires
such qualification in each case except as would not have a Material
Adverse Effect; all of the issued and outstanding capital stock of each
subsidiary of the Company has been duly authorized and validly issued
and is fully paid and nonassessable; and the capital stock of each
subsidiary owned by the Company, directly or through subsidiaries, is
owned free from liens, encumbrances and defects.
(e) The Offered Securities and all other outstanding shares of
capital stock of the Company have been duly authorized; all
outstanding shares of capital stock of the Company are, and, when
the Offered Securities have been delivered and paid for in accordance
with this Agreement on each Closing Date (as defined below), such
Offered Securities will have been, validly issued, fully paid and
nonassessable and will conform to the description thereof contained
in the Prospectus; and, except as set forth in the Prospectus, the
stockholders of the Company have no preemptive rights with respect
to the Securities.
(f) Except as disclosed in the Prospectus, there are no contracts,
agreements or
<PAGE>
-5-
understandings between the Company and any person that would give
rise to a valid claim against the Company or any Underwriter for a
brokerage commission, finder's fee or other like payment with respect
to the sale of the Offered Securities.
(g) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person
granting such person the right to require the Company to file a
registration statement under the Act with respect to any securities of
the Company owned or to be owned by such person or to require the
Company to include such securities in the securities registered
pursuant to a Registration Statement or in any securities being
registered pursuant to any other registration statement filed by the
Company under the Act.
(h) The Offered Securities have been approved for listing on The
Nasdaq Stock Market's National Market (the "NASDAQ NATIONAL MARKET"),
subject to notice of issuance.
(i) No consent, approval, authorization, or order of, or filing with,
any governmental agency or body or any court is required for the
consummation of the transactions contemplated by this Agreement in
connection with the issuance and sale of the Offered Securities by the
Company, except such as have been obtained and made under the Act and
such as may be required under state securities laws.
(j) The execution, delivery and performance of this Agreement, and
the issuance and sale of the Offered Securities will not result in a
breach or violation of any of the terms and provisions of, or
constitute a default under, any statute, any rule, regulation or order
of any governmental agency or body or any court, domestic or foreign,
having jurisdiction over the Company or any subsidiary of the Company
or any of their properties, or any agreement or instrument to which the
Company or any such subsidiary is a party or by which the Company or
any such subsidiary is bound or to which any of the properties of the
Company or any such subsidiary is subject, or the charter or by-laws of
the Company or any such subsidiary, and the Company has full power and
authority to authorize, issue and sell the Offered Securities as
contemplated by this Agreement.
(k) This Agreement has been duly authorized, executed and delivered
by the Company.
(l) Except as disclosed in the Prospectus, the Company and its
subsidiaries have good and marketable title to all real properties and
all other properties and assets owned by them, in each case free from
liens, encumbrances and defects that would materially affect the value
thereof or materially interfere with the use made or to be
<PAGE>
-6-
made thereof by them; and except as disclosed in the Prospectus, the
Company and its subsidiaries hold any leased real or personal property
under valid and enforceable leases with no exceptions that would
materially interfere with the use made or to be made thereof by them.
(m) The Company and its subsidiaries possess certificates,
authorities or permits issued by appropriate governmental agencies or
bodies necessary to conduct the business now operated by them (except
where the failure to possess the same would not individually or in the
aggregate have a Material Adverse Effect) and have not received any
notice of proceedings relating to the revocation or modification of any
such certificate, authority or permit that, if determined adversely to
the Company or any of its subsidiaries, would individually or in the
aggregate have a Material Adverse Effect.
(n) No labor dispute with the employees of the Company or any
subsidiary exists or, to the knowledge of the Company, is imminent that
might have a Material Adverse Effect.
(o) The Company and its subsidiaries own, possess or can acquire on
reasonable terms, adequate trademarks, trade names and other rights to
inventions, know-how, patents, copyrights, confidential information and
other intellectual property (collectively, "INTELLECTUAL PROPERTY
RIGHTS") necessary to conduct the business now operated by them, or
presently employed by them, and have not received any notice of
infringement of or conflict with asserted rights of others with respect
to any intellectual property rights that, if determined adversely to
the Company or any of its subsidiaries, would individually or in the
aggregate have a Material Adverse Effect.
(p) Except as disclosed in the Prospectus, neither the Company nor
any of its subsidiaries is in violation of any statute, any rule,
regulation, decision or order of any governmental agency or body or any
court, domestic or foreign, relating to the use, disposal or release of
hazardous or toxic substances or relating to the protection or
restoration of the environment or human exposure to hazardous or toxic
substances (collectively, "ENVIRONMENTAL LAWS"), owns or operates any
real property contaminated with any substance that is subject to any
environmental laws, is liable for any off-site disposal or
contamination pursuant to any environmental laws, or is subject to any
claim relating to any environmental laws, which violation,
contamination, liability or claim would individually or in the
aggregate have a Material Adverse Effect; and the Company is not aware
of any pending investigation which might lead to such a claim.
(q) Except as disclosed in the Prospectus, there are no pending
actions, suits or
<PAGE>
-7-
proceedings against or affecting the Company, any of its
subsidiaries or any of their respective properties that, if determined
adversely to the Company or any of its subsidiaries, would individually
or in the aggregate have a Material Adverse Effect, or would materially
and adversely affect the ability of the Company to perform its
obligations under this Agreement, or which are otherwise material in
the context of the sale of the Offered Securities; and no such actions,
suits or proceedings are threatened or, to the Company's knowledge,
contemplated.
(r) The financial statements included in each Registration Statement
and the Prospectus present fairly the financial position of the Company
and its subsidiaries as of the dates shown and their results of
operations and cash flows for the periods shown, and such financial
statements have been prepared in conformity with the generally accepted
accounting principles in the United States applied on a consistent
basis; and the assumptions used in preparing the pro forma financial
statements included in each Registration Statement and the Prospectus
provide a reasonable basis for presenting the significant effects
directly attributable to the transactions or events described therein,
the related pro forma adjustments give appropriate effect to those
assumptions, and the pro forma columns therein reflect the proper
application of those adjustments to the corresponding historical
financial statement amounts.
(s) Except as disclosed in the Prospectus, since the date of the
latest audited financial statements included in the Prospectus there
has been no material adverse change, nor any development or event
involving a prospective material adverse change, in the condition
(financial or other), business, properties or results of operations of
the Company and its subsidiaries taken as a whole, and, except as
disclosed in the Prospectus, there has been no dividend or distribution
of any kind declared, paid or made by the Company on any class of its
capital stock.
(t) The Company is not and, after giving effect to the offering and
sale of the Offered Securities and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as defined in the Investment Company Act of 1940.
(u) The Company has reviewed its operations and that of its
subsidiaries and any third parties with which the Company or any of its
subsidiaries has a material relationship to evaluate the extent to
which the business or operations of the Company or any of its
subsidiaries will be affected by the Year 2000 Problem. As a result of
such review, the Company has no reason to believe, and does not
believe, that the Year 2000 Problem will have a Material Adverse Effect
or result in any material loss or interference with the Company's
business or operations. The "YEAR 2000 PROBLEM" as used herein means
any significant risk that computer hardware or software used in
<PAGE>
-8-
the receipt, transmission, processing, manipulation, storage,
retrieval, retransmission or other utilization of data or in the
operation of mechanical or electrical systems of any kind will not, in
the case of dates or time periods occurring after December 31, 1999,
function at least as effectively as in the case of dates or time
periods occurring prior to January 1, 2000;
(v) The Company carries insurance in such amounts and covering such
risks as is reasonable and customary for businesses of the type
conducted by the Company.
(w) The Company does not have any liability for any prohibited
transaction or funding deficiency or any complete or partial withdrawal
liability with respect to any pension, profit sharing or other plan
which is subject to the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), to which the Company makes or ever has made
a contribution and in which any employee of the Company is or has ever
been a participant. With respect to such plans, the Company is in
compliance in all material respects with all applicable provisions of
ERISA.
3. PURCHASE, SALE AND DELIVERY OF OFFERED SECURITIES. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and the Underwriters agree, severally and not jointly, to purchase
from the Company, at a purchase price of $ per share, the respective numbers of
shares of Firm Securities set forth opposite the names of the Underwriters in
Schedule A hereto.
The Company will deliver the Firm Securities to the Representatives for
the accounts of the Underwriters, against payment of the purchase price in
Federal (same day) funds by official bank check or checks or wire transfer to an
account at a bank acceptable to Credit Suisse First Boston Corporation ("CSFBC")
drawn to the order of at the office of Cahill Gordon & Reindel ("UNDERWRITERS'
COUNSEL"), at 10:00 A.M., New York time, on , 1999, or at such other time not
later than seven full business days thereafter as CSFBC and the Company
determine, such time being herein referred to as the "FIRST CLOSING Date". For
purposes of Rule 15c6-1 under the Securities Exchange Act of 1934, the First
Closing Date (if later than the otherwise applicable settlement date) shall be
the settlement date for payment of funds and delivery of securities for all the
Offered Securities sold pursuant to the offering. The certificates for the Firm
Securities so to be delivered will be in definitive form, in such denominations
and registered in such names as CSFBC requests and will be made available for
checking and packaging at the above office of Underwriters' Counsel at least 24
hours prior to the First Closing Date.
In addition, upon written notice from CSFBC given to the Company from
time to time not more than 30 days subsequent to the date of the Prospectus, the
Underwriters may
<PAGE>
-9-
purchase all or less than all of the Optional Securities at the purchase price
per Security to be paid for the Firm Securities. The Company agrees to sell to
the Underwriters the number of shares of Optional Securities specified in such
notice and the Underwriters agree, severally and not jointly, to purchase such
Optional Securities. Such Optional Securities shall be purchased for the account
of each Underwriter in the same proportion as the number of shares of Firm
Securities set forth opposite such Underwriter's name bears to the total number
of shares of Firm Securities (subject to adjustment by CSFBC to eliminate
fractions) and may be purchased by the Underwriters only for the purpose of
covering over-allotments made in connection with the sale of the Firm
Securities. No Optional Securities shall be sold or delivered unless the Firm
Securities previously have been, or simultaneously are, sold and delivered. The
right to purchase the Optional Securities or any portion thereof may be
exercised from time to time and to the extent not previously exercised may be
surrendered and terminated at any time upon notice by CSFBC to the Company.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "OPTIONAL CLOSING DATE", which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "CLOSING DATE"), shall be determined by CSFBC
but shall be not later than five full business days after written notice of
election to purchase Optional Securities is given. The Company will deliver the
Optional Securities being purchased on each Optional Closing Date to the
Representatives for the accounts of the several Underwriters, against payment of
the purchase price therefor in Federal (same day) funds by official bank check
or checks or wire transfer to an account at a bank acceptable to CSFBC drawn to
the order of , at the above office of Underwriters' Counsel. The certificates
for the Optional Securities being purchased on each Optional Closing Date will
be in definitive form, in such denominations and registered in such names as
CSFBC requests upon reasonable notice prior to such Optional Closing Date and
will be made available for checking and packaging at the above office of
Underwriters' Counsel at a reasonable time in advance of such Optional Closing
Date.
4. OFFERING BY UNDERWRITERS. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
5. CERTAIN AGREEMENTS OF THE COMPANY. The Company agrees with the several
Underwriters that:
(a) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement, the Company will
file the Prospectus with the Commission pursuant to and in accordance
with subparagraph (1) (or, if applicable and if consented to by CSFBC,
subparagraph (4)) of Rule 424(b) not later than the earlier of (A) the
second business day following the execution and delivery of this
Agreement or (B) the fifteenth business day after the Effective Date of
the Initial
<PAGE>
-10-
Registration Statement.
The Company will advise CSFBC promptly of any such filing pursuant
to Rule 424(b). If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement and
an additional registration statement is necessary to register a portion
of the Offered Securities under the Act but the Effective Time thereof
has not occurred as of such execution and delivery, the Company will
file the additional registration statement or, if filed, will file a
post-effective amendment thereto with the Commission pursuant to and in
accordance with Rule 462(b) on or prior to 10:00 P.M., New York time,
on the date of this Agreement or, if earlier, on or prior to the time
the Prospectus is printed and distributed to any Underwriter, or will
make such filing at such later date as shall have been consented to by
CSFBC.
(b) The Company will advise CSFBC promptly of any proposal to amend
or supplement the initial or any additional registration statement as
filed or the related prospectus or the Initial Registration Statement,
the Additional Registration Statement (if any) or the Prospectus and
will not effect such amendment or supplementation without CSFBC's
consent; and the Company will also advise CSFBC promptly of the
effectiveness of each Registration Statement (if its Effective Time is
subsequent to the execution and delivery of this Agreement) and of any
amendment or supplementation of a Registration Statement or the
Prospectus and of the institution by the Commission of any stop order
proceedings in respect of a Registration Statement and will use its
best efforts to prevent the issuance of any such stop order and to
obtain as soon as possible its lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with
sales by any Underwriter or dealer, any event occurs as a result of
which the Prospectus as then amended or supplemented would include an
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is
necessary at any time to amend the Prospectus to comply with the Act,
the Company will promptly notify CSFBC of such event and will promptly
prepare and file with the Commission, at its own expense, an amendment
or supplement which will correct such statement or omission or an
amendment which will effect such compliance. Neither CSFBC's consent
to, nor the Underwriters' delivery of, any such amendment or supplement
shall constitute a waiver of any of the conditions set forth in Section
6.
(d) As soon as practicable, but not later than the Availability Date
(as defined below), the Company will make generally available to its
securityholders an earnings
<PAGE>
-11-
statement covering a period of at least 12 months beginning after the
Effective Date of the Initial Registration Statement (or, if later, the
Effective Date of the Additional Registration Statement) which will
satisfy the provisions of Section 11(a) of the Act. For the purpose of
the preceding sentence, "AVAILABILITY DATE" means the 45th day after
the end of the fourth fiscal quarter following the fiscal quarter that
includes such Effective Date, except that, if such fourth fiscal
quarter is the last quarter of the Company's fiscal year, "AVAILABILITY
DATE" means the 90th day after the end of such fourth fiscal quarter.
(e) The Company will furnish to the Representatives copies of each
Registration Statement (five of which will be signed and will include
all exhibits), each related preliminary prospectus, and, so long as a
prospectus relating to the Offered Securities is required to be
delivered under the Act in connection with sales by any Underwriter or
dealer, the Prospectus and all amendments and supplements to such
documents, in each case in such quantities as CSFBC requests. The
Prospectus shall be so furnished on or prior to 3:00 P.M., New York
time, on the business day following the later of the execution and
delivery of this Agreement or the Effective Time of the Initial
Registration Statement. All other documents shall be so furnished as
soon as available. The Company will pay the expenses of printing and
distributing to the Underwriters all such documents.
(f) The Company will arrange for the qualification of the Offered
Securities for sale under the laws of such jurisdictions as CSFBC
designates and will continue such qualifications in effect so long as
required for the distribution.
(g) During the period of five years hereafter, the Company will
furnish to the Representatives and, upon request, to each of the other
Underwriters, as soon as practicable after the end of each fiscal year,
a copy of its annual report to stockholders for such year; and the
Company will furnish to the Representatives (i) as soon as available, a
copy of each report and any definitive proxy statement of the Company
filed with the Commission under the Securities Exchange Act of 1934 or
mailed to stockholders, and (ii) from time to time, such other
information concerning the Company as CSFBC may reasonably request.
(h) The Company will pay all expenses incident to the performance of
its obligations under this Agreement, for any filing fees and other
expenses (including fees and disbursements of counsel) incurred in
connection with qualification of the Offered Securities for sale under
the laws of such jurisdictions as CSFBC designates and the printing of
memoranda relating thereto, for the filing fee incident to, and the
reasonable fees and disbursements of counsel to the Underwriters in
connection with, the review by the National Association of Securities
Dealers, Inc. of the Offered
<PAGE>
-12-
Securities, for any travel expenses of the Company's officers and
employees and any other expenses of the Company in connection with
attending or hosting meetings with prospective purchasers of the
Offered Securities and for expenses incurred in distributing
preliminary prospectuses and the Prospectus (including any amendments
and supplements thereto) to the Underwriters.
(i) The Company will use the net proceeds received by the Company
from the sale of the Offered Securities pursuant to this Agreement in
the manner specified in the Prospectus under the caption "Use of
Proceeds."
(j) For a period of 180 days after the date of the initial public
offering of the Offered Securities (the "LOCK-UP PERIOD"), the Company
will not offer, sell, contract to sell, pledge or otherwise dispose of,
directly or indirectly, or file with the Commission a registration
statement under the Act relating to, any additional shares of its
Securities or securities convertible into or exchangeable or
exercisable for any shares of its Securities, or publicly disclose the
intention to make any such offer, sale, pledge, disposition or filing,
without the prior written consent of CSFBC, except: (i) issuances of
Securities pursuant to the conversion of all the outstanding shares of
Series A Preferred Stock and Series B Preferred Stock as disclosed in
the Prospectus; (ii) the exercise of warrants or options, in each case
outstanding on the date hereof; (iii) grants of employee or director
stock options pursuant to the terms of a plan in effect on the date
hereof and the issuance of Securities upon the exercise of such
options; (iv) issuances of Securities pursuant to the Company's
employee stock purchase plan in effect on the date hereof or pursuant
to the Company's 401(k) plan; and (v) the issuance of warrants in
connection with an acquisition by the Company or the obtaining of
financing by the Company, provided that such warrants shall not be
exercisable during the Lock-up Period.
6. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The obligations of
the several Underwriters to purchase and pay for the Firm Securities on the
First Closing Date and the Optional Securities to be purchased on each Optional
Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company herein, to the accuracy of the statements
of Company officers made pursuant to the provisions hereof, to the performance
by the Company of its obligations hereunder and to the following additional
conditions precedent:
(a) The Representatives shall have received a letter, dated the date
of delivery thereof (which, if the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement, shall be on or prior to the date of this Agreement or, if
the Effective Time of the Initial Registration Statement is subsequent
to the execution and delivery of this Agreement, shall be prior to the
filing of the
<PAGE>
-13-
amendment or post-effective amendment to the registration statement to be filed
shortly prior to such Effective Time), of Ernst & Young LLP ("ERNST & YOUNG")
confirming that they are independent public accountants within the meaning of
the Act and the applicable published Rules and Regulations thereunder and
stating to the effect that:
(i) in their opinion the financial statements examined by them and
included in the Registration Statements comply as to form in all
material respects with the applicable accounting requirements of the
Act and the related published Rules and Regulations;
(ii) they have performed the procedures specified by the American
Institute of Certified Public Accountants for a review of interim
financial information as described in Statement of Auditing Standards
No. 71, Interim Financial Information, on the unaudited combined
financial statements of International Information Technology, Inc. and
International Information Technology IIT, C.A. (together, "IIT")
included in the Registration Statements;
(iii) on the basis of a reading of the latest available interim
financial statements of the Company, inquiries of officials of the
Company who have responsibility for financial and accounting matters,
the review referred to in clause (ii) above and other specified
procedures, nothing came to their attention that caused them to believe
that:
(A) the unaudited combined financial statements of IIT
included in the Registration Statements do not comply as to form
in all material respects with the applicable accounting
requirements of the Act and the related published Rules and
Regulations or any material modifications should be made to such
unaudited financial statements for them to be in conformity with
generally accepted accounting principles;
(B) at the date of the latest available balance sheet read by
such accountants, or at a subsequent specified date not more than
three business days prior to the date of such letter, there was
any change in the capital stock or any increase in short-term
indebtedness or long-term debt of the Company and its consolidated
subsidiaries or, at the date of the latest available balance sheet
read by such accountants, there was any decrease in consolidated
net assets, as compared with amounts shown on the latest balance
sheet included in the Prospectus;
<PAGE>
-14-
(C) for the period from the closing date of the latest income
statement included in the Prospectus to the closing date of the
latest available income statement read by such accountants there
were any decreases, as compared with the corresponding period of
the previous year, in consolidated net sales or net operating
income or in the total or per share amounts of consolidated net
income;
(D) any unaudited pro forma consolidated financial statements
included in the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of
the Act and the Rules and Regulations or the pro forma adjustments
have not been properly applied to the historical amounts in the
compilation of those statements;
except in all cases set forth in clauses B and C above for changes,
increases or decreases which the Prospectus discloses have occurred or
may occur or which are described in such letter; and
(iv) they have compared specified dollar amounts (or percentages
derived from such dollar amounts) and other financial information
contained in the Registration Statements (in each case to the extent
that such dollar amounts, percentages and other financial information
are derived from the general accounting records of the Company and its
subsidiaries subject to the internal controls of the Company's
accounting system or are derived directly from such records by analysis
or computation) with the results obtained from inquiries, a reading of
such general accounting records and other procedures specified in such
letter and have found such dollar amounts, percentages and other
financial information to be in agreement with such results, except as
otherwise specified in such letter.
(b) The Representatives shall have received a letter, dated the date of
delivery thereof (which, if the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement, shall be on
or prior to the date of this Agreement or, if the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of this
Agreement, shall be prior to the filing of the amendment or post-effective
amendment to the registration statement to be filed shortly prior to such
Effective Time), of Mahoney Cohen & Company, CPA, P.C. ("MAHONEY COHEN")
confirming that they are independent public accountants within the meaning of
the Act and the applicable published Rules and Regulations thereunder and
stating to the effect that:
<PAGE>
-15-
(i) in their opinion the financial statements of Advanced
Communication Resources, Inc. ("ACR") examined by them and included in
the Registration Statements comply as to form in all material respects
with the applicable accounting requirements of the Act and the related
published Rules and Regulations;
(ii) they have performed the procedures specified by the American
Institute of Certified Public Accountants for a review of interim
financial information as described in Statement of Auditing Standards
No. 71, Interim Financial Information, on the unaudited financial
statements of ACR included in the Registration Statements;
(iii) on the basis of the review referred to in clause (ii) above, a
reading of the latest available interim financial statements of ACR,
inquiries of officials of ACR who have responsibility for financial and
accounting matters and other specified procedures, nothing came to
their attention that caused them to believe that the unaudited
financial statements of ACR included in the Registration Statements do
not comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published Rules and
Regulations or any material modifications should be made to such
unaudited financial statements for them to be in conformity with
generally accepted accounting principles; and
(iv) they have compared specified dollar amounts (or percentages
derived from such dollar amounts) and other financial information
contained in the Registration Statements (in each case to the extent
that such dollar amounts, percentages and other financial information
are derived from the general accounting records of ACR subject to the
internal controls of ACR's accounting system or are derived directly
from such records by analysis or computation) with the results obtained
from inquiries, a reading of such general accounting records and other
procedures specified in such letter and have found such dollar amounts,
percentages and other financial information to be in agreement with
such results, except as otherwise specified in such letter.
For purposes of subsections (a) and (b), (i) if the Effective Time of the
Initial Registration Statement is subsequent to the execution and delivery of
this Agreement, "REGISTRATION STATEMENTS" shall mean the initial registration
statement as proposed to be amended by the amendment or post-effective amendment
to be filed shortly prior to its Effective Time, (ii) if the Effective Time of
the Initial Registration Statement is prior to the execution and delivery of
this Agreement but the Effective Time of the Additional Registration is
subsequent to such execution and delivery, "REGISTRATION
<PAGE>
-16-
STATEMENTS" shall mean the Initial Registration Statement and the additional
registration statement as proposed to be filed or as proposed to be amended by
the post-effective amendment to be filed shortly prior to its Effective Time,
and (iii) "PROSPECTUS" shall mean the prospectus included in the Registration
Statements.
(c) If the Effective Time of the Initial Registration Statement is not
prior to the execution and delivery of this Agreement, such Effective Time
shall have occurred not later than 10:00 P.M., New York time, on the date of
this Agreement or such later date as shall have been consented to by CSFBC.
If the Effective Time of the Additional Registration Statement (if any) is
not prior to the execution and delivery of this Agreement, such Effective
Time shall have occurred not later than 10:00 P.M., New York time, on the
date of this Agreement or, if earlier, the time the Prospectus is printed and
distributed to any Underwriter, or shall have occurred at such later date as
shall have been consented to by CSFBC. If the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement, the Prospectus shall have been filed with the Commission in
accordance with the Rules and Regulations and Section 5(a) of this Agreement.
Prior to such Closing Date, no stop order suspending the effectiveness of a
Registration Statement shall have been issued and no proceedings for that
purpose shall have been instituted or, to the knowledge of the Company or the
Representatives, shall be contemplated by the Commission.
(d) Subsequent to the execution and delivery of this Agreement, there
shall not have occurred (i) any change, or any development or event involving
a prospective change, in the condition (financial or other), business,
properties or results of operations of the Company or its subsidiaries which,
in the judgment of a majority in interest of the Underwriters including the
Representatives, is material and adverse and makes it impractical or
inadvisable to proceed with completion of the public offering or the sale of
and payment for the Offered Securities; (ii) any downgrading in the rating of
any debt securities or preferred stock of the Company by any "nationally
recognized statistical rating organization" (as defined for purposes of Rule
436(g) under the Act), or any public announcement that any such organization
has under surveillance or review its rating of any debt securities or
preferred stock of the Company (other than an announcement with positive
implications of a possible upgrading, and no implication of a possible
downgrading, of such rating); (iii) any suspension or limitation of trading
in securities generally on the New York Stock Exchange or the Nasdaq National
Market, or any setting of minimum prices for trading on such exchange, or any
suspension of trading of any securities of the Company on any exchange or in
the over-the-counter market; (iv) any banking moratorium declared by U.S.
Federal or New York authorities; or (v) any outbreak or escalation of major
hostilities in which the United States is involved, any declaration
<PAGE>
-17-
of war by Congress or any other substantial national or international calamity
or emergency if, in the judgment of a majority in interest of the Underwriters
including the Representatives, the effect of any such outbreak, escalation,
declaration, calamity or emergency makes it impractical or inadvisable to
proceed with completion of the public offering or the sale of and payment for
the Offered Securities.
(e) The Representatives shall have received an opinion, dated such
Closing Date, of Latham and Watkins, counsel for the Company, to the effect
that:
(i) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware,
with corporate power and authority to own its properties and conduct
its business as described in the Prospectus; and the Company is duly
qualified to do business as a foreign corporation in good standing in
all other jurisdictions in which its ownership or lease of property or
the conduct of its business requires such qualification, other than
where the failure to be so qualified and in good standing would not
have a Material Adverse Effect;
(ii) The Offered Securities delivered on such Closing Date have been
duly authorized and, when issued to and paid for by you and the other
Underwriters in accordance with the terms of the Underwriting Agreement
will be, validly issued, fully paid and nonassessable and conform to
the description thereof contained in the Prospectus; and, to the best
of such counsel's knowledge, the stockholders of the Company have no
preemptive rights with respect to the Securities;
(iii) The Company is not and, after giving effect to the offering
and sale of the Offered Securities and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as defined in the Investment Company Act of 1940.
(iv) No consent, approval, authorization or order of, or filing
with, any federal governmental agency or body, any New York State court
or as required pursuant to the Delaware General Corporation Law is
required for the consummation of the transactions contemplated by this
Agreement in connection with the issuance and sale of the Offered
Securities by the Company, except such as have been obtained and made
under the Act and such as may be required under state securities laws
in connection with the purchase and distribution of the Offered
Securities by the Underwriters;
(v) The execution, delivery and issuance and sale of the Offered
Securities by the Company pursuant to this Agreement will not result in
a breach or
<PAGE>
-18-
violation of any of the terms and provisions of, or constitute a
default under, any federal or New York State statute, any rule,
regulation or order of any federal governmental agency or body known to
such counsel to be applicable or any New York State court having
jurisdiction over the Company or any subsidiary of the Company or any
of its properties or under the Delaware General Corporation Law, or the
charter or by-laws of the Company, and the Company has full power and
authority to authorize, issue and sell the Offered Securities as
contemplated by this Agreement;
(vi) The Initial Registration Statement was declared effective under
the Act as of the date and time specified in such opinion, the
Additional Registration Statement (if any) was filed and became
effective under the Act as of the date and time (if determinable)
specified in such opinion, the Prospectus either was filed with the
Commission pursuant to the subparagraph of Rule 424(b) specified in
such opinion on the date specified therein or was included in the
Initial Registration Statement or the Additional Registration Statement
(as the case may be), and, to the best of the knowledge of such
counsel, no stop order suspending the effectiveness of a Registration
Statement or any part thereof has been issued and no proceedings for
that purpose have been instituted or are pending under the Act, and the
Registration Statement and the Prospectus, and each amendment or
supplement thereto, as of their respective effective or issue dates,
complied as to form in all material respects with the requirements of
the Act and the Rules and Regulations and, in passing on the compliance
as to the form of the Registration Statement and Prospectus, may assume
that the statements made therein are correct and complete;
(vii) Such counsel has no reason to believe that any part of a
Registration Statement or any amendment thereto, as of its effective
date or as of such Closing Date, contained any untrue statement of a
material fact or omitted to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading or that the Prospectus or any amendment or supplement
thereto, as of its issue date or as of such Closing Date, contained any
untrue statement of a material fact or omitted to state any material
fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading; it being
understood that such counsel need express no opinion as to the
financial statements or other financial data contained in the
Registration Statements or the Prospectus; and
(viii) This Agreement has been duly authorized, executed and
delivered by the Company.
<PAGE>
-19-
(f) The Representatives shall have received an opinion, dated such
Closing Date, of William T. Price, General Counsel for the Company, to the
effect that:
(i) Each of the Company's subsidiaries has been duly incorporated
and is validly existing as a corporation under the laws of its
jurisdiction of incorporation or organization with corporate power
and authority to own its properties and conduct its business as
described in the Prospectus and has been duly qualified to do business
as a foreign corporation in good standing in all other jurisdictions in
which its ownership, lease of properties, or conduct of its business
requires such qualification, other than where the failure to be so
qualified and in good standing would not have a Material Adverse
Effect; all of the outstanding shares of capital stock of each of the
Company's subsidiaries have been duly and validly authorized and
issued, are fully paid and non-assessable, and are owned directly or
indirectly by the Company, free and clear of all liens, encumbrances,
equities or claims;
(ii) All outstanding shares of the Common Stock of the Company have
been duly authorized and validly issued, are fully paid and
nonassessable and conform to the description thereof contained in the
Prospectus; and, to the best of such counsel's knowledge, except as set
forth in the Prospectus, the stockholders of the Company have no
preemptive rights with respect to the Securities;
(iii) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings known to such counsel between the Company
and any person granting such person the right to require the Company to
file a registration statement under the Act with respect to any
securities of the Company owned or to be owned by such person or to
require the Company to include such securities in the securities
registered pursuant to the Registration Statement or in any securities
being registered pursuant to any other registration statement filed by
the Company under the Act;
(vi) The execution, delivery and issuance and sale of the Offered
Securities by the Company pursuant to this Agreement will not result in
a breach or violation of any of the terms and provisions of, or
constitute a default under, any agreement or instrument to which the
Company or any such subsidiary is a party or by which the Company or
any such subsidiary is bound or to which any of the properties of the
Company or any such subsidiary is subject, or the charter or by-laws of
the Company or any such subsidiary;
(v) The Initial Registration Statement was declared effective under
the Act
<PAGE>
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as of the date and time specified in such opinion, the Additional
Registration Statement (if any) was filed and became effective under
the Act as of the date and time (if determinable) specified in such
opinion, the Prospectus either was filed with the Commission pursuant
to the subparagraph of Rule 424(b) specified in such opinion on the
date specified therein or was included in the Initial Registration
Statement or the Additional Registration Statement (as the case may
be), and, to the best of the knowledge of such counsel, no stop order
suspending the effectiveness of a Registration Statement or any part
thereof has been issued and no proceedings for that purpose have been
instituted or are pending under the Act, and the Registration Statement
and the Prospectus, and each amendment or supplement thereto, as of
their respective effective or issue dates, complied as to form in all
material respects with the requirements of the Act and the Rules and
Regulations; and, in passing on the compliance as to form of the
Registration Statement and Prospectus, may assume that the statements
made therein are correct and complete;
(vi) Such counsel has no reason to believe that any part of a
Registration Statement or any amendment thereto, as of its effective
date or as of such Closing Date, contained any untrue statement of a
material fact or omitted to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading or that the Prospectus or any amendment or supplement
thereto, as of its issue date or as of such Closing Date, contained any
untrue statement of a material fact or omitted to state any material
fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading; it being
understood that such counsel need express no opinion as to the
financial statements or other financial data contained in the
Registration Statements or the Prospectus; and
(vii) The descriptions in the Registration Statements and Prospectus
of statutes, legal and governmental proceedings and contracts and other
documents are accurate and fairly present the information required to
be shown; and such counsel do not know of any legal or governmental
proceedings required to be described in a Registration Statement or the
Prospectus which are not described as required or of any contracts or
documents of a character required to be described in a Registration
Statement or the Prospectus or to be filed as exhibits to a
Registration Statement which are not described and filed as required.
(g) The Representatives shall have received from Cahill Gordon &
Reindel, counsel for the Underwriters, such opinion or opinions, dated such
Closing Date, with
<PAGE>
-21-
respect to the incorporation of the Company, the validity of the
Offered Securities delivered on such Closing Date, the Registration
Statements, the Prospectus and other related matters as the
Representatives may require, and the Company shall have furnished to
such counsel such documents as they request for the purpose of enabling
them to pass upon such matters.
(h) The Representatives shall have received a certificate, dated
such Closing Date, of the Chief Executive Officer or President and a
principal financial or accounting officer of the Company in which such
officers, to the best of their knowledge after reasonable
investigation, shall state that: the representations and warranties of
the Company in this Agreement are true and correct; the Company has
complied with all agreements and satisfied all conditions on its part
to be performed or satisfied hereunder at or prior to such Closing
Date; no stop order suspending the effectiveness of any Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are contemplated by the Commission; the Additional
Registration Statement (if any) satisfying the requirements of
subparagraphs (1) and (3) of Rule 462(b) was filed pursuant to Rule
462(b), including payment of the applicable filing fee in accordance
with Rule 111(a) or (b) under the Act, prior to the time the Prospectus
was printed and distributed to any Underwriter; and, subsequent to the
date of the most recent financial statements in the Prospectus, there
has been no material adverse change, nor any development or event
involving a prospective material adverse change, in the condition
(financial or other), business, properties or results of operations of
the Company and its subsidiaries taken as a whole except as set forth
in or contemplated by the Prospectus or as described in such
certificate.
(i) The Representatives shall have received (i) a letter, dated such
Closing Date, of Ernst & Young which meets the requirements of
subsection (a) of this Section, and (ii) a letter, dated the Closing
Date, of Mahoney Cohen which meets the requirements of subsection (b)
of this Section except in each case that the specified date referred to
in such subsection will be a date not more than three days prior to
such Closing Date for the purposes of this subsection.
(j) The Offered Securities to be delivered on such Closing Date
shall have been approved for listing on the Nasdaq National Market,
subject to official notice of issuance.
(k) The lock-up agreements of each of the Company's executive
officers and directors, delivered to the Representatives on or before
the date of this Agreement, shall be in full force and effect on such
Closing Date.
The Company will furnish the Representatives with such conformed copies of such
opinions,
<PAGE>
-22-
certificates, letters and documents as the Representatives
reasonably requests. CSFBC may in its sole discretion waive on behalf
of the Underwriters compliance with any conditions to the obligations
of the Underwriters hereunder, whether in respect of an Optional
Closing Date or otherwise.
7. INDEMNIFICATION AND CONTRIBUTION. (a) The Company will indemnify
and hold harmless each Underwriter, its partners, directors and
officers and each person, if any, who controls such Underwriter within
the meaning of Section 15 of the Act, against any losses, claims,
damages or liabilities, joint or several, to which such Underwriter may
become subject, under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in any Registration Statement,
the Prospectus, or any amendment or supplement thereto, or any related
preliminary prospectus, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, and will reimburse each Underwriter for any legal or other
expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such loss, claim, damage, liability or
action as such expenses are incurred; provided, however, that the
Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement in or omission or alleged
omission from any of such documents in reliance upon and in conformity
with written information furnished to the Company by any Underwriter
through the Representatives specifically for use therein, it being
understood and agreed that the only such information furnished by any
Underwriter consists of the information described as such in subsection
(b) below.
(b) Each Underwriter will severally and not jointly indemnify and
hold harmless the Company, its directors and officers and each person,
if any who controls the Company within the meaning of Section 15 of the
Act, against any losses, claims, damages or liabilities to which the
Company may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in any Registration Statement,
the Prospectus, or any amendment or supplement thereto, or any related
preliminary prospectus, or arise out of or are based upon the omission
or the alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with
written information furnished to the Company by such Underwriter
through the Representatives specifically for use therein, and will
reimburse any
<PAGE>
-23-
legal or other expenses reasonably incurred by the Company in
connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred, it being
understood and agreed that the only such information furnished by any
Underwriter consists of (i) the following information in the Prospectus
furnished on behalf of each Underwriter: the concession and reallowance
figures appearing in the fourth paragraph under the caption
"Underwriting" and the information contained in the sixth and twelfth
paragraphs under the caption "Underwriting"; (ii) the following
information in the Prospectus furnished on behalf of BT Alex. Brown
Incorporated: "BT Alex. Brown Incorporated has from time to time
provided investment banking services to us for which it has received
customary fees"; and (iii) the following information in the Prospectus
on behalf of Legg Mason Wood Walker Incorporated: "Legg Mason Walker
Incorporated is an IMap client of USI."
(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against the
indemnifying party under subsection (a) or (b) above, notify the
indemnifying party of the commencement thereof; but the omission so to
notify the indemnifying party will not relieve it from any liability
which it may have to any indemnified party otherwise than under
subsection (a) or (b) above. In case any such action is brought against
any indemnified party and it notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with
any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall
not, except with the consent of the indemnified party, be counsel to
the indemnifying party), and after notice from the indemnifying party
to such indemnified party of its election so to assume the defense
thereof, the indemnifying party will not be liable to such indemnified
party under this Section for any legal or other expenses subsequently
incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation. No indemnifying
party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened action in
respect of which any indemnified party is or could have been a party
and indemnity could have been sought hereunder by such indemnified
party unless such settlement includes an unconditional release of such
indemnified party from all liability on any claims that are the subject
matter of such action.
(d) If the indemnification provided for in this Section is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a
result of the losses, claims, damages or liabilities referred to in
subsection (a) or (b) above (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand
and the Underwriters on the other from the offering of the Securities
or (ii) if the allocation provided by clause (i) above is not permitted
by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also
<PAGE>
-24-
the relative fault of the Company on the one hand and the Underwriters
on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities as well as any
other relevant equitable considerations. The relative benefits received
by the Company on the one hand and the Underwriters on the other shall
be deemed to be in the same proportion as the total net proceeds from
the offering (before deducting expenses) received by the Company bear
to the total underwriting discounts and commissions received by the
Underwriters. The relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material
fact relates to information supplied by the Company or the Underwriters
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission.
The amount paid by an indemnified party as a result of the losses,
claims, damages or liabilities referred to in the first sentence of
this subsection (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection
with investigating or defending any action or claim which is the
subject of this subsection (d). Notwithstanding the provisions of this
subsection (d), no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the
Securities underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue
or alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this subsection (d) to contribute are several in
proportion to their respective underwriting obligations and not joint.
(e) The obligations of the Company under this Section shall be in
addition to any liability which the Company may otherwise have and
shall extend, upon the same terms and conditions, to each person, if
any, who controls any Underwriter within the meaning of the Act; and
the obligations of the Underwriters under this Section shall be in
addition to any liability which the respective Underwriters may
otherwise have and shall extend, upon the same terms and conditions, to
each director of the Company, to each officer of the Company who has
signed a Registration Statement and to each person, if any, who
controls the Company within the meaning of the Act.
8. DEFAULT OF UNDERWRITERS. If any Underwriter or Underwriters
default in their obligations to purchase Offered Securities hereunder
on either the First or any Optional Closing Date and the aggregate
number of shares of Offered Securities that such defaulting Underwriter
or Underwriters agreed but failed to purchase does not exceed 10% of
the total number of shares of Offered Securities that the Underwriters
are obligated to purchase on such Closing Date, CSFBC may make
arrangements satisfactory to the Company for the purchase of such
Offered Securities by other persons, including any of the Underwriters,
but if no such
<PAGE>
-25-
arrangements are made by such Closing Date, the non-defaulting
Underwriters shall be obligated severally, in proportion to their
respective commitments hereunder, to purchase the Offered Securities
that such defaulting Underwriters agreed but failed to purchase on such
Closing Date. If any Underwriter or Underwriters so default and the
aggregate number of shares of Offered Securities with respect to which
such default or defaults occur exceeds 10% of the total number of
shares of Offered Securities that the Underwriters are obligated to
purchase on such Closing Date and arrangements satisfactory to CSFBC
and the Company for the purchase of such Offered Securities by other
persons are not made within 36 hours after such default, this Agreement
will terminate without liability on the part of any non-defaulting
Underwriter or the Company, except as provided in Section 9 (provided
that if such default occurs with respect to Optional Securities after
the First Closing Date, this Agreement will not terminate as to the
Firm Securities or any Optional Securities purchased prior to such
termination). As used in this Agreement, the term "Underwriter"
includes any person substituted for an Underwriter under this Section.
Nothing herein will relieve a defaulting Underwriter from liability for
its default.
9. SURVIVAL OF CERTAIN REPRESENTATIONS AND OBLIGATIONS. The
respective indemnities, agreements, representations, warranties and
other statements of the Company or its officers and of the several
Underwriters set forth in or made pursuant to this Agreement will
remain in full force and effect, regardless of any investigation, or
statement as to the results thereof, made by or on behalf of any
Underwriter, the Company or any of their respective representatives,
officers or directors or any controlling person, and will survive
delivery of and payment for the Offered Securities. If this Agreement
is terminated pursuant to Section 8 or if for any reason the purchase
of the Offered Securities by the Underwriters is not consummated, the
Company shall remain responsible for the expenses to be paid or
reimbursed by it pursuant to Section 5 and the respective obligations
of the Company and the Underwriters pursuant to Section 7 shall remain
in effect, and if any Offered Securities have been purchased hereunder
the representations and warranties in Section 2 and all obligations
under Section 5 shall also remain in effect. If the purchase of the
Offered Securities by the Underwriters is not consummated for any
reason other than solely because of the termination of this Agreement
pursuant to Section 8 or the occurrence of any event specified in
clause (iii), (iv) or (v) of Section 6(d), the Company will reimburse
the Underwriters for all out-of-pocket expenses (including fees and
disbursements of counsel) reasonably incurred by them in connection
with the offering of the Offered Securities.
10. NOTICES. All communications hereunder will be in writing and, if
sent to the Underwriters, will be mailed, delivered or telegraphed and
confirmed to the Representatives, c/o Credit Suisse First Boston
Corporation, Eleven Madison Avenue, New York, N.Y. 10010-3629,
Attention: Investment Banking Department--Transactions Advisory Group,
or, if sent to the Company, will be mailed, delivered or telegraphed
and confirmed to it at USINTERNETWORKING, Inc., One USI Plaza,
Annapolis, Maryland 21401-7478, Attention:
<PAGE>
-26-
William T. Price, Vice President and General Counsel; provided,
however, that any notice to an Underwriter pursuant to Section 7 will
be mailed, delivered or telegraphed and confirmed to such Underwriter.
11. SUCCESSORS. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the
officers and directors and controlling persons referred to in Section
7, and no other person will have any right or obligation hereunder.
12. REPRESENTATION OF UNDERWRITERS. The Representatives will act for
the several Underwriters in connection with this financing, and any
action under this Agreement taken by the Representatives jointly or by
CSFBC will be binding upon all the Underwriters.
13. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all
such counterparts shall together constitute one and the same Agreement.
14. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK,
WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS.
The Company hereby submits to the non-exclusive jurisdiction of
the Federal and state courts in the Borough of Manhattan in The City of
New York in any suit or proceeding arising out of or relating to this
Agreement or the transactions contemplated hereby.
<PAGE>
-27-
If the foregoing is in accordance with the Representatives'
understanding of our agreement, kindly sign and return to the Company
one of the counterparts hereof, whereupon it will become a binding
agreement between the Company and the several Underwriters in
accordance with its terms.
Very truly yours,
USINTERNETWORKING, INC.
By:
----------------------------
Name:
Title:
The foregoing Underwriting Agreement is hereby confirmed and accepted
as of the date first above written.
CREDIT SUISSE FIRST BOSTON CORPORATION
BEAR, STEARNS & CO. INC.
BT ALEX. BROWN INCORPORATED
LEGG MASON WOOD WALKER INCORPORATED
Acting on behalf of themselves and as the
Representatives of the
several Underwriters
By: CREDIT SUISSE FIRST BOSTON CORPORATION
By:
----------------------------------------
Name:
Title:
<PAGE>
-28-
SCHEDULE I
NUMBER OF
FIRM SECURITIES
UNDERWRITER
Credit Suisse First Boston Corporation ...............
Bear, Stearns & Co. Inc ..............................
BT Alex. Brown Incorporated ..........................
Legg Mason Wood Walker Incorporated ..................
------------------
Total ...................................... ------------------
------------------
<PAGE>
Exhibit 4.1
NUMBER SHARES
[USI LOGO]
USI
USINTERNETWORKING, INC.
CUSIP 917311 80 5
SEE REVERSE FOR CERTAIN DEFINITIONS
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
This Certifies that
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK PAR VALUE $.001 PER SHARE OF
USinternetworking, Inc. transferable on the books of the Corporation by the
holder hereof in person or by duly authorized attorney upon the surrender of
this Certificate properly endorsed. This Certificate is not valid unless
countersigned by the Transfer Agent and registered by the Registrar.
Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
/s/William T. Price /s/Stephen E. McManus
----------------------------- SEAL --------------------------------
William T. Price Stephen E. McManus
Vice President, General President
Counsel & Secretary
Countersigned and Registered:
AMERICAN STOCK TRANSFER & TRUST COMPANY
Transfer Agent
and Registrar
By Authorized Signature
<PAGE>
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S)
AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER.
USINTERNETWORKING, INC.
The Corporation will, upon request and without charge, furnish any
stockholder information as to the powers, designations, preferences and
relative participating, optional or other special rights of each class of
stock or series thereof and the qualifications, limitations or restrictions
of such preferences and/or rights.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT-__________ Custodian__________
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act _________________
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ________________HEREBY SELL, ASSIGN AND TRANSFER UNTO
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- -////////////////////////////////////////-
- - -
- -////////////////////////////////////////-_____________________________________
_______________________________________________________________________________
(NAME AND ADDRESS OF ASSIGNEE SHOULD BE PRINTED OR TYPEWRITTEN)
_______________________________________________________________________________
_______________________________________________________________________SHARES
OF THE COMMON STOCK REPRESENTED BY THE WITHIN CERTIFICATE AND DO HEREBY
IRREVOCABLY CONSTITUTE AND APPOINT
_____________________________________________________________________ATTORNEY
TO TRANSFER THE SAID STOCK ON THE BOOKS OF THE WITHIN-NAMED CORPORATION, WITH
FULL POWER OF SUBSTITUTION IN THE PREMISES.
DATED ___________________________________
AFFIX MEDALLION SIGNATURE
GUARANTEE IMPRINT BELOW ________________________________________
________________________________________
ABOVE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACT OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT, OR ANY CHANGE WHATEVER.
THE SIGNATURE(S) MUST BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION SUCH
AS A SECURITIES BROKER/DEALER,
COMMERCIAL BANK, TRUST COMPANY, SAVINGS
ASSOCIATION OR A CREDIT UNION
PARTICIPATING IN A MEDALLION PROGRAM
APPROVED BY THE SECURITIES TRANSFER
ASSOCIATION, INC.
<PAGE>
Exhibit 5.1
[LETTERHEAD OF LATHAM & WATKINS]
_____________
_____________, 1999
USINTERNETWORKING, Inc.
One USI Plaza
Annapolis, Maryland 21401
Re: Registration Statement No. 333-70717: 5,750,000 shares of
Common Stock, par value $0.001 per share
Ladies and Gentlemen:
In connection with the registration of 5,750,000 shares of
common stock of USINTERNETWORKING, Inc., a Delaware corporation (the "Company"),
par value $0.001 per share (the "Shares"), under the Securities Act of 1933, as
amended, by the Company on Form S-1 filed with the Securities and Exchange
Commission (the "Commission") on January 15, 1999 (File No. 333-70717), as
amended by Amendment No. 1 filed with the Commission on January 22, 1999, as
further amended by Amendment No. 2 filed on February 2, 1999, as further amended
by Amendment No. 3 filed on February 4, 1999, as further amended by Amendment
No. 4 filed on February 19, 1999, as further amended by Amendment No. 5 filed on
March 5, 1999, and as further amended by Amendment No. 6 filed on March ___,
1999 (as so amended, the "Registration Statement"), you have requested our
opinion with respect to the matters set forth below.
In our capacity as your counsel in connection with such
registration, we are familiar with the proceedings taken by the Company in
connection with the authorization, issuance and sale of the Shares. In addition,
we have made such legal and factual examinations and inquiries, including an
examination of originals or copies certified or otherwise identified to our
satisfaction of such documents, corporate records and instruments, as we have
deemed necessary or appropriate for purposes of this opinion.
<PAGE>
LATHAM & WATKINS
__________ ___, 1999
Page 2
In our examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals, and
the conformity to authentic original documents of all documents submitted to us
as copies.
We are opining herein as to the effect on the subject
transaction only of the General Corporation Law of the State of Delaware, and we
express no opinion with respect to the applicability thereto, or the effect
thereon, of any other laws, or as to any matters of municipal law or the laws of
any local agencies within any state.
Subject to the foregoing, it is our opinion that the Shares
have been duly authorized, and, upon issuance, delivery and payment therefor in
the manner contemplated by the Registration Statement, will be validly issued,
fully paid and nonassessable.
We consent to your filing this opinion as an exhibit to the
Registration Statement and to the reference to our firm contained under the
heading "Legal Matters."
Very truly yours,
<PAGE>
USINTERNETWORKING, INC.
AMENDED AND RESTATED
STOCKHOLDERS' AGREEMENT
DATED AS OF
DECEMBER 31, 1998
<PAGE>
AMENDED AND RESTATED
STOCKHOLDERS' AGREEMENT
This AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT (the "Agreement") is
entered into as of December 31, 1998 by and among USinternetworking, Inc., a
Delaware corporation (the "Company"), and the parties set forth on Exhibit A
hereto (the "Stockholders").
RECITALS:
A. Certain of the Stockholders (together, and including their permitted
successors and assigns, the "Series A Purchasers") have purchased shares of the
Series A Preferred Stock (the "Series A Preferred Shares").
B. The Company, the Series A Purchasers and the Individual Shareholders
have entered into a Shareholders' Agreement dated as of May 28, 1998 (as
amended, the "Original Agreement").
C. Certain of the Stockholders (together, and including their permitted
successors and assigns, the "Series B Purchasers") have agreed to purchase
shares of the Series B Preferred Stock (the "Series B Preferred Shares")
pursuant to that certain Stock Purchase Agreement dated as of the date hereof
(the "Stock Purchase Agreement").
D. It is a condition precedent to the Closing under the Stock Purchase
Agreement that the parties hereto enter into this Agreement for the purpose of
amending and restating the Original Agreement.
E. All of the Stockholders desire to enter into this Agreement for the
purpose of amending and restating the Original Agreement in its entirety and of
regulating certain aspects of the Stockholders' relationships with regard to
each other and the Company.
AGREEMENT:
NOW THEREFORE, in consideration of the mutual covenants herein
contained and for other good and valuable consideration, the Company and the
Stockholders agree to amend and restate the Original Agreement as follows:
Section 1. DEFINITIONS. As used herein, the following terms shall have
the following meanings and other defined terms in this Agreement shall have the
meanings given such terms in their respective sections and/or paragraphs:
"BUSINESS" means the acquisition of interests in, and the operation of,
companies engaged in activities related to the provision of Internet computing
services to enterprise customers worldwide, and all services related thereto.
<PAGE>
"COMMON STOCK" means the Common Stock, par value $.001 per share, of
the Company and any other capital stock of the Company into which such Common
Stock is reclassified or reconstituted.
"COMPANY SECURITIES" any and all shares, interests, participations or
other equivalents (however designated) of capital stock of the Company and any
rights to acquire the foregoing, including, without limitation, any rights to
acquire securities exercisable for, convertible into or exchangeable for the
foregoing now or hereafter issued by the Company.
"CONDITION OF THE COMPANY" shall have the same meaning as in the Stock
Purchase Agreement.
"EMPLOYEE STOCK OPTION PLAN" shall have the same meaning as in the
Stock Purchase Agreement.
"INDIVIDUAL SHAREHOLDERS" means Christopher R. McCleary, Stephen E.
McManus, Andrew A. Stern and Chris M. Poelma.
"INVESTORS" means the parties to this Agreement identified on Exhibit
B.
"PERSON" shall have the same meaning as the term "Person" in the Stock
Purchase Agreement.
"PREFERRED SHARES" means the Series A Preferred Shares and the Series B
Preferred Shares.
"PURCHASERS" means the parties to this Agreement identified on Exhibit
C hereto and their permitted successors and assigns.
"SERIES A PREFERRED STOCK" means the 8% Series A Cumulative Convertible
Preferred Stock, par value $.01 per share, of the Company, or any other capital
stock of the Company into which such Series A Preferred Stock is reclassified or
reconstituted.
"SERIES B PREFERRED STOCK" means the 8% Series B Cumulative Convertible
Redeemable Preferred Stock, par value $.01 per share, of the Company, or any
other capital stock of the Company into which such Series B Preferred Stock is
reclassified or reconstituted.
"SECURITIES ACT" means the Securities Act of 1933, as amended from time
to time, and the rules and regulations of the Securities and Exchange Commission
promulgated thereunder.
"STOCKHOLDERS" means those parties whose names appear on Exhibit A and
such other Persons who become parties hereto pursuant to Section 2 hereof.
"WHITNEY" shall mean J.H. Whitney III, L.P. and Whitney Strategic
Partners III, L.P., collectively.
Section 2. TRANSFER OF SECURITIES.
-2-
<PAGE>
(a) GENERAL PROHIBITION ON TRANSFER. No Stockholder shall
sell, assign, transfer, pledge, encumber or in any way otherwise dispose of any
Company Securities (any such disposition, whether voluntary or involuntary, and
any agreement to effect such disposition, a "Transfer") unless (i) such
Stockholder has complied with the provisions of this Section 2, (ii) the
transferee (if other than the Company or a transferee of Company Securities
pursuant to a transaction set forth in clause (iv) of the definition of Exempt
Transfers (as set forth in Section 2(c)) has agreed in writing to become a party
to, and be bound by the terms of, this Agreement and (iii) such Stockholder has
delivered to the Company an opinion of such Stockholder's counsel, in form and
substance reasonably satisfactory to the Company, to the effect that such
Transfer is either exempt from the registration requirements of the Securities
Act and the applicable securities laws of any state or that such registration
requirements have been complied with; PROVIDED, HOWEVER, that no such opinion of
counsel shall be required for a transfer by a holder of Company Securities which
is a partnership to a partner or employee of such holder or a retired partner or
retired employee of such holder who retires after the date hereof, or to the
estate of any such partner, retired partner, employee or retired employee, or a
transfer by gift, will or intestate succession from any holder of Company
Securities to his or her spouse or members of his or her or his or her spouse's
family or a trust for the benefit of any of the foregoing Persons, if the
transferee agrees in writing to be subject to the terms hereof to the same
extent as if such transferee were an original holder of Company Securities
hereunder.
(b) RIGHT OF FIRST REFUSAL.
(i) If any Stockholder (a "Seller") has received a
bona fide offer (a "Transfer Offer" ) which the Seller proposes to accept to
purchase any or all of the Company Securities (the "Transfer Stock") then owned
by such Seller to any Person (a "Bona Fide Purchaser") other than pursuant to an
Exempt Transfer (as defined in Section 2(c) below), then before the Seller may
sell the Transfer Stock, the Seller shall provide to each other Stockholder and
the Company a written notice detailing the terms of such Transfer Offer that the
Seller has received with respect to such Transfer Stock (a "Transfer Notice").
Such Transfer Notice shall identify the Transfer Stock, the price of the
Transfer Stock, the identity of the Bona Fide Purchaser and all the other
material terms and conditions of such Transfer Offer. The Transfer Notice shall
contain an irrevocable offer (a "First Offer") to sell to each other Stockholder
its pro rata share (determined for the purposes of this Section 2 on the basis
of its ownership of Company Securities as compared to the ownership of Company
Securities of all Stockholders calculated on a Common Stock equivalent basis) of
the Transfer Stock and an irrevocable offer (the "Second Offer") to sell to the
Company that number of shares of Transfer Stock not purchased by the
Stockholders pursuant to the Stockholder Right of First Refusal (as defined
below), each at a price equal to the price and upon substantially the same terms
as the terms contained in such Transfer Offer. Each other Stockholder shall have
the irrevocable right and option (the "Stockholder Right of First Refusal"),
exercisable as provided below, to accept the First Offer as to any or all of its
pro rata share of the Transfer Stock. Each other Stockholder which desires to
exercise its Stockholder Right of First Refusal shall provide the Seller and the
Company with an irrevocable written notice of acceptance (an "Initial Notice")
specifying the number of Company Securities of the Transfer Stock which such
other Stockholder is agreeing to purchase pursuant to such First Offer, which
shall be binding on such other Stockholder for the
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number of Company Securities in such notice of acceptance, which notice of
acceptance must be provided to the Seller and the Company within fifteen (15)
business days after the date the Transfer Notice is given (the "Initial Notice
Period"). If the aggregate number of shares of Transfer Stock to be purchased by
the Stockholders pursuant to the Initial Notices is less than the total number
of shares of Transfer Stock which the Seller proposes to sell in the Transfer
Notice, then each Stockholder that had provided the Seller with an Initial
Notice shall be so notified and shall have the irrevocable right and option to
purchase an additional amount of Transfer Stock equal to an amount up to its pro
rata share of the remaining Transfer Stock (the "Oversubscription Right"). Each
other Stockholder which desires to exercise its Oversubscription Right shall
provide the Seller and the Company with an irrevocable written notice of
acceptance (an "Oversubscription Notice") specifying the number of Company
Securities of the Transfer Stock which such other Stockholder is agreeing to
purchase pursuant to such Oversubscription Right, which shall be binding on such
other Stockholder for the number of Company Securities in such notice of
acceptance, which notice of acceptance must be provided to the Seller and the
Company within five (5) business days after receiving notice of its
Oversubscription Right (the "Oversubscription Period"). If the aggregate number
of shares of Transfer Stock to be purchased by the Stockholders pursuant to the
Initial Notices and Oversubscription Notices is less than the total number of
shares of Transfer Stock which the Seller proposes to sell in the Transfer
Notice then the Company shall have the irrevocable right and option to purchase
(the "Company Right of First Refusal"), exercisable as provided below, to
purchase any or all of such remaining shares. The Company may exercise its
Company Right of First Refusal by providing the Seller with an irrevocable
written notice of acceptance (the "Second Notice") specifying the number of
Company Securities of the Transfer Stock which the Company is agreeing to
purchase pursuant to such Second Offer, which shall be binding on the Company
for the number of Company Securities in such notice of acceptance, which notice
of acceptance must be provided to the Seller within fifteen (15) business days
after the end of the Oversubscription Period (the "Final Notice Period").
(ii) Subject to the Seller's rights under Section
2(b)(iii), the closing of the purchase of the Transfer Stock by the Stockholders
and/or the Company pursuant to this Section 2(b) shall take place at the
principal office of the Company on the thirtieth (30th) business day after the
expiration of the Final Notice Period (or after the receipt of any required
governmental consents or approvals). At such closing, the Stockholders and/or
the Company shall deliver a certified check or checks in the appropriate amount
to the Seller against delivery of certificates representing the Transfer Stock
so purchased, duly endorsed in blank by the Person or Persons in whose name a
stock certificate is registered or accompanied by a duly executed assignment
separate from the certificate with the signatures thereon guaranteed by a
commercial bank or trust company.
(iii) Notwithstanding the exercise by the
Stockholders and the Company of their rights under this Section 2(b), if at the
end of the Final Notice Period the Stockholders and the Company shall have
agreed to purchase less than all of the Transfer Stock covered thereby (a
"Partial Purchase Commitment"), the Seller shall promptly notify the
Stockholders and the Company as to whether or not it shall accept such Partial
Purchase Commitment. If such Partial Purchase Commitment is accepted, the
closing for such purchase of
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a portion of such Transfer Stock shall take place pursuant to Section 2(b)(ii)
hereof. Upon acceptance by the Seller of the Partial Purchase Commitment, the
Seller shall have the right within the time hereinafter specified to Transfer to
the Bona Fide Purchaser any Transfer Stock not included in the Partial Purchase
Commitment at a price not less than and on terms no more favorable to the Bona
Fide Purchaser than were in the Transfer Notice. If the Seller determines not to
accept the Partial Purchase Commitment, the Seller shall have the right within
the time hereinafter specified to Transfer to the Bona Fide Purchaser any or all
of the Transfer Stock at a price not less than and on terms no more favorable to
the Bona Fide Purchaser than contained in the Transfer Notice. If the
Stockholders and the Company notify the Seller that they have decided not to
purchase any portion of the Transfer Stock, or the Seller has accepted a Partial
Purchase Commitment and desires to Transfer the remaining Transfer Stock, or the
Seller has rejected the Partial Purchase Commitment and desires to Transfer the
Transfer Stock, the Seller shall have 180 days from the end of the Final Notice
Period (the "Sales Period"), in which to Transfer to the Bona Fide Purchaser any
or all of the Transfer Stock at a price not less than and on terms no more
favorable than were contained in the Transfer Notice. No sale may be made to any
third party unless such third party agrees in writing, to be bound by the
provisions of this Agreement. Promptly after any sale pursuant to this Section
2(b), the Seller shall notify the Stockholders and the Company of the
consummation thereof and shall furnish such evidence of the completion
(including time of completion) of such sale and of the terms thereof as the
Company may reasonably request. If, at the termination of the Sales Period, the
Seller has not completed the sale of all the Transfer Stock, such Seller shall
no longer be permitted to Transfer such Transfer Stock pursuant to this Section
2(b) without again fully complying with the provisions of this Section 2(b) and
all the restrictions on Transfer contained in this Agreement shall again be in
effect with respect to all such Seller's Transfer Stock.
(c) EXEMPT TRANSFER. The following transactions shall
constitute "Exempt Transfers" for the purpose of Section 2(b): (i) a redemption
of the Series B Preferred Stock by the Company, (ii) a Transfer by a Stockholder
of Company Securities by will or intestate succession to such Stockholder's
executors, administrators, testamentary trustees, legatees or beneficiaries,
(iii) a Transfer of Company Securities by a Stockholder to any Related Party (as
defined below) of such Stockholder, (iv) a Transfer of Company Securities by a
Stockholder to the public pursuant to an underwritten public offering of Common
Stock representing not less than $300 million pre-money valuation of the
Company's fully-diluted common equity, resulting in net proceeds to the Company
of not less than $50 million or pursuant to Rule 144 under the Securities Act,
(v) a Transfer of Company Securities by a Stockholder to an organization
described in Section 501(c)(3) of the U.S. Internal Revenue Code, provided that
during the term of this Agreement a Stockholder shall only be entitled to
Transfer Company Securities having an aggregate value of up to $120,000 pursuant
to this clause, and (vi) a Transfer of Company Securities that has been approved
in writing as an Exempt Transfer by the holders of a majority of the outstanding
Common Stock, the holders of a majority of the outstanding Series A Preferred
Stock and the holders of two-thirds of the outstanding Series B Preferred Stock.
(d) TAG-ALONG. In addition to the foregoing, a Stockholder (a
"Transferring Stockholder") may Transfer any Company Securities pursuant to
Section 2(b)(iii) only if the purchaser thereof agrees to provide each of the
other Stockholders the right (but not the
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obligation) to participate in the Transfer of its Company Securities to such
purchaser upon the same terms and conditions (except, in the case where the
other Stockholders so participating are selling Company Securities of a
different class, the purchase price to be paid therefor shall be equitably
adjusted to reflect the applicable differences in seniority and participation in
proceeds of sale or liquidation in respect of the differing classes of Company
Securities). If the prospective purchaser will not purchase all of the Company
Securities which each of the Stockholders wishes to sell pursuant to this
Section 2(d), then the number of shares which each of the Stockholders,
including without limitation the Transferring Stockholder, may sell will be
determined on a pro-rata basis. The right of a Stockholder to participate in any
Transfer of Company Securities pursuant to this Section 2(d) shall terminate
unless such Stockholder shall give written notice to the selling Stockholder of
its intent to participate in such Transfer within ten (10) days after receiving
the notice described above.
(e) RELATED PARTY. As used herein, the term "Related Party"
with respect to any Stockholder means: (A) any Person or entity that directly or
indirectly, through one or more intermediaries, has control of or is controlled
by, or is under common control with, the Person or entity specified (an "
Affiliate"); (B) a trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, or owners, or Persons holding a
controlling interest of which consist of such Stockholder and/or such other
Persons or entities referred to in the immediately preceding clause (A), (C)
with respect to any Stockholder which is an individual, such Stockholder's
spouse, siblings, children or parents, or (D) with respect to any Stockholder
which is a partnership or a limited liability company, such Stockholders'
partners or members as of the date hereof and those Persons who become partners
or members of such Stockholder in accordance with the terms of the partnership
or operating agreement thereof, and (E) with respect to J.H. Whitney III, L.P.,
Whitney Strategic Partners III, L.P. and Waller Sutton Media Partners, L.P.,
each such Purchaser and the Affiliates, partners and retired partners of such
Purchasers, the estates and family members of any such partners and retired
partners and of their spouses, and any trusts for the benefit of any of the
foregoing Persons.
(f) REGULATORY COMPLIANCE. The Company and each of the
Stockholders hereby waive the provisions of Section 2(b) to the extent that such
provisions would apply to any transfer of Company Securities by US West or its
Affiliates to the extent that, and in the circumstances under which, the Company
has agreed to waive such provisions pursuant to Section 7.3 of the Stock
Purchase Agreement or Section 7.4(c) of the Stock Purchase Agreement dated as of
June 18, 1998 between the Company and US WEST Communications, Inc.
("US WEST")
Section 3. REGISTRATION RIGHTS.
(a) PIGGYBACK REGISTRATION RIGHTS.
(1) RIGHT TO PIGGYBACK. Subject to the last sentence
of this subsection (1), whenever the Company proposes to register any securities
with the Securities and Exchange Commission (the "Commission") under the
Securities Act (other than registrations on Form S-4 or Form S-8) for itself or
other security holders or both and the registration form to be used may
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be used for the registration of the Registrable Securities (as defined in
subsection (j) below) (a "Piggyback Registration"), the Company will give
written notice to all Stockholders, at least thirty (30) days prior to the
anticipated filing date, of its intention to effect such a registration, which
notice will specify the proposed offering price, the kind and number of
securities proposed to be registered, the distribution arrangements and such
other information that at the time would be appropriate to include in such
notice, and will, subject to subsection (a)(2) below, include in such Piggyback
Registration all Registrable Securities with respect to which the Company has
received written requests for inclusion therein within twenty (20) business days
after the delivery of the Company's notice. Except as may otherwise be provided
in this Agreement, Registrable Securities with respect to which such request for
registration has been received will be registered by the Company and offered to
the public in a Piggyback Registration pursuant to this Section 3 on the terms
and conditions at least as favorable as those applicable to the registration of
the securities to be sold by the Company and by any other Person selling under
such Piggyback Registration.
(2) PRIORITY ON PIGGYBACK REGISTRATIONS. If the
managing underwriter or underwriters, if any, advise the holders of Registrable
Securities in writing that in its or their reasonable opinion or, in the case of
a Piggyback Registration not being underwritten, the Company shall reasonably
determine (and notify the holders of Registrable Securities of such
determination), after consultation with an investment banker of nationally
recognized standing, that the number or kind of securities proposed to be sold
in such registration (including Registrable Securities to be included pursuant
to subsection (a)(1) above) will materially adversely affect the success of such
offering (including, without limitation, an impact on the selling price), the
Company will include in such registration the number of securities, if any,
which, in the opinion of such underwriter or underwriters, or the Company, as
the case may be, can be sold, as follows: (i) first, the shares the Company
proposes to sell, (ii) second, the Registrable Securities requested to be
included in such registration by the Stockholders, pro rata among those of the
requesting Stockholders that are Purchasers on the basis of the number of shares
of Registrable Securities that each has requested to be included in such
registration and (iii) third, pro rata among all other Stockholders.
(b) Demand Registration Rights.
(1) RIGHT TO DEMAND REGISTRATION. Stockholders
holding at least 33% of the Registrable Securities then outstanding (all
calculated on a fully-diluted basis) (referred to herein as a "Demanding Group")
shall have the right at any time after the date ninety (90) days after the first
registration of Common Stock under the Securities Act (other than any
registration on Form S-8 or a similar successor form) (the "Trigger Date") to
make a written request of the Company for registration with the Commission,
under and in accordance with the provisions of the Securities Act, of all or
part of their Registrable Securities (a "Demand Registration"); PROVIDED, that
(x) the Company may once in any twelve-month period, if the Board of Directors
determines in the exercise of its reasonable judgment after consulting with
counsel that due to a pending or contemplated acquisition or disposition, to
effect such Demand Registration at such time would have a material adverse
effect on the Company, defer such Demand Registration for a single period not to
exceed one hundred eighty (180) days, provided that the 180-day period
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will lapse if the acquisition or disposition is completed or not pursued or such
registration otherwise would no longer have a material adverse effect, (but if
the Company elects to defer any Demand Registration pursuant to the terms of
this sentence, no Demand Registration shall be deemed to have occurred for
purposes of this Agreement) and (y) the Company shall be obligated pursuant to
this Section 3(b)(1) to effect only the number of Demand Registrations set forth
in subsection 3(b)(2) below. Within ten (10) days after receipt of the request
for a Demand Registration, the Company will send written notice (the "Notice")
of such registration request and its intention to comply therewith to all
Stockholders who are holders of Registrable Securities and, subject to
subsection (3) below, the Company will include in such registration all
Registrable Securities of such Stockholders with respect to which the Company
has received written requests within twenty (20) days of the date of the Notice.
All requests made pursuant to this subsection (b)(1) will specify the aggregate
number of Registrable Securities requested to be registered and will also
specify the intended methods of disposition thereof.
(2) NUMBER OF DEMAND REGISTRATIONS. The Stockholders
shall be entitled to three (3) Demand Registrations, and the expenses of each
(including the fees and expenses of a total of one counsel for the Demanding
Group in accordance with subsection (e)(2) below) shall be borne by the Company.
A Demand Registration shall not be counted as a Demand Registration hereunder
until such Demand Registration has been declared effective by the Commission and
maintained continuously effective for the period required by Section 3(c)(2). In
addition, at such time, if any, as the Company becomes eligible to use Form S-3
under the Securities Act (or any successor form thereto), a Demanding Group or a
Stockholder or Stockholders proposing to register Registrable Securities, the
sale of which is expected to generate at least $10,000,000 in aggregate gross
proceeds, shall be entitled to unlimited Demand Registrations on Form S-3,
provided that there may be only two (2) such Demand Registrations in each
twelve-month period, subject to the other provisions hereof.
(3) PRIORITY ON DEMAND REGISTRATIONS. If in any
Demand Registration the managing underwriter or underwriters thereof (or in the
case of a Demand Registration not being underwritten, the holders of a majority
of the Registrable Securities held by the Demanding Group after consultation
with an investment banker of nationally recognized standing), advise the Company
in writing that in its or their reasonable opinion the number of securities
proposed to be sold in such Demand Registration exceeds the number that can be
sold in such offering without having a material adverse effect on the success of
the offering (including, without limitation, an impact on the selling price),
the Company will include in such registration only the number of securities
that, in the reasonable opinion of such underwriter or underwriters (or such
holders of Registrable Securities held by the Demanding Group, as the case may
be) can be sold without having a material adverse effect on the success of the
offering, as follows: (i) first, the Registrable Securities requested to be
included in such Demand Registration by the Demanding Group and shares held by
Persons that are Purchasers but are not in the Demanding Group and requested to
be included in such Demand Registration, pro rata, among such Stockholders on
the basis of the number of shares of Registrable Securities each has requested
to be included in the Demand Registration, and (ii) second, shares to be issued
and sold by the Company and (iii) shares held by other Stockholders that are
requested to be included in the Demand Registration, on the same basis.
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(c) REGISTRATION PROCEDURES. With respect to any Piggyback
Registration or Demand Registration (generically, a "Registration"), the Company
will as expeditiously as practicable:
(1) prepare and file with the Commission, as
expeditiously as possible, but in no event later than 90 days after mailing the
applicable Notice, a registration statement or registration statements (the
"Registration Statement") relating to the applicable Registration on any
appropriate form under the Securities Act, which form shall be available for the
sale of the Registrable Securities in accordance with the intended method or
methods of distribution thereof; PROVIDED that the Company will include in any
Registration Statement all information that the holders of the Registrable
Securities so to be registered shall reasonably request and shall include all
financial statements required by the Commission to be filed therewith, cooperate
and assist in any filings required to be made with the National Association of
Securities Dealers, Inc. ("NASD"), and use its best efforts to cause such
Registration Statement to become effective; PROVIDED FURTHER, that before filing
a Registration Statement or prospectus related thereto (a "Prospectus") or any
amendments or supplements thereto, the Company will furnish to the holders of
the Registrable Securities covered by such Registration Statement and the
underwriters, if any, copies of all such documents proposed to be filed, which
documents will be subject to the reasonable review of such holders and
underwriters and their respective counsel, and the Company will not file any
Registration Statement or amendment thereto or any Prospectus or any supplement
thereto to which the holders of a majority of the Registrable Securities covered
by such Registration Statement or the underwriters, if any, shall reasonably
object;
(2) prepare and file with the Commission such
amendments and post-effective amendments to the Registration Statement as may be
necessary to keep each Registration Statement effective for (i) the period
necessary to allow all underwriters participating in a firm commitment
underwriting to complete distribution of the Registrable Securities covered by
such Registration Statement or (ii) if the Registrable Securities covered by
such Registration Statement are not being sold pursuant to a firm commitment
underwriting, the period ending on the later of nine months after the
effectiveness of the Registration Statement or when 80% of the Registrable
Securities covered by such Registration Statement have been sold, or such
shorter period which will terminate when all Registrable Securities covered by
such Registration Statement have been sold; cause each Prospectus to be
supplemented by any required Prospectus supplement, and as so supplemented to be
filed pursuant to Rule 424 under the Securities Act; and comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such Registration Statement during the applicable period
in accordance with the intended method or methods of distribution by the sellers
thereof set forth in such Registration Statement or supplement to the
Prospectus; the Company shall not be deemed to have used its best efforts to
keep a Registration Statement effective during the applicable period if it
voluntarily takes any action that would result in selling holders of the
Registrable Securities covered thereby not being able to sell such Registrable
Securities during that period unless such action is required under applicable
law, PROVIDED, that the foregoing shall not apply to actions taken by the
Company in good faith and for valid business reasons, including without
limitation the acquisition or divestiture of assets, so long as the Company does
not take
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such action (other than actions contemplated by (3)(F)) more than once in any
twelve-month period and promptly thereafter complies with the requirements of
subsection (11) of this subsection (c), if applicable;
(3) notify the selling holders of Registrable
Securities and the managing underwriters, if any, promptly, and (if requested by
any such Person or entity) confirm such advice in writing, (A) when the
Prospectus or any Prospectus supplement or post-effective amendment has been
filed, and, with respect to the Registration Statement or any post-effective
amendment, when the same has become effective, (B) of any request by the
Commission for amendments or supplements to the Registration Statement or the
Prospectus or for additional information, (C) of the issuance by the Commission
of any stop order suspending the effectiveness of the Registration Statement or
the initiation of any proceedings for that purpose, (D) if at any time the
representations and warranties of the Company contemplated by subsection (14)
below cease to be true and correct in any material respect, (E) of the receipt
by the Company of any notification with respect to the suspension of the
qualification of the Registrable Securities for sale in any jurisdiction or the
initiation or threatening of any proceeding for such purpose and (F) of the
happening of any event which makes any statement of a material fact made in the
Registration Statement, the Prospectus or any document incorporated therein by
reference untrue or which requires the making of any changes in the Registration
Statement, the Prospectus or any document incorporated therein by reference in
order to make the statements of material facts contained therein not misleading;
(4) make every reasonable effort to obtain the
withdrawal of any order suspending the effectiveness of the Registration
Statement as soon as possible;
(5) if requested by the managing underwriter or
underwriters or a holder of Registrable Securities being sold in connection with
an underwritten offering, promptly incorporate in a Prospectus supplement or
post-effective amendment such information as the managing underwriters and the
holders of a majority of the Registrable Securities being sold agree should be
included therein relating to the plan of distribution with respect to such
Registrable Securities, including, without limitation, information with respect
to the number of Registrable Securities being sold to such underwriters, the
purchase price being paid therefor by such underwriters and with respect to any
other terms of the underwritten (or best efforts underwritten) offering of the
Registrable Securities to be sold in such offering; and make all required
filings of such Prospectus supplement or post-effective amendment as soon as
notified of the matters to be incorporated in such Prospectus supplement or
post-effective amendment;
(6) furnish to each selling holder of Registrable
Securities and each managing underwriter, without charge, at least one signed
copy of the Registration Statement and any amendment thereto, including
financial statements and schedules, all documents incorporated therein by
reference and all exhibits (including those incorporated by reference);
(7) deliver to each selling holder of Registrable
Securities and the underwriters, if any, without charge, as many copies of the
Prospectus (including each preliminary prospectus) and any amendment or
supplement thereto as such selling holder of
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Registrable Securities and underwriters may reasonably request; the Company
consents to the use of each Prospectus or any amendment or supplement thereto by
each of the selling holders of Registrable Securities and the underwriters, if
any, in connection with the offering and sale of the Registrable Securities
covered by such Prospectus or any amendment or supplement thereto;
(8) prior to any public offering of Registrable
Securities, register or qualify or cooperate with the selling holders of
Registrable Securities, the underwriters, if any, and their respective counsel
in connection with the registration or qualification of such Registrable
Securities for offer and sale under the securities or "blue sky" laws of such
jurisdictions as any seller or underwriter reasonably requests in writing and do
any and all other acts or things necessary or advisable to enable the
disposition in such jurisdictions of the Registrable Securities covered by the
Registration Statement; PROVIDED that the Company will not be required to
qualify generally to do business in any jurisdiction where it is not then so
qualified or to take any action that would subject it to general service of
process in any such jurisdiction where it is not then so subject;
(9) cooperate with the selling holders of Registrable
Securities and the managing underwriters, if any, to facilitate the timely
preparation and delivery of certificates representing Registrable Securities to
be sold and not bearing any restrictive legends and to be in such denominations
and registered in such names as the managing underwriters may request at least
two business days prior to any sale of Registrable Securities to the
underwriters;
(10) use its best efforts to cause the Registrable
Securities covered by the applicable Registration Statement to be registered
with or approved by such other governmental agencies or authorities as may be
necessary to enable the seller or sellers thereof or the underwriters, if any,
to consummate the disposition of such Registrable Securities;
(11) upon the occurrence of any event contemplated by
subsection (3)(F) above, prepare a supplement or post effective amendment to the
Registration Statement or the related Prospectus or any document incorporated
therein by reference or file any other required document so that, as thereafter
delivered to the purchasers of the Registrable Securities, the Prospectus will
not contain an untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein not misleading;
(12) cause all Registrable Securities covered by any
Registration Statement to be listed on each securities exchange on which similar
securities issued by the Company are then listed, or cause such Registrable
Securities to be authorized for trading on the NASDAQ National Market System if
any similar securities issued by the Company are then so authorized, if
requested by the holders of a majority of such Registrable Securities or the
managing underwriters, if any;
(13) provide a CUSIP number for all Registrable
Securities, not later than the effective date of the applicable Registration
Statement;
(14) enter into such agreements (including an
underwriting agreement) and take all such other actions in connection therewith
in order to expedite or facilitate the
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disposition of such Registrable Securities and in such connection, whether or
not an underwriting agreement is entered into and whether or not the
Registration is an underwritten Registration (A) make such representations and
warranties to the holders of such Registrable Securities and the underwriters,
if any, in form, substance and scope as are customarily made by issuers to
underwriters in primary underwritten offerings; (B) obtain opinions of counsel
to the Company and updates thereof (which counsel and opinions (in form, scope
and substance) shall be reasonably satisfactory to the managing underwriters, if
any, and the holders of a majority of the Registrable Securities being sold)
addressed to each selling holder and the underwriters, if any, covering the
matters customarily covered in opinions requested in underwritten offerings and
such other matters as may be reasonably requested by such holders and
underwriters; (C) obtain "cold comfort" letters and updates thereof from the
Company's independent certified public accountants addressed to the selling
holders of Registrable Securities and the underwriters, if any, such letters to
be in customary form and covering matters of the type customarily covered in
"cold comfort" letters by underwriters in connection with primary underwritten
offerings; (D) if an underwriting agreement is entered into, the same shall set
forth in full the indemnification provisions and procedures set forth in
subsection (f) below with respect to all parties to be indemnified pursuant to
said subsection; and (E) the Company shall deliver such documents and
certificates as may be requested by the holders of a majority of the Registrable
Securities being sold and the managing underwriters, if any, to evidence
compliance with subsection 3(F) above and with any customary conditions
contained in the underwriting agreement or other agreement entered into by the
Company. No such agreement shall contain provisions applicable to the Company
which are inconsistent with the provisions hereof. The above shall be done at
each closing under such underwriting or similar agreement or as and to the
extent required thereunder;
(15) make available for inspection by each Seller,
any underwriter participating in any disposition pursuant to such Registration,
and any attorney or accountant retained by the sellers or underwriter, all
financial and other records, pertinent corporate documents and properties of the
Company, and cause the Company's officers, directors and employees to supply all
information reasonably requested by any such Seller, underwriter, attorney or
accountant in connection with such Registration Statement; PROVIDED, that any
records, information or documents that are designated by the Company in writing
as confidential shall be kept confidential by such Persons unless disclosure of
such records, information or documents is required by court or administrative
order or any regulatory body having jurisdiction;
(16) otherwise use its reasonable best efforts to
comply with all applicable rules and regulations of the Commission, and make
generally available to its security holders, earnings statements satisfying the
provisions of Section 11(a) of the Securities Act, no later than forty-five (45)
days after the end of any twelve (12)-month period (or ninety (90) days, if such
period is a fiscal year) (A) commencing at the end of any fiscal quarter in
which Registrable Securities are sold to underwriters in a firm or best efforts
underwritten offering, or (B) if not sold to underwriters in such an offering,
beginning with the first month of the Company's first fiscal quarter commencing
after the effective date of the Registration Statement, which statements shall
cover said twelve (12)-month periods; and
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(17) promptly prior to the filing of any document
that is to be incorporated by reference into any Registration Statement or
Prospectus (after initial filing of the Registration Statement), provide copies
of such document to counsel to the selling holders of Registrable Securities and
to the managing underwriters, if any, and make the Company's representatives
available for discussion of such document.
The Company may require each seller of Registrable Securities as to
which any Registration is being effected to furnish to the Company such
information regarding the proposed distribution of such securities as the
Company may from time to time reasonably request in writing.
Each holder of Registrable Securities agrees by acquisition of such
Registrable Securities that, upon receipt of any notice from the Company of the
happening of any event of the kind described in subsection (3)(F) of this
subsection (c), such holder will forthwith discontinue disposition of
Registrable Securities pursuant to the Registration Statement until such
holder's receipt of copies of the supplemented or amended Prospectus as
contemplated by subsection (11) of this subsection (c), or until it is advised
in writing (the "Advice") by the Company that the use of the Prospectus may be
resumed, and has received copies of any additional or supplemental filings that
are incorporated by reference in the Prospectus, and, if so directed by the
Company, such holder will deliver to the Company (at the Company's expense) all
copies, other than permanent file copies then in such holder's possession, of
the Prospectus covering such Registrable Securities current at the time of
receipt of such notice. In the event the Company shall give any such notice, the
time periods referred to in subsection (2) of this subsection (c) shall be
extended by the number of days during the period from and including the date of
the giving of such notice to and including the date when each seller of
Registrable Securities covered by such Registration Statement shall have
received the copies of the supplemented or amended prospectus contemplated by
subsection (11) of this subsection (c) or the Advice.
(d) RESTRICTIONS ON PUBLIC SALE.
(1) PUBLIC SALE BY HOLDERS OF REGISTRABLE SECURITIES.
To the extent not inconsistent with applicable law, each Stockholder, if
requested by the managing underwriter or underwriters for any such Registration,
agrees not to effect any public sale or distribution of Company Securities
including a sale pursuant to Rule 144 (or any similar provision then in force)
under the Securities Act, during the 15 business days prior to, and during the
ninety (90)-day period (or such shorter period as may be agreed to by such
holders) beginning on, the effective date of the applicable Registration
Statement (except as part of such Registration).
(2) PUBLIC SALE BY THE COMPANY AND OTHERS. If
requested by the managing underwriter or underwriters for any underwritten
Registration, (i) the Company will not effect any public sale or distribution of
Company Securities during the fifteen (15) business days prior to, and during
the ninety (90)-day period beginning on the effective date of such Registration
and (ii) the Company will cause each holder of Company Securities purchased from
the Company at any time after the date of this Agreement (other than in a
registered public
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offering) to agree not to effect any public sale or distribution of any such
securities during such period described in clause (i) above (except as part of
such Registration, if otherwise permitted).
(e) REGISTRATION EXPENSES.
(1) All expenses incident to the Company's
performance of or compliance with this Agreement will be borne by the Company,
including, without limitation, all registration and filing fees, printing fees,
fees of transfer agents, costs of insurance and the fees and expenses of the
counsel and accountants for the Company (including the expenses of any "cold
comfort" letters and special audits required by or incident to the performance
of such Persons), all other costs and expenses of the Company incident to the
preparation, printing and filing under the Securities Act of the Registration
Statement (and all amendments and supplements thereto) and furnishing copies
thereof and of the Prospectus included therein, the costs and expenses incurred
by the Company in connection with the qualification of the Registrable
Securities under the state securities or "blue sky" laws of various
jurisdictions, the costs and expenses associated with filings required to be
made with the NASD (including, if applicable, the fees and expenses of any
"qualified independent underwriter" and its counsel as may be required by the
rules and regulations of the NASD), the costs and expenses of listing the
Registrable Securities for trading on a national securities exchange or
authorizing them for trading on NASDAQ and all other costs and expenses incurred
by the Company in connection with any Registration hereunder; PROVIDED, that,
except as otherwise provided in subsection (2) below, each Stockholder shall
bear the costs and expenses of any underwriters' commissions, brokerage fees or
transfer taxes relating to the Registrable Securities sold by such Stockholders
and the fees and expenses of any counsel, accountants or other representative
retained by Stockholder.
(2) Notwithstanding the foregoing and except as
provided below, in connection with each Registration hereunder, the Company will
reimburse the Stockholders who are holders of Registrable Securities being
registered in any Registration hereunder for (i) the reasonable fees and
disbursements of not more than one counsel, which counsel shall be chosen (x) by
the holders of a majority of the Registrable Securities to be included therein
that are held by the Demanding Group, in the case of a Demand Registration and
(y) otherwise, by the holders of a majority of all Registrable Securities to be
included therein, and (ii) the reasonable out-of-pocket expenses of the holders
of Registrable Securities in connection with such Registration, including travel
costs (if any).
(f) INDEMNIFICATION.
(1) INDEMNIFICATION BY THE COMPANY. The Company
agrees to indemnify, to the full extent permitted by law, each Stockholder, its
officers, directors, partners and agents and each Person who controls such
Stockholder (within the meaning of the Securities Act and the Securities
Exchange Act of 1934, as amended (the "Exchange Act")), against all losses,
claims, damages, liabilities and expenses, joint or several, caused by any
untrue or alleged untrue statement of a material fact contained in any
Registration Statement, Prospectus or preliminary Prospectus, or any amendment
or supplement thereto, or any omission or alleged
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omission to state therein a material fact necessary to make the statements
therein (in the case of a Prospectus or any preliminary Prospectus, or any
amendment or supplement thereto, in light of the circumstances under which they
were made) not misleading, except insofar as the same are caused by or contained
in any information with respect to such Stockholder furnished in writing to the
Company by such Stockholder or its representative expressly for use therein. The
Company will also indemnify underwriters, selling brokers, dealer managers and
similar securities industry professionals participating in the distribution,
their officers and directors and each Person who controls such Persons (within
the meaning of the Securities Act) to the same extent as provided above with
respect to the indemnification of the holders of Registrable Securities;
PROVIDED, HOWEVER, if pursuant to an underwritten public offering of Registrable
Securities, the Company and any underwriters enter into an underwriting or
purchase agreement relating to such offering that contains provisions relating
to indemnification and contribution between the Company and such underwriters,
such provisions shall be deemed to govern indemnification and contribution as
between the Company and such underwriters. In such event, the indemnification of
the Sellers of Registrable Securities in such underwriting shall, at the
Sellers' request, be modified to conform to such terms and conditions of the
underwriting agreement.
(2) INDEMNIFICATION BY HOLDERS OF REGISTRABLE
SECURITIES. In connection with any Registration in which a Stockholder is
participating, each such Stockholder will furnish to the Company in writing such
information with respect to such Stockholder as the Company reasonably requests
for use in connection with any Registration Statement or Prospectus and agrees
to indemnify, severally and not jointly, to the full extent permitted by law,
the Company, the directors and officers of the Company signing the Registration
Statement and each Person who controls the Company (within the meaning of the
Securities Act and the Exchange Act) against any losses, claims, damages,
liabilities and expenses resulting from any untrue statement of a material fact
or any omission to state a material fact required to be stated therein or
necessary to make the statements in the Registration Statement or Prospectus or
preliminary Prospectus (in the case of the Prospectus or any preliminary
Prospectus, in light of the circumstances under which they were made) not
misleading, to the extent, but only to the extent, that such untrue statement or
omission is contained in any information with respect to such Stockholder so
furnished in writing by such Stockholder or its representative specifically for
inclusion therein; PROVIDED, HOWEVER, that the Stockholder's liability shall be
limited to the proportion of any such loss, claim, damage, liability or expense
which is equal to the proportion that the public offering price of shares sold
by such Seller under such Registration Statement bears to the total public
offering price of all securities sold thereunder, but shall in no event exceed
the net proceeds received by such Stockholder from the sale of shares pursuant
to such Registration Statement. The Company shall be entitled to receive
indemnities from underwriters, selling brokers, dealer managers and similar
securities industry professionals participating in the distribution, to the same
extent as provided above with respect to information with respect to such
Persons or entities so furnished in writing by such Persons or entities or their
representatives specifically for inclusion in any Prospectus or Registration
Statement.
(3) CONDUCT OF INDEMNIFICATION PROCEEDINGS. Any
Person or entity entitled to indemnification hereunder will (i) give prompt
written notice to the indemnifying
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party after the receipt by the indemnified party of a written notice of the
commencement of any action, suit, proceeding or investigation or threat thereof
made in writing for which such indemnified party will claim indemnification or
contribution pursuant to this Agreement; provided, however, that the failure of
any indemnified party to give notice as provided herein shall not relieve the
indemnifying party of its obligations under the preceding clauses (1) and (2),
unless and only if such failure to give notice results in the indemnifying
party's forfeiture of substantive rights or defenses and (ii) permit such
indemnifying party to participate and to the extent it desires, assume and
undertake the defense of such claim with counsel reasonably satisfactory to the
indemnified party , and, after notice from the indemnifying party to such
indemnified party of its election to assume and undertake the defense thereof,
the indemnifying party shall not be liable to such indemnified party under this
paragraph (f) for any legal expenses subsequently incurred by such indemnified
party in connection with the defense thereof other than reasonable costs of
investigation and of liaison with counsel so selected; PROVIDED, HOWEVER, that,
if the defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be reasonable defenses available to it which are different from
or additional to those available to the indemnifying party or if the interests
of the indemnified party reasonably may be deemed to conflict with the interests
of the indemnifying party, the indemnified party shall have the right to select
a separate counsel and to assume such legal defenses and otherwise to
participate in the defense of such action, with the expenses and fees of such
separate counsel and other expenses related to such participation to be
reimbursed by the indemnifying party as incurred. Whether or not such defense is
assumed by the indemnifying party, the indemnifying party will not be subject to
any liability for any settlement made without its consent (but such consent will
not be unreasonably withheld). No indemnifying party will consent to the entry
of any judgment or enter into any settlement that does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect of such claim or
litigation. An indemnifying party who is not entitled to, or elects not to,
assume the defense of a claim will not be obligated to pay the fees and expenses
of more than one counsel in any one jurisdiction for all parties indemnified by
such indemnifying party with respect to such claim, unless (i) in the reasonable
judgment of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim, (ii) the indemnifying party and such indemnified party shall have
mutually agreed to the retention of additional counsel or (iii) there may be
reasonable defenses available to the indemnified party which are different from,
or additional to those available to the other indemnified parties, in which
event the indemnifying party shall be obligated to pay the fees and expenses of
such additional counsel or counsels. Notwithstanding the foregoing, any
indemnified party shall always have the right to retain its own counsel in any
such action and the fees and disbursements of such counsel shall be at the
expense of the indemnified party except as otherwise provided above.
(4) CONTRIBUTION. If for any reason the
indemnification provided for in the preceding clauses (1) and (2) is not
available in full to an indemnified party as contemplated by the preceding
clauses (1) and (2), then the indemnifying party to the extent of such
unavailable indemnification shall contribute to the amount paid or payable by
the indemnified party as a result of such loss, claim, damage, liability or
expense in such proportion as is
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appropriate to reflect not only the relative benefits received by the
indemnified party and the indemnifying party, but also the relative fault of the
indemnified party and the indemnifying party, as well as any other relevant
equitable considerations, provided that no Stockholder shall be required to
contribute in an amount greater than the difference between the net proceeds
received by such Stockholder with respect to the sale of any Shares and all
damages paid and amounts already contributed by such Stockholder with respect to
such claims, including amounts paid for any legal or other fees or expenses
incurred by such Stockholder. No Person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who is not guilty of such fraudulent
misrepresentation. Upon the reasonable request of any Stockholder selling
Registrable Securities pursuant to a registration statement or any underwriter
of such stock, the Company shall obtain, if reasonably available, an insurance
policy covering the risks described above in this Section in an amount and with
a deductible as determined by the Company in its reasonable discretion and
naming such seller, any underwriter of such stock and any Person controlling
such seller or underwriter as beneficiaries. The costs of obtaining and
maintaining any such insurance shall be borne by the Company.
(g) RULE 144. The Company agrees that at all times after it
has filed a registration statement pursuant to the requirements of the
Securities Act relating to any class of equity securities of the Company, it
will file in a timely manner all reports required to be filed by it pursuant to
the Securities Act and the Exchange Act and will take such further action as any
holder of Registrable Securities may reasonably request in order that such
holder may effect sales of Company Securities pursuant to Rule 144. At any
reasonable time and upon request of any Stockholder, the Company will furnish
such Stockholder with a copy of the most recent annual and quarterly report of
the Company and such other information as may be necessary to enable the
Stockholder to effect sales of Company Securities pursuant to Rule 144 under the
Securities Act and will deliver to such Stockholder a written statement as to
whether it has complied with such requirements.
(h) PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No
Stockholder may participate in any underwritten Registration hereunder unless
such Stockholder (i) agrees to sell its Registrable Securities on the basis
provided in any underwriting arrangements, and (ii) accurately completes in a
timely manner and executes all questionnaires, powers of attorney, underwriting
agreements and other documents customarily required under the terms of such
underwriting arrangements, provided that the representations and warranties of
any Stockholder therein shall be limited to its title to the Registrable
Securities to be sold and other matters within its knowledge.
(i) OTHER REGISTRATION RIGHTS. The Company has not and will
not grant to any Person (including the Stockholders) any demand or piggyback
registration rights with respect to the Company Securities other than piggyback
registration rights that are not inconsistent with the terms of this Section 3.
To the extent that the Company grants to any Person registration rights with
respect to any securities of the Company having provisions more favorable to the
holders thereof than the provisions contained in this Agreement, the Company
will confer comparable rights to the holders of Registrable Securities under
this Agreement. Except as provided herein,
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the Company will not grant any registration rights that would permit any Person
or entity the right to piggyback on any Demand Registration.
(j) DEFINITION OF REGISTRABLE SECURITIES. "Registrable
Securities" means (x) any shares of Common Stock into which the Preferred Shares
shall have been converted or may be converted pursuant to the terms thereof or
(y) any shares of Common Stock purchased upon the exercise of those certain
common stock purchase warrants issued pursuant to the Note Purchase Agreement
dated as of September 8, 1998 between the Company and certain of the
Stockholders (or any warrants issued in exchange for such warrants), but with
respect to any share, only until such time as such share (i) has been
effectively registered under the Securities Act and disposed of in accordance
with the Registration Statement covering it or (ii) has been sold to the public
pursuant to Rule 144 (or any similar provision then in force) under the
Securities Act and the Legend referred to in Section 10(a) has been removed from
the certificate representing such share.
(k) AMENDMENTS AND WAIVERS. The provisions of this Section 3,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers of or consents to departures from the provisions
hereof may not be given unless approved by the Company in writing and the
Company has obtained the written consent of Stockholders holding at least 90% of
the then outstanding Registrable Securities.
Section 4. GOVERNANCE.
(a) On the date hereof, the Board of Directors of the Company
shall consist solely of the following members: Christopher McCleary, a Designee
of Siebel or the holders of the Series B Preferred Stock (as hereinafter
provided), Benjamin Diesbach, Dean Meiszer, David Poulin, Frank Adams, John
Wyant, Ray Rothrock, William Earthman, Joseph Zell and Michael C. Brooks
(collectively, the "Directors"). All Stockholders agree to vote or execute a
written consent to effect the election of such Directors to take office
immediately upon execution hereof.
(b) The Company's Board of Directors shall be composed of
eleven directors, and the Company and each Stockholder hereby agrees to take, at
any time and from time to time, all action necessary (including, without
limitation, voting the shares of Company Securities owned or controlled by such
Stockholder, calling special meetings of stockholders and executing and
delivering written consents) such that:
(A) The Board of Directors shall include at all times
a person designated by each Investor (treating Blue Chip and Miami as one
Investor, Grotech and Grotech II as one Investor, Venrock and Venrock II as one
Investor, and Massey and Massey II as one Investor), and shall, at the option of
Siebel Systems, Inc. ("Siebel"), include a person designated by Siebel.
(B) Christopher McCleary, so long as he is the Chief
Executive Officer of the Company, shall be a member of the Board of Directors.
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(C) In the event that Siebel has chosen not to
designate a member of the Board of Directors or fails to designate a replacement
for any prior designee, the holders of a majority of the Series B Preferred
Stock shall be given the right to designate a member of the Board of Directors.
(D) Three directors shall be elected annually and
shall be independent of the Company and of each of the Investors, as nominated
annually by Christopher McCleary, so long as he is the Chief Executive Officer,
subject to the consent of the holders of a majority of the outstanding Series A
Preferred Stock and the holders of 66 2/3% of the outstanding Series B Preferred
Stock, such consent not to be unreasonably withheld.
(c) The Board of Directors shall at all times have (i) an
Executive Committee, which shall have the right to exercise all powers of the
Board of Directors to the maximum extent permitted to be exercised by such
committees pursuant to the Delaware General Corporation Law, (ii) an Audit
Committee which will be responsible for reviewing the results and scope of
audits and other services provided by the Company's independent auditors, and
(iii) a Compensation Committee responsible for making recommendations concerning
salaries and incentive compensation. The Executive Committee will meet at least
monthly during the 12-month period following the date of this Agreement. The
Audit and Compensation Committees shall meet as needed but not less than twice
during the 12-month period following the date of this Agreement. Each
Stockholder hereby agrees to take, at any time and from time to time, all action
necessary (including, without limitation, voting the Company Securities owned or
controlled by such Stockholder, calling special meetings of Stockholders and
delivering written consents) such that:
(A) the Executive Committee shall consist at all
times of seven directors and shall include at all times the Chief Executive
Officer of the Company and a person designated by each Investor (treating Blue
Chip and Miami as one Investor, Grotech and Grotech II as one Investor, Venrock
and Venrock II as one Investor, and Massey and Massey II as one Investor); and
(B) the Audit Committee shall consist at all times of
at least three directors and shall include at all times a person designated by
Whitney.
(C) the Compensation Committee shall consist at all
times of at least three directors and shall include at all times a person
designated by Whitney.
(d) No director or member of a Committee may be removed
except by the holders of a majority of the Company Securities entitled to
appoint such director or member in accordance with Section 4(b) or Section 4(c),
respectively, and each Stockholder hereby agrees to take all action necessary
(including, without limitation, voting the shares of the Company's voting
securities owned or controlled by such Stockholder, calling special meetings of
stockholders and executing and delivering written consents) for the purpose of
accomplishing the foregoing. If a vacancy on the Board of Directors or a
Committee occurs by reason of the death, removal, resignation, retirement or
election not to serve of a designee, the remaining directors and the Company
shall cause the vacancy thereby created to be filled by a new designee as soon
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as possible, who is designated in the manner and by the persons specified in
Section 4(b) and the Company and each Stockholder hereby agrees to take, at any
time and from time to time, all actions necessary to accomplish the same;
PROVIDED, HOWEVER, that if any group fails to designate a representative in
accordance with Section 4(b) above for a period of thirty (30) consecutive days,
then such vacancy shall be filled by a vote of all of the stockholders of the
Company until such time as the board member is designated in accordance with
Section 4(b). Each of Waller Sutton Media Partners, L.P. ("Waller Sutton"), and
Whitney, if it has not designated a member of the Board of Directors pursuant to
Section 4(b)(A), shall have the right to designate one person to act as a
non-voting observer (each an "Observer"). Each Observer shall receive (at the
same time as the directors) copies of all notices of meetings of directors,
written consents of directors circulated for signature and other materials and
documents distributed or provided to the Directors and shall have the right to
attend all meetings of the board of directors (whether held in person or by
conference telephone call).
(e) Members of the Board of Directors and Observers shall be
entitled to reimbursement of expenses pursuant to policies to be adopted by the
Board of Directors. The Company shall obtain and maintain at all times during
which this Agreement remains in effect, at the cost and expense of the Company,
director and officer liability insurance policies covering all of the officers
and members of the Board of Directors in the amount of at least $3,000,000 upon
terms and pricing customary for a company of its size and operating industry;
provided that the Company is not obligated to purchase such insurance in the
event these such terms and pricing are not commercially available. Such director
liability insurance policies shall be provided by a reputable nationally
recognized insurance carrier and shall provide coverage in such amounts and on
such terms as may be reasonably acceptable to each member of the Board of
Directors.
Section 5. PREEMPTIVE RIGHTS.
If the Company proposes to issue or sell any Common
Stock, or any other class of capital stock, or any warrants, options or rights
to acquire, convertible into or exchangeable for any shares of capital stock of
the Company, or any security having a direct or indirect equity participation in
the Company (for purposes hereof, "New Securities"), other than (i) in a public
offering registered under the Securities Act, (ii) pursuant to a stock split,
dividend or other recapitalization, or the issuance of Common Stock upon the
conversion of the Series A Preferred Stock or Series B Preferred Stock, (iii)
pursuant to the Employee Stock Option Plan or in connection with the exercise of
currently outstanding warrants (or warrants issued in exchange therefor with
like terms for a like number of shares of Common Stock but with an exercise
price greater than the exercise price of the original warrant) or currently
outstanding options or options received pursuant to the Employee Stock Option
Plan or (iv) with the consent of holders of at least 66 2/3% of the outstanding
Series A Preferred Stock and holders of at least 66 2/3% of the outstanding
Series B Preferred Stock, then the Company shall deliver written notice thereof
to each of the Stockholders setting forth the number, terms and purchase
consideration (or if such purchase consideration is not expressed in cash, the
fair market value cash equivalent thereof determined in good faith by the Board
of Directors of the Company) of the New Securities which the Company proposes to
issue. Each such Stockholder shall thereupon have the right, unless otherwise
agreed in writing by such Stockholder in advance, to elect to purchase on the
same
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terms and conditions (including consideration or the cash equivalent thereof) as
those offered to any third party that number of New Securities proposed to be
issued as would maintain such Stockholder's relative proportional equity
interest in the Company. Such Stockholder may make such election by written
notice to the Company within twenty (20) days of receipt of notice of any
proposed issuance of New Securities. If a Stockholder does not elect to purchase
its pro rata portion of New Securities within twenty (20) days of the date of
the foregoing notice (the "Preemptive Notice Period"), this pro rata purchase
right shall terminate with respect to the New Securities described in the
written notice delivered to that party (but not with respect to any future
proposed sales of New Securities by the Company), and the Company may, in its
sole discretion, sell to third parties within ninety (90) days after such
Stockholder's receipt of the notice of the proposed issuance of New Securities
any or all of the New Securities described in such written notice with respect
to which the purchase right was not exercised, but only on the terms and
conditions set forth in such written notice to the Stockholders. Subject to the
Company's rights under the preceding sentence, in which case any purchases by
existing Stockholders would be made at the closing and upon the terms of the
sale of New Securities to the third party permitted by the preceding sentence,
the closing of the purchase of the New Securities by the Stockholders shall take
place at the principal office of the Company on the thirtieth (30th) business
day after the expiration of the Preemptive Notice Period (or after the receipt
of any required governmental consents or approvals). At such closing, the
Stockholders desiring to purchase New Securities shall deliver a certified check
or checks in the appropriate amount to the Company against delivery of
certificates representing the New Securities so purchased. The Company shall not
sell any New Securities to any Person unless such Person agrees, in form and
substance reasonably satisfactory to the Stockholders, to be bound by the terms
hereof as a Stockholder.
Section 6. INTENTIONALLY OMITTED.
Section 7. ACCESS AND REPORTS, CONFIDENTIALITY.
(a) As promptly as possible after the end of each month,
quarter and year, but not later than twenty (20) days after each month-end and
quarter-end and ninety (90) days after each year-end, the Company shall deliver
to each of the Stockholders consolidated financial statements (consisting of a
balance sheet and statements of income and cash flows and notes thereto) for
such period prepared in accordance with generally accepted United States
accounting principles, provided, however, that the monthly and quarterly
financial statements shall not be required to have footnotes and may be subject
to normal year-end adjustments, none of which will be materially adverse. Such
financial statements shall include in comparative form any available figures as
projected or planned and figures for the corresponding periods of the previous
fiscal year, all in reasonable detail. The annual financial statements shall be
accompanied by an audit opinion thereon of an independent certified public
accounting firm of national reputation acceptable to the Investors. The
quarterly and annual financial statements shall be accompanied by management's
narrative description and analysis in reasonable detail of the Company's results
of operations and financial condition. All financial statements shall be
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accompanied by a certificate of the chief financial officer, controller or chief
executive officer of the Company to the effect that they are true and correct in
all material respects and accurately reflect the consolidated financial
condition of the Company and its consolidated results of operations and cash
flows at the date and for the periods indicated.
(b) The Company shall promptly provide each of the Purchasers
with such other financial and business information as such Purchaser may
reasonably request at any time and from time to time.
(c) The Company shall, upon receipt of reasonable notice,
permit each of the Investors, Waller Sutton and Arbor and any of their
respective representatives to visit and inspect any of the properties or
facilities of the Company or any subsidiary during normal business hours and to
review their respective books and records (and to make extracts therefrom) and
to discuss the Company's affairs, finances and accounts with its officers,
employees and independent public accountants. Nothing provided herein shall be
deemed in any way to limit the rights of the Stockholders purchasing Series B
Preferred Stock pursuant to Article 7 of the Stock Purchase Agreement
Section 8. OTHER AFFIRMATIVE COVENANTS. Unless compliance is waived in
writing in advance by each of the Purchasers that has designated a member of the
Board of Directors or Observer pursuant to Section 4 hereof (except in the case
of Section 8(g), compliance with which shall not be subject to waiver), the
Company shall, and shall cause each of its subsidiaries to:
(a) prepare an annual fiscal year operating budget, which
shall include monthly capital and operating expense budgets, cash flow
statements, capital expenditure budgets, profit and loss projections and
employee hiring projections, and submit it for approval to the Executive
Committee of its Board of Directors at least fifteen (15) days prior to the
commencement of the year covered thereby (each such budget, as approved by such
Executive Committee, a "Budget");
(b) pay when due all taxes and file any tax returns when due;
(c) comply with all laws, rules and regulations applicable to
it;
(d) maintain all of its properties in good working order,
ordinary wear and tear excluded;
(e) maintain its corporate existence;
(f) maintain with credit-worthy insurers insurance in such
amounts and of such types as are maintained by prudent firms of similar size
engaged in businesses similar to the Business, and, subject to the exceptions
set forth in Section 4(e) above, obtain directors and officers liability
insurance with a limit of coverage of at least $3,000,000 as set forth above in
Section 4(e); and
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<PAGE>
(g) provide each of the Purchasers that has designated a
member of the Board of Directors or Observer pursuant to Section 4 hereof with
the information provided in Section 8(a) when submitted for approval to the
Board of Directors of the Company and prompt written notice of the occurrence of
(i) any default or breach by the Company or any subsidiary or any shareholder of
any of its representations, warranties or covenants under the Stock Purchase
Agreement or this Agreement, (ii) any default under this Agreement or violation
of the Company's Certificate of Incorporation or Bylaws, (iii) any event which,
with the passage of time or notice, would result in such a default, (iv) any
material adverse change in the Condition of the Company or (v) any event which
is reasonably likely to cause any of the matters described in clause (iv) above.
Section 9. TERMINATION AND AMENDMENT.
The provisions of Sections 2, 4, 5, 7 and 8 of this Agreement shall
terminate upon the earlier of (i) the consummation of an underwritten public
offering of Common Stock representing not less than $300 million pre-money
valuation of the Company's fully-diluted common equity, resulting in net
proceeds to the Company of not less than $50 million, or (ii) the consummation
of any merger of the Company with and into a company whose common stock is
publicly traded on a national securities exchange or NASDAQ (each an
"Exchange"), in which at least 90% of the merger consideration is composed of
registered securities listed on an Exchange and/or cash, and where as a result
of such merger the holders of the Company's equity securities immediately prior
to the merger own equity securities of the surviving publicly traded company
with less than 50% of the voting power of its outstanding securities;
notwithstanding the foregoing, so long as Whitney holds at least 75% of the
Company Securities held by it on the date hereof, the right of Whitney to
designate a member of the Board of Directors shall survive any termination of
Section 4 until the date that is two years from the date hereof. The provisions
of this Agreement may be modified or amended by the written agreement of the
Stockholders; PROVIDED, HOWEVER, that amendments of or modifications to Section
3 will be subject to the requirements of Section 3(k). The provisions of this
Agreement shall terminate as to any Stockholder at such time as such Stockholder
no longer holds any capital stock of the Company.
Section 10. MISCELLANEOUS.
(a) LEGEND. The certificates representing the capital stock of
the Company held by each of the Stockholders shall bear the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE
SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE
SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION TO THE
REGISTRATION REQUIREMENTS OF SUCH ACT OR SUCH LAWS. THE
SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN RESTRICTIONS SET FORTH
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IN THE AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT, DATED
DECEMBER 31, 1998. A COPY OF SUCH AGREEMENT MAY BE OBTAINED
FROM THE COMPANY UPON REQUEST."
If any capital stock of the Company becomes eligible for sale pursuant to Rule
144(k) promulgated under the Securities Act, the Company shall, upon the request
of any holder of such capital stock, remove the legend set forth in this Section
10(a) from the certificates evidencing the shares of such capital sock held by
such holder. In addition, (i) in connection with any Transfer of shares of any
capital stock of the Company pursuant to any public offering registered under
the Securities Act or pursuant to Rule 144 or Rule 144A (or any similar rule or
rules then in effect promulgated under the Securities Act) if such rule is
available or (ii) if the holder of any shares of capital stock of the Company
delivers to the Company an opinion of counsel reasonably acceptable to the
Company that no subsequent Transfer of such shares shall require registration
under the Securities Act, the Company shall promptly upon such Transfer deliver
new certificates for such shares which do not bear the legend set forth in this
Section 10(a).
(b) SUCCESSORS, ASSIGNS AND TRANSFEREES. This Agreement shall
be binding upon and inure to the benefit of the parties hereto, their respective
legal representatives, heirs, legatees, successors and permitted assigns
(including any party to which any Stockholder has Transferred Shares if such
party is required under Section 2(a) to become bound hereby). The Company
covenants and agrees that it will not issue Preferred Shares to any Person
unless such Person, prior to such issuance, agrees in writing to be bound by
this Agreement, as amended or modified prior to the date of such issuance, to
the same extent and in the same manner as the other parties hereto. Each such
supplementary agreement shall become effective upon its execution by the Company
and such Person acquiring such shares, and it shall not require the signatures
or the consent of any other party hereto. Upon such execution such Person shall
be bound by all the restrictions placed on the Stockholders by this Agreement
and all actions taken by the Stockholders and the Company pursuant to this
Agreement prior to the execution of such supplementary agreement, shall be
subject to any additional restrictions set forth in such supplementary agreement
and shall enjoy only such rights as are specifically set forth in such
supplementary agreement. Notwithstanding anything to the contrary set forth
herein, shares sold by a Stock holder to the public pursuant to an effective
Registration Statement shall no longer be subject to any of the provisions of
this Agreement.
(c) SPECIFIC PERFORMANCE, ETC. The Company and each
Stockholder, in addition to being entitled to exercise all rights provided
herein, in the Company's Certificate of Incorporation or granted by law,
including recovery of damages, will be entitled to specific performance of its
rights under this Agreement, without the requirement of bond. The Company agrees
that monetary damages would not be adequate compensation for any loss incurred
by reason of a breach by it of the provisions of this Agreement and hereby
agrees to waive the defense in any action for specific performance that a remedy
at law would be adequate.
(d) GOVERNING LAW. As to matters of corporate law, this
Agreement shall be governed by and construed in accordance with the Delaware
General Corporation Law. As to all
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other matters, this Agreement shall be governed by and construed in accordance
with the internal laws of the State of New York.
(e) INTERPRETATION. The headings of the sections contained in
this Agreement are solely for the purpose of reference, are not part of the
agreement of the parties and shall not affect the meaning or interpretation of
this Agreement.
(f) NOTICES. Any notice or other communication required or
permitted hereunder shall be in writing and shall be delivered personally,
telegraphed, telexed, or sent by facsimile transmission or sent by certified,
registered or express mail, postage prepaid. Any such notice shall be deemed
given when so delivered personally, telegraphed, telexed or sent by facsimile
transmission or, if mailed, three (3) business days after the date of deposit in
the United States mail, by certified mail return receipt requested, as follows:
(i) If to the Company to:
USinternetworking, Inc.
One USi Plaza
175 Admiral Cochrane Drive
Suite 400
Annapolis, MD 21401
Attention: Christopher R. McCleary
with a copy to:
Latham & Watkins
1001 Pennsylvania Avenue, N.W.
Suite 1300
Washington, D.C. 20004-2505
Attention: James F. Rogers, Esq.
(ii) If to the Stockholders, at the address set forth on
Exhibit A hereto.
(g) INSPECTION AND COMPLIANCE WITH LAW. Copies of this
Agreement will be available for inspection or copying by any Stockholder at the
offices of the Company through the Secretary of the Company.
(h) AMENDMENTS AND WAIVERS. The provisions of this Agreement,
including the provisions of this paragraph (h) but excluding the provisions of
Section 3(k), may not be amended, modified or supplemented, and waivers of or
consents to departures from the provisions hereof may not be given, except by a
written instrument executed by all of the parties hereto. No action taken
pursuant to this Agreement, including, without limitation, any investigation by
or on behalf of any party, shall be deemed to constitute a waiver by the party
taking such action. The waiver by any party hereto of a breach of any provision
of this
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<PAGE>
Agreement shall not operate or be construed as waiver of any preceding or
succeeding breach and no failure by any party to exercise any right or privilege
hereunder shall be deemed a waiver of such party's rights or privileges
hereunder or shall be deemed a waiver of such party's rights to exercise the
same at any subsequent time or times hereunder.
(i) TRANSFERS VOID. Any Transfer of any security of the
Company in violation of this Agreement shall be null and void and the Company
covenants and agrees that it will not register or otherwise recognize a Transfer
(whether for the purposes of shareholder voting or in connection with the
distribution of dividends or other corporate assets) of any securities which it
has reason to believe was effected in violation of this Agreement.
(j) COUNTERPARTS. This Agreement may be executed in one or
more counterparts, by the original parties hereto and any successor in interest,
each of which shall be deemed to be an original and all of which together shall
be deemed to constitute one and the same agreement.
(k) ATTORNEYS' FEES. In any action or proceeding brought to
enforce any provision of this Agreement, or where any provision hereof is
validly asserted as a defense, the successful party shall be entitled to recover
reasonable attorneys' fees in addition to any other available remedy.
(l) SEVERABILITY. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstances, is
held invalid, illegal or unenforceable in any respect for any reason, the
validity, legality and enforceability of any such provision in every other
respect and of the remaining provisions contained herein shall not be in any way
impaired thereby.
(m) CHANGES IN COMMON STOCK. If, and as often as, there are
any changes in the Common Stock by way of stock split, stock dividend,
combination or reclassification, or through merger, consolidation,
reorganization or recapitalization, or by any other means, appropriate
adjustment shall be made in the provisions hereof, as may be required, so that
the rights and privileges granted hereby shall continue with respect to the
Common Stock as so changed.
(n) REPRESENTATIONS AND WARRANTIES OF EACH PARTY HERETO. Each
party to this Agreement severally but not jointly represents and warrants as to
itself only to each of the other parties hereto as follows (which
representations and warranties shall survive the execution and delivery of this
Agreement):
(1) The execution, delivery and performance of this
Agreement by such party have been duly authorized by all requisite corporate,
partnership or other action and will not violate any provision of law, any order
of any court or other agency of government, the constituent or governing
documents of such party, or any provision of any indenture, agreement or other
instrument to which it or any of its properties or assets is bound, or conflict
with, result in a breach of or constitute (with due notice or lapse of time or
both) a default under any such indenture, agreement or other instrument, or
result in the creation or imposition of any lien,
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<PAGE>
charge or encumbrance of any nature whatsoever upon any of the properties or
assets of the party.
(2) This Agreement has been duly executed and
delivered by such party and constitutes the legal, valid and binding obligation
of such party, enforceable in accordance with its terms.
(o) ENTIRE AGREEMENT. This Agreement together with the Stock
Purchase Agreement constitutes the entire agreement among the undersigned with
respect to matters or understandings involving the ownership, control or
disposition of their Company Securities and supersedes any and all prior
agreements or understandings, oral or written, among any or all of the
undersigned relating to such ownership, control or disposition.
(p) SIGNATURES; COUNTERPARTS. Telefacsimile transmissions of
any executed original documents and/or retransmission of any executed
telefacsimile transmissions shall be deemed to be the same as the delivery of an
executed original. At the request of any party hereto, the other parties hereto
shall confirm telefacsimile transmissions by executing duplicate original
documents and delivering the same to the requesting party or parties.
(q) REPRESENTATION OF THE COMPANY. The Company hereby
represents and warrants (i) that the Company Securities held of record by the
Stockholders represent 100% of the outstanding shares of Common Stock of the
Company calculated on a fully-diluted basis and (ii) the Company is not party to
any Agreement with any Stockholder granting such Stockholder any approval or
consent rights over actions by the Company other than this Agreement or as
provided in the Amended and Restated Certificate of Incorporation.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amended and Restated
Stockholders' Agreement as of the date first above written.
USINTERNETWORKING, INC.
a Delaware corporation
By:
-------------------------------------
Christopher R. McCleary, President
BLUE CHIP CAPITAL FUND II LIMITED
PARTNERSHIP
By: BLUE CHIP VENTURE COMPANY, LTD.
Its General Partner
By:
------------------------------------
John H. Wyant
Manager
MIAMI VALLEY VENTURE FUND L.P.
By: BLUE CHIP VENTURE COMPANY OF
DAYTON, LTD.
Its Special Limited Partner
By:
------------------------------------
John H. Wyant
Manager
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<PAGE>
GROTECH PARTNERS IV L.P.
By: GROTECH CAPITAL GROUP IV, LLC
Its General Partner
By:
------------------------------------
Name:
Title:
GROTECH PARTNERS V L.P.
By: GROTECH CAPITAL GROUP V, LLC
Its General Partner
By:
------------------------------------
Name:
Title:
SOUTHERN VENTURE FUND SBIC, L.P.
By: SVF SBIC, L.P.
Its General Partner
By:
------------------------------------
Partner
By:
------------------------------------
Partner
SOUTHERN VENTURE FUND II, L.P.
By:
-------------------------------------
General Partner
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<PAGE>
VENROCK ASSOCIATES
By:
------------------------------------
General Partner
VENROCK ASSOCIATES II, L.P.
By:
------------------------------------
General Partner
USI PARTNERS, LTD.
By:
------------------------------------
US West Communications, Inc.
By:
------------------------------------
----------------------------------------
Christopher R. McCleary
----------------------------------------
Steve McManus
----------------------------------------
Chris M. Poelma
----------------------------------------
Andrew A. Stern
----------------------------------------
Richard C. Albright
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<PAGE>
Bruce H. Brandaleone
By: ACCOUNT MANAGEMENT CORPORATION, poa
By:
-------------------------------------
Christopher de Roetth
By: ACCOUNT MANAGEMENT CORPORATION, poa
By:
-------------------------------------
Elisabeth de Roetth
By: ACCOUNT MANAGEMENT CORPORATION, poa
By:
-------------------------------------
----------------------------------------
Peter de Roetth
Nicholas DeWolf
By: ACCOUNT MANAGEMENT CORPORATION, poa
By:
-------------------------------------
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<PAGE>
Christopher Egan
By: ACCOUNT MANAGEMENT CORPORATION, poa
By:
-------------------------------------
Michael J. Egan
By: ACCOUNT MANAGEMENT CORPORATION, poa
By:
-------------------------------------
Richard J. Egan
By: ACCOUNT MANAGEMENT CORPORATION, poa
By:
-------------------------------------
Richard J. and Maureen E. Egan
Grandchildren's Trust
By: ACCOUNT MANAGEMENT CORPORATION, poa
By:
-------------------------------------
Donald A. Foss
By: ACCOUNT MANAGEMENT CORPORATION, poa
By:
-------------------------------------
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David Friend
By: ACCOUNT MANAGEMENT CORPORATION, poa
By:
-------------------------------------
Roger G. Marino
By: ACCOUNT MANAGEMENT CORPORATION, poa
By:
-------------------------------------
William G. Miller
By: ACCOUNT MANAGEMENT CORPORATION, poa
By:
-------------------------------------
James K. Schuler
By: ACCOUNT MANAGEMENT CORPORATION, poa
By:
-------------------------------------
Carolyn H. Walter
By: ACCOUNT MANAGEMENT CORPORATION, poa
By:
-------------------------------------
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<PAGE>
Jane E. Westervelt
By: ACCOUNT MANAGEMENT CORPORATION, poa
By:
-------------------------------------
Chris Horgen
HAGC Partners
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
J. H. WHITNEY III, L.P.
By: J. H. WHITNEY EQUITY PARTNERS III,
LLC,
----------------------------------
Its General Partner
By:
-------------------------------------
Name:
Title: A Managing Member
SIEBEL SYSTEMS, INC.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
WALLER-SUTTON MEDIA PARTNERS, L.P.
By:
-------------------------------------
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<PAGE>
ARBOR VENTURE PARTNERS, L.L.C.
By:
-------------------------------------
SOUTHEASTERN TECHNOLOGY FUND, L.P.
By:
-------------------------------------
PNC BANK, N.A., TRUSTEE
By:
-------------------------------------
Name:
Title:
PNC BANK, N.A., CUSTODIAN
By:
-------------------------------------
Name:
Title:
AEH PROFIT SHARING TRUST
By:
-------------------------------------
Name:
Title:
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<PAGE>
WHITNEY STRATEGIC PARTNERS
III, L.P.
By: J. H. Whitney Equity Partners III,
LLC,
Its General Partner
By:
--------------------------------------
Name:
A Managing Member
CASTELLINI MANAGEMENT COMPANY
An Ohio General Partnership
By:
-------------------------------------
General Partner
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<PAGE>
EXHIBIT A
STOCKHOLDERS
Blue Chip Capital Fund II Limited Partnership, an Ohio limited partnership
("Blue Chip")
Miami Valley Venture Fund L.P., an Ohio limited partnership ("Miami")
Grotech Partners IV L.P., a Delaware limited partnership ("Grotech")
Grotech Partners V L.P., a Delaware limited partnership ("Grotech II")
Southern Venture Fund SBIC, L.P., a Delaware limited partnership ("Massey")
Southern Venture Fund II, L.P., a Delaware Limited Partnership ("Massey II")
Venrock Associates, a New York limited partnership ("Venrock")
Venrock Associates II, L.P., a New York limited partnership ("Venrock II")
USi Partners, Ltd., an Ohio limited liability company ("USi Partners")
US WEST Communications, Inc., a Colorado corporation ("US West")
HAGC Partners
Richard C. Albright
Bruce H. Brandaleone
Christopher de Roetth
Elisabeth de Roetth
Peter de Roetth
Nicholas DeWolf
Christopher Egan
Michael J. Egan
Richard J. Egan
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<PAGE>
Richard J. and Maureen E. Egan Grandchildren's Trust
Donald A. Foss
David Friend
Roger M. Marino
William G. Miller
James K. Schuler
Carolyn H. Walter
Jane E. Westervelt
Chris Horgen
J.H. Whitney III, L.P. ("J.H. Whitney")
Whitney Strategic Partners III, L.P. (together with J.H. Whitney, collectively,
"Whitney")
Waller Sutton Media Partners, L.P. ("Waller Sutton")
Siebel Systems, Inc.
Arbor Venture Partners, L.L.C. ("Arbor")
Southeastern Technology Fund, L.P.
PNC Bank, N.A., Trustee
PNC Bank, N.A., Custodian
AEH Profit Sharing Trust
Christopher R. McCleary
Stephen E. McManus
Castellini Management Company
Andrew A. Stern
Chris M. Poelma
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<PAGE>
EXHIBIT B
INVESTORS
Blue Chip
Miami
Grotech
Grotech II
Massey
Massey II
Venrock
Venrock II
US West
Whitney
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<PAGE>
EXHIBIT C
PURCHASERS
Blue Chip
Miami
Grotech
Grotech II
Massey
Massey II
Venrock
Venrock II
USi Partners
US West
HAGC Partners
Richard C. Albright
Bruce H. Brandaleone
Christopher de Roetth
Elisabeth de Roetth
Peter de Roetth
Nicholas DeWolf
Christopher Egan
Michael J. Egan
Richard J. Egan
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<PAGE>
Richard J. and Maureen E. Egan Grandchildren's Trust
Donald A. Foss
David Friend
Roger M. Marino
William G. Miller
James K. Schuler
Carolyn H. Walter
Jane E. Westervelt
Chris Horgen
Christopher R. McCleary (but only with respect to the Preferred Shares held by
him)
Whitney
Waller Sutton
Siebel Systems, Inc.
Arbor Venture Partners, L.L.C.
Southeastern Technology Fund, L.P.
PNC Bank, N.A., Trustee
PNC Bank, N.A., Custodian
AEH Profit Sharing Trust
Castellini Management Company
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<PAGE>
Exhibit 10.12
EMPLOYMENT AGREEMENT
THIS AGREEMENT (the "Agreement") is executed this 29 day of May,
1998, by and between USinternetworking, Inc., a Delaware corporation ("USi") and
Christopher R. McCleary ("Executive").
WITNESSETH:
WHEREAS, USi is engaged in the development of computing and
communications services for commercial customers;
WHEREAS, Executive is the founded USi in January 1998, provided
early stage financing and waived compensation through April 1, 1998;
WHEREAS, USi desires to employ Executive and Executive desires to
be employed by USi in such capacity and under such terms and conditions as
hereinafter set forth;
NOW THEREFORE, in consideration of the mutual covenants and
promises made by the parties and intending to be legally bound, the parties
agree as follows:
1. TERM. USi agrees to employ Executive, and Executive hereby accepts such
employment, on the terms and conditions set forth herein, for a period of three
(3) years. The terms and conditions effective as of and commencing on January 1,
1998 (the "Effective Date") and terminating on December 31, 2001 (the
"Termination Date"), unless earlier terminated in accordance with this
Agreement, with (i) the period from January 1, 1998 to December 31, 1998,
constituting the first contract year (the "First Contract Year"); (ii) the
period from January 1, 1999 to December 31, 1999, constituting the second
contract year (the "Second Contract Year"); and the period from January 1, 2000
to December 31, 2000, constituting the third contract year (the "Third Contract
Year", with the First Contract Year, Second Contract Year and Third Contract
Year being referred to collectively herein as the "Contract Years" or each a
"Contract Year").
2. EMPLOYMENT AND DUTIES.
(a) Executive has been duly elected chairman of the USi Board of
Directors, chief executive officer, director, and shall serve as, and have the
title of "Chairman and Chief Executive Officer". Executive shall have such
duties that are commensurate and consistent with those of board of director
chairmen and chief executive officers in the Internet industry, subject to the
authority and direction of the Board of Directors of USi. Executive shall serve
as chairman of any executive or operating committee if formed by USi or the
board of directors.
(b) Executive shall devote all skills solely and exclusively to
the business interests and affairs of USi. Executive shall not be a partner,
officer, director, stockholder, advisor, investor, creditor, or employee of any
business competitive with USi's business without the written consent of USi,
which consent may be withheld in USi's sole discretion, provided, however, that
nothing contained herein shall be deemed to prevent Executive from investing his
personal funds in the capital stock or other securities of any corporation whose
stock or securities are publicly owned or are regularly traded on any public
exchange, provided he does not own more than two percent (2%) thereof.
Page 1 of 8
<PAGE>
(c) Executive acknowledges and agrees that Executive owes a
fiduciary duty of loyalty, fidelity, and allegiance to act at all times in the
best interests of USi and to do no act which would knowingly injure the
business, interests, or reputation of USi or, to the best of his knowledge, any
of its subsidiaries, affiliates or owners. In keeping with these duties,
Executive shall make full disclosure to USi of all business opportunities
pertaining to USi's business and shall not appropriate for Executive's own
benefit business opportunities concerning the subject matter of the fiduciary
relationship.
(d) Executive shall at all times comply with (i) all material
applicable laws, rules and regulations related to Executive's responsibilities
assumed hereunder and known to Executive, and (ii) all material written
corporate and business policies and procedures of USi whether generally
applicable to all of USi's employees or made specifically applicable to
Executive as advised in advance by USi to Executive in writing but only to the
extent such policies and procedures are not inconsistent with the other
provisions of this Agreement.
(e) Executive shall not, without the prior written approval of
USi, which approval may withhold in its sole discretion, receive compensation or
obtain any direct or indirect financial benefit for services rendered to any
Person other than USi while employed by USi hereunder. As used herein, the term
"Person" shall include all natural persons, corporations, business trusts,
associations, companies, partnerships, joint ventures and other entities and
governments and agencies and political subdivisions.
(f) Executive shall notify USi within twenty-four (24) hours of
any solicitation of or discussion with Executive for employment, including any
oral or written contract, offer or inquiry in which a position of employment,
consulting arrangement or affiliation is discussed. During the term of this
Agreement, Executive will neither enter into nor engage in negotiations or
discussions for any employment, consulting or affiliation with or for any
Internet company or a company in any business competitive with USi's business.
3. COMPENSATION.
(a) As compensation for Executive's services, USi hereby agrees to pay
Executive, and Executive agrees to accept, a base salary equal to $175,000 per
year (the "Base Salary") for the First Contract Year. In January 1999, the
Compensation Committee shall consult with an independent compensation consultant
and shall increase the Base Salary to a level consistent with the salary levels
of other executives with similar responsibilities (Adjusted Base Salary). The
Adjusted Base Salary shall become effective January 1, 1999 and a similar review
shall occur in January 2000 and January 2001.
(b) Executive shall be eligible to receive a bonus for each Contract
Year if Executive meets or exceeds certain management objectives (the "Bonus
Objectives") as determined by the Compensation Committee of the Board of
Directors in accordance with the following provisions:
(i) If Executive meets or exceeds the Bonus Objectives in
the First Contract Year, then Executive may be granted a performance bonus at
the discretion of and as determined by the Compensation Committee of the Board
of Directors in January 1999;
Page 2 of 8
<PAGE>
(ii) If Executive meets or exceeds the Bonus Objectives in
the Second Contract Year, then Executive shall be entitled to receive a bonus of
$250,000 or such greater amount as may be determined by the Compensation
Committee of the Board of Directors in January 2000; and
(iii) If Executive meets or exceeds the Bonus Objectives in
the Third Contract Year, then Executive shall be entitled to receive a bonus of
$500,000 or such greater amount as may be determined by the Compensation
Committee of the Board of Directors in January 2001.
4. BENEFITS.
(a) Unless otherwise specified in this Agreement, Executive shall
be entitled to medical, dental and life insurance, and other such benefits
provided by USi, pursuant to its general employment policies. Said benefits may
be changed from time-to-time in USi's sole business discretion.
(b) Executive shall be entitled to fifteen (15) paid vacation
days per year. Unless USi consents in writing, Executive's vacation time shall
not be carried over from one contract year to another and Executive shall not be
compensated for any unused vacation time. Executive shall also received any
regular company holidays.
(c) Executive will be provided a company auto including all
operating expenses.
5. TERMINATION.
(a) USi may terminate Executive's employment for cause if
Executive is in breach of any of the terms and conditions of this Agreement.
Said termination for cause shall be preceded by a majority of the members of the
Compensation Committee or a majority of the members of the Executive Committee
notifying Executive in writing of the alleged breach and allowing a thirty day
period for the Executive to remedy said breach. During the thirty day remedy
period, a special session of Board of Directors will be convened to consider the
breach. In the event the Board of Directors, after considering the alleged
breach and rebuttal by Executive, vote with a 2/3 majority for cause, the
Executive will be considered terminated for cause.
(b) If USi completes a termination of the Executive's employment
for cause, Executive shall not be entitled to receive any compensation other
than his Base Salary earned but not yet paid as of the date of termination
PROVIDED, HOWEVER, that if Executive was awarded a bonus pursuant to Section 3
prior to the date of Executive's termination pursuant to this Section 5, then
Executive shall be entitled to receive such bonus.
(c) If USi terminates Executive's employment without cause or
Executive terminates his employment for Good Reason (as defined herein),
Executive shall receive his compensation, excluding bonuses, as provided herein
for the full term of this Agreement. Such compensation shall be payable in
accordance with the provisions of Section 3(a). "Good Reason" shall mean (i)
USi's material breach of any provision hereof, (ii) any material adverse change
in the Executive's job responsibilities, duties, functions, or reporting
relationships, or (iii) relocation of the Executive's regular work address to a
location that requires Executive to travel more than 50
Page 3 of 8
<PAGE>
miles from his residence PROVIDED, HOWEVER, that it shall not constitute Good
Reason unless Executive (i) has given USi written notice of any actions alleged
to constitute Good Reason; and (ii) USi shall have nevertheless not cured any
such alleged Good Reason within a reasonable period of time.
(d) If Executive terminates his employment with USi other than
for Good Reason, his Base Salary and benefits will cease as of the termination
date and USi shall be relieved of all payments or other liabilities to Executive
as required by this Agreement, including bonuses, PROVIDED, HOWEVER, that if
Executive was awarded a bonus pursuant to Section 3 prior to the date of
Executive's termination pursuant to this Section 5, then Executive shall be
entitled to receive such bonus.
(e) If Executive is terminated for any reason or terminates this
Agreement for any reason, Executive shall still be subject to and have to comply
with Executive's obligations under Sections 8, 9, and 10 of this Agreement.
6. DEATH OR DISABILITY.
(a) This Agreement shall terminate effective immediately upon the
date of Executive's death.
(b) In the event Executive fails to perform the responsibilities
stated hereunder due to disability, USi shall have the right to terminate
Executive's employment upon written notice to Executive. Non-performance is
defined as failure to perform the duties hereunder for a cumulative total of
sixty percent (60%) or more of the normal working days during any two (2)
consecutive months, or failure to perform duties for sixty (60) or more
consecutive days. Nothing herein shall be construed to violate any Federal or
State law including the Family and Medical Leave Act of 1993, 29 U.S.C.S.
Sections 2601 et seq., and the Americans with Disabilities Act of 1990, 42
U.S.C.S. Sections 12101 et seq.
7. OTHER COVENANTS. Executive acknowledges that USi desires to obtain a key-man
life insurance policy on Executive's life. Executive agrees to cooperate and
work with USi in its efforts to obtain key-man life insurance.
8. PUBLIC STATEMENTS. Executive agrees not to directly or indirectly publish,
circulate, utter or disseminate any statements, comments, or material
whatsoever, which reflects unfavorably on USi or harms, damages or impairs the
business or operations of USi unless required by law or by a valid order of a
Court of competent jurisdiction. This provision shall survive the termination of
this Agreement.
9. CONFIDENTIAL DOCUMENTS AND RECORDS.
(a) During the course of his employment, Executive will have
access to confidential information, including, but not limited to confidential
financial information, proprietary information of USi or its clients or
customers, technical information and other confidential information about USi's
business that is not known by actual or potential competitors of USi regardless
of whether such information qualifies as a "trade secret" under applicable law
("Confidential Information"). Executive shall not at any time use or divulge to
others any Confidential Information obtained as a result of his employment with
USi. Executive agrees either upon his termination or upon an earlier request of
USi, to return or deliver to USi all forms of such Confidential Information in
his possession or control including but not limited to
Page 4 of 8
<PAGE>
drawings, specifications, documents, records, devices, models or any other
material and copies or reproductions thereof. Executive acknowledges that
monetary damages would not be adequate to compensate USi if Executive violates
this confidentiality agreement. Accordingly, Executive agrees that USi should be
entitled to injunctive relief to prevent the continued violation of this
provision.
(b) All memoranda, notices, files, records and other documents
made or compiled by Executive during the period of his employment in the
ordinary course of business, or made available to him concerning the business of
USi, shall be USi's property and shall be delivered to USi at its request
therefor or automatically on the termination of this Agreement.
(c) Executive agrees promptly to disclose to USi, and assign to
USi or its designee, his entire right, title, and interest in and to all
designs, trademarks, discoveries, formulae, processes, manufacturing techniques,
trade secrets, inventions, improvements, ideas or copyrightable works, including
all rights to obtain, register, perfect and enforce these proprietary interests.
("Inventions") which he may solely or jointly develop or reduce to practice
during the period of his employment with USi (a) which pertain to any line of
business activity of USi, (b) which are aided by the use of time, material or
facilities of USi, whether or not during working hours, or (c) which relate to
any of his work during the period of his employment with USi, whether or not
during normal working hours.
(d) Executive agrees to perform, during and after his employment,
all acts deemed necessary or desirable by USi to permit and assist it, in
obtaining and enforcing the full benefits, enjoyment, rights and title
throughout the world in the Inventions hereby assigned to USi as set forth
above. Such acts may include, but are not limited to execution of documents and
assistance or cooperation in legal proceedings. This provision shall survive the
termination of the Agreement.
10. COVENANT NOT TO COMPETE. Although this Agreement gives both parties
flexibility over the term of Executive's employment, USi's willingness to hire
Executive is based in material part on the understanding between the parties
that Executive will not utilize the skills or knowledge or that he develops as
part of his job to the competitive disadvantage of USi. Accordingly, Executive
agrees to the following promises not to compete, as set forth in subsections (a)
through (e) below, with USi during or after the termination of this Agreement.
Although these restrictions may prohibit or limit Executive's right or ability
to work in the Internet industry, Executive agrees that these restrictions are
reasonable and acceptable to him.
(a) Executive promises that for a period of one (1) year after
the termination of this Agreement for any reason, Executive will not compete
with USi or perform services involving or related to USi's primary product line.
(b) Executive promises for a period of twenty-four (24) months
after the termination of this Agreement for any reason, Executive will not have
any contact with or solicit clients of USi.
(c) Executive promises that for twenty-four (24) months after the
termination of this Agreement for any reason, Executive will not solicit the
services of any employee or independent contractor of USi or induce or encourage
any of USi's employees to leave its employ.
(d) Executive will notify USi within 24 hours of any
solicitation, contact, or discussion by any person concerning Executive for
potential employment by any other employer.
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<PAGE>
(e) Executive acknowledges that if he violates this covenant not
to compete, USi is entitled to obtain a temporary restraining order or a
preliminary and permanent injunction (in addition to all other available
remedies) from a court enjoining Executive from violating this Agreement in
order to prevent immediate and irreparable harm to USi.
(f) Executive agrees that if any part of this covenant not to
compete is held to be unenforceable for any reason, this covenant shall be
interpreted in a manner that will render it enforceable.
11. FREEDOM TO CONTRACT. The Executive represents and warrants that he has the
right to negotiate and enter into this Agreement and that this Agreement does
not breach, interfere with or conflict with any other contractual agreement,
covenant not to compete, option, right of first refusal, or other existing
business relationship. Executive acknowledges that this representation is a
material inducement to USi entering into this Agreement and in the event
Executive breaches this warranty, Executive agrees to indemnify and hold
harmless USi from any and all claims, actions, losses, damages (including but
not limited to, reasonable attorney's fees and costs), and USi shall have the
right to terminate Executive for cause.
12. ASSIGNMENT. USi may assign this Agreement to a purchaser of substantially
all of the assets or capital stock of USi.
13. ARBITRATION. Except for breaches or threatened breaches of the provisions of
this Agreement relating to equitable relief, any controversy or claim arising
out of or in any way between the Executive and USi, shall be submitted to
arbitration. Said arbitration shall be conducted pursuant to the provisions of
the Federal Arbitration Act, 9 U.S.C. Section et. seq. in an expeditious manner.
The parties agree that a final arbitration hearing shall be conducted on the
first available date of the arbitrator after the parties have completed
discovery. In the event of any litigation or arbitration proceeding, the same
shall occur solely in Annapolis, Maryland. In the event of litigation or
arbitration arising out of this Agreement or the employment relationship or any
other claim between USi and Executive, the prevailing party shall be entitled to
recover any and all reasonable attorney's fees and costs incurred both on the
trial and appellate level as well as the arbitration level and/or any appeal of
the arbitration.
14. CONFIDENTIALITY. Executive hereby agrees to keep confidential and not
publish or publicly disclose in any manner the terms or provisions of this
Agreement including, without limitation, those relating to compensation, during
the employment term hereunder or at any time thereafter, except that Executive
may disclose this Agreement to his legal counsel or as required by a court or
governmental agency of competent jurisdiction.
15. GOVERNING LAW, VENUE AND WAIVER OF JURY TRIAL. This Agreement including any
disputes hereunder, and the interpretation, validity and/or enforcement of any
provision thereof, shall be governed by the laws of the State of Maryland. Any
action brought involving the arbitration and/or enforcement of any of the
covenants of this Agreement shall be brought only in a court of competent
jurisdiction in Maryland and the parties agree to waive any claim relating to
forum non conveniens. The parties further agree and hereby waive and release any
right to a trial by jury in any action arising out of the interpretation,
enforcement or breach of this Agreement or any arbitration provision.
16. ENTIRE AGREEMENT. This Agreement contains the entire understanding between
the parties and supersedes and replaces any and all previous agreements and/or
oral negotiations. The parties stipulate and agree that neither of them has made
any representations concerning the execution and delivery of this
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<PAGE>
Agreement except such representations as specifically set forth herein and that
all the terms and conditions of this Agreement are set forth in this writing,
and there are no representations or agreements that are not so contained herein
and that neither party is relying upon any representation made by the other that
is not contained herein in connection with the negotiations and the terms of
this Agreement. The parties agree that this Agreement may only be changed or
modified by an agreement in writing signed by both parties.
17. SEVERABILITY. The invalidity or unenforceability of any term or provision of
this Agreement shall not affect the validity or enforceability of any other
terms of provisions and this Agreement shall be construed in all other respects
as if the invalid or unenforceable term or provision were omitted.
18. WAIVER. A waiver by either party of any term or condition of this Agreement
in any instance shall not be construed as a waiver of any other term or
condition. All remedies, rights and obligations contained in this Agreement
shall be cumulative, and none of them shall be in limitation of any other
remedy, right or obligations of either party.
IN WITNESS WHEREOF, the parties hereto have set their hands and
seals on the day and year first above written.
USi: Executive:
USinternetworking, Inc.
illegible
-------------------------
/s/ Frank A. Adams
- --------------------------------
By Frank A. Adams
Chairman, Compensation Committee
USi
Page 7 of 8
<PAGE>
Rider #1, effective as of March 19, 1999, to the Employment Agreement between
USINTERNETWORKING, INC., a Delaware Corporation ("USi") and Christopher R.
McCleary ("Executive") executed on May 29, 1998.
Section 1 shall be amended to read in its entirety as follows:
1. TERM. USi agrees to employ Executive, and Executive hereby accepts such
employment, on the terms and conditions set forth herein, for an initial term
of three (3) years (the "Initial Term"), with such employment, terms and
conditions effective as of and commencing on January 14, 1998 (the "Effective
Date") and terminating on December 31, 2000 (the "Termination Date"), unless
earlier terminated in accordance with this Agreement, with (i) the period
from January 1, 1998 to December 31, 1998, constituting the first contract
year (the "First Contract Year"); (ii) the period from January 1, 1999 to
December 31, 1999, constituting the second contract year (the "Second
Contract Year"); and the period from January 1, 2000 to December 31, 2000,
constituting the thrid contract year (the "Third Contract Year", with the
First Contract Year, Second Contract Year and Third Contract Year being
referred to collectively herein as the "Contract Years" or each a "Contract
Year"). The Initial Term under this Agreement shall automatically be extended
for successive one year periods ("Extension Terms" and, collectively with the
Initial Term, the "Term") unless Executive or USi's Board of Directors gives
notice of non-extension to the other no later than 90 days prior to the
expiration of the then-applicable Term.
Section (3)(a) shall be amended to read in its entirety as follows:
3. COMPENSATION.
(a) As compensation for Executive's services, USi hereby agrees to pay
Executive, and Executive agrees to accept, a base salary equal to $175,000
per year (the "Base Salary") for the First Contract Year. In January 1999,
the Compensation Committee shall consult with an independent compensation
consultant and shall increase the Base Salary to a level consistent with the
salary levels of other executives with similar responsibilities (Adjusted
Base Salary). The Adjusted Base Salary shall become effective January 1, 1999
and a similar review shall occur in January 2000 and each January thereafter
during the Term.
IN WITNESS WHEREOF, the parties have set their hands and seals on this __ day
of March, 1999.
USINTERNETWORKING, INC. Executive:
- ---------------------- -----------------------
By: Christopher R. McCleary
Member of the USi Compensation Committee
Witness:
- ----------------------
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<PAGE>
Exhibit 10.13
OFFICER AGREEMENT
THIS AGREEMENT is executed this 2nd day of June 1999, by and between
USinternetworking, Inc., a Delaware corporation ("USi" or "the Company"), and
Stephen E. McManus ("OFFICER"). The commencement date shall be April 1, 1998
(the "Effective Date").
WITNESSETH:
WHEREAS, USi is a development stage Delaware corporation engaged in the
development of computing and communication services for commercial customers,
and
WHEREAS, USi desires to employ OFFICER and OFFICER desires to be
employed by USi in such capacity and under such terms and conditions as
hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and promises
made by the parties and intending to be legally bound, the parties agree as
follows:
1. TERM.
USi agrees to employ OFFICER, and OFFICER hereby accepts such
employment, on the terms and conditions set forth herein, for a period of three
years effective as of the Effective Date subject to the termination provisions
herewithin.
2. EMPLOYMENT AND DUTIES.
(a) OFFICER shall have the tide of President and shall have such duties that
are commensurate and consistent with those with similar positions in the
Internetworking industry, subject to the authority and direction of the Chief
Executive Officer and USi's Board of Directors.
(b) OFFICER shall devote all skills solely and exclusively to the business
interests and affairs of USi. OFFICER shall not be a partner, officer, director,
stockholder, advisor, investor, creditor, or officer of any business competitive
USi's business without the written consent of USi, which consent may be withheld
in USi's sole discretion, provided, however, that nothing contained herein shall
be deemed to prevent OFFICER from investing his personal funds in the capital
stock or other securities of any corporation whose stock or securities are
publicly owned or are regularly traded on any public exchange, provided he does
not own more than 2 percent (2%) thereof.
(c) OFFICER acknowledges and agrees that OFFICER owes a fiduciary duty of
loyalty, fidelity, and allegiance to act at all times in the best interests of
USi and to do no act which would knowingly injure the business, interests, or
reputation of USi or, to the best of his knowledge, any of its subsidiaries,
affiliates or owners. In keeping with these duties, OFFICER shall make full
disclosure to USi of all business opportunities pertaining to USi's business and
shall not appropriate for OFFICER's own benefit any such business opportunities.
(d) OFFICER shall at all times comply with (i) all material applicable laws,
rules and regulations related to OFFICER's responsibilities assumed hereunder
and known to OFFICER, and (ii) all material written corporate and business
policies and procedures of USi whether generally applicable to all of USi's
officers or made specifically applicable to OFFICER as advised in advance by USi
to OFFICER in writing but only to the extent such policies and procedures are
not inconsistent with the other provisions of this Agreement.
<PAGE>
(e) OFFICER shall not, without the prior written approval of USi, which
approval may be withheld in USi's sole discretion, receive compensation or
obtain any direct or indirect financial benefit for services rendered to any
Person other than USi after the Effective Date. As used herein, the term
"Person" shall include all natural persons, corporations, business trusts,
associations, companies, partnerships, joint ventures and other entities and
governments and agencies and political subdivisions.
(f) OFFICER agrees to relocate his family to the Annapolis area at the
Company's expense on or before the end of the school year at OFFICER's current
residence.
(g) OFFICER shall hold one seat on the Board of Directors of the Company
beginning at the Effective Date. In the event that the Chief Executive Officer
of the Company and the holders of a majority of the Series A Preferred Stock
agree that a certain individual of national prominence and reputation would
enhance the stature of the Board of Directors, and if there is no remaining
vacancy on the Board of Directors, OFFICER will agree to resign his seat so that
such individual may be nominated and elected to the Board.
3. COMPENSATION.
(a) As compensation for OFFICER's seances, USi hereby agrees to pay OFFICER,
and OFFICER agrees to accept a base salary, equal to $175,000 per year plus
consideration for a bonus of $75,000 or greater based on the accomplishments of
USi for the period ending December 31, 1998. The bonus payment, if any, shall be
paid in April 1999 after the review of USi's accomplishments by the compensation
Committee of the Board of Directors and will be reviewed annually by USi's
Compensation Committee for adjustment.
(b) As per compensation and in consideration of Section 2, USi hereby grants
to OFFICER 5,000,000 shares of USi common stock ("Stock Grant"). OFFICER
acknowledges that the Company contemplates the sales of additional equity
securities in the future that may dilute the ownership interest represented as
of the Effective Date by the Stock Grant.
(c) Future compensation enhancement, changes, or modifications may be made
by the Compensation Committee formed as a result of the first equity financing
contemplated for the second quarter of 1998.
4. BENEFITS.
(a) OFFICER shall be entitled to medical, dental and life insurance and
other such benefits provided by the USi, pursuant to its general policies as set
forth in the OFFICER Policy Handbook. Said benefits may be changed from
time-to-time in USi's sole business discretion, but only to the ex-tent that USi
changes its general employment policies with respect to such benefits.
(b) OFFICER shall be entitled to fifteen (15) paid vacation days per year.
Unless USi consents in writing, OFFICER's vacation time shall not be carried
over from one contract year to another and OFFICER shall not be compensated for
any unused vacation time.
(c) USi shall provide, at no cost to OFFICER, an additional life insurance
policy on OFFICER's life with the beneficiary specified by OFFICER and the face
amount of which shall be equal to twice the OFFICER's annual base salary as
provided by this Agreement, less any group insurance provided pursuant to
Section 4(a) above.
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<PAGE>
5. TERMINATION.
(a) USi shall have the right to terminate this agreement for cause in the
event OFFICER (i) is in violation of any provision of this Agreement; (ii)
engages in any illegal or immoral practices or activities which can reasonably
be expected to be materially detrimental to the reputation of USi; (ii)
manifests dishonesty, disloyalty, fraud, willful misconduct or material
dereliction in the discharge of his duties hereunder, or (iv) uses, possesses,
sells, trades in, or delivers any illegal drug or controlled substance, during
working hours or otherwise. In the event of a violation of any provision of this
Agreement the Board of Directors will advise OFFICER in and allow a 60-day cure
period for OFFICER to remedy the violation prior to termination.
(b) Termination without cause shall cause a payment to OFFICER of the then
base salary and prorated bonus times the remaining number of months in this
Agreement. If terminated without cause, OFFICER may keep Stock Grant subject to
the terms of the Shareholders' Agreement.
(c) This Agreement shall terminate effective immediately upon the date of
OFFICER's death.
(d) In the event OFFICER fails to perform the responsibilities stated
hereunder due to disability, USi shall have the right to the OFFICER's
employment upon written notice to OFFICER. Nonperformance is defined as failure
to perform the duties hereunder for a cumulative total of sixty percent (600%)
or more of the normal working days during any two (2) consecutive months, or
failure to perform duties for ninety (90) or more consecutive days. Nothing
herein shall be construed to violate any Federal or State law including the
Family and Medical Leave Act of 1993, 29 U.S.C.S. Section 2601 et seq., and the
Americans with Disabilities Act of 1990, 42 U.S.C.S. Section 12101 et seq.
(e) Upon any termination under Paragraph 5 (c) or (d) above during the term
of this Agreement, OFFICER (or his estate) shall thereupon surrender the Shares
to USi in exchange for a payment from USi equal to the fair market value of the
Shares, as determined by the Compensation Committee of USi's Board of Directors,
as of the date of OFFICER's death, or the onset of his disability. To the extent
that USi desires to obtain a policy of Insurance to cover the risk of OFFICER's
death or disability, OFFICER will cooperate in obtaining such policy.
(f) In the event the OFFICER is terminated by the Board of Directors for
cause, and said termination is deemed to be valid by the appointed arbitrator
pursuant to Section 11, USi shall have the option to buy back the Stock Grant
for One Hundred Dollars ($100.00) and all salary and benefits shall cease as of
the date of termination.
(g) In the event OFFICER elects to terminate this Agreement, all base salary
and benefits will cease as of the termination date. If the OFFICER elects to
terminate this Agreement before May 30, 2000, USi shall have the option to buy
back the Stock Grant for One Hundred Dollars ($100.00). If the OFFICER elects to
terminate this Agreement after May 30, 2000, USi shall have the option to buy
back the Stock Grant at the fair market value of the Shares as of the date of
termination, as determined by the Compensation Committee of USi's Board of
Directors.
(h) No termination of OFFICER's employment hereunder shall affect his
obligations under Sections 7, 8, 9 and 12 of this Agreement.
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<PAGE>
6. CHANGE OF CONTROL.
If a Change of Control occurs either (i) after June 4, 1998; or (ii)
after the closing of the proposed equity financing pursuant to the Stock
Purchase Agreement, dated as of May 13, 1998, by and among USi and the
Purchasers listed on Schedule I attached thereto, USi's right to buy back the
Stock Grant shall automatically expire if not previously exercised and the
Shares of Stock shall be afforded the same rights and consideration as the other
shares of common stock of USi, including the right to receive any merger or
similar type of consideration. A "Change of Control" means an assignment or
transfer, in a single transaction or a series of related transactions, of
substantially all of the assets of USi or capital stock in USi representing a
majority of the voting control of USi to an entity or entities not in control of
the capital stock as of June 4, 1998.
7. PUBLIC STATE.
OFFICER agrees not to directly or indirectly publish, circulate, utter
or disseminate any statements, comments, or material whatsoever, such reflects
unfavorably an USi or harms, damages or impairs the business or operations of
USi unless required by law or by a valid order of a Court of competent
jurisdiction. This provision shall survive the termination of this Agreement.
8. CONFIDENTIAL DOCUMENTS AND RECORDS.
(a) During the course of his employment OFFICER will have access to
confidential information including, but not limited to confidential financial
information, proprietary information of USi or its clients or customers,
technical information and other confidential information about USi's business
that is not known by actual or potential competitors of USi regardless of
whether such information qualifies as a "trade secret" under applicable law
("Confidential Information"). OFFICER shall not at any time use or divulge to
others any Confidential Information obtained as a result of his employment with
USi.
(b) OFFICER agrees either upon his termination or upon an earlier request of
USi, to return or deliver to USi all forms of such Confidential Information in
his possession or control including but not to drawings, specifications,
documents, records, devices, models or any other material and copies or
reproductions thereof. OFFICER acknowledges that monetary damages would not be
adequate to compensate USi if OFFICER violates this confidentiality agreement.
Accordingly, OFFICER agrees that USi should be entitled to injunctive relief to
prevent the continued violation of this provision.
(c) All memoranda, notices, files, records and other documents made or
compiled by OFFICER during the period of his employment in the ordinary course
of business, or made available to him concerning the business of USi, shall be
USi's property and shall be delivered to USi at its request therefor or
automatically on the termination of this Agreement.
(d) OFFICER agrees promptly to disclose to USi, and assign to USi or its
designee, his entire right, title, and interest in and to all designs,
trademarks, discoveries, formulae, processes, manufacturing techniques, trade
secrets, inventions, improvements, ideas or copyrightable works, including all
rights to obtain, register, perfect and enforce these proprietary interests.
("Inventions") which he may solely or jointly develop or reduce to practice
during the period of his employment with USi (a) which pertain to any line of
business activity of USi, (b) which are aided by the use of time, material or
facilities of USi, whether or not during working hours, or (c) which relate to
any of his work during the period of his employment with USi, whether or not
during normal working hours.
4
<PAGE>
(e) OFFICER agrees to perform, during and after his employment, all acts
deemed necessary or desirable by USi to permit and assist it, in obtaining and
enforcing the full benefits, enjoyment, rights and title throughout the world in
the Inventions hereby assigned to USi as set forth above. Such acts may include,
but are not limited to execution of documents and assistance or cooperation in
legal proceedings. This provision shall survive the termination of the
Agreement.
9. COVENANT NOT TO COMPETE
(a) Although this Agreement gives both parties flexibility over the terms of
OFFICER's employment, USi's willingness to hire OFFICER is based in material
part on the understanding between the parties that OFFICER will not utilize the
skills or knowledge that he develops as part of his job to the competitive
disadvantage of USi. Accordingly, OFFICER agrees to the following promises not
to compete, as set forth below, with USi during or after the termination of this
Agreement. Although these restrictions may prohibit or limit OFFICER's right or
ability to work in the Internet industry. OFFICER agrees that these restrictions
are reasonable and acceptable to him.
(b) OFFICER promises that for a period of one (1) year after the termination
of this Agreement for any reason set forth in Section 5 of this Agreement,
OFFICER will not compete or perform services involving or related to USi's
primary product fine.
(c) OFFICER further promises that for a period of one (1) year after the
termination of this Agreement for any reason set forth in Section 5 of this
Agreement, OFFICER will not (i) solicit the services of any employee or
independent contractor of USi; (ii) induce or encourage any of USi's employees
to leave its employ, and (iii) have any commercial contact with, nor solicit
clients of USi.
(d) OFFICER acknowledges that if he violates this covenant not to compete,
USi is entitled to obtain a temporary restraining order or an injunction (in
addition to all other available remedies and without the requirement of a bond)
from a court enjoining OFFICER from violating this Agreement in order to prevent
immediate and irreparable harm to USi.
(e) OFFICER agrees that if any part of this covenant not to compete is held
to be unenforceable for any reason, this covenant shall be interpreted in a
manner that will render it enforceable.
10. FREEDOM TO CONTRACT.
The OFFICER represents and warrants that he has the right to negotiate
and enter into this Agreement and that this Agreement does not breach, interfere
with or conflict with any other contractual agreement, covenant not to compete,
option, right of first refusal, or other existing business relationship. OFFICER
acknowledges that this representation is a material inducement to USi entering
into this Agreement and in the event OFFICER breaches this warranty, OFFICER
agrees to indemnify and hold harmless USi from any and all claims, actions,
losses, damages (including but not limited to, reasonable attorney's fees and
costs), and USi shall have the right to terminate OFFICER for cause.
11. ARBITRATION.
Except for breaches or threatened breaches of the provisions of this
Agreement relating to equitable relief, any controversy or claim arising out of
or in any way between the OFFICER and USi, shall be submitted to arbitration.
Said arbitration shall be conducted pursuant to the provisions of the Federal
Arbitration Act, 9 U.S.C. Section et. seq. in an expeditious manner. The parties
agree that a final
5
<PAGE>
arbitration hearing shall be conducted on the first available date of the
arbitrator after the parties have completed discovery. in the event of any
litigation or arbitration proceeding, the same shall occur solely m Annapolis
Maryland. in the event of litigation or arbitration arising out of this
Agreement or the employment relationship or any other claim between USi and
OFFICER, the prevailing party shall be entitled to recover any and all
reasonable attorney's fees and costs incurred both on the trial and appellate
level as well as the arbitration level and/or any appeal of the arbitration.
12. CONFIDENTIALITY.
OFFICER hereby agrees to keep confidential and not publish or publicly
disclose in any manner the terms or provisions of this Agreement including,
without limitation, those relating to compensation, during the employment term
hereunder or at any time thereafter, except that OFFICER may disclose this
Agreement to his legal counsel or as required by a court or go agency of
competent jurisdiction.
13. GOVERNING LAW, VENUE AND WAIVER OF JURY TRIAL.
Agreement including any disputes hereunder, and the interpretation,
validity and/or enforcement of any provision thereof shall be governed by the
laws of the State of Maryland. Any action brought involving the arbitration
and/or enforcement of any of the covenants of this Agreement shall be brought
only in a court of competent jurisdiction in Anne Arundel county and the parties
agree to waive any claim relating to forum non conveniens. The parties further
agree and hereby waive and release any right to a trial by jury in any action
arising out of the interpretation, enforcement or breach of this Agreement or
any arbitration provision.
14. ENTIRE AGREEMENT.
This Agreement contains the entire understanding between the parties and
supersedes and replaces any and all previous agreements and/or oral
negotiations. The parties stipulate and agree that neither of them has made any
representations concerning the execution and delivery of this Agreement except
such representations as specifically set forth herein and that all the terms and
conditions of this Agreement are set forth in this writing, and there are no
representations or agreements that are not so contained herein and that neither
party is relying upon any representation made by the other that is not contained
herein in connection with the negotiations and the terms of this Agreement. The
parties agree that this Agreement may only be modified by an agreement in
writing signed by both parties.
15. WAIVER.
A waiver by either party of any term or condition of this Agreement in
any instance shall not be construed as a waiver of any other term or condition.
All remedies rights and obligations contained in this Agreement shall be
cumulative, and none of them shall be in limitation of any other remedy, right
or obligations of either party.
IN WITNESS WHEREOF, the parties hereto have set their hands and seals on
the day and year first above written.
Usinternetworking, Inc. Officer:
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/s/ Christopher R. McCleary /s/ Stephen E. McManus
- -------------------------- ----------------------
By: Christopher R. McCleary
------------------------------------
Title: Chairman and Chief Executive Officer
------------------------------------
Attest: /s/ William T. Price Date: April 1, 1998
--------------------------- --------------------
7
<PAGE>
Rider #1, effective as of March 19, 1999, to the Officer Agreement between
USINTERNETWORKING, INC., a Delaware Corporation ("USi") and Andrew A. Stern,
("OFFICER") executed on July 27th, 1998.
Section 5 (e) shall be amended to read in its entirety as follows:
Upon any termination under Paragraph (5) (c) or (d) above
during the term of this Agreement, which occurs before the
initial public offering of any of the capital stock of
USi, OFFICER, (or his estate) shall thereupon surrender
the Shares to USi upon payment from USi equal to the fair
market value of the Shares, as reasonably determined by the
Compensation Committee of USi's Board of Directors, as of
the date of OFFICER's death, or the onset of disability.
After the initial public offering of any of the capital
stock of USi, USi shall not, upon any termination under
Paragraph 5 (c) or (d) above, during the term of this
Agreement, have the right or the requirement to repurchase
the Shares, but shall be obligated to register them as soon
as is practicable. To the extent that USi desires to obtain
a policy of Insurance to cover the risk of OFFICER's death
or disability, OFFICER will cooperate in obtaining such
policy.
IN WITNESS WHEREOF, the parties hereto have set their hands and seals
on the day and year first written above.
USINTERNETWORKING, INC.: OFFICER:
------------------------ ---------------------
By:
Witness:
------------------------
8
<PAGE>
Exhibit 10.14
OFFICER AGREEMENT
THIS AGREEMENT is executed this 27th day of July 1998, by and between
USinternetworking Inc., a Delaware corporation ("USi" or "the Company"), and
Andrew A. Stern ("OFFICER"). The commencement date shall be July 10, 1998 (the
"Effective Date").
WITNESSETH:
WHEREAS, USi is a development stage Delaware corporation engaged in the
development of computing and communication services for commercial customers,
and
WHEREAS, USi desires to employ OFFICER and OFFICER desires to be
employed by USi in such capacity and under such terms and conditions as
hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and promises
made by the parties and intending to be legally bound, the parties agree as
follows:
1. TERM.
USi agrees to employ OFFICER, and OFFICER hereby accepts such employment, on
the terms and conditions set forth herein, for a period of three years effective
as of the Effective Date subject to the termination provisions herewithin.
2. EMPLOYMENT AND DUTIES.
(a) OFFICER shall have the title of Executive Vice President and Chief
Financial Officer mergers and acquisitions and such other duties as may be
assigned from time to time by the Chief Executive Officer.
(b) OFFICER shall devote all skills solely and exclusively to the business
interests and affairs of USi. OFFICER shall not be a partner, officer, director,
stockholder, advisor, investor, creditor, or officer of any business competitive
with USi's business without the written consent of USi, which consent may be
withheld in USi's sole discretion, provided, however, that nothing contained
herein shall be deemed to prevent OFFICER from (i) investing his personal funds
in the capital stock or other securities of any corporation whose stock or
securities are publicly owned or are regularly traded on any public exchange,
provided he does not own more than 2 percent (2%) thereof, or (ii) devoting a
reasonable amount of his time to civic, charitable and personal affairs or to
the supervision of his personal investments (subject to the limitation in clause
(i)) nor from serving on boards of directors in accordance with USi's policies,
provided such activities do not reasonably interfere with the performance of the
OFFICER's duties under this Agreement.
(c) OFFICER acknowledges and agrees that OFFICER owes a fiduciary duty of
loyalty, fidelity and allegiance to act at all times in the best interests of
USi and to do no act which would knowingly injure the business, interests, or
reputation of USi or, to the best of his knowledge, any of its subsidiaries,
affiliates or owners. In keeping with these duties, OFFICER shall make full
disclosure to USi of all business opportunities pertaining to USi's business and
shall not appropriate for OFFICER's own benefit any such business opportunities.
(d) OFFICER shall at all times comply with (i) all material applicable laws,
rules and regulations related to OFFICER's responsibilities assumed hereunder
and known to OFFICER, and (ii)
<PAGE>
all material written corporate and business policies and procedures of USi
whether generally applicable to all of USi's officers or made specifically
applicable to OFFICER as advised in advance by USi to OFFICER in writing but
only to the extent such policies and procedures are not inconsistent with the
other provisions of this Agreement.
(e) Except to the extent permitted by subparagraph (b) above, and except for
receiving compensation from USF&O Corporation, OFFICER shall not, without the
prior written approval of USi, which approval may be withheld in USi's sole
discretion, receive compensation or obtain any direct or indirect financial
benefit for services rendered to any Person other than USi after the Effective
Date. As used herein, the term "Person" shall include all persons, corporations,
business @, associations, companies, partnerships, joint ventures and other
entities and governments and agencies and political subdivisions.
3. COMPENSATION.
(a) As compensation for OFFICER's services, USi hereby agrees to pay
OFFICER, and OFFICER agrees to accept a base salary, equal to no less than
$175,000 per year plus consideration for a bonus of $75,000 or greater based on
the accomplishments of USi for the period ending December 31, 1998. The bonus
payment, if any, shall be paid in April 1999 after the review of USi's
accomplishments by the Compensation Committee of the Board of Directors. OFFICER
shall also be entitled to be considered for annual bonuses for years commencing
after 12/31/98.
(b) As further compensation and in consideration of Section 2, USi hereby
grants to OFFICER 5,000,000 shares of USi Common Stock ("Stock Grant"). OFFICER
acknowledges that the Company contemplates the sales of additional equity
securities in the future that may dilute the ownership interest represented as
of the Effective Date by the Stock Grant. OFFICER will pay the Company par value
of $.001 per share, or $5,000, for the Stock Grant. OFFICER and USi acknowledge
that the fair market value of the Common Stock of the Company as of July 10,
1998 is $.20 per share.
(c) Subject to the minimum base salary set forth in subparagraph (a) above,
future compensation enhancements, changes, or modifications may be made by the
Compensation Committee.
4. BENEFITS.
(a) OFFICER shall be entitled to medical, dental and life insurance and such
other benefits provided by USi pursuant to its general policies as set forth in
the OFFICER Policy Handbook. Said benefits may be changed from time-to-time in
USi's sole business discretion, but only to the extent that USi changes its
general employment policies with respect to such benefits.
(b) OFFICER shall be entitled to a reasonable number of paid vacation days
per year.
(c) USi shall provide, at no cost to OFFICER, an additional life insurance
policy on OFFICER's life with the beneficiary specified by OFFICER and the face
amount of which shall be equal to twice the OFFICER's annual base salary as
provided by this Agreement, less any group insurance provided pursuant to
Section 4(a) above.
5. TERMINATION.
(a) USi shall have the right, with the concurrence of tile Chairman of the
Audit Committee, to terminate this agreement for cause in the event OFFICER (i)
is in violation of any provision of this
2
<PAGE>
Agreement which is materially detrimental to USi; (ii) engages in any illegal or
immoral practices or activities which can reasonably be expected to be
materially detrimental to the reputation of USi, (iii) manifests dishonesty,
disloyalty, fraud, willful misconduct, or material dereliction in the discharge
of his duties hereunder; or (iv) uses, possesses, sells, trades in, or delivers
any illegal drug or controlled substance, during working hours or otherwise. In
the event of a violation of any provision of this Agreement, the Board of
Directors will advise OFFICER in writing and allow a 60-day cure period for
OFFICER to remedy the violation prior to termination.
(b) Termination of this Agreement without cause shall cause payment to
OFFICER of the base salary determined under Section 3(a) of this Agreement and
prorated bonus times the remaining number of months in this Agreement or times
twelve months, whichever is greater. In addition, OFFICER shall be entitled, for
the period of time described above, to a continuation of the benefits described
in Section 4 above. At USi's discretion, the value of such benefits may be paid
to OFFICER in a lump sum, the amount of which shall be adjusted to reflect a
full gross-up of any tax liability with respect to such payments to OFFICER and
the time value of the receipt of such payment. If terminated without cause,
OFFICER may keep Stock Grant subject to the terms of the Shareholder's
Agreement. The remedies described in this provision shall apply in the event
that OFFICER is constructively terminated without cause. Constructive
termination occurs if USi significantly reduces OFFICER's duties; (ii) USi
requires OFFICER to move out of the greater Annapolis, Maryland, area, or (iii)
USi reduces OFFICER's compensation or benefits in violation of this Agreement.
(c) This Agreement shall terminate effective immediately upon the date of
the OFFICER's death.
(d) In the event OFFICER fails to perform the responsibilities stated
hereunder due to disability, USi shall have the right to terminate this
Agreement upon written notice to OFFICER. Non-performance is defined as failure
to perform the duties hereunder for a cumulative total of sixty percent (60%) or
more of the normal working days during any two (2) consecutive months, or
failure to perform duties for ninety (90) or more consecutive days. Nothing
herein shall be construed to violate any Federal or State law including the
Family and Medical Leave Act of 1993, 29 U.S.C.S. Sections 2601 et seq., and the
Americans with Disabilities Act of 1990, 42 U. S. C. S. Sections 12101 et seq.
(e) Upon any termination under Paragraph 5 (c) or (d) above during the term
of this Agreement, OFFICER (or his estate) shall thereupon surrender the Shares
to USi upon a payment from USi equal to the fair market value of the Shares
based on the most recent closing price if the Company's Common Stock is publicly
traded, or, if not, as reasonably determined by the Compensation Committee of
USi's Board of Directors, as of the date of OFFICER's death, or the onset of his
disability. To the extent that USi desires to obtain a policy of Insurance to
cover the risk of OFFICER's death or disability, OFFICER will cooperate in
obtaining such policy.
(f) In the event OFFICER is terminated by the Board of Directors for cause,
and said termination is deemed to be valid by the appointed arbitrator pursuant
to Section 11, USi shall have the option, within ninety (90) days, to buy back
the Stock Grant for the amount of the total Federal, State, payroll and local
tax liability incurred by OFFICER as a result of the Stock Grant In addition,
all salary and benefits shall cease as of the date of termination except for
health care coverage as required by law.
(g) In the event OFFICER elects to terminate this Agreement and such
termination is not as a result of a constructive termination as defined in
Section 5(b), all base salary and benefits will cease as of the termination date
except for health care coverage as required by law. If OFFICER elects to
3
<PAGE>
terminate this Agreement before May 31, 2000, and such termination is not as a
result of a constructive termination as defined in Section 5(b), USi shall have
the option, within ninety (90) days, to buy back the Stock Grant for the amount
of the total Federal, State, payroll and local tax liability incurred by OFFICER
as a result of the Stock Grant. If OFFICER elects to terminate this Agreement
after May 31, 2000, and such termination is not as a result of a constructive
termination as defined in Section 5(b), USi shall have the option, within ninety
(90) days, to buy back the Stock Grant at the fair market value of the Shares
based on the most recent closing price if the Company's Common Stock is publicly
traded, or, if not, as reasonably determined by the Compensation Committee of
USi's Board of Directors, as of the date of termination.
(h) No termination of OFFICER's employment hereunder shall affect his
obligations under Sections 7, 8, 9 and 12 of this Agreement.
6. CHANGE OF CONTROL.
(a) If a Change of Control occurs after July 10, 1998, USi's right to buy
back the Stock Grant shall automatically expire if not previously exercised and
the Shares of Stock shall be afforded the same rights and consideration as the
other shares of Common Stock of USi, including the right to receive any merger
or similar type of consideration. A "Change of Control" means an assignment or
transfer, in a single transaction or series of transactions, of (i)
substantially all of the assets of USi or (ii) the capital stock in USi
representing a majority of the voting control of USi to a person or persons not
in control of the capital stock as of July 10, 1998. An IPO does not constitute
a Change of Control.
(b) If OFFICER is terminated within one (1) year after a Change of Control
as described in Section 6(a), payment shall be made to OFFICER of the then base
monthly salary and prorated bonus times twenty four (24) months. In addition,
OFFICER shall be entitled, for the twenty four (24) months, to a continuation of
the benefits described in Section 4 above. At USi's discretion, the value of
such benefits may be paid to OFFICER in a lump sum, the amount of which shall be
adjusted to reflect a full gross-up of any tax liability with respect to such
payments to OFFICER and the time value of the receipt of such payment.
7. PUBLIC STATEMENTS.
OFFICER agrees not to directly or indirectly publish, circulate, utter
or disseminate any statements, comments, or material whatsoever, which reflects
unfavorably on USi or harms, damages or impairs the business or operations of
USi unless required by law or by a valid order of a Court of competent
jurisdiction. This provision shall survive the termination of this Agreement.
8. CONFIDENTIAL DOCUMENTS AND RECORDS.
(a) During the course of his employment, OFFICER will have access to
confidential information, including, but not limited to confidential financial
information, proprietary information of USi or its clients or customers,
technical information and other confidential information about USi's business
that is not known by actual or potential competitors of USi regardless of
whether such information qualifies as a "trade secret" under applicable law
("Confidential Information"). OFFICER shall not at any time use or divulge to
others any Confidential Information obtained as a result of his employment with
USi except that OFFICER may disclose this Agreement to his legal counsel or as
required by a court or governmental agency of competent jurisdiction.
4
<PAGE>
(b) OFFICER agrees either upon his termination or upon an earlier request of
USi, to return or deliver to USi all forms of such Confidential Information in
his possession or control including but not limited to drawings, specifications,
documents, records, devices, models or any other material and copies or
reproductions thereof. OFFICER acknowledges that monetary damages would not be
adequate to compensate USi if OFFICER violates this confidentiality agreement.
Accordingly, OFFICER agrees that USi should be entitled to injunctive relief to
prevent the continued violation of this provision.
(c) All memoranda, notices, files, records and other documents made or
compiled by OFFICER during the period of his employment in the ordinary course
of business, or made available to him, concerning the business of USi, shall be
USi's property and shall be delivered to USi at its request therefor or
automatically on the termination of this Agreement.
(d) OFFICER agrees promptly to disclose to USi, and assign to USi or its
designee, his entire right, title, and interest in and to all designs,
trademarks, discoveries, formulae, processes, manufacturing techniques, trade
secrets, inventions, improvements, ideals or copyrightable works, including all
rights to obtain, register, perfect and enforce these proprietary interest.
("Inventions") which he may solely or jointly develop or reduce to practice
during the period of his employment with USi (a) which pertain to any line of
business activity of USi, (b) which are aided by the use of time, material or
facilities of USi, whether or not during working hours, or (c) which relate to
any of his work during the period of his employment with USi, whether or not
during normal working hours.
(e) OFFICER agrees to perform, during and after his employment, all acts
deemed necessary or desirable by USi to permit and assist it, in obtaining and
enforcing the full benefits, enjoyment, rights and title throughout the world in
the Inventions hereby assigned to USi as set forth above. Such acts may include,
but are not limited to execution of documents and assistance or cooperation in
legal proceedings. This provision shall survive the termination of the
Agreement.
9. COVENANT NOT TO COMPETE.
(a) Although this Agreement gives both parties flexibility over the terms of
OFFICER's employment, USi's willingness to hire OFFICER is based in material
part on the understanding between the parties that OFFICER will not utilize the
skills or knowledge that he develops as part of his job to the competitive
disadvantage of USi. Accordingly, OFFICER agrees to the following promises not
to compete, as set forth below, with USi during or after the termination of this
Agreement. Although these restrictions may prohibit or limit OFFICER's right or
ability to work in the Internet industry, OFFICER agrees that these restrictions
are reasonable and acceptable to him.
(b) OFFICER promises that during the period of this Agreement and for a
period of one (1) year after the termination of this Agreement for any reason
set forth in Section 5 of this Agreement, OFFICER will not compete or perform
services involving or related to USi's primary product line.
(c) OFFICER further promises that for the period of this Agreement and for a
period of one (1) year after the termination of this Agreement for any reason
set forth in Section 5 of this Agreement, OFFICER will not (i) solicit the
services of any employee or independent contractor of USi; (ii) induce or
encourage any of USi's employees to leave its employ; and (iii) have any
commercial contact with, nor solicit clients of USi.
(d) OFFICER acknowledges that if he violates this covenant not to compete,
USi is entitled to obtain a temporary restraining order or an injunction (in
addition to all other available remedies and
5
<PAGE>
without the requirement of a bond) from a court enjoining OFFICER from violating
this Agreement in order to prevent immediate and irreparable harm to USi.
(e) OFFICER agrees that if any part of this covenant not to compete is held
to be unenforceable for any reason, this covenant shall be interpreted in a
manner that will render it enforceable.
10. FREEDOM TO CONTRACT.
OFFICER represents and warrants that he has the right to negotiate and enter
into this Agreement and that this Agreement does not breach, interfere with or
conflict with any other contractual agreement, covenant not to compete, option,
right of first refusal, or other existing business relationship. OFFICER
acknowledges that this representation is a material inducement to USi entering
into this Agreement and in the event OFFICER breaches this warranty, OFFICER
agrees to indemnify and hold harmless USi from any and all claims, actions,
losses, damages (including but not limited to, reasonable attorney's fees and
costs), and USi shall have the right to terminate OFFICER for cause.
11. ARBITRATION.
Except for breaches or threatened breaches of the provisions of this
Agreement relating to equitable relief, any controversy or claim arising out of
or in any way between the OFFICER and USi, shall be submitted to arbitration.
Said arbitration shall be conducted pursuant to the provisions of the Federal
Arbitration Act, 9 U.S.C. Section et seq. in an expeditious manner. The parties
agree that a final arbitration hearing shall be conducted on the first available
date of the arbitrator after the parties have completed discovery. In the event
of any litigation or arbitration proceeding, the same shall occur solely in
Annapolis, Maryland. In the event of litigation or arbitration arising out of
this Agreement or the employment relationship or any other claim between USi and
OFFICER, the prevailing party shall be entitled to recovery any and all
reasonable attorney's fees and costs incurred both on the trial and appellate
level as well as the arbitration level and/or any appeal of the arbitration.
12. CONFIDENTIALITY.
OFFICER hereby agrees to keep confidential and not publish or publicly
disclose in any manner the terms or provisions of this Agreement including,
without limitation, those relating to compensation, during the employment term
hereunder or at any time thereafter, except that OFFICER may disclose this
Agreement to his legal counsel or as required by a court or governmental agency
of competent jurisdiction.
13. GOVERNING LAW, VENUE AND WAIVER OF JURY TRIAL.
This Agreement including any disputes hereunder, and the interpretation,
validity and/or enforcement of any provision thereof, shall be governed by the
laws of the State of Maryland.
Any action brought involving the arbitration and/or enforcement of any
of the covenants of this Agreement shall be brought only in a court of competent
jurisdiction in or for Anne Arundel county and the parties agree to waive any
claim relating to forum non conveniens. The parties further agree and hereby
waive and release any right to a trial by jury in any action arising out of the
interpretation, enforcement or breach of this Agreement or any arbitration
provision.
14. ENTIRE AGREEMENT.
6
<PAGE>
This Agreement contains the entire understanding between the parties and
supersedes and replaces any and all previous agreements and/or oral
negotiations. The parties stipulate and agree that neither of them has made any
representations concerning the execution and delivery of this Agreement except
such representations as specifically set forth herein and that all the terms and
conditions of this Agreement are set forth in this writing, and there are no
representations or agreements that are not contained herein and that neither
party is relying upon any representation made by the other that is not contained
herein in connection with the negotiations and the terms of this Agreement. The
parties agree that this Agreement may only be modified by an agreement in
writing signed by both parties.
15. WAIVER.
A waiver by either party of any term or condition of this Agreement in
any instance shall not be construed as a waiver of any other term or condition.
All remedies rights and obligations contained in this Agreement shall be
cumulative, and none of them shall be in limitation of any other remedy, right
or obligation or either party.
THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK
IN WITNESS WHEREOF, the parties hereto have set their hands and seals on
the day and year first above written.
USinternetworking, Inc. Officer:
/s/ Christopher R. McCleary /s/ Andrew A. Stern
- --------------------------- -------------------
By: Christopher R. McCleary Andrew A. Stern
Title: Chairman and Chief Executive Officer
Attest: /s/ Christopher Kaine Date: July 10, 1998
----------------------- --------------------
7
<PAGE>
Rider #1, effective as of March 19, 1999, to the Officer Agreement between
USINTERNETWORKING, INC., a Delaware Corporation ("USi") and Stephen E.
McManus ("OFFICER") executed on June 2, 1998.
Section 5 (e) shall be amended to read in its entirety as follows:
Upon any termination under Paragraph (5) (c) or (d) above
during the term of this Agreement, which occurs before the
initial public offering of any of the capital stock of
USi, OFFICER, (or his estate) shall thereupon surrender
the Shares to USi upon payment from USi equal to the fair
market value of the Shares, as reasonably determined by the
Compensation Committee of USi's Board of Directors, as of
the date of OFFICER's death, or the onset of disability.
After the initial public offering of any of the capital
stock of USi, USi shall not, upon any termination under
Paragraph 5 (c) or (d) above during the term of this
Agreement, have the right or the requirement to repurchase
the Shares, but shall be obligated to register them as soon
as is practicable. To the extent that USi desires to obtain
a policy of Insurance to cover the risk of OFFICER's death
or disability, OFFICER will cooperate in obtaining such
policy.
IN WITNESS WHEREOF, the parties hereto have set their hands and seals
on the day and year first written above.
USINTERNETWORKING, INC.: Executive:
------------------------ ---------------------
By:
Witness:
------------------------
8
<PAGE>
Exhibit 10.15
OFFICER AGREEMENT
THIS AGREEMENT (the "Agreement") is executed this 15th day of December,
1998, by and between USinternetworking, Inc., a Delaware corporation USi') and
Jeffery L. McKnight ("Officer"). The effective commencement of the Agreement
shall be as of July 2, 1998 (the "Effective Date").
WITNESSETH:
WHEREAS, USi is engaged in the developmetrt of computing and
communications services for commercial customers, and
WHEREAS, USi desires to employ Officer and Officer desires to be
employed by USi in such capacity and under such terms and conditions as
hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and provisions
made by the parties and intending to be legally bound, the parties agree as
follows:
1. TERM.
USi agrees to employ Officer, and Officer hereby accepts such employment, on
the terms and conditions set forth herein for a period of three (3) years as of
the Effective Date subject to the termination provisions herewithin.
2. EMPLOYMENT AND DUTIES.
(a) Officer shall have the title of Executive Vice President of Operations
and Client Services and shall have such duties that are commensurate and
consistent with those with similar positions in the Internetworking industry,
subject to the authority and direction of the Chief Executive Officer and the
Board of Directors of USi.
(b) Officer shall, from the date of execution of this Agreement, devote all
skills solely and exclusively to the business interests and affairs of USi.
Officer shall not be a partner, officer, director, stockholder, advisor,
investor, creditor, or employee of any business competitive with USi's business
without the written consent of USi, which consent may be withheld in USi's sole
discretion, provided, however, that nothing contained herein shall be deemed to
prevent Executive from investing his personal funds in the capital stock or
other securities of any corporation whose stock or securities are publicly owned
or are regularly traded on any public exchange, provided he does not own more
than two percent (2%) thereof.
(c) Officer acknowledges and agrees that Officer owes a fiduciary duty of
loyalty, fidelity, and allegiance to act at all times in the best interests of
USi and to do no act which would knowingly injure the business, interests, or
reputation of USi or, to the best of his knowledge, any of its subsidiaries,
affiliates or owners. In keeping with these duties, Officer shall make full
disclosure to USi of all business opportunities pertaining to USi's business and
shall not appropriate for Officer's own benefit any such business opportunities.
(d) Officer shall at all times comply with (i) all material applicable laws,
rules and regulations related to Executives responsibilities assumed hereunder
and known to Officer, and (ii) all material written corporate and business
policies and procedures of USi whether generally applicable to
<PAGE>
all of USi's officers or made specifically applicable to Officer as advised in
advance by USi to Officer in writing but only to the extent such policies and
procedures are not inconsistent with the other provisions of this Agreement.
(e) Officer shall not, from the date of execution of this Agreement, without
the prior written approval of USi, which approval USi may withhold in its sole
discretion, receive compensation or obtain any direct or indirect financial
benefit for services rendered to any Person other than USi after the Effective
Date. As used herein, the term "Person" shall include all natural persons,
corporations, business trusts, associations, companies, partnerships, joint
ventures and other entities and governments and agencies and political
subdivisions.
3. COMPENSATION.
(a) As compensation for Officer's services, USi hereby agrees to pay
Officer, and Officer agrees to accept a base salary equal to $175,000 per year
plus consideration for a bonus of $75,000 or greater based upon the
accomplishments of USi for the period ending December 31, 1998. The bonus
payment, if any, shall be paid in April of 1999 after the review of USi's
accomplishments by the Compensation Committee of the Board of Directors and will
be reviewed annually by USi's Compensation Committee for adjustment.
(b) As further compensation and in consideration of Section 2, USi hereby
grants to Officer a fully exercisable option to purchase all or any part of
3,000,000 shares of fully paid and non-assessable common stock of USi at a price
per share of $0.33 without commission or other charge ("Option Grant"), subject
to the terms and conditions of the USINTERNETWORKING, INC.'S 1998 Stock Option
Plan ("Plan"), which is incorporated herein by this reference. Officer
acknowledges that the Company contemplates the sales of additional equity
securities in the future that may dilute any potential ownership interest the
Officer may obtain upon his exercise of all or any part of the Option Grant.
(c) Future compensation enhancements, changes, or modifications may be made
by the Compensation Committee formed as a result of the first equity financing
that occurred in the second quarter of 1998.
4. BENEFITS.
(a) Officer shall be entitled to medical, dental and life insurance, and
offer such benefits provided by USi, pursuant to its general employment
policies. Said benefits may be changed from time-to-time in USi's sole business
discretion, but only to the extent that USi changes its general employment
policies with respect to such benefits .
(b) Officer shall be entitled to fifteen (15) paid vacation days per year.
Unless USi consents in writing, Officer's vacation time shall not be carried
over from one contract year to another and Officer shall not be compensated for
any unused vacation time.
(c) USi shall provide, at no cost to Officer, an additional life insurance
policy on Officer's life with the beneficiary specified by Officer and the face
amount of which shall be equal to twice the Officer's annual base salary as
provided by this Agreement, less any group insurance provided pursuant to
Section 4(a) above.
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<PAGE>
5. TERMINATION.
(a) USi shall have the right to terminate this Agreement for cause in the
event Officer (i) is in violation of any provision of this Agreement; (ii)
engages in any illegal or immoral practices or activates which can be reasonably
be expected to be materially detrimental to the reputation of USi; (iii)
manifests dishonesty, disloyalty, fraud, willful misconduct or material
dereliction in the discharge of his duties hereunder, or (iv) uses, possesses,
sells, trades in, or delivers any illegal drug or controlled substance, during
working hours or otherwise. In the event of a violation of any provision of this
Agreement, the Board of Directors will advise Officer in writing and allow a
60-day cure period for executive to remedy the violation prior to termination.
(b) Termination without cause shall cause a payment to Officer of the then
base and pro-rated bonus times the remaining number of months in this Agreement.
If Officer is terminated without cause, USi's Repurchase Right under the Plan,
if any, shall lapse with respect to the Option Grant 24 hours prior to
termination.
(c) This Agreement shall terminate effective immediately upon the date of
Officer's death.
(d) In the event Officer fails to perform the responsibilities stated
hereunder due to disability, USi shall have the right to terminate Officer's
employment upon written notice to Officer. Nonperformance is defined as failure
to perform the duties hereunder for a cumulative total of sixty (60%) or more of
the normal working days during any two (2) consecutive months, or failure to
perform duties for ninety (90)or more consecutive days. Nothing herein shall be
construed to violate any Federal or State law including the Family and Medical
Leave Act of 1993, 29 U.S.C.S. sections 2601 et seq., and the American with
Disabilities Act of 1990, 42 U.S.C.S. sections 12101 et seq.
(e) Upon any termination under Paragraph 5 (c) or (d) above during the term
of this Agreement, Officer (or his estate) shall have, pursuant to the Plan, one
(1) year to exercise all or any part of the Option Grant. To the extent that USi
desires to obtain a policy of Insurance to cover the risk of Officer's death or
disability, Officer will cooperate in obtaining such policy.
(f) In the event the Officer is terminated by the Board of Directors for
cause, Officer may not exercise any part of the Option Grant from the date of
termination. Only if said termination is deemed to be invalid by the appointed
arbitrator pursuant to Section 11, may Officer once again exercise any part of
the Option Grant.
(g) In the event Officer elects to terminate this Agreement, all base salary
and benefits will cease as of the termination date. Pursuant to the Plan, if
this Agreement is terminated for any reason before July 2, 1999, USi shall have
the right to repurchase at the price of $0.33 all shares of Common Stock covered
by the Option Grant. If this Agreement is terminated for any reason as of July
2, 1999, USi's repurchase right shall lapse with respect to one-third (1/3) of
the number of shares of Common Stock covered by the Option Grant. If this
Agreement shall terminate for any reason as of the last day of each calendar
quarter (I.E., March 31, June 30, September 30 and December 31) that begins
coincident with or following the first anniversary of the Effective Date, July
2, 1998, USi's repurchase right shall lapse with respect to an additional
one-twelfth (1/12) of the shares of Common Stock covered by the Option Grant. No
termination of Officer's employment hereunder shall effect his obligations under
Sections 7, 8, 9, and 12 of this Agreement.
3
<PAGE>
6. CHANGE OF CONTROL
If a Change of Control occurs at any time during the term of this
Agreement, and the Officer's employment is terminated without cause, USi's
repurchase right to buy back any portion of the Option Grant shall automatically
expire 24 hours prior to such termination. A "Change of Control" means a change
in ownership or control of USi effected through either of the following
transactions: (a) any person or related group of persons (other than USi or any
person that prior to such transaction, directly or indirectly controls, is
controlled by, or is under common control with USi) directly or indirectly
acquires beneficial ownership (within the meaning of ?Rule 13d-3 of the
Securities and Exchange Act) of the securities possessing more than fifty
percent (50%) of the total combined voting power of the USi's outstanding
securities pursuant to a tender or exchange offer made directly to USi's
stockholders which the Board of Directors does not recommend such stockholders
to accept; or (b) there is a change in the composition of the Board of Directors
over a period of thirty-six (36) consecutive months (or less) such that a
majority of the Board members (rounded up to the nearest whole number) ceases,
by reason of one or more proxy contests for the election of Board members, to be
comprised of individuals who either (i) have been Board members continuously
since the beginning of such period or (ii) have been elected or nominated for
election as Board members during such period by at least a majority of the board
members described in clause (i) who were still in office at the time such
election or nomination was approved by the Board.
7. PUBLIC STATEMENTS.
Officer agrees not to directly or indirectly publish, circulate, utter
or disseminate any statements, commitments, or material whatsoever, which
reflects unfavorably on USi or harm, damages or impairs the business or
operations of USi unless required by law or by a valid order of a Court of
competent jurisdiction. This provision shall survive the termination of this
Agreement.
8. CONFIDENTIAL DOCUMENTS AND RECORDS.
(a) During the course of his employment, Officer will have access to
confidential information, including, but not limited to confidential financial
information, proprietary information of USi or its clients or customers,
technical information and other confidential information about USi's business
that is not known by actual or potential competitors of USi regardless of
whether such information qualifies as a "trade secret" under applicable law
("Confidential Information"). Officer shall not at any time use or divulge to
others any Confidential Information obtained as a result of his employment with
USi.
(b) Officer agrees either upon his termination or upon an earlier request of
USi, to return or deliver to USi all forms of such Confidential Information in
his possession or control including but not to drawings, specifications,
documents, records, devices, models or any other material and copies or
reproductions thereof. Officer acknowledges that monetary damages would not be
adequate to compensate USi if Officer violates this confidentiality agreement.
Accordingly, Officer agrees that USi should be entitled to injunctive relief to
prevent the continued violation of this provision.
(c) All memoranda, notices, files, records and other documents made or
compiled by Officer during the period of his employment in the ordinary course
of business, or made available to him concerning the business of USi, shall be
USi's property and shall be delivered to USi at its request therefor or
automatically on the termination of this Agreement.
4
<PAGE>
(d) Officer agrees promptly to disclose to USi, and assign to USi or its
designee, his entire right, title, and interest in and to all designs,
trademarks, discoveries, formulae, processes, manufacturing techniques, trade
secrets, inventions, improvements, ideas or copyrightable works, including all
rights to obtain, register, perfect and enforce these proprietary interests.
("Inventions") which he may solely or jointly develop or reduce to practice
during the period of his employment with USi (a) which pertain to any line of
business activity of USi, which are aided by the use of time, material or
facilities of USi, whether or not during working hours, or (c) which relate to
any of his work during the period of his employment with USi, whether or not
during normal working hours.
(e) Officer agrees to perform, during and after his employment, all acts
deemed necessary or desirable by USi to permit and assist it, in obtaining and
enforcing the full benefits, enjoyment, rights and title throughout the world in
the Inventions hereby assigned to USi as set forth above. Such acts may include,
but are not limited to execution of documents and assistance or cooperation in
legal proceedings. This provision shall survive the termination of the
Agreement.
9. COVENANT NOT TO COMPETE.
(a) Although this Agreement gives both parties flexibility over the term of
Officer's employment, USi's willingness to hire Officer is based in material
part on the understanding between the parties that Officer will not utilize the
skills or knowledge or that he develops as part of his job to the competitive
disadvantage of USI. Accordingly, Officer agrees to the following promises not
to compete, as set forth in subsections (a) through (e) below, with USi during
or after the termination of this Agreement. Although these restrictions may
prohibit or limit Officer's right or ability to work in the Internet industry,
Officer agrees that these restrictions are reasonable and acceptable to him.
(b) Officer promises that for a period of one (1) year after the termination
of this Agreement for any reason set forth in Section 5 of this Agreement,
Officer will not compete or perform services involving or related to USi's
primary product line.
(c) Officer further promises that for a period of one (1) year after the
termination of this Agreement for any reason set forth in Section 5 of this
Agreement, Officer will not (i) solicit the services of any employee or
independent contractor of USi; (ii) induce or encourage of USi's employees to
leave its employ, and (iii) have any commercial contact with, nor solicit
clients of USi.
(d) Officer acknowledges that if he violates this covenant not to compete,
USi is entitled to obtain a temporary restraining order or a preliminary and
permanent injunction (in addition to all other available remedies) from a court
enjoining Officer from violating this Agreement in order to prevent immediate
and irreparable harm to USi.
(e) Officer agrees that if any part of this covenant not to compete is held
to be unenforceable for any reason, this covenant shall be interpreted in a
manner that will render it enforceable.
10. FREEDOM TO CONTRACT.
The Officer represents and warrants that he has the right to negotiate
and enter into this Agreement and that this Agreement does not breach, interfere
with or conflict with any other contractual agreement, covenant not to compete,
option, right of first refusal, or other existing business relationship. Officer
acknowledges that this representation is a material inducement to USi entering
into this Agreement and in the event Officer breaches this warranty, Officer
agrees to indemnify and hold
5
<PAGE>
harmless USi from any and all claims, actions, losses, damages (including but
not limited to, reasonable attorney's fees and costs), and USi shall have the
right to terminate Officer for cause.
11. ARBITRATION.
Except for breaches or threatened breaches of the provisions of this
Agreement relating to equitable relief, any controversy or claim arising out of
or in any way between the Officer and USi, shall be submitted to arbitration.
Said arbitration shall be conducted pursuant to the provisions of the Federal
Arbitration Act, 9 U.S.C. Section et. seq. in an expeditious manner. The parties
agree that a final arbitration hearing shall be conducted on the first available
date of the arbitrator after the parties have completed discovery. In the event
of any litigation or arbitration proceeding, the same shall occur solely in
Annapolis, Maryland. In the event of litigation or arbitration arising out of
this Agreement or the employment relationship or any other claim between USi and
Officer, the prevailing party shall be entitled to recover any and all
reasonable attorney's fees and costs incurred both on the trial and appellate
level as well as the arbitration level and/or any appeal of the arbitration.
12. CONFIDENTIALITY.
Officer hereby agrees to keep confidential and not publish or publicly
disclose in any manner the terms or provisions of this Agreement including,
without limitation, those relating to compensation, during the employment term
hereunder or at any time thereafter, except that Officer may disclose this
Agreement to his legal counsel, financial advisors, agents, family or as
required by a court or governmental agency of competent jurisdiction.
13. GOVERNING LAW, VENUE AND WAIVER OF JURY TRIAL.
This Agreement including any disputes hereunder, and the interpretation,
validity and/or enforcement of any provision thereof, shall be governed by the
laws of the State of Maryland. any action brought involving the arbitration
and/or enforcement of any of the covenants of this Agreement shall be brought
only in a court of competent jurisdiction in Maryland and the parties agree to
waive any claim relating to forum non conveniens. The parties further agree and
hereby waive and release any right to a trial by jury in any action arising out
of the interpretation, enforcement or breach of this Agreement or any
arbitration provision.
14. ENTIRE AGREEMENT.
This Agreement contains the entire understanding between the parties and
supersedes and replaces any and all previous agreements and/or oral
negotiations. The parties stipulate and agree that neither of them has made any
representations concerning the execution and delivery of this Agreement except
such representations as specifically set forth herein and that all the terms and
conditions of this Agreement are set forth in this writing, and there are no
representations or agreement that are not so contained herein and that neither
party is relying upon any representation made by the other that is not contained
herein in connection with the negotiations and the terms of this Agreement. The
parties agree that this Agreement may only be changed or modified by an
agreement in writing signed by both parties.
15. WAIVER.
A waiver by either party of any term or condition of this Agreement in
any instance shall not be construed as a waiver of any other term or condition.
All remedies, rights and obligations
6
<PAGE>
contained in this Agreement shall be cumulative, and none of them shall be in on
of any offer remedy, right or obligations of either party.
IN WITNESS WHEREOF, the parties hereto have set their hands and seats on
the day and year first above
USinternetworking, Inc.
/s/ Christopher R. McCleary
---------------------------------
By: Christopher R. McCleary
Chairman and Chief Executive Officer
/s/ Jeffrey L. McKnight
--------------------------------
Officer.
7
<PAGE>
Exhibit 10.16
FIRST AMENDMENT TO OUTSOURCER ALLIANCE AGREEMENT
BETWEEN
USINTERNETWORKING, INC.
AND
PEOPLESOFT USA, INC.
(NON-EXCLUSIVE DISTRIBUTION TERMS)
This First Amendment ("First Amendment") to the Outsourcer Alliance Agreement
between PeopleSoft USA, Inc. and USINTERNETWORKING, INC. ("Service Provider")
dated September 28, 1998 ("Agreement") is effective as of 21 March 1999 ("First
Amendment Effective Date"). This Amendment is created pursuant to Section 14 (o)
of the Agreement. The parties agree that the Sections of the Agreement set forth
below are modified as follows:
1. DEFINITIONS
Unless otherwise defined herein, capitalized terms shall have the same meaning
as those referenced in the Agreement.
"COMMERCIAL ENTERPRISE" means only enterprises within the Market Segments
with annual revenues of not more than, [CONFIDENTIAL TREATMENT] as reported
on a consolidated basis in (1) such enterprise's most recent fiscal year end
audited financials, or if not available, (2) by the One Source database, with
the exception of enterprises in the higher education and government (public
sector and federal) segments where only a right of first refusal to a third
party is in effect.
"MINIMUM QUARTERLY ROYALTY GUARANTEE (MQRG)" means the minimum amount of
non-cancelable, non-refundable Software license fees that Service Provider is
obligated to pay PeopleSoft each applicable independent calendar quarter for
Service Provider's right to distribute Software, in the amounts as specifically
stated in the subsection entitled MINIMUM YEARLY ROYALTY GUARANTEES.
2. LICENSE GRANTS
THE FOLLOWING PARAGRAPH IS ADDED:
(a) INTERNAL USE LICENSE, (B) DEVELOPMENT LICENSE (C) END USER TRAINING LICENSE
In connection with Service Provider's enhanced rights under this First Amendment
to act as a distributor of the Software, PeopleSoft grants Service Provider: (1)
a personal, internal use license and development license to the Software listed
in Exhibit B hereto and which is commercially available as of the First
Amendment Effective Date; and (2) a personal End User Training license to the
software listed in Exhibit C hereto and which is commercially available as of
the First Amendment Effective Date.
Page 1 of 13
_______________________
[CONFIDENTIAL TREATMENT] means that certain confidential
information has been deleted from this document and filed
separately with the Securities and Exchange Commission.
<PAGE>
For these two new license rights, Service Provider shall pay PeopleSoft a
noncancelable, nonrefundable [CONFIDENTIAL TREATMENT] license fee on or
before 31 March 1999.
THE FOLLOWING NEW SUBSECTION IS ADDED:
(g) MINIMUM QUARTERLY ROYALTY GUARANTEES ("MQRG")
PeopleSoft grants Service Provider a non-exclusive right to distribute Software
solely to Commercial Enterprises in the Territory.
Service Provider shall pay PeopleSoft the following MQRGs for the period from 1
April 1999 until 31 December 2000 ("MQRG Term"):
<TABLE>
<CAPTION>
DATE PAYMENT DUE AMOUNT
---------------- ------
<S> <C>
30 June 99 the greater of actual Software license fees paid to PSFT (including the
addition of Software or Services paid by Service Provider to PeopleSoft under
the Software License and Service Agreement made as of March 31, 1999, to
process the internal data of [CONFIDENTIAL TREATMENT]) or [CONFIDENTIAL TREATMENT]
cumulative to date;
30 Sept 99 the greater of actual Software license fees paid to PSFT or [CONFIDENTIAL TREATMENT]
cumulative to date;
31 Dec 99 the greater of actual Software license fees paid to PSFT or [CONFIDENTIAL TREATMENT]
cumulative to date;
31 March 00 the greater of actual Software license fees paid to PSFT or [CONFIDENTIAL TREATMENT]
cumulative to date;
30 June 00 the greater of actual Software license fees paid to PSFT or [CONFIDENTIAL TREATMENT]
cumulative to date;
30 Sept 00 the greater of actual Software license fees paid to PSFT or [CONFIDENTIAL TREATMENT]
cumulative to date; and
31 Dec 00 the greater of actual Software license fees paid to PSFT or [CONFIDENTIAL TREATMENT]
cumulative to date.
</TABLE>
Unless the Agreement is properly terminated by Service Provider under Section 12
(b) or by PeopleSoft under Section 12 (b) or 12 (c), during the MQRG Term,
Service Provider's total MQRG to PeopleSoft shall be a non-cancelable,
non-refundable [CONFIDENTIAL TREATMENT].
Page 2 of 13
<PAGE>
For each Software license distributed, Service Provider shall pay PeopleSoft a
non-cancelable, non-refundable payment of [CONFIDENTIAL TREATMENT] of the
then-current list Software license fee charged to the End User or Designated
Customer as set forth in PeopleSoft's then-current price calculator or price
list. Service Provider has no rights to return Software licenses reported by
Service Provider from PeopleSoft.
A hypothetical example for illustrative purposes only is set forth in Exhibit A
hereto.
The accounting for and reporting of each MQRG payment shall be made by Service
Provider to PeopleSoft by the last day of each calendar quarter, with a
contemporaneous payment on that last day of the calendar quarter as well.
PeopleSoft shall have the right to adjust the list prices for the Software from
time to time and will provide Service Provider with at least ninety (90) days
prior written notice of such price increases and all such price increases shall
be general market price increases for all other third party providers of
Software or Support Services.
Service Provider shall Sublicense the Software only to Commercial Enterprise End
Users and only pursuant to sublicense agreements substantially in the form as
the PeopleSoft License Agreement, which includes all applicable increased
license fee payments based on an End User's growth.
In addition to the pertinent Software sublicense fee payable by Service
Provider to PeopleSoft, Service Provider shall also pay PeopleSoft Support
Services fees at the rate of [CONFIDENTIAL TREATMENT] of the then-current
value based multi-pricing model Software fee charged to of the Commercial
Enterprise End User license fee. Since the first year of Support Services is
included in the Software license fee, Service Provider's payment obligation
to PeopleSoft for Support Services arises one (1) year after the specific
Software modules are sublicensed to End Users. Service Provider has first
line Support Service obligations and PeopleSoft has second line Support
Service Obligations.
Service Provider shall have the right to transfer the right to use the
Software to a successor-in-interest to a specific End User with appropriate
growth clause payments payable to PeopleSoft less the [CONFIDENTIAL TREATMENT]
price reduction retained by Service Provider.
Service Provider shall have the right to provide End User's with access to
Service Provider's financing programs and offer any financing entity the right
to retain a security interest solely in the Software license, with limited
remarketing capabilities vesting in the Service Provider's financing entity for
the specific End User Software license only upon the prior written consent of
PeopleSoft (which consent shall not be unreasonably withheld or delayed). Title
to the Software shall not transfer to Service Provider, the End User or any
other entity.
After the First Amendment Effective Date, all payments under the Agreement and
the Select Partner Agreement between Service Provider (as a Select Partner) and
PeopleSoft,
Page 3 of 13
<PAGE>
dated June 30, 1998, (except the Annual Select Partner Program Fee) may be
credited towards satisfying the MQRG. Service Provider's payments under the
Agreement shall be credited towards satisfying the MQRG in the full amount of
the licensing fee that would have been paid by Service Provider but for the
revenue sharing model of aggregate Fees under Exhibit A of the Agreement.
On a limited case by case basis by separate written amendment to the
Agreement, PeopleSoft, may authorize Service Provider to distribute or
Sublicense the Software to enterprises with annual revenues of more than
[CONFIDENTIAL TREATMENT]. Distribution outside of the Commercial Enterprise
parameter will be the exception rather than the rule and PeopleSoft shall
have complete discretion to make the decision in that regard. Service
Provider commits to the [CONFIDENTIAL TREATMENT]MQRG above based on a
distribution model solely to Commercial Enterprises, however, in the event
distribution outside of the Commercial Distribution model is granted by
PeopleSoft in its discretion, amounts thereby received by Service Provider
shall then be applied against the MQRG.
5. TERMS
THE FOLLOWING NEW SENTENCE IS ADDED AT THE END OF THE CURRENT SUBSECTION
ENTITLED REPORTING:
Service Provider shall also provide PeopleSoft with reports as set forth above
for Software licenses acquired and distributed pursuant to Section 1 (g).
6. MARKETING OBLIGATIONS
THE FOLLOWING NEW SUBSECTION IS ADDED:
(a) PARTIES' OBLIGATIONS.
(3) Service Provider shall contribute not less than [CONFIDENTIAL TREATMENT]
in co-marketed print advertising campaigns with PeopleSoft over a two
year period commencing on the First Amendment Effective Date, with the
condition that Service Provider shall not contribute any more money
for a particular advertising campaign than that contributed by any
other Outsourcing Alliance Partner mentioned in the same campaign.
PeopleSoft has no financial contribution responsibility under this
subsection. The contributions shall be amortized over the two year
period as the parties mutually agree in writing, but in the absence of a
written agreement, the amounts shall be [CONFIDENTIAL TREATMENT]
accumulated quarter per calendar quarter. Service Provider's contribution
obligation under this Section shall cease immediately upon notification
by PeopleSoft of its notice to terminate the Agreement pursuant to
Section 12 (b) or 12 (c).
Page 4 of 13
<PAGE>
7.5 PEOPLESOFT OBLIGATIONS
THE FOLLOWING NEW SUBSECTION IS ADDED:
(a) PEOPLESOFT SALES FORCE COMPENSATION PLAN
When Service Provider Sublicenses Software licenses pursuant to Section 2
(g), PeopleSoft shall pay its direct sales force employees commissions in the
same amounts as if [CONFIDENTIAL INFORMATION]. In no event shall the
commissions payable by PeopleSoft to its sales force be less than PeopleSoft
otherwise commissions its sales force for Software licenses marketed through
any other Outsource Alliance Partner.
Within five (5) business days of the First Amendment Effective Date, PeopleSoft
shall communicate immediately to its sales force that it may conduct business
and market with Service Provider. Within thirty (30) days of signing, PeopleSoft
shall have in full force and effect a PeopleSoft Sales Force Compensation Plan,
as described in the preceding paragraph.
12. TERM AND TERMINATION
THE FOLLOWING NEW SUBSECTION (C)REPLACES THE EXISTING SUBSECTION:
(i) Either party may terminate this Agreement for any reason or no reason at
all, not less than ninety (90) days after giving the other party written notice
of intent to so terminate.
Such a convenience termination by Service Provider will not diminish or
eliminate Service Provider's obligation to pay PeopleSoft all past, current
and future MQRGs. For the avoidance of doubt all [CONFIDENTIAL TREATMENT]
MQRG obligations of Service Provider shall survive termination of this
Agreement for convenience by Service Provider; provided, however, that all
future MQRG's due and owing at the time of termination for convenience by
Service Provider shall not be accelerated but shall be paid according to the
MQRG Term schedule set forth in Section 1 (g) above.
Page 5 of 13
<PAGE>
14. GENERAL
THE FOLLOWING NEW SUBSECTION IS ADDED:
(p) In any action to enforce the terms of the Agreement, the prevailing party
shall be entitled to its reasonable attorney's fees, costs and expenses.
In addition to the terms of this First Amendment, all other terms and conditions
of the Agreement remain in full force and effect. In the event any term
contained in this First Amendment conflicts with any term in the Agreement, the
term set forth in this First Amendment shall take precedence. The parties hereto
have caused this First Amendment to be executed by their duly authorized
representatives as of the First Amendment Effective Date.
USINTERNETWORKING, INC. PEOPLESOFT USA, INC.
- --------------------------------- -----------------------------
Authorized Signature Authorized Signature
- --------------------------------- -----------------------------
Printed Name Printed Name
- --------------------------------- ----------------------------
Title Title
Page 6 of 13
<PAGE>
EXHIBIT A
<TABLE>
<CAPTION>
Actual Qtr.Activity MQRG Payments
<S> <C> <C> <C>
6/30/99 [CONFIDENTIAL TREATMENT] [CONFIDENTIAL TREATMENT] [CONFIDENTIAL TREATMENT] activity is paid along with
[CONFIDENTIAL TREATMENT] shortfall
9/30/99 [CONFIDENTIAL TREATMENT] [CONFIDENTIAL TREATMENT] [CONFIDENTIAL TREATMENT] activity is paid along with
[CONFIDENTIAL TREATMENT] cumulative shortfall is paid to
reach the [CONFIDENTIAL TREATMENT] cumulative MQRG
12/31/99 [CONFIDENTIAL TREATMENT] [CONFIDENTIAL TREATMENT] [CONFIDENTIAL TREATMENT] activity is paid; Cumulative
actual of [CONFIDENTIAL TREATMENT] against
[CONFIDENTIAL TREATMENT] cumulative MQRG
3/31/00 [CONFIDENTIAL TREATMENT] [CONFIDENTIAL TREATMENT] [CONFIDENTIAL TREATMENT] is paid; Cumulative actual of
[CONFIDENTIAL TREATMENT] against [CONFIDENTIAL TREATMENT]
MQRG
6/30/00 [CONFIDENTIAL TREATMENT] [CONFIDENTIAL TREATMENT] [CONFIDENTIAL TREATMENT] is paid, Cumulative actual of
[CONFIDENTIAL TREATMENT] against [CONFIDENTIAL TREATMENT]
cumulative MQRG, therefore additional [CONFIDENTIAL TREATMENT]
is paid
</TABLE>
Page 7 of 13
<PAGE>
EXHIBIT B
SOFTWARE / SERVICES
<TABLE>
<CAPTION>
------------------------------------------------------------------ --------------------------- ---------------- ----------------
SOFTWARE MODULES MFR. PROVIDED COPIES FEE
---------------- ---- --------------- ---
------------------------------------------------------------------ --------------------------- ---------------- ----------------
<S> <C> <C>
HRMS SOFTWARE MODULES
------------------------------------------------------------------ --------------------------- ---------------- ----------------
Human Resources PeopleSoft, Inc. 1
------------------------------------------------------------------ --------------------------- ---------------- ----------------
Benefits Administration PeopleSoft, Inc. 1
------------------------------------------------------------------ --------------------------- ---------------- ----------------
Payroll(1) PeopleSoft, Inc. 1
------------------------------------------------------------------ --------------------------- ---------------- ----------------
Payroll Interface PeopleSoft, Inc. 1
------------------------------------------------------------------ --------------------------- ---------------- ----------------
Time & Labor(2) PeopleSoft, Inc. 1
------------------------------------------------------------------ --------------------------- ---------------- ----------------
FSA Administration PeopleSoft, Inc. 1
------------------------------------------------------------------ --------------------------- ---------------- ----------------
------------------------------------------------------------------ --------------------------- ---------------- ----------------
FINANCIALS SOFTWARE MODULES
------------------------------------------------------------------ --------------------------- ---------------- ----------------
General Ledger PeopleSoft, Inc. 1
------------------------------------------------------------------ --------------------------- ---------------- ----------------
Budgets(3) PeopleSoft, Inc. 1
------------------------------------------------------------------ --------------------------- ---------------- ----------------
Asset Management(4) PeopleSoft, Inc. 1
------------------------------------------------------------------ --------------------------- ---------------- ----------------
Payables PeopleSoft, Inc. 1
------------------------------------------------------------------ --------------------------- ---------------- ----------------
Receivables PeopleSoft, Inc. 1
------------------------------------------------------------------ --------------------------- ---------------- ----------------
Billing PeopleSoft, Inc. 1
------------------------------------------------------------------ --------------------------- ---------------- ----------------
Projects(5) PeopleSoft, Inc. 1
------------------------------------------------------------------ --------------------------- ---------------- ----------------
Expenses PeopleSoft, Inc. 1
------------------------------------------------------------------ --------------------------- ---------------- ----------------
------------------------------------------------------------------ --------------------------- ---------------- ----------------
------------------------------------------------------------------ --------------------------- ---------------- ----------------
Cash Management, Deal Management and Risk Management PeopleSoft, Inc. 1
------------------------------------------------------------------ --------------------------- ---------------- ----------------
------------------------------------------------------------------ --------------------------- ---------------- ----------------
DISTRIBUTION SOFTWARE MODULES
------------------------------------------------------------------ --------------------------- ---------------- ----------------
Purchasing PeopleSoft, Inc. 1
------------------------------------------------------------------ --------------------------- ---------------- ----------------
Inventory PeopleSoft, Inc. 1
------------------------------------------------------------------ --------------------------- ---------------- ----------------
Order Management(6) PeopleSoft, Inc. 1
------------------------------------------------------------------ --------------------------- ---------------- ----------------
Product Configurator PeopleSoft, Inc. 1
------------------------------------------------------------------ --------------------------- ---------------- ----------------
Order Promising PeopleSoft, Inc. 1
------------------------------------------------------------------ --------------------------- ---------------- ----------------
Remote Order Entry PeopleSoft, Inc. 1
------------------------------------------------------------------ --------------------------- ---------------- ----------------
MANUFACTURING SOFTWARE MODULES(7)
------------------------------------------------------------------ --------------------------- ---------------- ----------------
</TABLE>
- ----------------------
(1) The license for the Payroll Software module includes a restricted use
license for the Human Resources Software module. Such restricted use
license means that the Human Resources Software module shall only be
used in order to access the features and functions of the Payroll
Software module.
(2) The license for the Time and Labor Software module includes a
restricted use license for the Human Resources Software module. Such
restricted use license means that the Human Resources Software module
shall only be used in order to access the features and functions of
the Time and Labor Software module.
(3) The license for the Budgets Software module includes a restricted use
license for the General Ledger Software module. Such restricted use
license means that the General Ledger Software module shall only be
used in order to access the features and functions of the Budgets
Software module.
(4) The server version of SQR MUST be licensed.
(5) The license for the Projects Software module includes a restricted use
license for General Ledger. Such restricted use license means that the
General Ledger Software module shall only be used in order to access
the features and functions of the Projects Software module.
(6) The license for the Order Management Software module includes a
restricted use license for the Inventory Software module. Such
restricted use license means that the Inventory Software module shall
only be used in order to access the features and functions of the
Order Management Software module.
(7) The license for any Manufacturing Software module includes a
restricted use license for the Inventory Software module. Such
restricted use license means that the Inventory Software module shall
only be used in order to access the
Page 8 of 13
<PAGE>
<TABLE>
<S> <C> <C>
------------------------------------------------------------------ --------------------------- ---------------- ----------------
Engineering PeopleSoft, Inc. 1
------------------------------------------------------------------ --------------------------- ---------------- ----------------
Bills and Routing PeopleSoft, Inc. 1
------------------------------------------------------------------ --------------------------- ---------------- ----------------
Production Planning - Basic PeopleSoft, Inc. 1
------------------------------------------------------------------ --------------------------- ---------------- ----------------
Production Planning - Advanced PeopleSoft, Inc. 1
------------------------------------------------------------------ --------------------------- ---------------- ----------------
Production Management PeopleSoft, Inc. 1
------------------------------------------------------------------ --------------------------- ---------------- ----------------
Cost Management PeopleSoft, Inc. 1
------------------------------------------------------------------ --------------------------- ---------------- ----------------
Quality PeopleSoft, Inc. 1
------------------------------------------------------------------ --------------------------- ---------------- ----------------
------------------------------------------------------------------ --------------------------- ---------------- ----------------
------------------------------------------------------------------ --------------------------- ---------------- ----------------
------------------------------------------------------------------ --------------------------- ---------------- ----------------
------------------------------------------------------------------ --------------------------- ---------------- ----------------
------------------------------------------------------------------ --------------------------- ---------------- ----------------
------------------------------------------------------------------ --------------------------- ---------------- ----------------
------------------------------------------------------------------ --------------------------- ---------------- ----------------
------------------------------------------------------------------ --------------------------- ---------------- ----------------
OTHER SOFTWARE
------------------------------------------------------------------ --------------------------- ---------------- ----------------
PeopleTools - Restricted Development(8) PeopleSoft, Inc. 1 Included
------------------------------------------------------------------ -------------------------- ----------------- ----------------
Workstation Access for "n"(9) users (includes base application PeopleSoft, Inc. Sybase, Included Included
access, PeopleSoft Workflow, Workstation SQR, QueryLink, Inc./SQRIBE
Crystal, nVision). Technologies Crystal
Computer Services
------------------------------------------------------------------ --------------------------- ---------------- ----------------
Server SQR for "n" servers(10) Sybase, Inc./ SQRIBE 1 Included
Technologies.
------------------------------------------------------------------ --------------------------- ---------------- ----------------
PowerPlay 5 user pack(11) Cognos Corp. 1 Included
------------------------------------------------------------------ --------------------------- ---------------- ----------------
PeopleTools - General Dev.(12) PeopleSoft, Inc. 1
------------------------------------------------------------------ --------------------------- ---------------- ----------------
Test and Development License PeopleSoft, Inc. 1
------------------------------------------------------------------ --------------------------- ---------------- ----------------
------------------------------------------------------------------ --------------------------- ---------------- ----------------
SUBTOTAL LICENSE FEES: $
---------------------------------------------------------------------------------------------------------------- ---------------
</TABLE>
1. SPECIFIC LICENSED USE: Licensee's use of the Software is limited to
each of the following restrictions.
<TABLE>
<CAPTION>
<S> <C>
------------------------------------------------------------------------------------------------ -------------------------------
TERRITORY United States of America
------------------------------------------------------------------------------------------------ -------------------------------
SOFTWARE(13) (indicate the country specific global version or local version(14) for each American English language
country within the Territory in which or for which the Software will be used) with U.S. functionality
------------------------------------------------------------------------------------------------ -------------------------------
</TABLE>
- ---------------------
features and functions of such licensed Manufacturing Software
modules.
(8) PeopleTools for Restricted Development shall be used by Licensee to
develop interfaces and modification only to the licensed PeopleSoft
Software application modules.
(9) "n" is that number necessary to effect the purpose for which the
Software is licensed in accordance with this Agreement.
(10) Licensee must license one (1) copy of Server SQR for each server upon
which it has installed the Software.
(11) PowerPlay shall be licensed for each named user.
12) PeopleTools for General Development shall be used solely to develop
applications for Licensee's internal systems. Licensee shall not
market or distribute such applications. Any third party software
required by Licensee must be licensed directly from PeopleSoft or the
software manufacturer.
(13) PeopleSoft makes no representations regarding any functionality
contained in the Software versions to which Licensee has rights as set
forth in this table except as set forth in the Documentation. Except
as otherwise explicitly set forth in this Schedule, Licensee shall not
be entitled to: (i) local country Support Services, including without
limitation, account management; or (ii) local country installation.
Page 9 of 13
<PAGE>
2. TECHNICAL ENVIRONMENT:
<TABLE>
<CAPTION>
--------------------------- ------------------------ -------------------------- --------------------------- ----------------------
DATABASE VERSION HARDWARE MODEL OPERATING SYSTEM CLIENTS TOPOLOGY/NETWORK
--------------------------- ------------------------ -------------------------- --------------------------- ----------------------
<S> <C> <C> <C> <C>
HP HP UX Windows Ethernet
Oracle
--------------------------- ------------------------ -------------------------- --------------------------- ----------------------
</TABLE>
3. INCREMENTAL LICENSE FEES: Licensee may use the Software licensed pursuant
to this Schedule to process its data, provided that Licensee's employee count
does not exceed [CONFIDENTIAL TREATMENT] employees. Each year on the
Anniversary Date (defined as the month and date of the Schedule Effective
Date), Licensee shall report to PeopleSoft the number of employees ("REPORTED
EMPLOYEES") when the number of employees exceeds [CONFIDENTIAL TREATMENT],
Licensee shall pay PeopleSoft an additional non-refundable, non-cancelable
license fees equal to the then current Incremental expansion fee as set forth
in PeopleSoft's then current price list for each incremental increase in
employee count Licensee shall pay additional license fees in accordance with
the terms set forth herein upon each Report.
- --------------------
(14) Local support services must be purchased for each country in which or
for which a local version of the Software will be used.
Page 10 of 13
<PAGE>
EXHBIT C
SCHEDULE
TO THE
FIRST AMENDMENT TO OUTSOURCER ALLIANCE AGREEMENT
This independent Schedule ("SCHEDULE") is made as of 21 March 1999 ("SCHEDULE
EFFECTIVE DATE") by and between PeopleSoft USA, Inc. ("PEOPLESOFT") and
USINTERNETWORKING, INC. ("LICENSEE"). This Schedule is part of the First
Amendment to the Outsource Alliance Agreement between the parties dated 21 March
1999 ("AGREEMENT"). Capitalized terms used herein shall have the same meaning
ascribed to them in the Agreement.
1. LICENSE GRANT: PeopleSoft grants to Licensee a non-exclusive,
nontransferable, perpetual license to use those PeopleSoft End-User Training
products for the application(s) listed below ("MATERIALS") and to make an
unlimited number of copies of the Materials only as necessary to provide
End-User Training solely to Licensee's employees and Designated Customers and
End Users for the Software, subject to the terms and conditions set forth in the
Agreement for such Software, provided all copyright notices are reproduced as
provided on the original. Licensee is prohibited from reselling or distributing
the Materials to any other party, or using the Materials other than as
explicitly permitted herein or in the Agreement. PeopleSoft represents that the
Materials contain valuable proprietary information. PeopleSoft (or its
third-party Software providers) retains title to all portions of the Materials
and any copies thereof. If Licensee creates a modification to the Materials,
Licensee shall only have title in such modification that remains after the
Developer's Kit has been separated from the modification ("LICENSEE
MODIFICATION"). Licensee shall use Materials modifications created by Licensee
solely for its internal use in accordance with the terms of this Agreement. In
the event Licensee provides Licensee Modifications to PeopleSoft, PeopleSoft
shall have a perpetual, royalty-free license from Licensee to use, enhance and
incorporate such modifications into PeopleSoft's software products for use and
distribution. Licensee may provide access to and use of the Materials only to
those third parties that: (i) provide services to Licensee concerning Licensee's
use of the Materials; (ii) have a need to use and access the Materials; and
(iii) have agreed to substantially similar non-disclosure obligations imposed by
Licensee as those contained in the Agreement.
<TABLE>
<CAPTION>
---------------------------------------------------------- ------------------------------- -------------------- ----------------
Materials(15) MFR. PROVIDED COPIES FEE
---------------------------------------------------------- ------------------------------- -------------------- ----------------
<S> <C> <C> <C>
---------------------------------------------------------- ------------------------------- -------------------- ----------------
MATERIALS THAT SUPPORT HRMS SOFTWARE MODULES
---------------------------------------------------------- ------------------------------- -------------------- ----------------
Human Resources Version 6 PeopleSoft, Inc. 1 $
---------------------------------------------------------- ------------------------------- -------------------- ----------------
Human Resources Version 7 PeopleSoft, Inc. 1 $
---------------------------------------------------------- ------------------------------- -------------------- ----------------
Human Resources Version 7.5 PeopleSoft, Inc. 1 $
---------------------------------------------------------- ------------------------------- -------------------- ----------------
Human Resources for Canada Version 6 PeopleSoft, Inc. 1 $
---------------------------------------------------------- ------------------------------- -------------------- ----------------
Human Resources for Canada Version 7 PeopleSoft, Inc. 1 $
---------------------------------------------------------- ------------------------------- -------------------- ----------------
Human Resources for Canada Version 7.5 PeopleSoft, Inc. 1 $
---------------------------------------------------------- ------------------------------- -------------------- ----------------
Human Resources for Global Functionality Version 7.5 PeopleSoft, Inc. 1 $
---------------------------------------------------------- ------------------------------- -------------------- ----------------
Human Resources for Education and Gov't Version 7 PeopleSoft, Inc. 1 $
---------------------------------------------------------- ------------------------------- -------------------- ----------------
Benefits Administration Version 6 PeopleSoft, Inc. 1 $
---------------------------------------------------------- ------------------------------- -------------------- ----------------
Benefits Administration Version 7 PeopleSoft, Inc. 1 $
---------------------------------------------------------- ------------------------------- -------------------- ----------------
Benefits Administration Version 7.5 PeopleSoft, Inc. 1 $
---------------------------------------------------------- ------------------------------- -------------------- ----------------
Benefits Administration for Education and PeopleSoft, Inc. 1 $
Gov't Version 7
---------------------------------------------------------- ------------------------------- -------------------- ----------------
Payroll Version 6 PeopleSoft, Inc. 1 $
---------------------------------------------------------- ------------------------------- -------------------- ----------------
Payroll Version 7 PeopleSoft, Inc. 1 $
---------------------------------------------------------- ------------------------------- -------------------- ----------------
Payroll Version 7.5 PeopleSoft, Inc. 1 $
---------------------------------------------------------- ------------------------------- -------------------- ----------------
Payroll for Canada Version 7.5 PeopleSoft, Inc. 1 $
---------------------------------------------------------- ------------------------------- -------------------- ----------------
</TABLE>
- -----------------
(15) The license for any Materials includes a limited use license for the
Single User version of the associated Software module. Such limited
use license means that the Single User version shall only be used in
order to access the features and functions of such licensed Materials.
All Materials are in English and support the American English global
Software module functionality only, unless explicitly stated
otherwise.
Page 11 of 13
<PAGE>
<TABLE>
<S> <C> <C> <C>
---------------------------------------------------------- ------------------------------- -------------------- ----------------
Payroll for Education and Gov't Version 7 PeopleSoft, Inc. 1 $
---------------------------------------------------------- ------------------------------- -------------------- ----------------
Time & Labor Version 7.5 PeopleSoft, Inc. 1 $
---------------------------------------------------------- ------------------------------- -------------------- ----------------
MATERIALS THAT SUPPORT FINANCIALS SOFTWARE MODULES
---------------------------------------------------------- ------------------------------- -------------------- ----------------
General Ledger Version 6 PeopleSoft, Inc. 1 $
---------------------------------------------------------- ------------------------------- -------------------- ----------------
General Ledger Version 7 PeopleSoft, Inc. 1 $
---------------------------------------------------------- ------------------------------- -------------------- ----------------
General Ledger Version 7.5 PeopleSoft, Inc. 1 $
---------------------------------------------------------- ------------------------------- -------------------- ----------------
Payables Version 6 PeopleSoft, Inc. 1 $
---------------------------------------------------------- ------------------------------- -------------------- ----------------
Payables Version 7 PeopleSoft, Inc. 1 $
---------------------------------------------------------- ------------------------------- -------------------- ----------------
Payables Version 7.5 PeopleSoft, Inc. 1 $
---------------------------------------------------------- ------------------------------- -------------------- ----------------
Receivables Version 6 PeopleSoft, Inc. 1 $
---------------------------------------------------------- ------------------------------- -------------------- ----------------
Receivables Version 7 PeopleSoft, Inc. 1 $
---------------------------------------------------------- ------------------------------- -------------------- ----------------
Receivables Version 7.5 PeopleSoft, Inc. 1 $
---------------------------------------------------------- ------------------------------- -------------------- ----------------
Billing Version 7.5 PeopleSoft, Inc. 1 $
---------------------------------------------------------- ------------------------------- -------------------- ----------------
MATERIALS THAT SUPPORT DISTRIBUTION SOFTWARE MODULES
--------------------------------------------------------------------------------------------------------------------------------
Purchasing Version 6 PeopleSoft, Inc. 1 $
---------------------------------------------------------- ------------------------------- -------------------- ----------------
Purchasing Version 7 PeopleSoft, Inc. 1 $
---------------------------------------------------------- ------------------------------- -------------------- ----------------
Purchasing Version 7.5 PeopleSoft, Inc. 1 $
---------------------------------------------------------- ------------------------------- -------------------- ----------------
Inventory Version 7.5 PeopleSoft, Inc. 1 $
---------------------------------------------------------- ------------------------------- -------------------- ----------------
Other Materials
--------------------------------------------------------------------------------------------------------------------------------
Developer's Kit - Customization Development(16) PeopleSoft, Inc. 1 Included
---------------------------------------------------------- ------------------------------- -------------------- ----------------
Developer's Kit - Customization Development Including PeopleSoft, Inc. 1 Included
Translation Rights(17)
---------------------------------------------------------- ------------------------------- -------------------- ----------------
Developer's Kit - New Dev.(18) for PeopleSoft's HRMS PeopleSoft, Inc. 1 $
Software Modules
---------------------------------------------------------- ------------------------------- -------------------- ----------------
Developer's Kit - New Dev.(19) for PeopleSoft's Financials PeopleSoft, Inc. 1 $
Software Modules
---------------------------------------------------------- ------------------------------- -------------------- ----------------
Developer's Kit - New Dev.(20) for PeopleSoft's PeopleSoft, Inc. 1 $
Distribution Software Modules
---------------------------------------------------------- ------------------------------- -------------------- ----------------
Developer's Kit - New Dev.(21) for PeopleSoft's PeopleSoft, Inc. 1 $
Manufacturing Software Modules
---------------------------------------------------------- ------------------------------- -------------------- ----------------
</TABLE>
- ---------------
(16) Developer's Kit for Customization Development shall be used by
Licensee only to develop minor customizations including upgrades to
the licensed Materials set forth above. Licensee shall NOT have the
right to translate the licensed version of the Materials to another
language.
(17) Developer's Kit for Customization Development Including Translation
Rights shall be used by Licensee only to develop minor customizations
including upgrades and translations to the licensed Materials set
forth above, provided however, Licensee shall have the right to
translate to a different country language only within the associated
Territory.
(18) Developer's Kit for New Development shall be used solely to develop
end user training products which are not available from PeopleSoft for
the exclusive benefit of Licensee to support those Software modules
licensed by Licensee. Licensee shall not market or distribute such end
user training products.
(19) Developer's Kit for New Development shall be used solely to develop
end user training products which are not available from PeopleSoft for
the exclusive benefit of Licensee to support those Software modules
licensed by Licensee. Licensee shall not market or distribute such end
user training products.
(20) Developer's Kit for New Development shall be used solely to develop
end user training products which are not available from PeopleSoft for
the exclusive benefit of Licensee to support those Software modules
licensed by Licensee. Licensee shall not market or distribute such end
user training products.
(21) Developer's Kit for New Development shall be used solely to develop
end user training products which are not available from PeopleSoft for
the exclusive benefit of Licensee to support those Software modules
licensed by Licensee. Licensee shall not market or distribute such end
user training products.
Page 12 of 13
<PAGE>
<TABLE>
<S> <C> <C> <C>
---------------------------------------------------------- ------------------------------- -------------------- ----------------
Developer's Kit - New Dev.(22) for PeopleSoft's Supply PeopleSoft, Inc. 1 $
Chain Software Modules
---------------------------------------------------------- ------------------------------- -------------------- ----------------
Developer's Kit - New Dev.(23) for PeopleSoft's Student PeopleSoft, Inc. 1 $
Administration Software Modules
---------------------------------------------------------- ------------------------------- -------------------- ----------------
Reporting 7.5 - HRMS PeopleSoft, Inc. 1 $
---------------------------------------------------------- ------------------------------- -------------------- ----------------
Reporting 7.5 - Financials and Distribution PeopleSoft, Inc. 1 $
---------------------------------------------------------- ------------------------------- -------------------- ----------------
TOTAL FEES: $
--------------------------------------------------------------------------------------------------------------- ----------------
</TABLE>
2. HOTLINE SUPPORT: Notwithstanding anything to the contrary, the Materials are
NOT covered under the terms and conditions of PeopleSoft's Software Support
Services program. Licensee shall be eligible to receive only hotline support for
the Materials for a period of two years commencing on the Schedule Effective
Date, at no additional support fee. The support number for the Materials for
Licensee is 919-676-5960 ex.222, toll free if Licensee is located in the U.S.
and Canada is 1-888-636-3873. (PLEASE NOTE THAT THIS NUMBER IS DIFFERENT FROM
THAT OF PEOPLESOFT'S GLOBAL SUPPORT CENTER, USED FOR SUPPORT ON OTHER PEOPLESOFT
PRODUCTS.)
<TABLE>
<CAPTION>
- ----------------------------------- --------------------------------- --------------------------------
SHIPPING INFORMATION BILLING INFORMATION TRAINING ADMINISTRATOR
- ----------------------------------- --------------------------------- --------------------------------
<S> <C> <C>
Contact: SAME AS ORIGINAL Contact: Contact: Wendy Moore
- ----------------------------------- --------------------------------- --------------------------------
Address: Address: Address:
- ----------------------------------- --------------------------------- --------------------------------
- ----------------------------------- --------------------------------- --------------------------------
- ----------------------------------- --------------------------------- --------------------------------
Phone: Phone: Phone:
- ----------------------------------- --------------------------------- --------------------------------
Fax: Fax: Fax:
- ----------------------------------- --------------------------------- --------------------------------
</TABLE>
- ------------------------
(22) Developer's Kit for New Development shall be used solely to develop
end user training products which are not available from PeopleSoft for
the exclusive benefit of Licensee to support those Software modules
licensed by Licensee. Licensee shall not market or distribute such end
user training products.
(23) Developer's Kit for New Development shall be used solely to develop
end user training products which are not available from PeopleSoft for
the exclusive benefit of Licensee to support those Software modules
licensed by Licensee. Licensee shall not market or distribute such end
user training products.
Page 13 of 13
<PAGE>
OUTSOURCER ALLIANCE AGREEMENT
WITH
USINTERNETWORKING, INC.
This Outsourcer Alliance Agreement ("Agreement") is made as of the Effective
Date by and between PeopleSoft USA, Inc., a California corporation having
its principal place of business at 4305 Hacienda Drive, Pleasanton, CA 94588
("PeopleSoft") and USINTERNETWORKING, INC., a Delaware corporation having its
principal place of business at One USI Plaza, Annapolis, MD 21401-7478
("Service Provider"). This Agreement shall delete and supersede in their
entirety all prior contractual provisions or understandings between the
parties relating to any service bureau arrangements or any of the subject
matter relating to Outsourcing Services contemplated by this Agreement
excluding the customers of Service Provider listed on Schedule A attached
hereto; PROVIDED, HOWEVER, this this Agreement shall not have any effect upon
any contractual provisions relating to the status of Service Provider as a
Select Partner pursuant to that certain Select Partner Agreement dated as of
June 30, 1998 by and between the parties.
Whereas, the parties intend to develop a business relationship to provide
Service Provider with rights to leverage its expertise in the outsourcing
service business by hosting the Software to provide a solution within its
outsourcing business by offering the Software under sublicense as provided in
this Agreement as part of an integrated solution (the "Solution Offering");
and
Whereas, in every situation with a Designated Customer, the Designated
Customer will procure, or will have procured, either a license to use the
Software from Service Provider pursuant to a Sublicense Agreement with
payment of applicable fees indirectly to PeopleSoft, or directly from
PeopleSoft pursuant to a PeopleSoft License Agreement with payment of
applicable fees directly to PeopleSoft. Therefore, the parties agree as
follows:
1. DEFINITIONS
"APPLICATION MANAGEMENT" ("AM") means Service Provider's management of
Software for a Designated Customer on Service Provider's owned, leased, or
subcontracted for premises or premises otherwise under Service Provider's
control, such that Service Provider manages the Designated Customer's
Software, applications upgrades, performs routine maintenance, applies fixes,
performance tuning, and system enhancements, using PeopleTools, and other
functions typically performed by an in-house function and IT staff. These
services may also include the performance of such functions as DBA and OS
administration, in connection with the Software and business processes
supported by the Software. For the avoidance of doubt, Applications
Management shall not include Business Process Outsourcing.
"BUSINESS PROCESS OUTSOURCING" ("BPO") includes the functions typically
performed by staff in, for example, human resources or payroll department,
an accounting department, or
- --------------
[CONFIDENTIAL TREATMENT] means that certain confidential information has been
deleted from this document and filed separately with the Securities and
Exchange Commission.
<PAGE>
purchasing department, on a daily basis, adding, changing, deleting, or
viewing data. BPO displaces performance of this work by the Designated
Customer to premises owned or leased by Service Provider or under Service
Provider's control within a multi-client service center such that the
Designated Customers share a common infrastructure and support staff and the
Service Provider is responsible for maintenance and management of the
systems, processes, and staff using the Service Provider's systems.
"COMMERCIAL ENTERPRISE" means all enterprises within the Market Segments,
with the exception of enterprises in the higher education and government
(public sector and federal) segments where only a right of first refusal to a
third party is in effect.
"DESIGNATED CUSTOMER(S)" means only End Users which, at the date of
execution of an Outsourcing Agreement with Service Provider, is a Commercial
Enterprise.
"DEVELOPMENT CENTER" means the location(s) of facilities owned, leased,
subcontracted for, or otherwise under Service Provider's control where
Service Provider uses or utilizes the Software pursuant to the subsections
entitled INTERNAL USE LICENSE or DEVELOPMENT LICENSE.
"DOCUMENTATION" means the user guides and manuals for installation and use of
the Software in CD-ROM and bound hard copy form.
"EFFECTIVE DATE" means September 28, 1998.
"END USER" means a third party sublicensee of the Software that acquires
rights from PeopleSoft either through a sublicense from Service Provider
pursuant to section 2(f) hereof or from PeopleSoft directly, to use the
Software solely for such party's own internal business purposes and not for
distribution, further sublicensing, or other commercial purposes.
"FEES" means the Software license fee and any all other fees including, but
not limited to, implementation fees (including fit analysis, data conversion,
minor customizations, testing, reports, interfaces and any and all other
actions necessary to migrate an End User to a production environment),
infrastructure (including, but not limited to, the operations, the
connectivity, the database and the hardware), Software Maintenance and
Support and On-going fees (including, but not limited to, the application of
fixes, enhancements, releases, upgrades, call center support, and
database/performance tuning) received by Service Provider for the provision
of Outsourcing Services or Solution Offering, as the case may be.
"INTELLECTUAL PROPERTY RIGHTS" means any patent, patent application,
copyright, moral right, trade name, trademark, trade secret, copyright, and
any applications or right to apply for registration therefor, know-how, mask
work, schematics, computer software programs or applications, tangible or
intangible proprietary information, or any other intellectual property right
or proprietary information or technology, whether registered or unregistered
and whether first made or created before or after the Effective Date.
<PAGE>
"MARKET SEGMENTS" are limited under this agreement to all industries in the
Territory, with the exception of the higher education and government (public
sector and federal) segments where only a right of first refusal to a third
party is in effect.
"OUTSOURCING AGREEMENT" means a separate agreement between Service Provider and
a Designated Customer for the provision by Service Provider to the Designated
Customer of Outsourcing Services, which includes a Sublicense Agreement or
PeopleSoft License Agreement.
"OUTSOURCING CENTER" means the location(s) under Service Provider's control,
owned, leased, subcontracted for or otherwise, at which Service Provider may
perform Outsourcing Services.
"OUTSOURCING SERVICES" means the provision of Applications Management (AM)
services to a Designated Customer.
"PEOPLESOFT LICENSE AGREEMENT" means a written agreement between PeopleSoft and
an End User whereby the End User has been granted the non-exclusive,
non-transferable right to use the Software solely for such End User's internal
business purposes and in accordance with the Documentation. A PeopleSoft
License Agreement can be a binding agreement which commenced operation before
the Effective Date or PeopleSoft's pro forma standard End User license and
services agreement which is executed by an End User after the Effective Date.
"PRICE LIST" means Peoplesoft's standard commercial fee schedule that is in
effect when a software sublicense is ordered by the Designated Customer.
"SOFTWARE" means the current release or version of any and all commercially
available PeopleSoft HRMS, Financial, and Distribution and any other PeopleSoft
commercially available software programs and products, and includes updated or
enhanced versions of such programs that PeopleSoft may provide to a Designated
Customer or End User. Software does not include any third party software.
Software includes Documentation.
"SUBLICENSE" means a non-exclusive, a non-transferable right granted by
Service Provider under a Sublicense Addendum to a Designated Customer or End
User, as the case may be, to use the Software solely for such Designated
Customer's or End User's internal business purposes, in accordance with the
Documentation, and pursuant to a Sublicense Agreement.
"SUBLICENSE ADDENDUM" shall mean an addendum to this Agreement specifying
additional Sublicense terms and Sublicense rates and fees for the various types
of Sublicenses which may be granted by Service Provider.
"SUBLICENSE AGREEMENT" means a written agreement between Service Provider and
an End User whereby a Sublicense is granted, and that complies with the
provisions of Section 2(f) ("Sublicense Agreement").
<PAGE>
"SUPPORT SERVICES" means PeopleSoft's then current technical support services
for Service Provider. A statement of Support Services offered as of the
Effective Date is attached hereto as Exhibit B.
"TERRITORY" means the United States of America only.
<PAGE>
2. LICENSE GRANTS
(a) INTERNAL USE LICENSE.
Subject to the terms and conditions of this Agreement (including Service
Provider's obligation to pay the fees), PeopleSoft grants to Service Provider a
worldwide, royalty-free, non-exclusive, non-transferable license during the term
of this Agreement to use and display the Software only for the following
non-production, marketing purposes in connection with the Outsourcing Services
contemplated hereby; demonstrations; technical promotion activities; and
internal education and training of employees of Service Provider. Service
Provider may copy and distribute and/or electronically distribute the Software
within Service Provider for the purposes set forth in this subsection. Service
Provider shall reproduce all titles, trademarks, and copyright and restricted
rights notices in the Software in all such copies. Except as set forth above,
Service Provider may not transfer or duplicate the Software under this grant
except for (i) temporary transfer in the event of a CPU malfunction and (ii) a
single backup and archival copy. With the exception of the limited and
restricted use license granted pursuant to this section, all other terms and
conditions of PeopleSoft's License Agreement shall govern and apply.
(b) DEVELOPMENT LICENSE.
Subject to the terms and conditions of this Agreement (including Service
Provider's obligation to pay the fees), PeopleSoft hereby grants to Service
Provider a worldwide, non-exclusive, non-transferable license during the term of
this Agreement to use the Software at one (1) Development Center per development
license for the sole purpose of providing Software development, customization
and integration services for (i) a Designated Customer or (ii) End Users who
have already entered into (a) a PeopleSoft License Agreement, and (b) a
maintenance and support agreement with PeopleSoft.
(c) OUTSOURCING SERVICES LICENSE.
Subject to the terms and conditions of this Agreement (including Service
Provider's obligation to pay the fees). PeopleSoft hereby grants to Service
Provider a worldwide, non-exclusive, non-transferable restricted license during
the term of this Agreement to use the Software solely to perform the Outsourcing
Services at at Outsourcing Center. Service Provider may copy, distribute and/or
electronically distribute the Software within Service Provider for the purposes
set forth in this subsection. Service Provider shall reproduce all titles,
trademarks, and copyright and restricted rights notices in the Software in all
such copies. Except as set forth above, Service Provider may not transfer or
duplicate the Software except for (i) temporary transfer in the event of a CPU
malfunction and (ii) a single backup and archival copy. Except as set forth
above, Service Provider will not use the Software licensed under this grant for
the processing of Service Provider's internal administrative data. If Service
Provider wishes to use the Software licensed under this grant for the processing
of Service Provider's internal administrative data. Service Provider may do so
only at PeopleSoft's then current Price List rates. Service Provider will not
allow any third party, including an employee or other representative of a
Designated Customer, to use the Software Product under this license grant.
Service Provider further agrees to use the Software only in accordance with the
Documentation, on a computer and operating system.
<PAGE>
configuration specified in the Documentation and in accordance with the
obligations imposed by this Agreement. Service Provider warrants to
PeopleSoft that it will perform the Outsourcing Services with due care and
skill and in accordance with generally accepted professional standards for
providing similar services. Service Provider will not disclose or publish to
any third party any results of benchmark tests run on the Software.
(d) RESTRICTIONS ON USE.
Service Provider agrees not to translate the Software into another computer
language, in whole or in part. Except as set forth above, Service Provider
shall not make copies or make media translations of the Software or the
Documentation, in whole or in part without PeopleSoft's prior written
approval. Service Provider agrees that if, for any reason, it comes into
possession of any Software source code, or portion thereof, for any
PeopleSoft product, which it knows or reasonably should know is source code
not generally provided by PeopleSoft as a part of the Software or provided
under the terms of a license grant in this Agreement, it will immediately
deliver all copies of such source code to PeopleSoft. Except as specifically
provided in this Agreement, Service Provider shall not (i) rent,
electronically distribute or timeshare the Software; or (ii) distribute the
Software including without limitation by interactive cable or remote
processing service. Service Provider acknowledges PeopleSoft's representation
that the Software and its structure, organization and source code constitute
valuable trade secrets that belong to PeopleSoft. Service Provider agrees
that it shall not reverse compile, disassemble or otherwise reverse engineer
the Software and that it shall not use the Software or Documentation except
as expressly permitted by this Agreement.
(e) MARKETING AS PART OF OUTSOURCING SERVICES
PeopleSoft hereby grants to Service Provider the non-exclusive,
nontransferable right to co-market the Software with PeopleSoft to End Users
solely as part of Service Provider's provision of Outsourcing Services.
Within this context, co-marketing does NOT mean that Service Provider will
have any rights to distribute, ship, Sublicense or otherwise convey any
rights or interest to any third party to use the Software except as otherwise
expressly set forth in this Agreement.
(f) SUBLICENSE TRANSACTIONS.
(1) SUBLICENSE RIGHT. As further set forth in the applicable Sublicense
Addendum and subject to the terms and conditions of this Agreement
(including Service Provider's obligation to pay the Fees), PeopleSoft
hereby grants to Service Provider a worldwide, non-exclusive, non-
transferable license during the term of this Agreement to market and grant
Sublicenses to the Software to a sublicensee (the "Sublicensee") as set
forth in such Sublicense Addendum and at the rates and fees set forth
therein ("Sublicense Transaction"). Service Provider shall only have the
right to Sublicense the Software pursuant to an effective Sublicense
Addendum between the parties hereto. PeopleSoft shall have sole authority
to set any and all rates and fees, including, but not limited to, pricing
of the Software and maintenance fees, in any Sublicense Addendum for any
Sublicense Transaction. PeopleSoft reserves the right to amend any
Sublicense Addendum as PeopleSoft, in its sole discretion, deems
reasonably necessary in the event
<PAGE>
of, inter alia, price increases for the Software or Designated User or End
User growth pursuant to PeopleSoft's then-current growth methodology.
PeopleSoft shall make available to, and Service Provider shall notify any
Sublicensee of, a migration option such that in the event that a
Sublicensee migrates from sublicensing Software from Service Provider at
the end of the term of the relevant Sublicense Agreement to licensing
Software directly from PeopleSoft pursuant to a perpetual PeopleSoft
License Agreement, such Sublicensee shall be entitled to a [CONFIDENTIAL
TREATMENT] discount from PeopleSoft's then-current license fees pursuant to
such PeopleSoft License Agreement.
(2) SUBLICENSE AGREEMENT. Service Provider shall Sublicense the Software
solely through a written Sublicense Agreement substantially in the form
of the Alliance Partner License Agreement to be provided by PeopleSoft
after the Effective Date ______; PROVIDED, HOWEVER, that in no instance
shall Service Provider execute and enter into any Sublicense Agreement
unless and until PeopleSoft has given its prior written consent to the
final draft of such proposed Sublicense Agreement. In the event that
Service Provider enters into any Sublicense Agreement in a form not
expressly consented to by PeopleSoft pursuant to the terms of this
subsection, such Sublicense Agreement shall be void AB INITIO.
3. TECHNICAL SERVICES
(a) SOFTWARE INSTALLATION.
PeopleSoft shall install the Software at a single authorized Service
Provider Outsourcing Center, at the prevailing rates for installations
taking up to five days. Under any other circumstance, installation will be at
PeopleSoft's then current standard commercial time and materials hourly or
daily rates.
(b) TRAINING.
PeopleSoft to provide Software training to Service Provider at a PeopleSoft
training center on a mutually agreeable date(s) during the first calendar year
after the Effective Date at Peoplesoft's prevailing rates. A training unit is
equivalent to one eight-hour day of training. At the Designated Customer's
request, Software training for the Designated Customer will be provided as
part of the implementation by either Service Provider, a third party, or
PeopleSoft at their respective then-current prevailing rates.
(c) IMPLEMENTATION.
Service Provider shall be responsible for the Designated Customer's Software
implementation efforts. Service Provider may choose to subcontract some or
all of the implementation to PeopleSoft but in that event, PeopleSoft, as a
subcontractor, shall be contractually obligated only to Service Provider
pursuant to the terms of the relevant subcontract, and not to any third party
and PeopleSoft's fees for such subcontract shall not be Fees as defined above
in Section 1.
(d) SUPPORT SERVICES.
<PAGE>
Service Provider will provide Designated Customers with the first level of
Support Services to the Designated Customers. At no additional fee to Service
Provider, PeopleSoft will provide Service Provider with Support Services and
account management as outlined in Exhibit B.
(e) CONSULTING
Service Provider will provide ongoing consulting to Designated Customers
which will include the application of Software fixes and upgrades.
(f) INCIDENTAL EXPENSES
For any on-site services requested by Service Provider, Service Provider
shall reimburse PeopleSoft for actual, reasonable travel and out-of-pocket
expenses incurred; PROVIDED, HOWEVER, that any expenses over one
thousand U.S. dollars ($1,000.00) will require the prior written approval of
Service Provider, which prior written approval shall not be unreasonably
withheld.
4. DELIVERY
All Software and Documentation for which delivery from PeopleSoft is required
under this Agreement shall be shipped by PeopleSoft FOB Peoplesoft's
manufacturing facility. Software and Documentation will be deemed accepted
upon shipment by PeopleSoft.
5. TERMS
(a) LICENSE FEES.
Service Provider shall pay Peoplesoft the applicable fees as set forth in
Exhibit A.
(b) REPORTING.
Within ten (10) days after the end of each month, Service Provider shall
provide PeopleSoft with a written report in a form reasonably acceptable to
Peoplesoft within a reasonable time after the Effective Date. Such reports
shall, at a minimum, contain information detailing (i) the number of
Development Centers and the location of each; (ii) the name, location and
number of employees for each Designated Customer and the location of the
Outsourcing Center for each such Designated Customer; and (iii) all other
information needed to calculate and verify the Fees owed to PeopleSoft during
such reporting period, broken down by month, product breakdown and on a
cumulative basis.
(c) INVOICING.
All invoiced fees shall be due and payable within thirty (30) days of receipt
of an invoice and shall be made without deductions based on any taxes or
withholdings, except where such deduction is based on PeopleSoft's net income.
<PAGE>
(d) PAYMENTS
All payments made by Service Provider shall be in United States Dollars and
directed to:
Lockbox or Wire Instructions:
(e) OVERDUE AMOUNTS AND TAXES.
Any amounts not paid within thirty (30) days of the due date will be subject
to interest of the lower of the prime rate as published by Bank of America,
NT &SA (or successor) or twelve per cent (12%) p.a. compounded quarterly,
which interest will be immediately due and payable from the due date for
payment until the date of actual receipt of the amount in cleared funds by
PeopleSoft. In addition to any other payments due under this Agreement,
Service Provider agrees to pay, indemnify and hold Peoplesoft harmless from,
any sales, use, excise, import or export, value added or similar tax or duty,
and any other tax not based on PeopleSoft's net income, including penalties
and interest and all government permit fees, license fees, customs fees and
similar fees levied upon the delivery of the Software or other deliverables
which PeopleSoft may incur in respect of this Agreement, and any costs
associated with the collection or withholding of any of the foregoing items.
(f) NEW VERSIONS.
PeopleSoft may, at its sole discretion, modify the Software. For purposes of
this Agreement, PeopleSoft shall have sole discretion as to whether a product
is deemed to be a new version of an existing Software program to be provided
to Service Provider under the terms of this Agreement, or a new product. Once
a new version of an existing Software program begins shipping, Service
Provider shall return to PeopleSoft, at Service Provider's expense, copies of
the prior version of the Software in Service Provider's inventory that were
replaced by PeopleSoft's new version installed within thirty (30) days from
the later of the first PeopleSoft shipment date of the new version to Service
Provider and the written notification date; PROVIDED, HOWEVER that
if any Designated Customers express the intent not to migrate to the new
version within such thirty (30) day time period, then Service Provider shall
not be so obligated by the foregoing and shall return such prior version
within thirty (30) days from the date PeopleSoft ceases it support of said
prior version.
<PAGE>
6. MARKETING OBLIGATIONS.
(a) PARTIES OBLIGATIONS.
(1) PeopleSoft and Service Provider shall use their best efforts to promote,
market and offer Outsourcing Services to potential Designated Customers.
(2) Service Provider shall (i) promptly refer all Software sales leads to
PeopleSoft's designated sales contact, and (ii) provide to PeopleSoft upon
execution of this Agreement, and thereafter on each anniversary date of
this Agreement, a business plan for the ensuing year containing at least
the minimum information specified in the initial business plan.
(b) JOINT MARKETING OBLIGATIONS.
(1) JOINT MARKETING. PeopleSoft and Service Provider will cooperate and
jointly invest in the marketing of the Software only for use in conjunction
with Outsourcing Services pursuant to the joint business plan adopted by
the parties within sixty (60) days of the Effective Date, including but not
limited to (a) prospecting, mailings, telemarketing, seminars, user group
meetings and trade show events, (b) joint account strategy development, and
(c) joint proposal development. Each Party shall allow the other to review
all announcements, press releases, marketing materials and product brochures
pertaining to the others products prior to their release to the public or
the press, and shall incorporate all changes that the other may reasonably
request to ensure correct usage of their trademarks and accuracy of content.
A party's failure to respond to the submission of material for approval
with any recommended changes within three (3) business days shall be an
approval of the material submitted.
(2) CO-MARKETING. Each party will provide the other with information
necessary for a mailing to the other's customer base when requested and
at their own expense.
(3) MARKETING LIAISONS. PeopleSoft and Service Provider will each appoint an
individual to act as the representative for such party in respect to
each party (the "Marketing Liaisons"). Each Marketing Liaison will have
the authority to act for and on behalf of the party which appointed it
and to make binding decisions with respect to the marketing activities
described herein. The Marketing Liaisons will meet via telephone
conferences on an ongoing basis as may be necessary to discuss the status
and implementation of such marketing activities. The Marketing Liaisons
shall have authority for approval of any material submitted pursuant to
sub-section (b)(1), above of this Section 7.
(4) ALLIANCE GOVERNANCE. PeopleSoft and Service Provider agree to allocate
the appropriate resources for ensuring the success and constant improvement
of the strategic alliance. Components will include, but not be limited to:
(a) Equal representation from PeopleSoft and Service Provider management;
and
(b) Quarterly face-to-face reviews covering the following topics (at a
minimum): (1)
<PAGE>
Market Assessment; (2) Client Acquisition Progress; (3) Pricing
Evaluation and (4) Implementation Progress Review.
(c) USE OF TRADEMARKS.
(1) TRADEMARKS. PeopleSoft hereby grants to Service Provider and Service
Provider hereby grants to PeopleSoft a non-exclusive, limited license to
use the PeopleSoft and Service Provider trademarks respectively and the
PeopleSoft and Service Provider logo respectively and the other
applicable trademarks of each party (collectively, the "Trademarks" and
singularly the "PeopleSoft Trademarks" and the "Service Provider
Trademarks") solely on the Software and in advertising and printed
materials for the Software. Each party acknowledges that utilization of
the other parties' Trademarks will not create in it, nor will it
represent it has any right, title or interest in or to the other parties'
Trademarks. Each party acknowledges the other parties' exclusive
ownership or right to use of its own Trademarks and agrees not to do
anything to impair or dilute the other party's rights in its own
Trademarks. Each party agrees to display the acknowledgment of the other
party's trademark ownership of the Trademark clearly the first time it is
used in any advertising. Service Provider agrees to include the
PeopleSoft Trademarks on all copies, advertisements, brochures, manuals,
and other appropriate uses made in the promotion, license or use of the
Software.
(2) QUALITY. Each party agrees that the nature and quality of any products
or services it supplies in connection with the Trademarks shall conform to
the standards set by the owner of the Trademark. Each party agrees to
cooperate with the other party in facilitating monitoring and control of
the nature and quality of such products and services.
7. SERVICE PROVIDER OBLIGATIONS
(a) RECORDS.
Each party agrees to maintain a complete, clear and accurate record for at
least three (3) years relating to its use and marketing of the Software and
Documentation under this Agreement in accordance with generally accepted
accounting principles.
(b) AUDIT.
Service Provider shall permit PeopleSoft or persons designated by PeopleSoft
to inspect records pertaining to the Software and any other materials
provided to Service Provider by PeopleSoft to ensure compliance by Service
Provider with its obligations to PeopleSoft. Any such inspection and audit
shall be conducted upon at least five (5) days prior written notice and not
more frequently than annually, during regular business hours and in such a
manner as not to interfere with normal business activities of Service
Provider. If an audit reveals that Service Provider has underpaid Fees to
PeopleSoft, Service Provider shall be invoiced directly for such underpaid
Fees. If the underpaid Fees are in excess of five percent (5%), the Service
Provider shall pay
<PAGE>
PeopleSoft's reasonable costs of conducting the audit. If an audit reveals
that Service Provider has overpaid Fees to PeopleSoft, PeopleSoft shall
refund any overpayments within thirty (30) days. At PeopleSoft's written
request, not more frequently than annually, Service Provider shall furnish
PeopleSoft with a signed certification verifying that the Software and
Documentation are being used pursuant to the provisions of this Agreement and
applicable Purchase Orders.
(e) NOTIFICATION OR INFRINGEMENT.
Service Provider shall immediately inform Peoplesoft by telephone, telex or
facsimile, with written confirmation by mail, if it becomes aware of any
facts indicating that any person is infringing any Intellectual Property
Rights of PeopleSoft or is engaging in unauthorized distribution of any
Software or Documentation.
(d) COMPLIANCE WITH LAWS.
In exercising its rights and performing its obligations under this Agreement,
Service Provider will comply with all applicable international, national and
local laws and regulations. Service Provider further agrees not to violate
any provisions of the U.S. Foreign Corrupt Practices Act of 1977 as amended,
which generally prohibits the payment of moneys or anything of value to
government officials in order the obtain benefits from such government
officials or their governments. Without limiting the generality of the
foregoing, Service Provider will not use or re-export, or permit any person
to use or re-exports the Software or Documentation, without all required
licenses, and Service Provider will comply, and will require all of its
customers to comply, with all applicable export and import control laws.
Service Provider will defend, indemnify and hold harmless PeopleSoft and its
successors, agents, officers, directors and employees from and against any
violation of any laws or regulations by Service Provider or any of its
agents, officers, directors, employees or customers.
8. MODIFICATIONS
The parties agree and acknowledge, subject to PeopleSoft's underlying
proprietary rights, that Service Provider may create certain Software
modifications which have no cross-industry application and apply exclusively
to Service Provider's Designated Customer's internal business
("Modifications"). Any Modification developed solely by Service Provider
shall be the property of Service Provider. To the extent that Service
Provider desires to have PeopleSoft provide support for the term of this
Agreement for such Modification, Service Provider will promptly deliver to
PeopleSoft the source and object code versions of such Modification, and any
updates or further modifications thereto, and hereby grants PeopleSoft for
the term of this Agreement an irrevocable, worldwide, fully-paid,
royalty-free, non-exclusive, non-transferable license to use and to
distribute and sublicense, directly and indirectly, through multiple tiers of
sublicensees, such Modification. For any Modification developed by Service
Provider with the assistance of PeopleSoft or any modification developed by
Service Provider, with or without the assistance of PeopleSoft, which are not
Modifications, Service Provider will promptly deliver to PeopleSoft the
source and object code versions of such modification, and any updates or
further modifications thereto, and hereby grants PeopleSoft a perpetual,
irrevocable, worldwide, fully-paid, royalty-free, non-exclusive,
non-transferable license to use and to distribute and sublicense,
<PAGE>
directly and indirectly, through multiple tiers of sublicensees, such
modification. Any modification, including without limitation Modification
developed solely by PeopleSoft shall be the property of PeopleSoft.
9. OWNERSHIP OF INTELLECTUAL PROPERTY RIGHTS
Servicer Provider acknowledges that the structure, organization and code of
the Software are proprietary to PeopleSoft and that PeopleSoft retains
exclusive ownership of the Software, Documentation and Trademarks. Service
Provider will take reasonable measures to protect PeopleSoft's Intellectual
Property Rights in the Software, Documentation and Trademarks, including such
reasonable assistance and measures as are requested by PeopleSoft from time
to time at reasonable cost to Service Provider. Except as provided herein,
Service Provider is not granted any other Intellectual Property Rights, or
any other rights, franchises or licenses, with respect to the Software,
Documentation or Trademarks.
Except as provided in the Section entitled MODIFICATIONS, any intellectual
Property Rights developed by Service Provider in connection with the license
grants under this Agreement shall be owned by PeopleSoft, and therefore
Service Provider irrevocably assigns to PeopleSoft all right, title and
interest worldwide in and to such Intellectual Property Rights. If Service
Provider has any rights to such Intellectual Property Rights that cannot be
assigned to PeopleSoft, Service Provider unconditionally and irrevocably
waives the enforcement of such rights, and all claims and causes of action of
any kind against PeopleSoft with respect to such rights, and agrees, at
PeopleSoft's request and expense, to consent to and join in any action to
enforce such rights. If Service Provider has any rights to such Intellectual
Property Rights that cannot be assigned to PeopleSoft or waived by Service
Provider, Service Provider unconditionally and irrevocably grants to
PeopleSoft during the term of such rights, an exclusive, irrevocable,
perpetual, worldwide, fully paid and royalty-free license, with rights to
sublicense through multiple levels of sublicense, to reproduce, create
derivative works of, distribute, publicly perform and publicly display by all
means now known or later developed, such rights.
Service Provider shall indemnify and hold harmless PeopleSoft from and
against any suits, actions, losses, damages and other expenses arising out of
or in connection with any claim that any software modifications, as delivered
by Service Provider infringes or violates a U.S. patent, copyright,
trademark, trade secret or other proprietary right of any third party;
provided PeopleSoft promptly notifies Service Provider of such claim and
gives Service Provider sole control and all reasonable assistance in the
settlement of the claim. If PeopleSoft's use of the modifications is
prevented in any way by an injunction or court order because of any claim of
infringement or misappropriation, Service Provider shall, at its sole
expense, use reasonable commercial efforts to: (a) replace or modify such
software so that it is no longer subject to a claim of infringement; or (b)
procure for the benefit of PeopleSoft the right to use such software. Service
Provider shall have liability for the claim of infringement based only on the
percentage or portion the infringement claim is (or alleged to be)
attributable to such software.
10. CONFIDENTIALITY
<PAGE>
During the term of this Agreement, Service Provider and PeopleSoft may be
exposed to certain information, including know-how and trade secrets,
proposed new products and services, and/or the business or affairs which are
the confidential and proprietary information of the other party and not
generally known to the public (herein "Confidential Information"). The parties
agree that during and after the term of this Agreement, they will not use or
disclose any Confidential Information to any third party without the prior
written consent of the other party. The parties hereby consent to the
disclosure of its Confidential Information to the employees, contractors or
consultants of the other party as is reasonably necessary in order to allow
the other party to perform its obligations under this Agreement and to obtain
the benefits hereof, provided that each such employee, contractor or
consultant who will have access to any confidential Information has executed
a non-disclosure agreement which prohibits the unauthorized use or disclosure
of any such Confidential Information. This section shall not apply, or shall
cease to apply, to data and information supplied by a party if the other
party can establish that such data or information: (a) were already known to
it, (b) have come into the public domain without a breach of confidence by
that party, (c) were received by that party from a third party without
restrictions on their use in favor of the other party, or (d) are required to
be disclosed pursuant to any statutory or regulatory provision or court
order, provided, however, that the party provides notice thereof to the other
party, together with the statutory or regulatory provision, or court order,
on which such disclosure, is based, as soon as practicable prior to such
disclosure so that the other party has the opportunity to obtain a protective
order to take other protective measures as it may deem necessary with respect
to such information.
11. WARRANTY AND INDEMNITY
(a) SOFTWARE WARRANTY.
For each copy of Software that Service Provider licenses and receives Support
Services hereunder, PeopleSoft warrants to Service Provider that for a period
of one year from the date on which, such Software is shipped by PeopleSoft
that the Software, unless modified by Service Provider, will perform the
functions described in the associated Documentation in all material respects
when operated on a system which meets the requirements specified by
PeopleSoft in the Documentation. PeopleSoft will undertake to correct any
reported error condition in accordance with its technical support policies.
Provided that Service Provider gives PeopleSoft written notice of a breach of
the foregoing warranty during the warranty period, Service Provider sole and
exclusive remedy shall be for PeopleSoft to correct any reproducible errors
pursuant to the Support Services terms and conditions.
(b) MEDIA WARRANTY.
PeopleSoft warrants the tapes, diskettes or other media to be free of defects
in materials and workmanship under normal use for ninety (90) days from the
date of Software is shipped by PeopleSoft. In any breach of the foregoing
warranty, and provided that Service Provider gives written notice thereof
during the warranty period, Service Provider' sole and exclusive remedy shall
be to require PeopleSoft to replace defective media returned within such
warranty period.
<PAGE>
(c) SERVICES WARRANTY.
PeopleSoft warrants any services provided hereunder shall be performed in a
professional and workmanlike manner in accordance with generally accepted
industry practices. PeopleSoft's sole and exclusive obligation pursuant to
this warranty shall be to re-perform any work not in compliance with this
warranty that is brought to its attention by written notice within thirty
(30) days after such services are performed.
(d) DISCLAIMER OF WARRANTIES.
EXCEPT AS SET FORTH IN SECTIONS ENTITLED SOFTWARE WARRANTY, MEDIA WARRANTY,
SERVICES WARRANTY, ABOVE, PEOPLESOFT EXPRESSLY DISCLAIMS TO THE EXTENT
PERMITTED BY LAW ALL WARRANTIES, WHETHER EXPRESS, IMPLIED OR STATUTORY BY ANY
TERRITORY OR JURISDICTION, RELATING TO THE SOFTWARE, DOCUMENTATION OR RELATED
SERVICES AND FURTHER EXPRESSLY EXCLUDES TO THE EXTENT PERMITTED BY LAW ANY
WARRANTY OF NON-INFRINGEMENT, TITLE, FITNESS FOR A PARTICULAR PURPOSE OR
MERCHANT ABILITY.
PeopleSoft does not warrant that the Software will operate in combinations
other than as specified in the Documentation or that the operation of the
Software will be uninterrupted or error-free. Pre-production releases of
Software are distributed "AS IS."
(e) INDEMNITY.
Subject to the limitations set forth herein below, PeopleSoft shall indemnify
and defend Service Provider with respect to all claims, suits or proceedings
with respect to any claim that the Software, as designed and licensed to
Service Provider in furtherance of this Agreement, infringe upon any U.S. and
Canadian patent, trademark, copyright or other proprietary right; provided,
however, that Service Provider (i) notifies PeopleSoft in writing within ten
(10) days of the receipt of notice of such claim, suit or proceeding, (ii)
gives PeopleSoft the right to control and direct investigation, preparation,
defense and settlement of any claim, suit or proceeding; and (iii) gives
assistance and full cooperation for the defense of same and further provided
that PeopleSoft's liability with respect to third party software embedded in
the Software will be limited to the extent PeopleSoft is indemnified by such
third parties. PeopleSoft shall pay any resulting damages, costs and expenses
finally awarded to a third party but PeopleSoft is not liable for settlements
incurred by Service Provider without Peoplesoft's written authorization. If
such claim, suit or proceeding has occurred or, in PeopleSoft's opinion, is
likely to occur, PeopleSoft may, at its election and expense, either obtain
for Service Provider the right to continue distributing such allegedly
infringing Software or replace or modify the Software so it is not infringing.
(f) EXCLUSIONS.
The provisions of the foregoing indemnity shall not apply with respect to any
instances of alleged infringement based upon or arising out of the use of
such Software in any manner for which the Software were not designed, or for
use of Software for other than the uses and
<PAGE>
distributions designated by PeopleSoft, for use of any Software which has
been modified by Service Provider or any third party, or for use of any
Software in connection with or in combination with my equipment, devices or
software which have not been supplied by PeopleSoft, where such alleged
infringement would not have occurred but for the use of such Software in
connection with or in combination with such equipment devices or software.
Notwithstanding any other provisions hereof, the foregoing indemnity shall
not apply with respect to any infringement based on Service Provider's
activities occurring subsequent to its receipt of notice of any claimed
infringement unless PeopleSoft shall have given Service Provider written
permission to continue to market and distribute the allegedly infringing
Software.
(g) ENTIRE LIABILITY.
THE FOREGOING SECTIONS ENTITLED INDEMNITY AND EXCLUSIONS STATE THE SOLE AND
EXCLUSIVE REMEDY OF SERVICE PROVIDER AND THE ENTIRE LIABILITY AND OBLIGATION
OF PEOPLESOFT WITH RESPECT TO INFRINGEMENT OR CLAIMS OF INFRINGEMENT OF ANY
INTELLECTUAL PROPERTY RIGHT BY THE SOFTWARE, BUNDLED SOFTWARE, DOCUMENTATION,
RELATED SERVICES OR ANY PART THEREOF.
(h) LIMITATIONS AND DISCLAIMER.
Service Provider shall make no warranty, express or implied, on behalf of
PeopleSoft. Nothing contained in this Agreement shall prejudice the statutory
rights of any party dealing as a consumer.
(i) INDEMNITY BY SERVICE PROVIDER.
Service Provider agrees to indemnify and hold PeopleSoft harmless from any
claims, suits, proceedings, losses, liabilities, damages, costs and expenses
(inclusive of PeopleSoft's reasonable attorneys' fees) made against or
incurred by PeopleSoft as a result of negligence, misrepresentation, error or
omission on the part of Servicer Provider or representatives of Service
Provider. Service Provider shall be solely responsible for, and shall
indemnify and hold PeopleSoft harmless from, any claims, warranties or
representations made by Service Provider or Service Provider's employees or
agents that differ from the warranty provided by PeopleSoft in its End User
Agreement; provided, however, that PeopleSoft (i) notifies Service
Provider in writing within ten (10) days of such claim, suit or proceeding,
(ii) gives Service Provider the right to control and direct the
investigation, preparation, defense and settlement of any claim suit or
proceeding; and (iii) gives assistance and full co-operation for the
defense of same. Service Provider shall pay any resulting damages, costs and
expenses finally awarded to a third party but Service Provider is not liable
for settlements incurred by PeopleSoft without Service Provider's written
authorization.
12. TERM AND TERMINATION
<PAGE>
(a) TERM.
The term of this Agreement shall commence as of the Effective Date of this
Agreement and continue for a term of three (3) years unless sooner terminated
as set forth below. This Agreement shall be reviewed annually (the "Annual
Review") by the parties. The Annual Review shall include such criteria as
performance in the marketplace (as determined by comparison against
PeopleSoft's standard support, quality and referencability guidelines) and a
review of the business terms herein. This Agreement will renew for successive
one (1) year terms unless either party gives the other party written notice
of its intent to allow the Agreement to terminate at its expiration. Such
notice shall be given not less than twelve (12) months prior to the end of
the Agreements' term.
(b) TERMINATION WITH CAUSE.
Any of the following shall constitute an event of default:
(1) Either party fails to perform any of its material obligations
under this Agreement and such failure remains uncured for
forth-five (45) days after receipt of written notice thereof; or
(1) Either party ceases to conduct business, becomes or is declared
insolvent or bankrupt, is the subject of any proceeding relating
to its liquidation or insolvency which is not dismissed within
ninety (90) days or makes an assignment for the benefit or its
creditors.
If an event of a default occurs, the non-defaulting party in addition to any
other rights available to it under law or equity, may withhold its
performance hereunder or may terminate this Agreement and the licenses
granted hereunder by written notice to the defaulting party. Unless otherwise
provided in this Agreement, remedies shall be cumulative and there shall be
no obligation to exercise a particular remedy.
(c) TERMINATION WITHOUT CAUSE
Either party may terminate this agreement without cause not less than ninety
(90) days after giving written notice of intent to so terminate to the other
party.
(d) RIGHTS UPON TERMINATION.
Upon any termination of this Agreement by PeopleSoft pursuant to Section 12(b)
hereof, all Service Provider's rights to market Outsourcing Services, to use
the Software, and grant Sublicense Agreements and any and all other rights
as provided in this Agreement shall cease immediately. Upon termination of
this Agreement by Service Provider pursuant to Section 12(b) or Section 12(c)
hereof or by expiration of this Agreement, all Service Provider's rights to
market Outsourcing Services and use the Software as set forth in this
Agreement shall cease,
<PAGE>
except that Service Provider shall be permitted to continue to use the
Software solely to fulfill existing contractual obligations for a reasonable
period of time (the "Migration Period") and PeopleSoft agrees and
acknowledges its obligations to honor such Sublicense Agreements for such
Migration Period; PROVIDED, HOWEVER, that in no event shall such Migration
Period be more than twenty four (24) months from the date of the termination
of this Agreement pursuant to Section 12(b) hereof. Upon termination of this
Agreement by PeopleSoft pursuant to Section 12(c) hereof, all Service
Provider's rights to market Outsourcing Services and use the Software as set
forth in this Agreement shall cease, except that Service Provider shall be
permitted to continue to use the Software solely to fulfill existing
contractual obligations for the term of such existing contractual
arrangements.
(c) PAYMENT UPON TERMINATION.
The payment date of all moneys due to PeopleSoft shall automatically be
accelerated as of the date of termination so that they shall become due and
payable on the effective date of termination, even if longer terms had been
provided previously. All credits previously issued to Service Provider will
be canceled as of the date of termination.
(f) LIABILITY UPON TERMINATION.
Each party understands that the rights of termination or expiration hereunder
are absolute. Neither party shall incur any liability whatsoever for any
damage, loss or expenses of any kind suffered or incurred by the other
arising from or incident to any termination of this Agreement by such party
or any expiration hereof which complies with the terms of the Agreement,
whether or not such party is aware of any such damage, loss or expenses. In
particular, without in any way limiting the foregoing, neither party shall be
entitled to any damages on account of prospective profits or anticipated
sales. Service Provider agrees to waive the benefit of any law or regulation
providing compensation to Service Provider arising from the termination or
failure to renew this Agreement and Service Provider hereby represents and
warrants that such waiver is irrevocable and enforceable by PeopleSoft.
Service Provider also indemnifies and holds harmless PeopleSoft from any and
all claims for compensation arising from the termination or failure to renew
this Agreement asserted by Service Provider's employees or any third parties
including without limitation prospective Designated Customers.
(g) SURVIVAL.
The provisions of the sections entitled CONFIDENTIALITY, WARRANTY AND
INDEMNITY, TERM AND TERMINATION, LIMITATION OF LIABILITY, and GENERAL shall
survive the expiration or termination of this Agreement by either party for
any reason.
(h) RETURN OF SOFTWARE UPON TERMINATION.
If a license granted under this Agreement expires or otherwise terminates,
Service Provider shall (a) cease using the applicable Software or
Documentation, and (b) certify to PeopleSoft within one (1) month after
expiration or termination that Service Provider has destroyed or has returned
to PeopleSoft such Software and Documentation and all copies in all forms,
partial and complete, in all types of media and computer memory, and whether
or not modified or merged into other materials; PROVIDED, HOWEVER that in the
instance of a termination pursuant to Section 12(b) hereof, Service Provider
shall, at the end of the Migration Period defined in Section 12(d) hereof,
cease using the applicable Software or Documentation, and (b) certify to
PeopleSoft within one (1) month after the end of the Migration Period that
Service Provider has destroyed or has returned to PeopleSoft such Software
and Documentation under its control and all copies in all forms, partial and
complete, in all types of media and computer memory, and whether or not
modified or merged into other materials.
13. LIMITATION OF LIABILITY
NEITHER PARTY WILL BE LIABLE TO THE OTHER FOR DAMAGES ARISING OUT OF OR
RELATED TO THIS AGREEMENT FOR ANY LOSS OF USE, INTERRUPTION OF BUSINESS, COST
OF PROCUREMENT OF SUBSTITUTE GOODS, TECHNOLOGY OR SERVICES AND ANY INDIRECT,
SPECIAL, INCIDENTAL, ECONOMIC OR CONSEQUENTIAL LOSS OR DAMAGE, LOSS OF
PROFITS, LOSS OF GOODWILL, LOSS OF OPPORTUNITIES OR SAVINGS, REGARDLESS OF
THE FORM OF ACTION WHETHER IN CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT
PRODUCT LIABILITY OR ANY OTHER LEGAL OR EQUITABLE THEORY EVEN IF THEY HAVE
BEEN ADVISED OF THE POSSIBILITY OF SUCH LOSSES OR DAMAGES. IN NO EVENT WILL
PEOPLESOFT'S AGGREGATE CUMULATIVE LIABILITY TO SERVICE PROVIDER FOR ANY
CLAIMS ARISING OUT OF OR RELATED TO THIS AGREEMENT EXCEED THE AMOUNTS PAID TO
PEOPLESOFT BY SERVICE PROVIDER PURSUANT TO THIS AGREEMENT.
14. GENERAL.
(a) NOTICES.
All notices or reports permitted or required under this Agreement shall be in
writing and shall be by personal delivery, telegram, telex, telecopier,
facsimile transmission, or by certified or registered mail, return receipt
requested, and shall be deemed given upon personal delivery, five (5) days
after deposit in the mail, or upon acknowledgment of receipt of electronic
transmission. Notices shall be sent to the addresses set forth at the
beginning of this Agreement or such other address as either party may
specify in writing. Notices shall be sent to the person bearing the title set
forth below the parties' signature to this Agreement.
(b) FORCE MAJEURE.
Neither party shall be liable hereunder by reason of any failure or delay in
the performance of its obligations hereunder (except for the payment of
money) on account of strikes, shortages, riots, insurrection, fires, flood,
storm, explosions, acts of God, war governmental action, labor
<PAGE>
conditions, earthquakes, material shortages or any other cause which is
beyond the reasonable control of such party.
(c) ASSIGNMENT.
Service Provider may not assign this Agreement, delegate any duty or assign
any right hereunder without the prior written consent of PeopleSoft. Any
assignment in violation of this section shall be void and of no effect.
(d) WAIVER.
The failure of either party to require performance by the other party of any
provision hereof shall not affect the full right to require such performance
at any time thereafter; nor shall the waiver by either party of a breach of
any provision hereof be taken or held to be a waiver of the provision itself.
(e) SEVERABILITY.
In the event that any provision of this Agreement shall be unenforceable or
invalid under any applicable law or be so held by applicable court decision,
such unenforceability or invalidity shall not render this Agreement
unenforceable or invalid as a whole and, in such event, any such provision
shall be changed and interpreted so as to best accomplish the objectives of
such unenforceable or intended provision within the limits of applicable law
or applicable court decisions.
(f) INJUNCTIVE RELIEF.
It is understood and agreed that notwithstanding any other provisions of this
Agreement, a breach by Service Provider of Section 2 ("License Grants") or by
either party of Section 10 ("Confidentiality"), will cause either party
irreparable damage for which recovery of money damages would be inadequate,
and that, in addition to any and all remedies available at law, either party
shall be entitled to seek timely injunctive relief to protect its rights
under this Agreement.
(g) CONTROLLING LAW.
This Agreement shall be governed in all respects by the laws of the United
States of America and the State of California as such laws are applied to
agreements entered into and to be performed entirely within California between
California residents. The parties agree that the United Nations Convention
on Contracts for the International Sale of Goods is specifically excluded
from application to this Agreement.
(h) NO AGENCY.
Nothing contained herein shall be construed as creating any agency,
partnership or other form of joint enterprise between the parties.
<PAGE>
(i) HEADINGS.
The section headings appearing in this Agreement are inserted only as a
matter of convenience and in no way define, limit, construe or describe the
scope or extent of such section or in any way affect such section.
(j) WARRANTY.
Each party warrants that it has full power and authority to enter into and
perform this Agreement, and that the person signing this Agreement on such
party's behalf has been duly authorized and empowered to enter into this
Agreement. Each party further acknowledges that it has read this Agreement,
understands it and agrees to be bound by it.
(k) CHOICE OF FORUM AND VENUE.
The Superior Court of Alameda County and the United States District Court for
the Northern District of California shall together have non-exclusive
jurisdiction over disputes under this Agreement. Service Provider consents to
personal jurisdiction of the above courts.
(l) CONFIDENTIALITY OF AGREEMENT.
Neither party will disclose any terms, conditions, pricing of this Agreement,
except to its employees, directors, agents and professional advisors with a
need to know or pursuant to a mutually agreeable press release or as otherwise
required by law.
(m) COUNTERPARTS.
This Agreement may be executed simultaneously in two or more counterparts,
each of which will be considered an original, but all of which together will
constitute one and the same instrument.
(n) DISCLAIMER.
The Software is not specifically developed or licensed for use in any nuclear,
aviation, mass transit or medical application or in any other inherently
dangerous applications. Service Provider agrees that PeopleSoft and its
suppliers shall not be liable for any claims or damages arising from Servicer
Provider's use of the Software for such applications. Service Provider agrees
to indemnify and hold PeopleSoft harmless from any claims for losses, costs,
damages or liability arising out of or in connection with its use of the
Software in such applications.
(o) ENTIRE AGREEMENT.
<PAGE>
This Agreement, together with any schedules, exhibits and addenda completely
and exclusively defines the agreement of the parties regarding Service
Providers' rights to host the Software to provide Outsourcing Services. In
the event of any conflict between the terms of this Agreement and an addendum
hereto, the terms of the addendum shall control with respect to the subject
matter of the addendum only. This Agreement supercedes, and its terms
govern, all prior proposals, agreements or other communications between the
parties, oral or written, regarding the subject matter of this Agreement. This
Agreement shall not be modified except by a subsequently dated written
amendment signed on behalf of PeopleSoft and Service Provider by their duly
authorized representatives, and any purchase order or other document
purporting to supplement the provisions hereof shall be void.
In Witness Whereof, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the Effective Date.
USINTERNETWORKING, INC. PeopleSoft USA, Inc.
/s/ William T. Price /s/ Ken Horowitz
- ------------------------ -----------------------------
Authorized Signature Authorized Signature
William T. Price Ken Horowitz
Printed Name Printed Name
Vice President General Counsel Vice President
Title Title
<PAGE>
Exhibit A
Fees
REVENUE SPLITS
PeopleSoft and Service Provider agree to a sharing of aggregate Fees under
this Agreement. The Fees per End User/Designated Customer shall be allocated
as follows:
PeopleSoft shall be entitled to [CONFIDENTIAL TREATMENT] of Fees received
by Service Provider from such End User or Designated Customer, as the case
may be; PROVIDED, HOWEVER, that from time to time, in the case of
certain End Users or Designated Customers, as the case may be, PeopleSoft
and Service Provider may agree to a different sharing of Fees received
from such End User or Designated Customer only, by executing an Addendum
to Exhibit A. Any such Addenda to Exhibit A shall govern over the
sharing of Fees as set forth in this Exhibit A SOLELY in the instance of
the End User or Designated Users set forth therein and not for any other
End Users or Designated Customers.
<PAGE>
Addendum to Exhibit A
With regard to the End User(s) or Designated Customer(s) listed in the table
below only, PeopleSoft and Service Provider agrees to a sharing of Fees from
such End User or Designated Customer, as the case may be, as is set forth
across from the name of such End User or Designated User in the table below:
<TABLE>
<CAPTION>
<S> <C>
End User or Designated Customer Percentage of Fees payable to PeopleSoft*
- ------------------------------- ----------------------------------------
</TABLE>
*The percentages listed in this column shall mean the percentage of Fees
received by Service Provider from the relevant End User or Designated
Customer, as the case may be, that PeopleSoft is entitled to.
For the avoidance of doubt, this Addendum to Exhibit A shall govern only in
the instances of the End Users or Designated Customers listed herein. In the
case of all other End Users or Designated Customers not expressly covered in
any Addenda to Exhibit A, Exhibit A shall continue to govern.
In Witness Whereof, the parties hereto have caused this Addendum to Exhibit A
to be executed by their duly authorized representatives as of
________________, ______.
USINTERNETWORKING, INC. PeopleSoft USA, Inc.
Authorized Signature Authorized Signature
Printed Name Printed Name
Title Title
<PAGE>
Exhibit B
Software Support Services Terms and Conditions
Software Support Services Terms and Conditions ("Support Services") are
referenced in and incorporated into the Agreement between PeopleSoft and
USINTERNETWORKING, INC. ("Service Provider"). Upon reasonable notice,
PeopleSoft reserves the right to modify the terms and conditions of Support
Services on an annual basis to reflect current market conditions.
1. Coverage
PeopleSoft provides Service Provider with Support Services for the Software
for the appropriate sites set forth in the applicable Schedule in
consideration of Service Provider's payment to PeopleSoft of the applicable
fees in exhibit A. Only designated Service Provider employees may contact
PeopleSoft for the provision of Support Services. Service Provider may
acquire Support Services for additional Service Provider sites by paying to
PeopleSoft the applicable annual fee. Support Services may be provided to
additional locations for additional fees.
2. Software Maintenance
The following technical and functional improvements will be issued
periodically by PeopleSoft to improve Software operations:
a. Fixes to Errors;
b. Updates; and
c. Enhancements contained within new releases.
3. Priority Level of Errors
PeopleSoft shall reasonably determine the priority level of Error in
accordance with the following protocols:
Priority A:
PeopleSoft promptly initiates the following procedures: (1) assign
PeopleSoft specialist(s) to correct the Error; (2) provide ongoing
communication on the status of the correction; and (3) immediately begin
to provide a Workaround or a Fix.
Priority B:
(1) PeopleSoft assigns a PeopleSoft specialist to commence correction of
Error; and (2) provide escalation procedures as reasonably determined by
PeopleSoft support staff. PeopleSoft exercises all commercially
reasonable efforts to include the Fix for the Error in the next Software
maintenance release.
Priority C:
PeopleSoft may include the Fix for the Error in the next major Software
release.
4. Telephone Support
PeopleSoft provides telephone support concerning installation and use of the
Software. Except for designated holidays, standard telephone support hours
are Monday through Friday, 4:00 a.m.
<PAGE>
to 6:30 p.m., Pacific Time. Telephone Support is also available 24-hours a
day, 7-days a week to resolve critical production problems outside of normal
support hours.
5. Account Manager
PeopleSoft assigns an account manager to assist with the on-going support
relationship between PeopleSoft and Service Provider. Service Provider will
reimburse PeopleSoft for the reasonable travel and living expenses of the
account manager for on-Site support activity.
6. PeopleSoft Customer Connection
c. The PeopleSoft Customer Connection system ("PCC") is an on-line,
self-service system which features postings by PeopleSoft and PeopleSoft
Software users regarding technical and non-technical topics of interest.
Service Provider may access PCC via the Internet. At Service Provider's
expense, Service Provider is responsible for independently acquiring
appropriate Internet access.
a. All Software maintenance releases and Fixes to the Software may be
delivered to Service Provider through PCC or by mail from PeopleSoft upon
written request by Service Provider. All information specified in PCC by
PeopleSoft is confidential and proprietary to PeopleSoft and shall only
be used in connection with Service Provider's use of the software and
informational communications with other PCC participants. PeopleSoft
reserves the right to modify information posted to PCC. PeopleSoft shall
have the right to publish and distribute only through PCC in all
languages and in association with Service Provider's name any material or
software programs provided by Service Provider to PCC. Service Provider
shall not use PCC for advertising or public relations purposes and shall
only submit information to PCC which is owned by Service Provider or
which Service Provider has third party permission to submit to PC for use
by all other PCC users.
a. In the interest of diminishing exposure to software viruses, PeopleSoft
tests and scans for software viruses all information entered by
PeopleSoft prior to submission of information to PCC. Service Provider
shall also use a reliable virus detection system on any software or
information posted to PCC, utilize backup procedures; monitor access to
PCC promptly notify PeopleSoft of any virus detected within Service
Provider's systems associated with PCC and generally exercise a
reasonable degree of caution when utilizing information from PCC. PeopleSoft
does not warrant that PCC will operate without interruption or without
errors. PeopleSoft reserves the right to modify or suspend PCC service in
connection with PeopleSoft's provision for Support Services.
7. Fees
PeopleSoft shall provide Service Provider with Support Services for the
Software for the appropriate sites set forth in the applicable Schedule in
consideration of Service Provider's payment to PeopleSoft of the applicable
fees in exhibit A. In the event Service Provider elects to receive Support
Services outside of the scope of the foregoing, Service Provider shall pay
PeopleSoft the annual fees, as set forth in Exhibit A. Service Provider shall
be responsible for all taxes associated with Support Services, exclusive of
taxes based on PeopleSoft's income. In the event Service Provider elects not
to renew Support Services and subsequently request Support
<PAGE>
Services, PeopleSoft shall reinstate Support Services only after Service
Provider pays PeopleSoft the annual then current fee plus all cumulative fees
that would have been payable had Service Provider not suspended Support
Services.
8. Term and Termination
Support Services shall be provided for the Initial Support Services Term as
set forth in the applicable Schedule, and shall be extended each additional
year unless terminated by either party. Each one (1) year term shall commence
on the anniversary of the Schedule Effective Date.
Either party may terminate the support Services provisions at the end of the
original term or at the end of any renewal term by giving the other party
written notice at least ninety (90) days prior to the end of any term.
In the event Service Provider fails to make payment pursuant to the section
titled "Fees", or in the event Service Provider breaches the support Services
provisions and such breach has not been cured within thirty (30) days of
written receipt of notice of breach, PeopleSoft may suspend or cancel Support
Services.
9. Exclusions
PeopleSoft shall have no obligation to support:
a. Altered, damaged or substantial modified Software;
b. Software that is not the then-current release, or a Previous
Sequential Release;
c. Errors caused by Service Provider's negligence, hardware malfunction,
or other causes beyond the reasonable control of PeopleSoft;
d. Software installed in a hardware or operating environment not
supported by PeopleSoft; and
e. Third party software not licensed through PeopleSoft.
10. General
All Upgrades provided to Service Provider are subject to the terms and
conditions of the Agreement.
11. Definitions
Unless otherwise defined herein, capitalized terms used herein shall have the
same meaning as set forth in the Agreement and applicable Schedule.
"Enhancement" means technical or functional additions to the Software to
improve software functionality and/or operations. Enhancements are delivered
with new releases of the Software.
"Error" means a malfunction in the Software which degrades the use of the
Software.
"Fix" means the repair or replacement of source of object or executable code
versions of the Software to remedy an Error.
<PAGE>
"Previous Sequential Release" means a release of Software for use in a
particular operating environment which has been replaced by a subsequent
release of the Software in the same operating environment. PeopleSoft will
support a Previous Sequential Release for a period of eighteen (18) months
after release of the subsequent release. Multiple Previous Sequential
Releases may be supported at any given time.
"Priority A" means an Error that: (1) renders the Software inoperative; or
(2) causes the Software to fail catastrophically.
"Priority B" means an Error that affects performance of the Software, but
does not prohibit Service Provider's use of the Software.
"Priority C" means an Error that causes only a minor impact of the use of
Software.
"Update" means all published revisions to the Documentation and one (1) copy
of the new release of the Software which are not designated by PeopleSoft as
new products for which it charges separately.
"Workaround" means a change in the procedures followed or data supplied, to
avoid an Error without significantly impairing performance of the Software.
<PAGE>
Schedule A
Prospect List and Terms
The following list represents the set of prospects that USINTERNETWORKING,
INC. may pursue under certain Select Partner Agreement dated as of June 30,
1998 by and between the parties.
Service Provider shall not directly or indirectly contact or otherwise engage
in marketing and sales activities directed at the potential Designated
Customers listed below without obtaining PeopleSoft's prior written consent:
[CONFIDENTIAL TREATMENT]
<PAGE>
Exhibit 10.17
U S WEST Contract: 9800051560
----------
USi Agreement Number: 008
---
IMAP AGREEMENT
USinternetworking, Inc. ("USi"), a Delaware corporation with its principal
office located at One USi Plaza, Annapolis, MD 21401-7428 and U S WEST INC. AND
ITS AFFILIATES ( "Client"), a Delaware corporation with its principal office
located at 1800 CALIFORNIA, DENVER CO 80111 hereby agree that the following
terms and conditions will apply to each iMAP Solution provided under this iMAP
Agreement ("Agreement").
1. SCOPE OF SERVICE
1.1 SERVICES
USi will provide the services as defined in individual Product
Schedules which will be mutually agreed upon, attached hereto and
incorporated herein as Exhibit A. The Product Schedules may be modified
by mutual written agreement. Changes or additions to work performed
under each Product Schedule may require changes in the resources
provided by USi and may result in additional costs or charges in each
Product Schedule.
1.2 PRODUCT SCHEDULES
Each Product Schedule will become a part of this Agreement, and, unless
otherwise clearly specified in writing, the terms and conditions of
each Product Schedule shall be independent of and shall have no impact
upon, the provisions of any other Product Schedule.
1.3 ADDITIONAL SERVICES
Client may order additional iMAP Solutions or add on to existing iMAP
Solutions by contacting USi. USi will send Client a Product Schedule,
based on USi's formal requirements analysis and/or proposal for the
additional services, specifying the terms of the iMAP Solution,
including the payment(s) due for each ordered item. Client may accept
the terms of the iMAP Solution by signing that Product Schedule and
returning it to USi. All executed Product Schedules will become part of
this Agreement and will be covered by all of this Agreement's terms and
conditions.
2. DEFINITIONS
2.1 "ACCEPTABLE USE POLICY" shall mean USi's policy on the use of its
Global Network. The Acceptable Use Policy is incorporated by reference
as Exhibit B.
2.2 "ADDENDA" shall mean any written document executed by both parties
which modifies the terms of this Agreement or any executed Product
Schedule.
2.3 "AFFILIATES" shall mean any company controlling, controlled by or under
common control of Client.
2.4 "AGREEMENT" shall mean this iMAP Agreement, any and all Exhibits
attached hereto and all Product Schedules attached simultaneously with
the execution of the Agreement or agreed upon and executed subsequent
hereto.
2.5 "CONSULTING AND IMPLEMENTATION SERVICES" shall mean the services
provided by USi as part of the iMAP Solution and may be set forth in
the Product Schedule as applicable.
2.6 "CONTENT" means any and all text, multimedia or images (graphics, audio
and video), data and the like provided by Client and installed on a
server, which shall be subject to the terms and conditions set forth in
the Product Schedule and Acceptable Use Policy.
2.7 "CUSTOMIZATION" shall mean any customized deliverable created by USi as
part of the iMAP Solution.
2.8 "DOCUMENTATION" shall mean the Software Application user manual(s) and
any other materials supplied by USi concurrently with the delivery of
and for use with the iMAP Solution.
2.9 "GLOBAL NETWORK" shall mean USi's Internet-based data center and
network.
2.10 "HARDWARE" shall mean any computing or networking equipment USi uses
and/or provides to Client for its use as part of the iMAP Solution.
2.11 "iMAP SOLUTION" shall mean the collective bundling of any and all
Consulting and Implementation Services, Customization, access to the
Global Network, Hardware and Software Application(s), as outlined in
each executed Product Schedule.
- ----------------------
[CONFIDENTIAL TREATMENT] means that certain confidential information has
been deleted from this document and filed separately with the Securities
and Exchange Commission.
2.12 "PRODUCT SCHEDULE" shall mean a written order for any iMAP Solution
accepted by USi and executed by both parties, which shall be subject to
the terms and conditions of this Agreement and which, at a minimum,
shall contain a description of the work to be undertaken and the
obligations and responsibilities of each party related to that Product
Schedule.
2.13 "SLA" shall mean the Service Level Agreement specified in each Product
Schedule.
2.14 "SOFTWARE APPLICATION" shall mean the Third Party computer software USi
provides to Client for its use as part of the iMAP Solution.
2.15 "THIRD PARTY" shall mean any natural person or legal entity other than
USi and Client.
2.16 "USi SOFTWARE" shall mean certain software which was developed by USi
independently of this Agreement or pursuant to the terms of this
Agreement as may be required for customization.
3. LICENSE
3.1 RIGHTS GRANTED
In accordance with the terms of this Agreement, USi grants to Client a
limited, nontransferable, non-exclusive license to use the iMAP
Solution included in the executed Product Schedules attached hereto for
the sole purpose of supporting the operations of Client's business as
described in the Product Schedule. Notwithstanding anything to the
contrary, Client may not use the iMAP Solution in a resale capacity, to
process and/or analyze the data of a Third Party as a service bureau or
on any Hardware other than as set forth in the relevant Product
Schedule.
3.2 OWNERSHIP
All components of the iMAP Solution provided to Client shall remain at
all times the property of USi and/or its Third Party Software
Application vendors and contain trade secrets and other valuable
proprietary information of USi and/or its Third Party vendor.
3.3 EFFECTIVE DATE
This Agreement shall be effective on the date it is executed by USi,
and shall remain in effect for the Term unless terminated in accordance
with the provisions set forth in this Agreement.
3.4 SOFTWARE
Client acknowledges and understands that USi may provide to Client (a)
USi Software and/or (b) Software Applications owned by Third Parties
which USi uses under license agreements from Third Parties defined in
Section 2.14 as "Software Application." Client acknowledges that (a)
title to all such USi Software and
Page 1
Proprietary & Confidential
<PAGE>
Software Application remains with and is subject to the proprietary
rights of USi or its Third Party vendor, and (b) such USi Software and
Software Application contain trade secrets and other valuable
proprietary information of USi or its Third Party vendor.
3.5 RESTRICTIONS
Client agrees it shall not: (a) alter or modify the USi or Software
Application or any part thereof; (b) copy or duplicate, or permit a
Third Party to copy or duplicate, the USi Software or Software
Application or any part thereof or (c) reverse engineer, decompile or
disassemble USi Software or Software Application, unless otherwise
provided in the relevant Product Schedule.
3.6 NON-TRANSFERABLE
Client agrees not to license, sell, transfer, lease or disclose the USi
Software or Software Application to any Third Party.
4. TERM
4.1 AGREEMENT TERM
The term of this Agreement (the "Term") shall commence on the Effective
Date and shall expire three (3) years thereafter unless (a) either
terminated pursuant to the terms of this Agreement or (b) extended by
mutual written agreement.
4.2 PRODUCT SCHEDULE
Each individual Product Schedule shall include a period of performance.
In the event that any Product Schedule period of performance extends
beyond the Term, the Term shall automatically be extended and remain in
effect until such time as the Product Schedule period of performance is
completed.
5. PAYMENTS
5.1 FEES
As compensation for the license of the iMAP Solution granted to Client
and the provisions of services as applicable, Client agrees to pay the
amount(s) specified in each executed Product Schedule. Any fee
specified in a Product Schedule will only remain in effect until the
date specified in the Product Schedule.
5.2 PAYMENT TERMS
Unless otherwise specified in the Product Schedule, payments will be
due and payable to USi within forty-five (45) days of the date of USi's
invoice. Such invoices will be generated in accordance with the terms
specified in each Product Schedule. USi reserves the right, in USi's
absolute discretion, to perform a credit check on Client.
5.3 TAXES
Client shall be responsible for the payment of all taxes associated
with this Agreement or its use of the iMAP Solution (other than taxes
based on USi's net income), including, but not limited to, personal
property taxes, import taxes, taxes on telecommunication services,
information services, data processing services or similar governmental
charges that may be assessed by any jurisdiction, whether based on
gross revenue or delivery of products or services. If USi is required
to pay any such taxes directly, Client shall, upon receipt of USi's
invoice, reimburse USi for any amount that USi has paid.
Notwithstanding the above, Client shall not be required to pay those
taxes from which Client is legally exempt.
5.4 INSURANCE
Client shall obtain and maintain adequate liability insurance and
insurance against loss or damage to USi's Hardware located on Client's
premises. Upon request, Client shall furnish to USi a Certificate of
Insurance or other evidence of insurance coverage.
5.5 INTEREST
Any payments not made when due will be subject to an interest charge of
one percent (1%) per month, unless applicable law specifies a lower
lawful rate of interest, in which case past due payments shall bear
interest at that lower maximum rate. Interest shall not be applied to
any invoice during which time such invoice is being disputed by Client.
6. WARRANTIES
6.1 PERFORMANCE WARRANTY
USi warrants that: (a) work performed to complete any Product Schedule
will be performed by qualified personnel in a professional, workmanlike
manner, consistent with the prevailing standards of the industry; and
(b) it will use commercially reasonable efforts to complete each
Product Schedule.
6.2 AUTHORITY WARRANTY
USi warrants that it has the authority to license the Software
Application(s) for the purposes set forth in this Agreement and the
Product Schedule. Client acknowledges and agrees that its sole and
exclusive remedies for breach of this warranty are set forth in Section
8.1 of this Agreement.
6.3 LIMITATION
Unless otherwise expressly provided herein or in a Product Schedule,
neither USi nor any of its service providers, licensors, employees or
agents warrant (a) that the functions contained in the iMAP Solution
provided hereunder will meet Client's requirements or (b) that the
operation of the iMAP Solution will be uninterrupted or error free or
(c) that the products or services will have the capacity to meet the
demand during specific hours. USi will not be liable for any damages
that Client may suffer arising out of use, or inability to use, the
products or services provided hereunder. USi will not be liable for
unauthorized access to or alteration, theft or destruction of Client's
data files, programs, procedures or information through accident,
fraudulent means or devices, or any other method, unless such access,
alteration, theft or destruction is caused as a result of USi's gross
negligence or intentional misconduct.
6.4 YEAR 2000 WARRANTY
USi warrants that its iMAP Solutions, as provided by USi are capable of
processing, recording, storing and presenting data containing
four-digit years after December 31, 1999 in substantially the same
manner and with substantially the same functionality as before January
1, 2000. USi assumes no responsibilities or obligations to cause Third
Party products or services to function with the iMAP Solutions. USi
will not be in breach of this warranty for any failure of the iMAP
Solutions to correctly create or process date-related data if such
failure results from the inability of any software, hardware, or
systems of Client or any Third Party either to correctly create or
process date-related data in a manner consistent with the method in
which the iMAP Solution creates or processes date-related data. In the
event of a breach of this warranty, Client's sole and exclusive remedy
and USi's sole liability shall be to use its commercially reasonable
efforts to correct errors that cause breach of this warranty or if USi
is unable to make the corrections within a reasonable period of time
considering the severity of the error and its impact on the Client as
determined by USi, Client shall be entitled to terminate this Agreement
pursuant to Section 10.1.
6.5 EXCLUSION
THE WARRANTIES ABOVE ARE EXCLUSIVE AND IN LIEU OF ALL OTHER WARRANTIES
AND CONDITIONS, EXPRESSED, IMPLIED OR STATUTORY, INCLUDING, BUT NOT
LIMITED TO, THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE, TITLE OR NONINFRINGEMENT.
Page 2
Proprietary & Confidential
<PAGE>
7. CLIENT CARE
7.1 CLIENT ASSISTANCE CENTER
Under the Client Care program, USi will provide a level of service
concerning Client's iMAP Solution as outlined in each specific Product
Schedule. In all cases, Client will have availability to USi's Client
Assistance Center twenty-four (24) hours per day, seven (7) days per
week, three hundred sixty-five (365) days per year. Client acknowledges
and agrees that all calls into the Client Assistance Center are public
and may be monitored and/or recorded for quality control purposes.
7.2 SERVICE LEVEL AGREEMENTS
USi will provide a Service Level Agreement with each iMAP Solution
which will be stated in each executed Product Schedule. Specific
remedies for USi's failure to meet the applicable Service Level
Agreement will be stated in each executed Product Schedule.
7.3 MAINTENANCE WINDOW
USi has established set maintenance windows on Tuesday and Friday
mornings between the hours of 2am and 6am (ET). During this time, USi
reserves the right to take down a Client's server(s) in order to
conduct routine maintenance checks to both software and hardware. If a
Client's server(s) will be down for more than two (2) minutes within
this pre-established window, USi will advise Client of such prior to
any scheduled maintenance downtime. USi will not be responsible for any
damages or costs incurred by Client, if any, for scheduled down time.
USi reserves the right to change its maintenance window upon prior
notice to Client.
8. INDEMNITY OBLIGATIONS
8.1 USi INDEMNITY OBLIGATIONS
USi will (a) defend Client against any final claim that the products or
services delivered by USi infringe a patent, copyright, trade secret,
or other proprietary right in the United States; and (b) pay costs,
damages and attorney's fees finally awarded against Client as a result
of such claims.
(a) Infringement Remedies. In addition to defending Client as
stated above, if a claim occurs, or in USi's opinion, is
likely to occur, USi will, at its sole option and expense,
(subject to its agreement with Software Application vendors)
either (i) procure Client the right to continue using the
Software Application in question, or (ii) replace or modify
the infringing Software Application so that it becomes
noninfringing; provided that the Software Application's
functionality are not materially and adversely affected by
such replacement or modification. If neither of these
alternatives is reasonably available, Client shall return the
Software Application at issue and USi will refund the amount
paid by Client to USi for such Software Application as
depreciated. The depreciation shall be an equal amount per
year over a three (3) year life commencing with the date of
installation.
(b) Exclusions. USi shall not be liable for infringement claims
based on (i) the combination, operation or use of Software
Application with hardware, data or software not supplied by
USi if the claim would have been avoided by use of other
hardware, data or software; or (ii) modifications to Software
Application if the modifications were not made by USi.
8.2 CLIENT INDEMNITY OBLIGATIONS
Client will (a) defend USi against any claims by Third Parties arising
from Client's use of Software Application or iMAP Solution provided by
USi hereunder excluding, however, (i) proprietary rights infringement
claims under Section 8.1; and (ii) claims for bodily injury or damages
to tangible personal property proximately caused by the negligent act,
error or omission of USi and (b) pay costs, damages and attorney's fees
finally awarded against USi and any settlement costs incurred as a
result of such claims.
8.3 CONDITIONS
The indemnification obligations set forth above in Sections 8.1 and 8.2
are contingent upon compliance with the following conditions by the
party seeking indemnification:
(a) Providing prompt written notice of a claim within twenty (20)
days of its service upon Client;
(b) Providing all information
and evidence within its control which is necessary for the
indemnifying party to conduct a defense; and
(c) Providing the indemnifying party with sole control of the
defense and all related settlement negotiations. However, the
non-indemnifying party may participate in the defense or
settlement of the claim at its own expense.
8.4 LIMITATIONS OF REMEDY
This Section 8 states the entire obligations of the parties with
respect to indemnity or infringement of copyrights, patents, trade
secrets or other intellectual property or proprietary rights.
9. LIMITATION OF LIABILITY
9.1 LIMITATION OF LIABILITY
USi's entire liability and Client's exclusive remedies are set forth in
this Section 9, Section 6 WARRANTIES, Section 8 INDEMNITY OBLIGATIONS
and Section 10 TERMINATION. USi's liability to Client for damages other
than those set forth in Section 6, Section 8 or Section 10 (regardless
of the form of action, whether in contract, tort, warranty or
otherwise) shall in no event exceed the monthly fee paid by the Client
to USi under this Agreement for the one (1) month period immediately
preceding the event which caused the damage or injury.
9.2 DISCLAIMER OF DAMAGES
USi shall not be liable for any special, incidental, indirect or
consequential damages or for the loss of profit, revenue, or data, even
if USi shall have been advised of the possibility of such potential
loss or damages. Client further agrees that USi shall not be liable for
any claim or demand against Client or USi by any Third Party, except to
the extent expressly covered under Section 8 INDEMNITY OBLIGATIONS or
Section 9 LIMITATION OF LIABILITY.
10. TERMINATION
10.1 TERMINATION FOR BREACH
Either party may terminate this Agreement immediately upon written
notice to the other party if the other party materially breaches any
obligation under this Agreement and fails to cure such breach within
thirty (30) days after receiving notice of the breach. Unless otherwise
agreed in writing, termination of this Agreement shall also
automatically terminate all Product Schedules which are incomplete at
the time of termination. Termination of one Product Schedule shall have
no effect on any other Product Schedule or the Agreement so long as the
party in default of the Product Schedule being terminated complies with
the terms and conditions of the Agreement and other Product Schedules.
Notwithstanding anything to the contrary, either party shall have the
right to terminate this Agreement and the license granted herein in the
event either party (a) terminates or suspends its business, (b) becomes
subject to any bankruptcy or insolvency proceeding under Federal or
state statute, (c) becomes insolvent or becomes subject to direct
control by a trustee, receiver or similar authority, or (d) has wound
up or liquidated, voluntarily or otherwise. In the event of termination
by reason of either party's failure to comply with any part of this
Agreement, or upon any act
Page 3
Proprietary & Confidential
<PAGE>
which shall give rise to the right to terminate, USi shall have the
right, at any time, to terminate the license and take immediate
possession of the iMAP Solutions and all copies wherever located, with
thirty (30) days written notice. Within ten (10) days after termination
of the license, Client shall return to USi all tangible portions of the
iMAP Solutions, including any Hardware provided by USi and any Software
in the form provided by USi or as modified, or, upon request by USi,
destroy all tangible portions of the iMAP Solutions and all copies, and
certify in writing that they have been destroyed. Termination of this
Agreement shall not relieve either party of its obligations regarding
confidentiality under Section 12 below. Lastly, no cure period shall be
afforded in an event of a breach of Sections 3 or 12.1, for which
either party shall be entitled to all legal and equitable remedies,
including but not limited to, injunctive relief, without requirement of
bond.
10.2 EFFECT OF TERMINATION
Termination of this Agreement for any reason shall not affect any past
or future sums due USi under this Agreement or any additional remedies
provided by law or equity to either party. All rights that have been
granted to Client shall immediately be terminated and all unpaid
charges accrued under this Agreement shall become immediately due and
payable upon the happening of any event of termination. In the event of
a termination of this Agreement or any Product Schedule for default,
each party agrees to return to the other within sixty (60) days of a
request, any property, data sheets, schematics, samples, customer
lists, confidential information, in whatever form or media which are
used by a disclosing party or which are furnished to a recipient.
11. SOFTWARE AND WORK PRODUCT DEVELOLPED UNDER AGREEMENT
11.1 TITLE
Except as otherwise provided for in Section 11.2 below or as may be
expressly agreed in any Product Schedule, USi shall retain title to and
ownership of any Hardware provided by USi, any software developed under
any Product Schedule issued hereunder ("Project Software") and any
other products of its work hereunder which may consist of reports,
designs, data or similar materials ("Work Product"); provided, however,
that USi will not have ownership of Content (as defined in Section 2.6
above) incorporated into Project Software or Work Product. To the
extent that Project Software contains any USi Software or Software
Application(s), such Project Software is subject to restrictions as may
be applicable to the USi Software or Software Application(s) which is
incorporated therein.
11.2 CLIENT OWNERSHIP
Client shall retain title to and all ownership rights in Content (as
defined in Section 2.6 above) but grants USi the right to access and
use Content for the purpose of complying with its obligations under
this Agreement and any applicable Product Schedule.
12. GENERAL PROVISIONS
12.1 NONDISCLOSURE
Each party shall retain in confidence all proprietary information
transmitted to the other that the disclosing party has identified in
writing, or orally and then subsequently identified in writing, as
being proprietary and/or confidential, and will make no use of such
information except under the terms and during the term of this
Agreement. Client agrees to use all reasonable precautions and take all
necessary steps to prevent the iMAP Solution from being acquired by
unauthorized persons, and to take appropriate action, by instruction,
agreement, or otherwise, with regard to all persons permitted access to
the iMAP Solution, in order to ensure the iMAP Solution is protected.
Client shall not disclose the iMAP Solution to any person for any
purpose other than as provided in this Agreement. However, neither
party shall have an obligation to maintain the confidentiality of
information that (a) it has rightfully received from another party
prior to its receipt from the disclosing party; (b) the disclosing
party has disclosed to a Third Party without any obligation to maintain
such information in confidence, (c) enters the public domain or becomes
generally known to the public by some action other than breach of this
Agreement by the receiving party; or (d) is independently developed by
the receiving party. Each party shall safeguard proprietary and
confidential information disclosed by the other using the same degree
of care it uses to safeguard its own proprietary and confidential
information but, in no event, shall use less than a reasonable degree
of care. Each party's obligation under this paragraph shall extend for
a period of three (3) years following termination or expiration of this
Agreement.
12.2 ASSIGNMENT
Neither this Agreement nor any rights granted hereunder may be sold,
leased, assigned or otherwise transferred, in whole or in part by
either party by operation of law or otherwise, and any such attempted
assignment shall be void and of no effect without the advance written
consent of the other party, such consent not to be unreasonably
withheld or delayed; PROVIDED, HOWEVER, that such consent shall not be
required if either party assigns this Agreement to a wholly owned
subsidiary or in connection with a merger, acquisition, or sale of all
or substantially all of its assets, unless the surviving entity is a
competitor of USi.
12.3 GOVERNING LAW
This Agreement shall be governed by and construed in accordance with
the laws of the State of Colorado, without regard to conflicts of law.
The parties to this Agreement consent to the exclusive jurisdiction and
venue of the state and federal courts sitting in or for Denver County,
Colorado.
12.4 DISPUTE RESOLUTION AND ARBITRATION
In the event that any dispute or disagreement between the parties with
respect to the interpretation of any provision of this Agreement, the
performance of either party under this Agreement, or any other matter
that is in dispute between the parties related to this Agreement, upon
the written request of either party, the parties will meet for the
purpose of resolving such dispute. The parties agree to discuss the
problem and negotiate in good faith without the necessity of any formal
proceedings related thereto. No formal proceedings for the resolution
of such dispute may be commenced until either party concludes in good
faith that the applicable resolution through continued negotiation of
the matter in issue does not appear likely. The parties further agree
that all disputes hereunder which cannot be settled in the manner
hereinbefore described (any such dispute is referred to here as a
"Dispute") will be settled by final and binding arbitration conducted
in accordance with the American Arbitration Association ("AAA") (or any
successor thereto), as amended from time to time. The Federal
Arbitration Act, 9 U.S.C. Secs. 1-16, shall govern the arbitrability of
all Disputes. Judgment upon the award rendered in any such arbitration
may be entered in any court having jurisdiction thereof, or application
may be made to such court for a judicial acceptance of the award and an
enforcement, as the law of such jurisdiction may require or allow. The
arbitrator shall not have authority to award punitive damages. All
expedited procedures prescribed by the AAA rules shall apply. The
arbitrator's decision and award shall be final and binding and judgment
may be entered in any court having jurisdiction thereof. Each party
shall bear its own costs and attorneys' fees, and shall share equally
in the fees and expenses of the arbitrator but the arbitrator shall
have the discretion to award costs and attorney's fees in his
discretion.
The arbitration panel will be composed of one single arbitrator engaged
in the practice of law, under the then current rules of the AAA. No
person may be appointed as an arbitrator unless he or she is
independent of the Applicant and Respondent, is skilled in the subject
matter of the Dispute and is not directly or indirectly carrying on or
involved in a business being carried on in competition with the
business of the parties. The decision of the arbitration panel shall be
made by the sole arbitrator. The venue for the arbitration shall be in
Washington, DC unless otherwise agreed to by the parties in writing.
Page 4
Proprietary & Confidential
<PAGE>
12.5 WAIVER
No waiver of any breach of any provisions of this Agreement shall
constitute a waiver of any other breach of the same or any other
provision of the Agreement, and no waiver shall be effective unless
made in writing.
12.6 SEVERABILITY
In the event that any term or provision of this Agreement conflicts
with the law under which this Agreement is to be construed, or if any
such provision is held invalid by a court with jurisdiction over the
parties to this Agreement, such provision shall be restated to reflect,
as nearly as possible, the original intentions of the parties in
accordance with applicable law, and the remainder of this Agreement
shall remain in full force and effect.
12.7 ENFORCEMENT
Both parties agree to pay all reasonable costs and expenses the other
party incurs in successfully enforcing this Agreement, including
reasonable attorneys' fees.
12.8 FORCE MAJEURE
Neither party shall be liable for any delay or failure in performance
due to Force Majeure, which shall mean acts of God, earthquake, labor
disputes, changes in law, regulation or government policy, riots, war,
fire, epidemics, acts or omissions of vendors or suppliers,
transportation difficulties or other occurrences which are beyond
either party's reasonable control. In the event that USi is prevented
or delayed in the delivery or installation of the iMAP Solution for
reasons beyond its control, such delivery or installation shall take
place as soon thereafter as is reasonably possible.
12.9 NOTICE
Any notice or invoice required or permitted under this Agreement shall
be in writing and delivered by hand or mailed by overnight express
charges prepaid or certified mail with return receipt requested to the
address set forth above.
Notices or invoices shall be deemed received when delivered.
12.10 HIRING
Client and USi agree that during the term of this Agreement and for one
(1) year thereafter, they will not, without prior written consent of
the other, employ or offer employment to any employee of the other who
has worked to a material extent on matters relating to this Agreement
or the provision of USi services by USi hereunder.
12.11 SURVIVAL
The terms of Sections 3, 4, 5, 8, 9, 11 and 12 shall survive the
termination or expiration of this Agreement.
12.12 ACCEPTABLE USE POLICY
Client agrees at all times, and to require and enforce its employees,
agents and contractors at all times, to comply with the USi Acceptable
Use Policy, which is included as Exhibit B to this Agreement. Client
agrees to indemnify and hold USi harmless from any damages, costs and
expenses incurred by USi caused by the breach of this provision.
12.13 THIRD PARTY RIGHTS
The provisions of this Agreement are solely for the benefit of the
parties hereto and not for the benefit of any Third Parties.
12.14 ENTIRE AGREEMENT
This Agreement (including all Product Schedules and Addenda, if any)
contains the full understanding between the parties and supercedes all
prior representations or agreements, whether oral or written, with
respect to such matters. The Agreement (including all Product Schedules
and Addenda, if any) may only be changed by a written document signed
by both parties. To the extent of any inconsistencies between the
Agreement and the Product Schedule, the Product Schedule shall control,
except if the Agreement is modified by Addenda, then the Addenda shall
control.
USinternetworking, INC. U S WEST INC.
By: /s/ William T. Price By: /s/ Cynthia J. Lewis
--------------------------------------- ------------------------------
Name: William T. Price Name: Cynthia J. Lewis, U S WEST
Business Resources, Inc.,
acting as agent for U S
WEST Inc.
Title: Vice President and General Counsel Title: Supplier Manager
Date: JANUARY 15, 1999 Date: JANUARY 15, 1999
--------------------------------- -------------------------
Page 5
Proprietary & Confidential
<PAGE>
U S WEST Contract: 9800051560
----------
USi Agreement Number: 008
---
Effective Date: JANUARY 15, 1999
-----------------
EXHIBIT A
PRODUCT SCHEDULE
This Product Schedule by and between U S WEST BUSINESS RESOURCES, INC.
("Client") and USinternetworking, Inc. ("USi") is governed by and incorporated
into the terms and conditions contained in the iMAP Agreement entered into
between USi and U S WEST INC. dated January 15, 1999. USi's Proposal to Client
dated OCTOBER 28, 1998 AND REVISED ON DECEMBER 22, 1998 (the "Proposal") is
attached as Exhibit A to this Product Schedule, although only those Sections of
the Proposal specifically referenced below shall be incorporated into the terms
and conditions of this Product Schedule.
iMAP SOLUTION: USi ENTERPRISE SALES APPLICATION POWERED BY SIEBEL
FOR UP TO [CONFIDENTIAL TREATMENT] USERS as detailed
in Section 3 of the Proposal.
For the purposes of this Product Schedule, "Users"
shall mean the name or specified (by password or
other user identification) individuals authorized by
Client to use the iMAP Solution, regardless of
whether the individual is actively using the iMAP
Solution at any given time.
PAYMENT SCHEDULE: $4,121,250 payable in thirty-six (36) monthly
installments as outlined in the table below
commencing upon Client's acceptance. Invoices shall
be issued on the 5th of the month following the
calendar month of service. All invoices are due upon
receipt. This pricing is also valid for the Initial
Period and the 1st Renewal Period (both as defined
below) and is exclusive of any applicable taxes,
tariffs, telecommunications surcharges or other
governmental fees or charges that may be imposed from
time to time by applicable law or regulation.
<TABLE>
<CAPTION>
---------------------------- ----------------- ---------------------------
CALENDAR MONTH OF SERVICE TOTAL # OF USERS MONTHLY INSTALLMENT AMOUNT
---------------------------- ----------------- ---------------------------
<S> <C> <C>
1st to 3rd [CONFIDENTIAL [CONFIDENTIAL TREATMENT]
TREATMENT]
---------------------------- ----------------- ---------------------------
4th [CONFIDENTIAL [CONFIDENTIAL TREATMENT]
TREATMENT]
---------------------------- ----------------- ---------------------------
5th to 36th [CONFIDENTIAL [CONFIDENTIAL TREATMENT]
TREATMENT]
---------------------------- ----------------- ---------------------------
37th to 60th [CONFIDENTIAL [CONFIDENTIAL TREATMENT]
TREATMENT]
---------------------------- ----------------- ---------------------------
</TABLE>
ADDITIONAL USERS: During the Initial Period and the 1st Renewal
Period (both as defined below), Client may add
additional Users, above the initial 1,000 Users, to
the iMAP Solution by executing an applicable Addenda
to this Product Schedule. Upon exercise of this
upgrade, the monthly installment fee will increase
based on the table below for each additional User for
the remaining term of the Initial Period and the 1st
Renewal Period commencing on the day the additional
User(s) is specified by Client.
<TABLE>
<CAPTION>
------------------------ ---------------------------------
USER NUMBERS ADDITIONAL MONTHLY INSTALLMENT
AMOUNT PER USER
------------------------ ---------------------------------
<S> <C>
1,001 to 1,500 $[CONFIDENTIAL TREATMENT]
------------------------ ---------------------------------
1,501 to 2,000 $[CONFIDENTIAL TREATMENT]
------------------------ ---------------------------------
2,001 to 3,000 $[CONFIDENTIAL TREATMENT]
------------------------ ---------------------------------
3,001 & above $[CONFIDENTIAL TREATMENT]
------------------------ ---------------------------------
</TABLE>
EFFECTIVE DATE OF PRODUCT SCHEDULE: The Effective Date of this Product
Schedule shall be January 15, 1999.
CLIENT ACCEPTANCE: Acceptance shall occur upon the completion of the
User Acceptance Test, which will be mutually
developed between Client and USi during the initial
implementation phase. Notwithstanding anything to the
contrary, Client's use of all or a part of the iMAP
Solution in the operation of Client's business shall
be considered Acceptance.
PERIOD OF PERFORMANCE: The Period of Performance of this Product Schedule
shall commence on the Effective Date and shall
continue for a period of thirty-six (36) months plus
the interim time period between the Effective Date
and the date of Acceptance (the "Initial Period").
Thereafter, this Product Schedule shall automatically
renew for a twenty-four (24) month period (the "1st
Renewal Period") based on the pricing shown above for
[CONFIDENTIAL TREATMENT] Users.
After the 1st Renewal Period, this Product Schedule
shall renew upon mutual agreement for successive
twelve (12) month periods (the "Subsequent Renewal
Period") on the same terms and conditions as herein
agreed, as may be amended from time to time,
including, but not limited to, monthly payments as
described below, unless and until either party
provides the other party with a notice of termination
thirty (30) days prior to the end of the Initial
Period, the 1st Renewal Period or any annual
Subsequent Renewal Period.
PRICE CHANGES: USi will notify Client sixty (60) days prior to any
Subsequent Renewal Period of any price changes which
will become effective upon such Subsequent Renewal
Period.
Page 1 January 15, 1999
Confidential. Disclose and distribute solely to those individuals who have a
need to know.
CLIENT CARE: Under the Client Care program, Client's Help Desk
will have availability to (a) USi's Client Assistance
Center twenty-four (24) hours per day, seven (7) days
per week, three hundred sixty-five (365) days per
year and (b) the assigned Client Assistance Team
during Client's designated standard business hours.
CONSULTING & IMPLEMENTATION SERVICES: USi will provide Consulting &
Implementation Services as outlined in
Section 3 of the Proposal., which will
require the approval of the U S WEST
project manager prior to implementation.
SECURITY PROCEDURES: USi has defined certain policies and procedures to
provide the level of security associated with the iMAP
Solution as set forth in Section 3 of the Proposal.
These policies and procedures will change over time to
reflect emerging technologies, business practices and
Internet-related issues. USi will provide written notice
to Client of any changes made to its security
procedures.
TERMINATION CLAUSE: Notwithstanding anything to the contrary contained
herein, commencing thirty-six (36) months after
Client's Acceptance as noted above, Client may cancel
this Product Schedule for any reason at the time frames
stated in the chart below by providing USi with
ninety (90) days written notice. Client agrees to pay
USi a termination fee based on the chart below upon
exercising its rights under this Termination Clause.
<TABLE>
<CAPTION>
--------------------------------- ------------------------
CALENDAR MONTH OF TERMINATION TERMINATION FEE
--------------------------------- ------------------------
<S> <C>
37th to 42nd $[CONFIDENTIAL TREATMENT]
--------------------------------- ------------------------
43rd to 48th $[CONFIDENTIAL TREATMENT]
--------------------------------- ------------------------
49th to 54th $[CONFIDENTIAL TREATMENT]
--------------------------------- ------------------------
55th to 57th $[CONFIDENTIAL TREATMENT]
--------------------------------- ------------------------
</TABLE>
SERVICE LEVEL AGREEMENT:
USi's will provide for [CONFIDENTIAL TREATMENT] Availability for Services (as
herein defined) within USi's direct control where "Availability" refers to a
Users ability to access the application on the appropriate USi hosted server.
Services include network services to the ISP circuit termination point on the
Cisco router in the data facility, all network hardware, firewalls or other
security services provided in the iMAP Solution.
<PAGE>
REMEDY:
In the event USi is unable to provide:
1. [CONFIDENTIAL TREATMENT] Availability in any given calendar month, Client
shall receive a credit to their account equal to [CONFIDENTIAL TREATMENT]
of that month's service fees excluding rebilled circuit charges.
2. [CONFIDENTIAL TREATMENT] Availability in any given calendar month, Client
shall receive a credit to their account equal to [CONFIDENTIAL TREATMENT]
of that month's service fees excluding rebilled circuit charges.
3. [CONFIDENTIAL TREATMENT] Availability in any given calendar month, Client
shall receive a credit to their account equal to [CONFIDENTIAL TREATMENT]
of that month's service fees, excluding rebilled circuit charges.
If USi fails to meet [CONFIDENTIAL TREATMENT] Availability for
[CONFIDENTIAL TREATMENT] consecutive calendar months, Client may terminate
this Product Schedule without penalty, regardless of any term remaining on
the Agreement, without liability to either party for penalties or damages
associated with such termination and upon thirty (30) days prior written
notice to USi.
"Availability" percentage shall be calculated as follows:
X = [CONFIDENTIAL TREATMENT] * 100
---------------------------------------------
N
where "n" is the total number of hours in any given calendar month, and "x" is
the Availability percentage.
Specifically excluded from "n" in this calculation and exceptions to the levels
of Availability provided herein are (a) scheduled maintenance windows; (b)
reasons of Force Majeure (as defined in Section 12.8 of the Agreement); (c)
issues associated with Client's personal computers, local area networks or
Internet Service Provider connections; (d) use of unapproved or modified
Hardware or Software and/or; (e) issues arising from the misuse of the iMAP
Solution by Client, its employees, agents, customers or contractors.
In the event of a Force Majeure event, the Client shall have the option of
canceling this Product Schedule with USi if the resulting total outage time
is greater than [CONFIDENTIAL TREATMENT] consecutive days in any
[CONFIDENTIAL TREATMENT] month period, without liability to either party for
penalties or damages associated with such outages or termination and upon
thirty (30) days prior written notice to USi.
The remedies stated in this Section are Client's sole and exclusive remedies for
service interruption.
Page 2 January 15, 1999
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need to know.
<PAGE>
NON-RENEWAL: Should Client elect not to renew this Product Schedule at the
end of either the Initial Period or any subsequent Renewal
Period, USi will deliver to Client (i) all data contained on
the Hardware used for the Client's iMAP Solution; (ii)
Client's Content; and (iii) all Consulting & Implementation
Services specifically created or performed for Client by USi
in support of the iMAP Solution (clause (iii) specifically
referred to as "C&I Work Product"). USi will deliver these
items to Client for no additional charge on a mutually
agreeable date and in a mutually agreeable format.
Upon non-renewal by Client, Client agrees: (i) that the C&I
Work Product shall no longer be supported by USi; and (ii)
that the C&I Work Product may only be used for the sole
purpose of supporting the operations of Client's business.
Notwithstanding anything to the contrary stated herein, USi
maintains all rights, title and interest in the C&I Work
Product and Client may not use the C&I Work Product in a
resale capacity or allow access to the C&I Work Product by any
Third Parties.
USi reserves all rights to use the C&I Work Product in
whatever manner it chooses, including support of iMAP
Solutions for other USi clients. In addition, USi retains all
rights to the web site addresses established by USi in support
of the Client's iMAP Solution.
CLIENT RESPONSIBILITIES: This section describes Client's additional
responsibilities under this Agreement.
1. Client will designate qualified personnel to act as liaisons between
Client and USi.
2. Client will adhere to and will require any Third Party having access to the
iMAP Solution to adhere to USi's Acceptable Use Policy as set forth at the
following URL: http://www.usi.net/usepolicy.
3. Client is responsible for obtaining and complying with license terms for
all Client-provided software, if any, and represents to USi that the terms
of such licenses shall allow use of the software on the Hardware, as well
as the implementation by USi of the iMAP Solution as proposed.
4. Client is solely responsible for Content, including any subsequent changes
or updates made or authorized by Client. Client represents and warrants
that Content: (a) will not infringe or violate the rights of any third
party including, but not limited to, intellectual property, privacy or
publicity rights of others; (b) is not abusive, profane or offensive to a
reasonable person; or (c) will not be hateful or threatening. Violations of
the foregoing by Client may result in early termination of services by USi.
5. Client is solely responsible for the Contents of its transmissions and the
transmissions of Third Parties accessing the iMAP Solution through Client.
Client agrees to comply with U.S. law with regard to the transmission of
technical data which is exported from the United States through the iMAP
Solution. Client further agrees not to use the iMAP Solution (a) for
illegal purposes or (b) to interfere with or disrupt other network users,
network services or network equipment. Interference or disruptions include,
but are not limited to, distribution of unsolicited advertising or chain
letters, propagation of computer worms and viruses, and use of the network
to make unauthorized entry to any other machine accessible via the network.
Violations of the foregoing by Client may result in early termination of
services by USi.
6. Upon expiration of this Product Schedule, Client must relinquish use of the
IP address or address blocks assigned to it by USi in connection with the
services.
7. Upon Client's Acceptance of the iMAP Solution, Client shall be responsible
for the administration of all end user login names and passwords for the
purpose of authenticating and authorizing Global Network access by end
users to the iMAP Solution.
8. Client shall be responsible for handling all communication, technical
support to and business relations with end users who are the customers of
Client including but not limited to responding to inquiries and questions.
9. Client shall provide USi with access to such hardware, software and
network connections as USi shall require.
10. Client shall be responsible for obtaining and maintaining the following
hardware and/or software:
A. To be determined
11. Client shall be responsible for providing to USi all information required
for the Acceptance Test in a timely manner and in form directed by USi.
Client shall participate in the Acceptance Testing in good faith and with
all due diligence.
12. Client shall indemnify, defend and hold USi harmless against any claims,
damages, costs and attorneys fees incurred by USi arising from USi's use of
software licensed by or delivered through Client for use in the iMAP
Solution, including, but not limited to, claims for infringement of
patents, copyrights, trade secrets or other proprietary rights. This
obligation shall survive termination of the Product Schedule.
13. Client shall perform the obligations set forth in the incorporated
provisions of the Proposal as Client responsibility.
Page 3 January 15, 1999
Confidential. Disclose and distribute solely to those individuals who have a
need to know.
<PAGE>
USinternetworking, INC. U S WEST BUSINESS RESOURCES, INC.
/s/ William T. Price /s/ Cynthia J. Lewis
- ---------------------------------- --------------------------------
(signature) (signature)
William T. Price Cynthia J. Lewis
Vice President and General Counsel Supplier Manager
January 15, 1999 January 15, 1999
- ---------------------------------- --------------------------------
(date) (date)
Page 4 January 15, 1999
Confidential. Disclose and distribute solely to those individuals who have a
need to know.
<PAGE>
Exhibit B
Acceptable Use Policy
USinternetworking, Inc.
Introduction
This document defines the Acceptable Use Policy ( "Policy") of products and
services provided by USinternetworking, Inc. ("USi") to all of its clients and
other users (collectively, "Client"). This Policy will ensure the integrity,
security, reliability and privacy of the USi network, systems, products,
services, server hosting facilities and data contained within (collectively, the
"USi Network"). Client is responsible for continual compliance of this Policy.
USi Network Security
Client is prohibited from violating, or attempting to violate, the security of
the USi Network. Any violations may result in criminal and civil liabilities to
the Client. USi will investigate any alleged violations and will cooperate with
law enforcement agencies if a criminal violation is suspected. Examples of
violations of the security of the USi Network include, without limitation, the
following:
- Accessing data not intended for such Client
- Logging into a server or account which the Client is not authorized
to access
- Attempting to probe, scan or test the vulnerability of a system or
network
- Breach security or authentication measures without proper
authorization
- Attempting to interfere with service to any user, host or network
including, without limitation, via means of overloading, "flooding,"
"mailbombing," or "crashing"
- Taking any action in order to obtain services to which the Client is
not entitled
Illegal Use
The USi Network may only be used for lawful purposes. For example, Client may
not use the USi Network to create, transmit, distribute, or store material that:
- Violates a trademark, copyright, trade secret or other intellectual
property rights of others
- Violates the privacy, publicity or other personal rights of others
- Impairs the privacy of communications
- Contains obscene, offensive or inappropriate content
- Constitutes pornography
- May be threatening, abusive or hateful
- Violates export control laws or regulations
- Encourages conduct that would constitute a criminal offense or give
rise to civil liability
- Causes technical disturbances to the USi Network, including, but not
limited to, introduction of viruses, worms or other destructive
mechanisms
- Violates reasonable regulations of USi or other service providers
with respect to the network o Assist or permit any persons in
engaging in any of the activities described above o Constitutes
deceptive on-line marketing.
If Client becomes aware of any such activities, Client is obligated to
immediately notify USi and take all other appropriate actions to cause such
activities to cease.
UNSOLICITED COMMUNICATIONS ("SPAM")
Posting the same or similar unsolicited e-mail messages, bulk commercial
advertising or informal announcements to one or more groups (known as "Spam") is
prohibited. Spam is not only annoying to Internet users, it seriously affects
the efficiency and cost-effectiveness of the USi Network. These unsolicited
messages can increase your costs by clogging the USi Network, rendering your web
site inaccessible and potentially leading to down time of your mission-critical
Internet applications.
In addition, both USENET AND E-MAIL USERS may not:
- send or post e-mail messages which are excessive and/or intended to
harass or annoy others
- continue to send e-mail to a recipient that has indicated that
he/she does not wish to receive it o send e-mail with forged TCP/IP
packet header information
- intentionally omit, delete, forge or misrepresent transmission
information, including headers, return addresses information
- take any other actions intended to cloak the Client's identity or
contact information
CONTENT
Client is responsible for all its content hosted by USi. USi exercises no
control over, and accepts no responsibility for, the content of the information
passing through the USi Network, including content provided on any third party
websites linked to the USi Network. Any website links are provided as Internet
navigation tools for informational purposes only and not as an endorsement by
USi of the contents of such web sites. USi does not adopt, nor warrant the
accuracy of, the content of any linked website and undertakes no responsibility
to update the content. Use of any information obtained via the USi Network is at
Client's own risk.
USi does not screen communications and is not responsible for screening or
monitoring content used by Client.
<PAGE>
Exhibit B
Acceptable Use Policy
USinternetworking, Inc.
Consequences of Unacceptable Use
USi reserves the right to suspend or terminate access to the USi Network upon
notice of a violation of this Policy.
Indirect or attempted violations of this Policy, and actual or attempted
violations by a third party on behalf of a Client, shall be considered
violations of this Policy by such Client.
INDEMNITY
Client agrees to indemnify and hold harmless USi, its officers, directors,
employees and agents from any losses, damages, costs or expenses resulting from
any third party claim or allegation ("Claim") arising out of or relating to any
use of the USi Network, including any Claim which, if true, would constitute a
violation of this Policy.
Limitation of Liability
Under no circumstances shall USi's liability for any damages to Client under
this Policy exceed the amount Client paid for one (1) month's access to the USi
Network.
Questions, Comments or Complaints
USi reserves the right to modify this Policy in the manner set forth above at
any time. If you are unsure whether any contemplated use is permitted or have
any comments regarding prohibited use or other abuse of the USi Network, please
direct questions or comments to: USinternetworking, Inc., One USi Plaza,
Annapolis, MD 21401-7478 Attn: Legal Department or [email protected].
<PAGE>
Exhibit 10.26
SIEBELNET AGREEMENT
THIS SIEBELNET AGREEMENT ("Agreement") is entered into this 31 day of
January, 1999 (the "Effective Date"), by and between SIEBELNET, INC., a Delaware
corporation ("SiebelNet") with its principal place of business at 1855 South
Grant Street, San Mateo, CA 94402, and USINTERNETWORKING, INC. ("USi"), a
Delaware corporation with its principal place of business at One USi Plaza,
Annapolis, MD 21401-7478
RECITALS
WHEREAS, SiebelNet owns or has the right to grant licenses to certain sales,
marketing and customer service software applications and related computer
software;
WHEREAS, USi has entered into the Existing Agreement (as defined below),
pursuant to which USi has obtained certain rights;
WHEREAS, USi and SiebelNet previously entered into a preliminary agreement dated
December 23, 1998 (the "Preliminary Agreement") relating to the subject matter
hereof, which the parties contemplated would be superseded by this Agreement;
WHEREAS, USi and SiebelNet now wish to enter into this Agreement, pursuant to
which USi will refrain from exercising certain rights under the foregoing
Software License and Services Agreement, and shall provide certain
applications hosting services as hereinafter described;
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged by the parties, SiebelNet and USi hereby agree
as follows:
AGREEMENT
1. DEFINITIONS. Capitalized terms used in this Agreement shall have the
following meanings:
"AFFILIATES" shall mean, with respect to a party hereto, any entity
controlled by, controlling, or under common control with such party; provided,
however, that such entity shall be deemed to be an Affiliate only so long as
such control exists.
"AUTHORIZED INDIVIDUAL" shall mean an individual who is permitted to
have access to and use the Programs pursuant to the terms of a User Agreement.
"AVAILABILITY" shall have the meaning assigned to it in EXHIBIT C
[CONFIDENTIAL TREATMENT].
"BUSINESS HOURS" shall have the meaning assigned to it in EXHIBIT C
[CONFIDENTIAL TREATMENT].
"BUSINESS PLAN" shall have the meaning assigned to it in Subsection 5.2
("Business Plan").
"CERTIFICATION SERVICES" shall mean the review and analysis by USi of
software and hardware owned or installed by a User and the provision by USi of a
written opinion to the effect
- ------------------------------------------------------------------------------
[CONFIDENTIAL TREATMENT] means that confidential material has been filed
separately with the Securities and Exchange Commission.
C-1
<PAGE>
that the use of such software and/or hardware in conjunction with the Programs
may have a negative impact on the quality of the response time or other
operating characteristics of the Programs as made available to such User
pursuant to a User Agreement, as further described in EXHIBIT F hereto.
"CONFIDENTIAL INFORMATION" shall have the meaning assigned to it in
Section 9.1 of the Existing Agreement.
"DESIGNATED EQUIPMENT" shall mean the Hardware described as such in
EXHIBIT D ("Designated EQUIPMENT"), or such other or replacement equipment as
USi may use, with SiebelNet's prior written permission, to provide Services
hereunder.
"DESIGNATED PURPOSE" shall mean the provision of Services for the
benefit of Users pursuant to the terms of this Agreement and the User Agreement,
and shall in no event include any other activity.
"DESIGNATED SITE" shall mean, subject to Subsection 9.1 ("Designated
Site"), USi's business location with the street address of One USi Plaza,
Annapolis, MD 21403 or 1375 McCandless Drive, Milpitas, CA 95035, or such other
location as SiebelNet may approve beforehand and in writing.
"DOCUMENTATION" shall mean any instructive or illustrative materials,
in written, magnetic or electronic format, which describe the computer software
contained in the Programs and are generally provided to licensees of such
Programs.
"EFFECTIVE DATE" shall have the meaning assigned to it in the first
paragraph of this Agreement.
"ELEMENT" shall have the meaning assigned to it in EXHIBIT C
[CONFIDENTIAL TREATMENT].
"ENTERPRISE RELATIONSHIP MANAGEMENT PRODUCTS" shall mean the Programs
specified in EXHIBIT A or any other software products which Siebel or SiebelNet
may release from time to time which relate to the automation of corporate sales,
marketing or customer service functions.
"EXISTING AGREEMENT" shall mean the Software License and Services
Agreement executed dated as of June 30, 1998 by and between USi and Siebel
Systems, Inc. ("Siebel").
"FORCE MAJEURE EVENT" shall mean any condition arising outside the
reasonable control of and without fault or negligence by a party hereto
including, without limitation, acts of God, acts of the public enemy, acts of
the United States of America, or any state, territory or political division
of the United States of America or of the District of Columbia, fires,
floods, earthquakes, epidemics, quarantine restrictions, freight embargoes,
and unusually severe weather conditions.
"HARDWARE" shall mean computer hardware, networking equipment and
associated system software on which the Programs are installed for use by a User
in connection with USi's provision of Services hereunder, which may include
without limitation hardware and/or software which is: (a) procured by USi from
one or more third parties with the prior, written consent of
2.
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SiebelNet (such consent not to be unreasonably withheld); or (b) originally
provided to SiebelNet by [CONFIDENTIAL TREATMENT] as described in EXHIBIT E
hereto [CONFIDENTIAL TREATMENT], which may be procured by USi from Siebel or
SiebelNet under terms and conditions to be agreed to in good faith by such
parties.
"INDEMNIFYING PARTY" shall mean the party to whom an Indemnitee shall
give notice of a claim that is covered by Subsection 14.1 ("By SiebelNet") or
Subsection 14.2 ("By USi").
"INDEMNITEE" shall mean the party against whom a third party makes a
claim covered by Subsection 14.1 ("By SiebelNet") or Subsection 14.2 ("By USi")
as to which an Indemnified Party seeks indemnification.
"INITIAL TERM" shall have the meaning assigned to it in Section 16
("Term and Termination").
"MAINTENANCE SERVICES" shall mean the maintenance services defined in
EXHIBIT G which USi and SiebelNet shall provide to Users in connection with each
such User's use of the Programs.
"OBJECT CODE" shall mean computer software programs, not readily
perceivable by humans, and suitable for machine execution without the
intervening steps of interpretation or compilation.
"PROGRAMS" shall mean the computer software (in Object Code format
only) described in EXHIBIT A ("Programs") and other computer software delivered
to USi from time to time, including any and all Updates and Documentation
provided to USi hereunder.
"RENEWAL TERM" shall have the meaning assigned to it in Section 16
("Term and Termination").
"SERVICES" shall mean all aspects of USi's performance under this
Agreement, including without limitation the provision of Program hosting,
Maintenance Services and related services.
"SOURCE CODE" shall mean computer software programs not in machine
readable format and not suitable for machine execution without the intervening
steps of interpretation or compilation.
"TERM" shall mean the period of time commencing with the Effective
Date and ending with the later of: (a) the last day of the Initial Term; or
(b) the last day of the latest Renewal Term.
"TRAINED PARTY" shall have the meaning assigned to it in Section 6
("Training and Leads").
"TRAINING PARTY" shall have the meaning assigned to it in Section 6
("Training and Leads").
3.
<PAGE>
"UPDATES" shall mean any new version, release, update, enhancement,
correction or modification of the Programs, or entirely new products identified
by SiebelNet as such, which SiebelNet may, in its sole discretion, provide to
USi hereunder; provided SiebelNet shall be required to provide to USi any
Updates that SiebelNet makes generally available to its customers or other
service providers.
"USER" shall mean any person or entity which has entered into and is
party to a valid and effective User Agreement.
"USER AGREEMENT" shall mean an agreement between a User and SiebelNet,
with a minimum duration of six (6) months following the effective date
thereof, which may include, at SiebelNet's discretion, certain product and
development obligations.
"USi FEE ADJUSTMENT" shall have the meaning assigned in EXHIBIT C
[CONFIDENTIAL TREATMENT].
"USi FEES" shall have the meaning assigned in Subsection 5.3
("Payment").
2. EXISTING AGREEMENT. During the Term of this Agreement, USi agrees
not to offer or sell licenses or products which incorporate, in whole or in
part, Siebel software products and will not provide access to Siebel software
products to "Users" as defined in Section 1.17 of the Existing Agreement
("USi Users"). Notwithstanding the foregoing, USi shall continue to have the
right to provide access to Siebel software products in accordance with the
terms of the Existing Agreement to (i) individuals or entities that are
designated as USi Users as of the date of this Agreement ("Existing USi
Users"), and (ii) additional USi Users solely to the extent that the licenses
purchased by USi pursuant to the Existing Agreement have not been deployed to
Existing USi Users ("Additional USi Users"); provided, however, that once
such Siebel software licenses have been initially deployed to such Existing
USi Users or Additional USi Users, USi shall not have the right under the
Existing Agreement to subsequently redeploy, reassign, redesignate or
otherwise transfer any such licenses to any party, including USi or its
Affiliates.
USi shall not have the right to make additional license purchases
pursuant to Section 5 of the Additional Terms and Conditions to
Exhibit A (Order Form) of the Existing Agreement, except for future
purchases of licenses that are permanently deployed solely for the internal
business operations of USi and which may never be subsequently redeployed,
reassigned, redesignated or otherwise transferred to any third party.
3. PROVISION OF SERVICES.
3.1 DELIVERY OF PROGRAMS. All Programs delivered by SiebelNet to USi
pursuant to this Agreement shall be deemed accepted by USi within thirty days of
delivery, and USi hereby waives all right of revocation. SiebelNet may deliver
additional copies of the Programs, including without limitation Updates, which
USi shall install at the Designated Site as soon as reasonably practicable or as
otherwise directed by SiebelNet.
3.2 HARDWARE AND SOFTWARE. USi shall be responsible, at its own
expense, for the acquisition, installation, operation and maintenance of the
Designated Equipment at the Designated Site to provide Services and to carry out
all of USi's obligations hereunder; except as such obligations relate to the
acquisition of the [CONFIDENTIAL TREATMENT] and any maintenance related
4.
<PAGE>
such [CONFIDENTIAL TREATMENT] that is covered by a maintenance contract
between [CONFIDENTIAL TREATMENT]and [CONFIDENTIAL TREATMENT] which is in
existence as of the date of this Agreement. Without limiting the generality
of the foregoing, in the event the parties mutually agree that USi should
acquire the [CONFIDENTIAL TREATMENT] from [CONFIDENTIAL TREATMENT], the
parties agree to negotiate in good faith the pricing and terms of such
acquisition.
3.3 PROGRAM LICENSE. In consideration of all obligations of USi
hereunder, SiebelNet hereby grants to USi (and certain USi subsidiaries as
approved in writing in advance by SiebelNet) a revocable, non-exclusive,
non-transferable license (without the right to grant sublicenses) to use,
execute and display the Programs in Object Code format: (a) solely on the
Designated Equipment; (b) solely at the Designated Site; (c) solely for the
Designated Purpose; and (d) solely during the Term. The foregoing license
includes the right to make a reasonable number of copies of the Programs for
internal back-up and archival purposes only, provided that all such copies shall
bear the original and unmodified copyright, patent and other intellectual
property markings as when originally delivered by SiebelNet. It is understood
that such unused copies do not need to be on Designated Equipment or at the
Designated Site. USi represents and warrants that any and all USi subsidiaries
which are granted a license pursuant to this Section shall comply with the terms
of such license and the other terms of this Agreement, and that USi shall be
liable for the breach by any such subsidiary of the terms of such license or
other terms of this Agreement.
3.4 SERVICES. USi shall provide the Services as further described
in EXHIBIT C [CONFIDENTIAL TREATMENT] and EXHIBIT G, which shall include the
installation and operation of the Programs on the Designated Equipment, at
the Designated Site, in order to make the use of such Programs available to
Users pursuant to the User Agreement.
3.4 NO REVERSE ENGINEERING. USi hereby acknowledges that the Programs
contain valuable trade secret and confidential information of SiebelNet and
Siebel. USi agrees not to reverse compile, reverse engineer, reverse assemble,
or otherwise attempt, directly or indirectly, to obtain or create Source Code
for the Programs or to otherwise discover or reveal such information.
3.5 TRADEMARK LICENSE. Each party (the "Licensing Party") hereby
grants to the other party (the "Licensed Party") a worldwide, non-transferable,
non-exclusive, non-sublicenseable license to use the trademarks, service marks,
trade names, and other product source identifiers of the Licensing Party
(collectively, the "Marks") to identify the corresponding goods and services of
the Licensing Party solely for the purpose of carrying out the obligations of
the Licensed Party hereunder, subject to the publicity agreement provisions of
Section 19.7.
Each Licensing Party may terminate the foregoing license if, in its
sole discretion, the Licensed Party's use of the Marks of the Licensing Party
does not conform to the Licensing Party's standards; provided, however, that
the Licensing Party must first state in writing the basis for such
termination and provide the Licensed Party a reasonable opportunity to cure.
Title to and ownership of the Licensing Party's Marks shall remain with the
Licensing Party or its licensors. The Licensed Party shall not form any
combination marks or composite marks with the Marks of the Licensing Party.
The Licensed Party shall not take any action inconsistent with
5.
<PAGE>
the Licensing Party's ownership of its Marks and any benefits accruing from use
of such Marks shall automatically vest in the Licensing Party.
3.7 NO IMPLIED LICENSES. The Programs, including all copies thereof,
are and shall remain at all times the exclusive property of SiebelNet or its
suppliers. USi acquires no rights to or licenses of such Programs except those
expressly granted herein.
3.8 CERTIFICATION SERVICES. As SiebelNet's reasonable request, USi
agrees that it shall provide to Users the Certification Services, at prices
not to exceed the prices set forth in EXHIBIT F. SiebelNet agrees that USi
shall be the exclusive third party provider of such Certification Services
during the Term of this Agreement, for so long as Siebel is reasonably
satisfied with USi's provision of Certification Services
[CONFIDENTIAL TREATMENT].
In the event [CONFIDENTIAL TREATMENT] shall have the option of
providing Services to such User by notifying [CONFIDENTIAL TREATMENT] in
writing within three (3) business days following [CONFIDENTIAL TREATMENT]
receipt of notice from [CONFIDENTIAL TREATMENT] of such objection. In the
event [CONFIDENTIAL TREATMENT] elects to provide Services to such User,
[CONFIDENTIAL TREATMENT] agrees that the Certification Services may be
provided to such User by [CONFIDENTIAL TREATMENT]. In the event
[CONFIDENTIAL TREATMENT] elects not to provide Services to such User or fails
to make a timely election to provide Services to such User,
[CONFIDENTIAL TREATMENT] agrees to waive its rights under Section 4.2 hereof
with respect to such User.
USi further agrees to offer its implementation methodology known as
RAPIDi to any and all Users, at prices and terms to be negotiated and agreed to
by USi and each such User.
3.9 PROGRAM SERVICES. In addition to all other obligations of
SiebelNet hereunder, USi agrees that it will, upon request from SiebelNet and
without any payment of any kind to USi except for the USi Fees, provide
in-person, telephone, or email assistance and support to SiebelNet or Siebel
personnel as is reasonably necessary to assist in the sales and marketing by
SiebelNet of the services described in this Agreement.
3.10 SALES REPRESENTATIVES. Each party agrees that the compensation of
its respective sales representatives shall be the sole and exclusive
responsibility of such party. Each party further agrees to compensate its sales
representatives with respect to sales of services described in this Agreement in
a manner consistent with such party's usual practices.
4 EXCLUSIVITY.
4.1 BY USi. During the Term, USi shall not, and shall ensure that
USi Affiliates shall not, sell, lease, rent, license, sublicense, host,
market or otherwise make available or offer to make available to any third
party any computer software products (other than the Programs pursuant to
this Agreement) or offer services relating to any product which: (a) perform
functions substantially similar to those performed by any Enterprise
Relationship Management Products; (b) are part of a larger system which
performs functions substantially similar to those performed by any Enterprise
Relationship Management Products; or (c) are competitive in whole or in part
with any Enterprise Relationship Management Products.
6.
<PAGE>
4.2 BY SIEBELNET. During the Term, but subject to Exhibit C
[CONFIDENTIAL TREATMENT], SiebelNet agrees not to enter into any agreements
with any third parties for the provision during the Term of application
hosting and rental services substantially similar to the Services to business
entitles having their respective headquarters located in North America. Upon
the reasonable request of USi during the Term, SiebelNet agrees from time to
time during the first year of the Term, to evaluate in good faith the
technical and other capabilities of USi to provide Services to entities
having their respective headquarters outside of North America, and in the
event that SiebelNet deems such capabilities acceptable in SiebelNet's
reasonable discretion, SiebelNet agrees to appoint USi as a preferred
provider of Services to such entities on a non-exclusive basis under similar
terms and conditions, as applicable, to this Agreement.
5. PRICING AND PAYMENTS.
5.1 PRICING. The initial fees for the Services shall be as set forth
in EXHIBIT B hereto, which may be modified from time to time as set forth in
Subsection 5.2 below.
5.2 BUSINESS PLAN. The parties agree to meet promptly after the
Effective Date in person or by telephone, and to negotiate in good faith a
business plan ("Business Plan") which shall include prices, terms and other
details for the provision of Services hereunder and which is mutually acceptable
to both parties. The parties further agree to communicate from time to time
during the first year of the Term no less frequently than one (1) time each
ninety (90) days to discuss such Business Plan and to adjust such pricing as
they mutually agree in good faith. The parties further agree that after the
first year of the Term, they shall meet as reasonably necessary to adjust such
pricing. In the event that the parties are unable to reach agreement on the
Business Plan or any such pricing adjustments within sixty (60) days following
the commencement of good faith negotiations relating thereto, then either party
may terminate this Agreement without cause pursuant to Subsection 16(a)
("Termination for Convenience"). The parties agree that any upward adjustments
of such pricing (i) must be in response to an attendant rise in USi's cost of
providing the Services, and (ii) shall not exceed [CONFIDENTIAL TREATMENT] per
annum in the aggregate.
5.3 PAYMENT. SiebelNet shall pay to USi the fees due and owing
hereunder, subject to reduction by the USi Fee Adjustment (collectively, "USi
Fees"), according to EXHIBIT B ("Pricing"). USi agrees to issue invoices in
advance to SiebelNet for payment of USi Fees on a monthly basis for the
following month's Services (including any adjustment necessary for the prior
month's Services), and SiebelNet shall pay each properly documented invoice
no later than [CONFIDENTIAL TREATMENT] days from the date of SiebelNet's
receipt of such invoice. Notwithstanding the foregoing, the parties agree to
adjust such invoicing and payment schedule to the extent required to ensure
that SiebelNet's payments to USi for the Services provided hereunder are not
due and payable prior to the date on which Users are required to pay
SiebelNet for such services pursuant to the respective User Agreements.
6. TRAINING AND LEADS.
6.1 CROSS TRAINING. Each party (the "Training Party") shall provide
reasonable instruction to the sales representatives and pre-sales engineers
of the other party (the "Trained Party") regarding the products and services
offered by the Training Party that relate to the subject matter of this
Agreement.
7.
<PAGE>
6.2 OTHER TRAINING. USi shall develop an internal training course for
its employees regarding the use and support of the Programs. This training will
be consistent with SiebelNet's then-current training policies. Should this
training integrate or include SiebelNet-supplied materials or courses or
otherwise require payment by USi to SiebelNet pursuant to SiebelNet's then
current training policies, USi agrees to pay SiebelNet the associated fees
therefor, using the discounts defined within Section 4(a) and 4(b) of Exhibit A
to the Existing Agreement.
6.3 PRODUCT MANAGERS. Each party shall appoint at least one (1)
appropriately qualified full-time product manager whose sole responsibility
shall be to define and market the Services.
6.4 LEADS. USi will promptly provide to SiebelNet any and all
potential Services leads arising from or with respect to any sales by USi of its
iMAP product line or other operations.
7. TAXES. In addition to any other payments due under this Agreement, USi
agrees to pay, and to indemnify and hold SiebelNet and its Affiliates harmless
from, any sales, use, excise, import or export, value added or similar tax or
duty based on USi's provision of Services to SiebelNet, including any penalties
and interest, as well as any costs associated with the collection or withholding
thereof, and all governmental permit fees, license fees and customs and similar
fees levied upon the delivery by SiebelNet of the Programs to USi, which
SiebelNet or its Affiliates may incur in respect of this Agreement. SiebelNet
agrees to pay, and to indemnify and hold USi and its Affiliates harmless from,
any taxes based on the services or Programs provided by SiebelNet to its Users.
8. [CONFIDENTIAL TREATMENT]. At all times during the term, USi shall
provide [CONFIDENTIAL TREATMENT] consistent with the [CONFIDENTIAL TREATMENT].
9. SERVICE LOCATIONS, SAFETY AND SECURITY.
9.1 DESIGNATED SITE. USi shall provide Services from: (a) the
Designated Site; or (b) with SiebelNet's permission, another site, on a
temporary basis when the Designated Site is unavailable (such other site to be
considered a Designated Site for purposes of this Agreement).
9.2 SAFETY AND SECURITY. USi shall at all times maintain and enforce
at the Designated Site safety and security procedures that are at least: (a)
equal to industry standards for such locations; (b) as rigorous as those
procedures which are in effect for other similar locations owned or controlled
by USi as of the Effective Date and at any time during the Term; and (c)
compliant with other reasonable safety and security requirements as to which
SiebelNet may inform USi at any time during the Term.
10. RECORDS AND AUDITS.
10.1 RECORDS. At all times during the Term, and for three (3) years
thereafter, USi shall keep written books and records documenting the
pertinent aspects of its performance hereunder for the previous three years,
including without limitation, billing and payment records, data used for
calculations of Availability, description of Services for each User, Hardware
8.
<PAGE>
acquisition, security and access records, maintenance records and travel and
expense records (collectively, "Records"), according to Generally Accepted
Accounting Principles. At a maximum of once every six (6) months during the
Term, USi agrees to provide copies of such Records to SiebelNet promptly
following the receipt by USi of a SiebelNet reasonable request therefor.
10.2 AUDITS. At a maximum of once every six (6) months during the
Term, and upon reasonable notice from SiebelNet, USi shall provide, and shall
cause its employees and agents to provide, SiebelNet auditors and inspectors,
as SiebelNet may from time to time designate, with access to the Designated
Site and all Records during USi's normal business hours for the purpose of
performing audits or inspections of the Services (including without
limitation data processing, the procurement of new systems, disaster
recovery, maintenance and support, and the systems and physical environments
in or in which the Services are performed). USi shall provide, and shall
cause its employees and agents to provide, at the sole expense of SiebelNet,
to such auditors and inspectors any assistance as they may reasonably
require. Any information disclosed by USi to such auditors and inspectors
shall be protected by the confidentiality provisions set forth in Section 11.
11. CONFIDENTIAL INFORMATION. The parties agree that they are bound by
the provisions contained in Section 9.1 of the Existing Agreement, and agree
that such confidentiality obligations shall apply to all activities taken and
disclosures made in furtherance of this Agreement. USi further agrees that
the following information shall be deemed to be the Confidential Information
of Siebel, as defined in Section 9.1 of the Existing Agreement: (i) all
information which Siebel is required to treat confidentially pursuant to a
User Agreement (which shall be protected by USi in a manner consistent with
the terms of such User Agreement), and (ii) all information regarding the
existence, terms and pricing of this Agreement.
12. CONSULTING. USi agrees that it will continue to engage in its
current consulting business with respect to the products of SiebelNet and
Siebel Systems, Inc., apart from any rights and obligations contained herein.
13. REPRESENTATIONS AND WARRANTIES.
13.1 BY SIEBELNET. SiebelNet represents and warrants that: (a) it is a
corporation duly incorporated, validly existing and in good standing under the
laws of Delaware; (b) it has all the requisite corporate power and authority to
execute, deliver and perform its obligations under this Agreement; (c) the
execution, delivery, and performance of this Agreement have been duly authorized
by SiebelNet; (d) no approval, authorization, or consent of any governmental or
regulatory authority is required to be obtained or made by it in order for it to
enter into and perform its obligations under this Agreement; and (e) in
connection with its obligations under this Agreement, it shall comply with all
applicable Federal, State, and local laws and regulations and shall obtain all
applicable permits and licenses.
13.2 BY USI. USi represents and warrants that: (a) it is a corporation
duly incorporated, validly existing and in good standing under the laws of
Delaware; (b) it has all the requisite corporate power and authority to execute,
deliver and perform its obligations under this Agreement; (c) the execution,
delivery, and performance of this Agreement have been duly authorized by USi;
(d) no approval, authorization, or consent of any governmental or regulatory
9.
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authority is required to be obtained or made by it in order for it to enter
into and perform its obligations under this Agreement; (e) in connection with
its obligations under this Agreement, it shall comply with all applicable
Federal, State, and local laws and regulations and shall obtain all
applicable permits and licenses; (f) it shall provide the services
contemplated by this Agreement in a manner consistent with the generally
accepted industry standards and USi's best practices, (g) it shall be at all
times either the owner of the Hardware or shall be at all times authorized by
the owner of the Hardware to use the Hardware in accordance with the terms of
this Agreement (except to the extent such Hardware is the [CONFIDENTIAL
TREATMENT] or other Hardware provided by [CONFIDENTIAL TREATMENT]).
EXCEPT FOR THE EXPRESS WARRANTY SET FORTH IN THIS SECTION 13, BOTH
PARTIES MAKE NO OTHER, AND DISCLAIM ALL, WARRANTIES WITH RESPECT TO THE SERVICES
OR SOFTWARE, EXPRESS, IMPLIED, STATUTORY OR IN ANY OTHER PROVISION OF THIS
AGREEMENT INCLUDING WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
14. INDEMNIFICATION.
14.1 BY SIEBELNET. SiebelNet shall indemnify USi from, and defend USi
against, any liability or expenses (including reasonable attorneys' fees)
finally awarded against USi to a third party by a court of competent
jurisdiction arising out of or relating to any claim by a third party: (a) that
SiebelNet's provision of Programs, including without limitation the Programs
listed on EXHIBIT A (but not including any goods or services provided by USi)
directly infringes any U.S. or Canadian patent issued as of the Effective Date
or any copyright, trade secret or trademark of a third party; (b) relating to
any amounts including taxes, interest, and penalties assessed against USi which
are obligations of SiebelNet pursuant to Section 7 ("TAXES"); (c) relating to
the inaccuracy or untruthfulness of any representations or warranties made by
SiebelNet pursuant to Subsection 13.1 ("By SiebelNet"); and (d)(i) relating to
any violation of Federal, State, or other laws or regulations of any nature,
including without limitation those for the protection of persons or members of a
protected class or category of persons by SiebelNet or its employees,
subcontractors or agents, (ii) relating to illegal discrimination or harassment
by SiebelNet, its employees, subcontractors or agents, (iii) relating to
work-related injury (except as may be covered by USi's workers' compensation
obligations) or death caused by the negligence or willful acts of SiebelNet, its
employees or agents; (iv) relating to tangible personal or real property damage
resulting from SiebelNet's acts or omissions inconsistent with this Agreement
(subject to (d)(iii) above).
14.2 BY USI. USi shall indemnify SiebelNet from, and defend SiebelNet
against, any liability or expenses (including reasonable attorneys' fees)
finally awarded against USi to a third party by a court of competent
jurisdiction arising out of or relating to any claim by a third party: (a) that
USi's provision of Services (but not including any goods or services provided by
SiebelNet) infringes upon or misappropriates the proprietary rights, including
any and all worldwide patent, copyright, trade secret, trademark, or similar
rights of any third party; (b) relating to any amounts including taxes,
interest, and penalties assessed against SiebelNet which are obligations of USi
pursuant to Section 7 ("Taxes"); (c) relating to the inaccuracy or
untruthfulness of any representations or warranty made by USi pursuant to
Subsection 13.2 ("By
10.
<PAGE>
USi"); and (d)(i) relating to any violation of Federal, State, or other laws or
regulations of any nature, including without limitation those for the protection
of persons or members of a protected class or category of persons by USi or its
employees, subcontractors or agents, (ii) relating to illegal discrimination or
harassment by USi, its employees, subcontractors or agents, (iii) relating to
work-related injury (except as may be covered by SiebelNet's workers'
compensation obligations) or death caused by the negligence or willful acts of
USi, its employees or agents; (iv) relating to tangible personal or real
property damage resulting from USi's acts or omissions inconsistent with this
Agreement (subject to (d)(iii) above).
14.3 PROCEDURE. If any third party makes a claim covered by Subsection
14.1 ("By SiebelNet") or Subsection 14.2 ("By USi") against an Indemnitee with
respect to which such Indemnitee intends to seek indemnification under
Subsection 14.1 ("By SiebelNet") or Subsection 14.2 ("By USi"), such Indemnitee
shall give notice of such claim to the Indemnifying Party (under Subsection 14.1
("By SiebelNet") or Subsection 14.2 ("By USi")), including a brief description
of the amount and basis therefor, if known. Upon giving such notice, the
Indemnifying Party shall be obliged to defend such Indemnitee against such
claim, and shall be entitled to assume control of the defense or settlement of
the claim with counsel chosen by the Indemnifying Party, reasonably satisfactory
to the Indemnitee. Indemnitee shall cooperate fully with, and assist, the
Indemnifying Party in its defense against or settlement of such claim in all
reasonable respects at the Indemnifying Party's expense. The Indemnifying Party
shall keep the Indemnitee fully apprised at all times as to the status of the
defense or settlement. Notwithstanding the foregoing, the Indemnitee shall have
the right to employ its own separate counsel in any such action, but the fees
and expenses of such counsel shall be at the expense of such Indemnitee;
provided, however: (a) if the parties agree that it is advantageous to the
defense for the Indemnitee to employ its own counsel; or (b) in the reasonable
judgment of the Indemnitee, based upon an opinion of counsel which shall be
provided to the Indemnifying Party, representation of both the Indemnifying
Party and the Indemnitee would be inappropriate under applicable standards of
professional conduct due to actual or potential conflicts of interest between
them, then reasonable fees and expenses of the Indemnitee's counsel shall be at
the expense of the Indemnifying Party, provided that the Indemnifying Party
approves such counsel (such consent not to be unreasonably withheld). Neither
the Indemnifying Party nor any Indemnitee shall be liable for any settlement of
any action or claim effected without its consent. Notwithstanding the foregoing,
the Indemnitee shall retain, assume, or reassume sole control over, all expenses
relating to, every aspect of the defense that it believes is not the subject of
the indemnification provided for in Subsection 14.1 ("By SiebelNet") or
Subsection 14.2 ("By USi"). Until both: (y) the Indemnitee receives notice from
the Indemnifying Party that it will defend; and (z) the Indemnifying Party
assumes such defense or settlement, the Indemnitee may, at any time after sixty
(60) days from the date notice of claim is given to the Indemnifying Party by
the Indemnitee, resist or otherwise defend the claim or, after consultation with
and consent of the Indemnifying Party, settle or otherwise compromise or pay the
claim. The Indemnifying Party shall pay all costs of the Indemnitee arising out
of or relating to that defense and any such settlement, compromise, or payment.
The Indemnitee shall keep the Indemnifying Party fully apprised at all times as
to the status of the defense. Following indemnification as provided in
Subsection 14.1 ("By SiebelNet") or Subsection 14.2 ("By USi"), the Indemnifying
Party shall be subrogated to all rights of the Indemnitee with respect to the
matters for which indemnification has been made.
11.
<PAGE>
14.4 THE FOREGOING PROVISIONS OF THIS SECTION 14 STATE THE ENTIRE
LIABILITY AND OBLIGATION OF EACH PARTY WITH RESPECT TO ANY ALLEGED INFRINGEMENT
OF ANY PATENTS, COPYRIGHTS OR OTHER INTELLECTUAL PROPERTY RIGHTS.
15. DISPUTE RESOLUTION. All disputes between the parties shall initially be
referred jointly to one (1) senior executive from each party. If such executives
are unable to resolve the dispute in good faith within ten (10) days (or such
longer time as the parties may mutually agree in writing) following the referral
of the matter to them, then in such case either party may pursue all remedies
available to it, in law and equity.
16. TERM AND TERMINATION.
16.1 TERM. The initial term of this Agreement ("Initial Term") shall
be for thirty-six (36) months from the Effective Date, which shall be
renewable at SiebelNet's election for additional twelve (12) month periods
thereafter ("Renewal Period"). SiebelNet shall inform USi at least sixty (60)
days prior to the end of the Initial Term or any Renewal Period whether
SiebelNet will renew the Agreement.
At the expiration of the Initial Term or Renewal Period or upon
termination of the Agreement by SiebelNet other than as provided in this
Agreement, SiebelNet will retain the option to move Users off the Designated
Site prior to the expiration of such User's User Agreement upon payment of an
early withdrawal fee, which would be paid month by month, User by User,
through the non-cancelable term of each User's then-existing User Agreement
at a rate of [CONFIDENTIAL TREATMENT] of the end-user hosting fee
specifically contracted for between USi and SiebelNet relating to such User.
16.2 TERMINATION.
(a) TERMINATION FOR CONVENIENCE. This Agreement may be terminated
by SiebelNet with one hundred eighty (180) days prior written notice to the
other party; provided, however, that in no event shall this Agreement be
terminated without cause prior to three (3) years following the Effective
Date. Notwithstanding the foregoing, either party may terminate this
Agreement without cause if at any time after the Effective Date
[CONFIDENTIAL TREATMENT] fails to provide staging and training at the
Designated Site and at [CONFIDENTIAL TREATMENT] sole expense, to the extent
such staging and training are reasonably required in [CONFIDENTIAL TREATMENT]
judgment to enable [CONFIDENTIAL TREATMENT] to use the
[CONFIDENTIAL TREATMENT] in order to provide Services hereunder.
[CONFIDENTIAL TREATMENT] will use its best efforts to have
[CONFIDENTIAL TREATMENT] authorize [CONFIDENTIAL TREATMENT]to log trouble and
service calls directly with [CONFIDENTIAL TREATMENT] in connection with the
[CONFIDENTIAL TREATMENT], and to arrange for [CONFIDENTIAL TREATMENT]
personnel to stage and implement such [CONFIDENTIAL TREATMENT].
(b) TERMINATION FOR BREACH. In addition to [CONFIDENTIAL TREATMENT]
termination rights set forth in EXHIBIT C hereto, either party may terminate
this Agreement for the material breach of the other party, which material
breach has remained uncured for period of thirty (30) days from the date of
delivery of written notice thereof to the breaching party. If
[CONFIDENTIAL TREATMENT] terminates the Agreement pursuant to this Section
16.2(b), [CONFIDENTIAL TREATMENT].
12.
<PAGE>
(c) EFFECT OF TERMINATION.
(i) FOR CONVENIENCE. In the event of any non-renewal of this
Agreement as described in Subsection 16.1 ("Term") or any termination of this
Agreement by either party without cause as described in Subsection 16.2(a)
("Termination for Convenience"), except as otherwise provided in Sections
16.2(c)(iii) and 17, all licenses granted by SiebelNet hereunder shall
immediately terminate, and USi shall immediately return to SiebelNet all
material belonging to SiebelNet or its licensors, including without
limitation all copies of the Programs and SiebelNet Confidential Information,
and shall promptly certify to SiebelNet in writing that USi has done so. Any
User Agreement already entered into by as of the date of such non-renewal or
termination shall remain in effect provided that all associated Users have at
all times remained in strict compliance with the terms thereof.
(ii) FOR MATERIAL BREACH. In the event of any termination of this
Agreement as provided in Subsection 16.2(b) ("Termination for Breach"), except
as otherwise provided in Sections 16.2(c)(iii) and 17, all licenses granted by
SiebelNet hereunder shall immediately terminate, and USi shall immediately
return to SiebelNet all material belonging to SiebelNet or its licensors,
including without limitation all copies of the Programs and SiebelNet
Confidential Information, and shall promptly certify to SiebelNet in writing
that USi has done so. Any User Agreements already entered into by User as of the
date of the foregoing material breach shall remain in effect provided that all
associated Users have at all times remained in strict compliance with the terms
thereof.
(iii) TRANSITION SERVICES. In the event of any non-renewal of this
Agreement or any termination of this Agreement for any reason other than a
breach by SiebelNet of its exclusivity obligations pursuant to Section 4.2 ("By
SiebelNet") or its payment obligations pursuant to Section 5.3 ("Payment"), the
provisions of Section 17 ("Transition Services") shall apply.
17. TRANSITION SERVICES. Upon the expiration or termination of
this Agreement for any reason other than a breach by SiebelNet of its
exclusivity obligations pursuant to Section 4.2 ("By SiebelNet") or its
payment obligations pursuant to Section 5.3 ("Payment"):
17.1 USi shall continue to perform its obligations hereunder with
respect to the provision of Services for each User for the duration of the term
of the then-current User Agreement for such User, in accordance with the terms
of such User Agreement, PROVIDED that SiebelNet continues to pay USi under
Section 5.3 ("Payment") of the Agreement for the provision of any such Services
associated with each User for the duration of the term of the then-current
applicable User Agreement and the licenses granted by SiebelNet pursuant to
Section 3.3 ("Program License") hereunder survive during such period to the
extent necessary to provide such transition services;
17.2 USi shall cooperate fully with SiebelNet in effecting the orderly
transfer of the Programs and related materials to one (1) or more third parties,
as directed by SiebelNet, and SiebelNet shall pay USi any reasonable fees or
expenses incurred by in connection with such cooperation;
13.
<PAGE>
17.3 Upon SiebelNet's request, USi shall return to SiebelNet, or
deliver to one (1) or more third parties, as directed by SiebelNet, all copies
of the Programs, Documentation, SiebelNet Confidential Information, and all
other materials and items belonging to SiebelNet or its suppliers; and
17.4 Upon SiebelNet's request, with respect to any third party
contracts applicable to the Services, including without limitation any contracts
for maintenance, disaster recovery services, and other third party services, USi
shall transfer or assign such contracts to SiebelNet or its designees, on terms
and conditions acceptable to both parties, to the extent permitted by the terms
thereof and at USi's expense.
17.5 Upon SiebelNet's request, USi shall continue to provide Services
for each User for the duration of the term of the then-current User Agreement
for such User, in accordance with the terms of such User Agreement, PROVIDED
that SiebelNet continues to pay USi under Section 5.3 ("Payment") of the
Agreement for the provision of any Services associated with such User for the
duration of the term of the then-current applicable User Agreement, and the
licenses granted by SiebelNet pursuant to Section 3.3 ("Program License")
hereunder shall survive during such period to the extent necessary to provide
such transition services.
18. DAMAGES.
18.1 LIMITATION. NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY OR TO
ANY OTHER PARTY FOR ANY LOSS OF USE, INTERRUPTION OF BUSINESS OR ANY INDIRECT,
SPECIAL, INCIDENTAL, PUNITIVE OR CONSEQUENTIAL DAMAGES OF ANY KIND (INCLUDING
LOST PROFITS) REGARDLESS OF THE FORM OF ACTION WHETHER IN CONTRACT, TORT
(INCLUDING NEGLIGENCE), STRICT PRODUCT LIABILITY OR OTHERWISE, EVEN IF ADVISED
OF THE POSSIBILITY OF SUCH DAMAGES. SIEBELNET AGREES THAT USI'S LIABILITY UNDER
THIS AGREEMENT TO SIEBELNET WHICH ARISES SOLELY IN CONNECTION WITH AN ACTION
BROUGHT BY A USER AGAINST SIEBELNET PURSUANT TO A USER AGREEMENT SHALL NOT
EXCEED THE AMOUNT BY WHICH SIEBELNET'S LIABILITY TO SUCH USER IS ENFORCEABLY
LIMITED PURSUANT TO SUCH USER AGREEMENT, PLUS ANY ASSOCIATED FEES AND COSTS
REASONABLY INCURRED BY SIEBEL IN DEFENSE OF SUCH USER CLAIM.
18.2 EXCLUSIONS. The limitations or exculpations of liability set forth
in Subsection 18.1 ("Limitation") shall not apply to: (a) indemnification for
third party claims as set forth in Section 14 ("Indemnification"); (b) liability
resulting from the willful misconduct of a party, or (c) the violation or
infringement by either party of the other party's intellectual property rights.
14.
<PAGE>
19. GENERAL.
19.1 NOTICES. Except as otherwise specified in this
Agreement, all notices, requests, consents, approvals, and other
communications required or permitted under this Agreement shall be in writing
and shall be sent by telecopy to the number specified below. A copy of any
such notice shall also be sent by registered express air mail on the date
such notice is transmitted by telecopy to the address specified below:
In the case of SIEBELNET:
Kevin Johnson, Esq.
Vice President, Legal Affairs
Siebel Systems, Inc.
1855 South Grant Street
San Mateo, CA 94402
Fax: 650-295-5116
With a COPY to:
Eric Jensen, Esq.
Cooley Godward LLP
3000 Sand Hill Road
Suite 230
Menlo Park, CA 94025-7116
Fax: 650-854-2691
In the case of USi:
Mr. Christopher R. McCleary
Chairman & Chief Executive Officer
USinternetworking, Inc.
One USi Plaza
Annapolis, MD 21401-7478
Fax: 410-263-8645
With a copy to:
William T. Price
Vice President, General Counsel
USinternetworking, Inc.
One USi Plaza
Annapolis, MD 21401-7478
Fax: 410-263-8645
Either party may change its address or telecopy number for
notification purposes by giving the other party notice of the new address or
telecopy number and the date upon which it will become effective.
15.
<PAGE>
19.2 COUNTERPARTS. This Agreement may be executed in any number
of counterparts, all of which taken together shall constitute one single
agreement between the parties.
19.3 HEADINGS. The section headings appearing in this Agreement
are inserted only as a matter of convenience and in no way define, limit,
construe, or describe the scope or extent of such section or in any way
affect this Agreement.
19.4 RELATIONSHIP. The performance by USi of its duties and
obligations under this Agreement shall be that of an independent contractor
and nothing contained in this Agreement, except for the limited agency
expressly provided for herein, shall create or imply an agency relationship
between SiebelNet and USi, nor shall this Agreement be deemed to constitute a
joint venture or partnership between SiebelNet and USi. Each party assumes
sole and full responsibility for its acts and the acts of its personnel.
Neither party shall have the authority to make commitments or enter into
contracts on behalf of, bind, or otherwise oblige the other party except for
the limited agency expressly provided for herein. Subject to the performance
by each party of its obligations hereunder, each party shall be free to
pursue other business opportunities, to enter into other agreements, and to
develop and market such goods and services as such party may wish without
notice or payment to, or permission from, the other party.
19.5 SEVERABILITY. If any term or provision of this Agreement
shall be found by a court of competent jurisdiction to be invalid, illegal or
otherwise unenforceable, the same shall not affect the other terms or
provisions hereof or the whole or this Agreement, but such term or provision
shall be deemed modified to the extent necessary in the court's opinion to
render such term or provision enforceable, and the rights and obligations of
the parties shall be construed and enforced accordingly, preserving to the
fullest permissible extent the intent and agreements of the parties herein
set forth.
19.6 WAIVER. No delay or omission by either party to exercise any
right or power it has under this Agreement shall impair or be construed as a
waiver of such right or power. A waiver by any party of any breach or
covenant shall not be construed to be a waiver of any succeeding breach or
any other covenant. All waivers must be in writing and signed by the party
waiving its rights.
19.7 PUBLICITY. Except as otherwise required by law or
regulation, neither party shall use the other party's name, trademarks, or
service marks or refer to the other party directly or indirectly in any media
release, public announcement, or public disclosure relating to this Agreement
or its subject matter, including, but not limited to, in any promotional or
marketing materials or business presentations without obtaining prior consent
from the other party for each such use or release.
19.8 ENTIRE AGREEMENT. This Agreement and each of the Exhibits,
which are hereby incorporated by reference into this Agreement, is the entire
agreement between the parties with respect to its subject matter, there are
no other representations, understandings, or agreements between the parties
relative to such subject matter, and this Agreement supersedes and merges all
prior and contemporaneous agreements, understandings and communications
between the parties with respect to this subject matter, including without
limitation the Preliminary Agreement. The parties further agree that to the
extent the terms of this Agreement are inconsistent with the terms of the
Existing Agreement, the Existing Agreement is hereby amended in such respects.
16.
<PAGE>
19.9 AMENDMENTS. No amendment to, or change, waiver, or discharge
of, any provision of this Agreement shall be valid unless in writing and
signed by an authorized representative of the party against which such
amendment, change, waiver, or discharge is sought to be enforced.
19.10 SURVIVAL. The terms of Section 1 ("Definitions"), Section 2
("Existing Agreement"), Subsection 3.5 ("No Reverse Engineering"), Section 7
("Taxes"), Section 10 ("Records and Audits"), for the duration provided
therein, Section 11 ("Confidential Information"), Section 13
("Representations and Warranties"), Section 14 ("Indemnification"),
Subsection 16.2(c) ("Effect of Termination"), Section 17 ("Transition
Services"), Section 18 ("Damages") and Section 19 ("General") shall survive
the expiration or termination of this Agreement for any reason.
19.11 NO THIRD PARTY BENEFICIARIES. Each party intends that this
Agreement shall not benefit, or create any right or cause of action in or on
behalf of, any person or entity other than SiebelNet, Siebel Systems, Inc. or
USi. The parties acknowledge that Siebel is a third party beneficiary with
respect to Section 2 of this Agreement.
19.12 CHOICE OF LAW AND JURISDICTION. This Agreement shall be
governed in all respects by the laws of the United States of America and the
State of California without regard to conflicts of law principles. The
parties agree that the United Nations Convention on Contracts for the
International Sale of Goods is specifically excluded from application to this
Agreement. All disputes arising under this Agreement shall be brought in the
State and Federal Courts located in Santa Clara County, as permitted by law,
and the parties hereby consent to the personal jurisdiction of such courts.
19.13 FURTHER ASSURANCES. SiebelNet and USi covenant and agree that,
subsequent to the execution and delivery of this Agreement and without any
additional consideration, each of SiebelNet and USi will execute and deliver any
further legal instruments and perform any acts which are or may become
reasonably necessary to effectuate the purposes of this Agreement.
19.14 INTERPRETATION OF DOCUMENTS. The parties understand and agree
that this Agreement has been fully reviewed and negotiated by both parties and
their attorneys, and that it shall not be interpreted to favor or disfavor
either party based on the authorship thereof.
19.15 FORCE MAJEURE. Neither party shall be liable hereunder by reason
of any failure or delay in the performance of its obligations hereunder on
account of any Force Majeure Event. SiebelNet and USi shall work together in
good faith with Sequent to establish a satisfactory disaster recovery plan for
Force Majeure Events. Once that plan is established and agreed to by all
parties, SiebelNet shall have the option of terminating this Agreement if the
total outage time resulting from such event is greater than that allowed for in
the established plan.
19.16 ASSIGNMENT. USi may not assign this Agreement in whole or in
part without the prior written permission of SiebelNet; provided, however,
that USi may assign this Agreement to an entity which acquires all or
substantially all of USi's assets or capital stock, unless such acquiring
entity is reasonably deemed by SiebelNet to be a competitor of SiebelNet or
its Affiliates. SiebelNet may assign this Agreement in whole or in part upon
notice to USi, unless such assignee is reasonably deemed by USi to be a
competitor of USi or any of its wholly owned subsidiaries.
17.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this SiebelNet Agreement
as of the date first above written.
SIEBELNET, INC. USINTERNETWORKING, INC.
By: /s/Jeffrey T. Amann By:/s/William T. Price
-------------------------- --------------------------
Title: Secretary Title: Vice President, Secretary &
General Counsel
----------------------- -----------------------
Date: January 31, 1999 Date: January 31, 1999
------------------------ ------------------------
18.
<PAGE>
Exhibit 10.26
Appendix A
TERMS OF THE EXISTING
AGREEMENT INCORPORATED
BY REFERENCE
1.17 "USERS" shall mean the named or specified (by password or other user
identification) individuals authorized by Customer to use Programs, regardless
of whether the individual is actively using the Programs at any given time. The
maximum number of Users that may use or access the Programs is specified in the
Order Form. Users may include the employees of Customer or third parties;
PROVIDED that such third party is limited to use of the Programs (i) only as
configured and deployed by Customer, and (ii) solely in connection with
Customer's provision of outsourcing services to such third party. Customer
agrees that it is responsible for ensuring that any third party usage is in
accordance with the terms and conditions of this Agreement. Notwithstanding the
foregoing, Users shall exclude any individuals employed by, or acting on behalf
or under the direction of, a direct competitor of Siebel.
9.1 NONDISCLOSURE. Each party may have access to information that is
confidential to the other party ("Confidential Information"). Siebel's
Confidential Information shall include, but not be limited to, the Programs,
Documentation, formulas, methods, know how, processes, designs, new products,
developmental work, marketing requirements, marketing plans, customer names,
prospective customer names, the terms and pricing under this Agreement, and all
information clearly identified in writing at the time of disclosure as
confidential. Customer's Confidential Information shall include, but not be
limited to, its software programs, formulas, methods, know-how, processes,
designs, new products, developmental work, marketing requirements, marketing
plans, customer names, prospective customer names, and all information clearly
identified in writing at the time of disclosure as confidential. Confidential
Information includes all information received from third parties that either
party is obligated to treat as confidential and oral information that is
identified by either party as confidential.
A party's Confidential Information shall not include information that (i) is or
becomes a part of the public domain through no act or omission of the other
party; (ii) was in the other party's lawful possession prior to the disclosure
and had not been obtained by the other party either directly or indirectly from
the disclosing party; (iii) is lawfully disclosed to the other party by a third
party without restriction on disclosure; (iv) is independently developed by the
other party without use of or reference to the other party's Confidential
Information; or (v) is required to be disclosed by law or valid order of a court
or other governmental authority; PROVIDED, HOWEVER, that the responding party
shall first have given notice to the other party and shall have made a
reasonable effort to obtain a protective order requiring that the Confidential
Information so disclosed be used only for the purposes for which the order was
issued.
The parties agree, unless required by law, not to make each other's Confidential
Information available in any form to any third party (except third parties who
are Users as defined hereunder) or to use each other's Confidential Information
for any purpose other than in the performance of this Agreement.
Customer shall not disclose the results of any performance tests of the Programs
to any third party without Siebel's prior written approval. Each party agrees to
take all reasonable steps to ensure that Confidential Information is not
disclosed or distributed by its employees or agents in breach of this Agreement.
The parties agree to hold each other's Confidential Information in confidence
during the term of this Agreement and for a period of three (3) years
thereafter; provided, however, that with respect to source code, the Siebel Data
Model Reference Manual, the Siebel Data Mart Data Model Reference, and other
highly sensitive confidential information clearly identified as such at the time
of disclosure by either party, the nondisclosure obligations set forth herein
shall continue indefinitely. Each party's additional obligations regarding the
Siebel Data Model Reference Manual and Siebel Data Mart Data Model Reference are
set forth in EXHIBIT C. Each party acknowledges and agrees that, due to the
unique nature of Confidential Information, there can be no adequate remedy at
law for breach of this Section 9.1 and that such breach would cause irreparable
harm to the non-breaching party; therefore, the non-breaching party shall be
entitled to seek immediate injunctive relief, in addition to whatever remedies
it might have at law or under this Agreement.
This Section 9.1 constitutes the entire understanding of the parties and
supersedes all prior or contemporaneous agreements, representations or
negotiations, whether oral or written, with respect to Confidential Information.
1
<PAGE>
ADDITIONAL TERMS AND CONDITIONS:
(4) VOLUME PURCHASE ARRANGEMENT FOR SERVICES. Provided Customer has timely paid
all Program License fees as provided herein and has fulfilled all other
material obligations under this Agreement, Customer shall be eligible for
the following discounts on Services provided under this Agreement. For
purposes of this provision, "Services" eligible for discount shall include
Consulting Services provided by Siebel, Consulting Services subcontracted
to Siebel by Customer for delivery to Customer's Users, Training Services
delivered to Customer, Technical Account Management Services delivered to
Customer, and other Services delivered to Customer. Maintenance and Support
Services shall not be included in Services or otherwise be eligible for
discount under this provision. Customer and Siebel shall meet at least
quarterly to review achievement against discount milestones to help insure
that accurate invoicing occurs.
(a) ELIGIBILITY FOR DISCOUNTS THROUGH JUNE 15, 1999. Customer agrees to
purchase a minimum of [CONFIDENTIAL TREATMENT] in net Services from
Siebel before June 15, 1999. Based on this purchase commitment,
Siebel will provide Services to Customer at a discount of
[CONFIDENTIAL TREATMENT] off Siebel's then-current list price for
Services. If Customer does not purchase at least [CONFIDENTIAL
TREATMENT] in net Services by June 15, 1999, Customer shall pay
Siebel the difference between the list price and the discounted amount
for Services provided as of that date and Customer shall not be
eligible for any discount on Services going forward. Once Customer has
purchase certain amounts of net Services, Customer shall be eligible
for the following discounts off Siebel's then-current list price for
Services, on a going-forward basis:
<TABLE>
<CAPTION>
NET SERVICES PURCHASED DISCOUNT
----------------------- --------
<S> <C>
[CONFIDENTIAL TREATMENT] [CONFIDENTIAL TREATMENT]
</TABLE>
(b) ELIGIBILITY FOR DISCOUNTS FROM JUNE 16, 1999 THROUGH JUNE 15, 2000.
The total amount of net Services Customer has purchased as of June 15,
1999 shall determine the level of discount for which Customer shall be
eligible from June 16, 1999 through June 15, 2000, as set forth below.
<TABLE>
<CAPTION>
NET SERVICES PURCHASED AS OF JUNE 16, 1999 DISCOUNT
------------------------------------------ --------
<S> <C>
[CONFIDENTIAL TREATMENT] [CONFIDENTIAL TREATMENT]
</TABLE>
(5) PURCHASE OF PROGRAM LICENSES FOR ADDITIONAL USERS OF THE PROGRAMS SET FORTH
IN THE ORDER FORM ON OR BEFORE JUNE 15, 2001. Provided Customer has timely
paid all Program License fees as provided herein and has fulfilled all
other material obligations under this Agreement, Customer may purchase
Program Licenses of the Programs set forth in this Order Form at a discount
of [CONFIDENTIAL TREATMENT] from the then current list price for such
Programs; provided: (i) Customer's purchase must represent a binding
non-cancelable commitment on its part with no additional terms and
conditions and must be in a minimum net amount of no less than
[CONFIDENTIAL TREATMENT] (ii) Customer must deliver a signed Order Form
(substantially in the form of this EXHIBIT A) to Siebel on or before
June 15, 2001, (iii) Customer agrees to purchase Maintenance Services
relating to such additional licenses at the then current standard price
for such services, and (iv) the total Program License fees relating to
such additional licenses shall be due and payable net 30 days from the
delivery of such Programs to Customer.
2
<PAGE>
Exhibit 10.27
USW/USi Contract Execution Copy
U S WEST/USinternetworking
MARKETING/SERVICES AGREEMENT
1. INTRODUCTION
(a) This agreement is entered into this 30 day of January, 1999, by
and between U S WEST Communications Services, Inc. and U S WEST Interprise
America, Inc. Colorado corporations (together referred to as "U S WEST") and
USinternetworking, Inc. a Delaware corporation ("USi").
(b) U S WEST is a provider of telecommunications, Internet and
integrated data services; and
(c) USi is an Internet Managed Application Provider, or iMAP,
integrating Internet communications, network and data center management and
the use of "packaged" application software and related implementation and
ongoing support; and.
(d) USi wishes to create a relationship with U S WEST for the
purposes of selling, purchasing and otherwise marketing iMAP Services (as
hereinafter defined) to U S WEST's existing and future customers (each a
"Customer" and collectively, the "Customers); and,
(e) Each party wishes to create a relationship with the other for
the purposes of selling and purchasing network transport services from, or
through, each other, maximizing volume discounts available; and,
(f) The parties wish to work together for future product and
services innovations; and
(g) The parties wish to provide for other services and arrangements
in connection with the purchase and marketing of the Services (as hereinafter
defined).
(h) THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein, the parties, intending to be
legally bound, hereby agree as follows:
2. PURPOSE OF AGREEMENT
(a) U S WEST and USi wish to enter into a contractual teaming
arrangement for the creation and distribution of network services, Internet
Protocol Services, hosted applications, system integration services and
comprehensive customer service. Each party will purchase services from the
other for purposes of creating service packages. The goal is to provide
customers a robust portfolio of enterprise application and access solutions
not currently available from any other single source. Quality metrics,
customer experience, and performance must not vary widely between U S WEST
and USi clients
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using the same services. Both parties wish to promote their brand names in
the offering made to end user customers.
This Agreement and U S WEST's ability to sell each iMAP Service
hereunder is subject to, and contingent upon, the agreement(s) USi may have
with the Third Party Software Application Provider(s) (as defined below) and
such Provider(s) independent review of, and continuous consent to this
Agreement.
3. DEFINITIONS
(a) "AGREEMENT" means this Marketing/Services Agreement, and any and
all attachments and schedules attached simultaneously with the execution of
the Agreement or agreed upon and executed subsequent hereto.
(b) "AVAILABLE" - shall describe the situation where facilities can
reach specific addresses with no incremental charges for backhauling or
buildout.
(c) "CHANGE IN CONTROL" shall mean change in ownership of more than
51% of either party.
(d) "CLIENT ASSISTANCE TEAM or CATs" shall mean teams of USi CLIENT
care professionals who have the expertise to handle end-user Customer
inquiries regarding end-user and application issues over the phone.
(e) "COMPETITIVE PRICE" - shall mean that price is equal to, or less
than, price provided by other parties/vendors for the same Products and
Services provided by U S WEST under the terms of this Agreement.
(f) "COORDINATED SERVICES TEAM OR CST": Following the execution of
this Agreement U S WEST shall create a Coordinated Services Team ("CST")
responsible for the coordination of: (i) Implementation Services; (ii)
Solution Services; (iii) Billing Services; and (iv) Monitoring Services. The
primary purpose of this team will be to assist various internal U S WEST
personnel and vendor-partner personnel in coordinating the product support
needs for U S WEST Products. The CST will perform, INTER ALIA, the following
functions:
(f.1) CUSTOMER COMMUNICATIONS. The CST will serve as a
contact point for Customers buying Products from a U S WEST sales
representative.
(f.2) USi COMMUNICATIONS. The CST will serve as a single
point of contact for USi personnel needing product support assistance for U S
WEST-provided Products sold by a USi sales representative.
(f.3) IMPLEMENTATION SERVICES. The Implementation Services
cluster of the CST will coordinate and project manage all aspects of Product
implementation including design, order processing, service activation, and
service acceptance.
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(f.4) SOLUTION SERVICES. The Solution Services cluster of
the CST will coordinate and project manage issues relating to service
outages, repair, help desk support, problem resolution, and solution
acceptance.
(f.5) BILLING Services. The Billing Services cluster of the
CST will coordinate and project manage issues relating to Customer billing,
credits, and collections.
(f.6) MONITORING Services. The Monitoring Services cluster
of the CST will be responsible for the coordination of the parties' system
performance monitoring needs including proactive trouble notification and
proactive problem resolution.
(f.7) AVAILABILITY. The CST will always be available for
its internal and external customers: 24 hours a day, 7 days a week, 365 days
a year.
(g) "CUSTOMER(S)" means the end-user(s) to whom U S WEST sells iMAP
services to under this Agreement.
(h) "CUSTOMER ADMINISTRATION FUNCTIONS" - shall mean the same
services and functions also referred to as Service Support.
(i) "END USER" shall mean the end user of the Product(s) sold.
Customer shall not mean customer of record, which is assigned a separate
meaning under this Agreement.
(j) "Exclusivity" shall mean: 1) that U S WEST is USi's exclusive
sales channel of iMAP Services in U S WEST's 14-state region as well as to
U S WEST's National Accounts and Protected Customers listed in Schedule D,
which shall be amended by mutual consent of the Parties' respective Executive
Vice Presidents for Sales at least once per calendar quarter; and 2) that USi
is excluded from entering into any similar marketing/services agreements
within U S WEST's 14-state region with any of the following competitors of
U S WEST: other Regional Bell Operating Companies, all Independent/Competitive
Local Exchange Carriers, and all Interexchange Carriers or cable television
operators.
(k) "iMAP SERVICES" - refers to the collective bundling of any and
all of USi's consulting and implementation services, customization, hardware
and software applications (as described in Schedule B) and access to USi's
Internet-based data center and network
(l) "IN-REGION" shall include the following 14 states: Arizona,
Colorado, Idaho, Iowa, New Mexico, Minnesota, Montana, Nebraska, North
Dakota, Oregon, South Dakota, Utah, Washington, and Wyoming.
(m) "MOST FAVORED CUSTOMER" - refers to most favorable pricing and
terms available to other similarly situated customers purchasing similar
quantities of the same products and services from U S WEST.
(n) "PACKAGED PRODUCT"- shall mean a packaged solution that includes
hosted applications and network services that support access to them. The
network services shall
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include but not be limited to Frame Relay, ATM, Internet Access, Security
Services, and Virtual Private Networking.
(o) "PRE-QUALIFIED SALES LEAD"- refers to a sales lead that has
passed the initial screening done in stage one of the sales process and the
pre-qualification form has been successfully completed.
(p) Order fulfillment and Service provisioning may also be referred
to as "PRESALE SERVICE SUPPORT" services and functions. All other services
and functions listed above may also be referred to as "POST-SALE SERVICE
SUPPORT" services and functions.
(q) "PRODUCT OR PRODUCTS" shall mean the list of USi and U S WEST
products and services made available for joint marketing, sales, and support
under this Agreement as described on Exhibit A, which is attached hereto and
made a part hereof.
(r) "PRODUCT QUOTA"- refers to sales of individual, bundled iMAP
Services sales, such as Sagent iMAP solutions that U S WEST will be required
to sell in accordance with the provisions of Schedule C.
(s) "REQUIREMENTS ANALYSIS" shall mean the analysis USi's consulting
and implementation teams perform to determine what iMAP services are best
suited for a Customer before an iMAP Services agreement is entered into.
(t) "SERVICE SUPPORT" shall refer to those services and functions
provided to customers including but not limited to the following:
- Service provisioning
- Network monitoring
- Customer notification
- Billing
- Managed repair
- Customer database management
(u) "SERVICES" shall mean the services each party may purchase from
the other, including the iMAP Services U S WEST purchases from USi and the
Internet access, managed firewall service, ATM and VPN services USi purchases
from U S WEST, all of which are described in Schedules A and B.
(v) "STAND-ALONE SERVICES"- unbundled delivery of any portion of the
iMAP Services, as well as other services delivered independently, including
but not limited to training and time and material implementation services
(w) "THIRD PARTY SOFTWARE APPLICATION PROVIDERS"- refers to the
companies that USi has entered into, or will enter into agreements with to
provide licenses, software, applications and other components to the iMAP
services and have agreed to permit U S WEST to market their products pursuant
to this Agreement.
(x) "TOTAL iMAP SALES QUOTA"- refers to the required level of sales
made of the bundled iMAP Services, excluding stand-alone services, as
described in Schedule C.
(y) "WHOLESALE PRICE" - refers to the quoted price U S WEST pays
USi, based on a calculation of retail price less a negotiated discount.
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4. SERVICES
(a) Throughout the term of the Agreement, each party may purchase
from the other the services set forth on Schedule A and Schedule B attached
hereto and incorporated herein by reference (collectively, the "Services").
The fees to be charged for the Services are set forth in Schedules A and C,
attached hereto and incorporated herein by reference.
(b) The parties may agree to include additional Services or delete
existing Services that are discontinued or deleted from this agreement. The
other party will be notified 90 days prior to discontinuance of any Services,
subject to the terms and conditions of USi's contracts with its third party
software application providers.
(c) Each party reserves the right to modify, alter, improve or
change any and all of its Services covered by this Agreement and this
Agreement will cover the sales of Services as they may be modified, altered,
improved or changed by each party from time to time. A party wishing to
modify, alter, improve or change one or more of its Services shall provide
the other party with written notice of all such modifications, alterations,
improvements and changes. Such written notice shall be provided no less than
30 days prior to any modification, alteration, improvement or change.
(d) Each party will notify the other with respect to the
availability of new products and services. The parties may choose to
negotiate these new products and services into this agreement.
(e) The management and sale of new products and services not
described in this document or the Schedules will be negotiated at the time of
introduction of such new products and services. Nothing in this section is
intended to limit the parties' ability to separately develop new products and
services.
(f) Both parties are free to package other products and services not
listed on the product and services Schedules A and B from other providers to
enhance the overall solution to the customer.
5. U S WEST RESPONSIBILITIES
(a) U S WEST will provide "Most Favored Customer" pricing to USi for
inclusion into the total solution to the customer. Within its region, U S
WEST will offer regulated services at tariff rates on a pass-through basis. U
S WEST will also price CPE to USi at levels allowed by existing contracts
either for resell or internal consumption. Maintenance and support for CPE
will be at wholesale prices. All prices are found on the U S WEST product
list entitled Schedule A.
(b) U S WEST will be the exclusive USi sales channel within U S
WEST's fourteen state region and to its National Accounts and protected
customers listed in Schedule D. U S WEST will be responsible to manage the
sales activities of its account teams to meet or exceed sales objectives.
(c) U S WEST will be responsible for packaging, pricing, billing,
collecting, servicing and account control for those sales initiated and
closed by U S WEST.
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(d) U S WEST will work with USi to create packages from the parties'
Services to create competitive offerings.
(e) U S WEST will target the Service to its customers where
integrated solutions are required. If U S WEST chooses not to pursue a
potential sales opportunity with a Customer in or out of its 14 state region,
or a Customer refuses to negotiate or enter into an agreement with U S WEST
for the sale of iMAP services, U S WEST will promptly notify USi within 3
business days of that opportunity or Customer so that a USi sales team may
follow up and close the opportunity.
(f) U S WEST will be USi's customer of record, for pricing and
billing purposes, on all iMAP Services provided to U S WEST's customers. USi
will maintain end customer records only to the extent that it is required
within the agreed upon customer support model, and to provide in advance an
itemized monthly invoice payable 30 days after receipt by U S WEST.
(g) U S WEST will provide office space for two (2) USi employees at
their Denver facility, co-located, to the extent possible, with the
appropriate channel and product management from U S WEST. This space will be
available by the end of February 1999. Future requirements will be reviewed
as the overall relationship evolves and grows.
(h) U S WEST agrees not to directly solicit any employees of USi for
employment at US WEST while this Agreement is in place.
(i) U S WEST may resell USi stand-alone implementation Services on a
non-exclusive basis.
(j) If U S WEST's Customer prematurely terminates its contract for
iMAP Services with U S WEST, unless such termination is directly caused by a
material breach of the provisions of this Agreement by USi, U S WEST will be
responsible for an accelerated payment to USi of [CONFIDENTIAL TREATMENT] of:
1) the remaining unpaid value of the Customer contract; or 2) the equivalent
of [CONFIDENTIAL TREATMENT] months of Customer contract value, whichever is
less. The accelerated payment from U S WEST to USi shall be due within 30
days of the Customer's premature termination.
6. USi RESPONSIBILITIES:
(a) USi will provide iMAP Services to U S WEST at discounted price
levels as described in Schedule C and shall implement services in accordance
with the sales process and intervals listed on Schedule E.
(b) USi shall provide professional support Services for pre-sale
site assessment, requirements analysis, statement of work, and project plan
for implementation Services at discount rates identified in Schedule C. U S
WEST will engage and compensate USi for these Services for every U S WEST
iMAP Customer that reaches the pre-sale site assessment/requirements stage.
It is at U S WEST's discretion whether the end Customer bears the cost of
this Service.
(c) USi will provide training for the first 12 months and offer
sales and product training Services thereafter on a fee basis.
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(d) USi will calculate the monthly end Customer cost for each iMAP
Service product sold through the U S WEST channel as part of the analysis
completed in 6b, above. USi will then apply a predetermined discount to reach
a wholesale monthly recurring fee that USi will charge US WEST for the
duration of the Customer contract. US WEST will be responsible for end
Customer pricing, billing and collection. The discount structure is
identified in Schedule C.
(e) USi will bear the implementation labor risk for effort expended
on implementing within the scope of requirements analysis and statement of
work developed by USi for US WEST Customers. In the event of out of scope
labor increases, USi reserves to the right to increase the quoted wholesale
price to US WEST. It is at U S WEST's discretion whether the end Customer
bears the increased scope cost.
(f) USi will staff one Business Development Manager in-Region, and
one technical Sales Engineer per [CONFIDENTIAL TREATMENT] in quota assigned.
These managers will be co-located at US WEST facilities in Denver.
(g) USi will commit to using U S WEST's Out of Region (OOR) services
for customer requirements contingent upon the provisioning of services in a
timely manner, at Competitive Prices, within industry standards for
reliability and availability, and to the extent such OOR services are
consistent with USi's iMAP service architecture. Services available OOR from
U S WEST are Frame Relay, ATM and Internet Access and Security and VPN
Services.
(h) USi will be customer of record on all Services provided by U S
WEST as part of a total solution to an end user customer where U S WEST
initiates an inter-LATA WAN sales process.
(i) USi shall provide to U S WEST a method for demonstrating the
functionality of all iMAP applications over the world-wide web with
production-like representations of the various products U S WEST will be
expected to sell. This demonstration capability will include but not be
limited to customer sales presentations, internal training, etc.
(j) USi agrees not to directly solicit any employees of U S WEST for
employment at USi while this agreement is in place.
(k) USi will maintain end customer records only to the extent that
it is required within the agreed upon customer support model, and to provide
an itemized monthly invoice in advance to US WEST, payable 30 days after
receipt.
(l) USi will work with U S WEST to create packages from the parties'
services to create competitive offerings. USi's responsibility and obligation
under this Agreement to provide Products and iMAP Services are contingent
upon the existence, terms and conditions of USi's agreements with each of its
Third Party Software Application Providers.
(m) USi may sell stand-alone implementation services within and
outside of U S WEST's 14-state region. Contingent upon the subsequent mutual
agreement of the parties, USi may establish a finder's fee for implementation
service leads originated by U S WEST in its 14-state region and closed by USi.
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(n) USi shall offer U S WEST the same pricing methodology as USi
uses to determine pricing for USi's direct customers on pre-sale Requirements
Analysis and iMAP consulting and implementation Services.
7. CUSTOMER SUPPORT SERVICES/TRAINING
(a) Generally, customers sold by either party will be managed by
that party, therefore, all customer contact will be through the selling
organization. Components of the overall customer solution will be supported
by the party that supplies that portion of the solution. The parties agree to
work together to define interfaces, processes and handoffs that provide a
superior level of service. The parties will share customer experience metrics
to insure a consistent level of service.
(b) The party that closes the sale will be responsible for total
management of the customer relationship regardless of who provides the actual
component services to the end user customer. The parties will mutually agree
on the support model and interfaces employed. The parties will also mutually
agree to procedures in the case of a customer transfer to USi for closing if
the Customer does not fit with the U S WEST sales model.
(c) Both parties will run operations centers for their respective
services while customers will have the option of choosing from different
support levels. Where actual support work is done will be transparent to
customers. The parties agree to structure support offerings around
capabilities of each other. The parties further agree that they will provide
service levels in accordance with the baseline service levels described in
Schedule F.
(d) The parties agree to coordinate service readiness processes to
insure that the overall solution to the customer is delivered in a
coordinated fashion, and that all service elements, irrespective of whether
USi or U S WEST components, are available within defined production timelines.
(e) Billing will be performed by the parties for each of their
respective customers, therefore billing explanations, reviews, collections
and bad debt will be the responsibility of the selling party.
(f) USi will make available to U S WEST all pertinent support
training. Training will be provided at no additional cost to U S WEST, or at
pass through rates if provided by a third party, for the first year of the
Agreement. Thereafter, U S WEST will pay USi, at its current rates, for all
necessary support. It is at U S WEST's discretion whether the end customer
bears the increased support cost. U S WEST will be responsible for any travel
and incidental expenses incurred as a result of attending USi training.
8. NETWORK SERVICES AND SUPPORT
(a) Due dates for network facilities can not be guaranteed and are
subject to availability both in U S WEST's region as well as outside of the
14-state territory.
(b) USi and U S WEST agree to regularly review network expansion
plans and requirements, as well as network transport pricing received from
third parties. USi and
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US WEST will coordinate efforts to obtain the most favorable transport
pricing available for both parties.
(c) The parties agree that within U S WEST's 14-state region, all
inter-LATA network services shall be provided by the carrier of the
customer's choice in accordance with U S WEST's regulatory limitations.
(d) If U S WEST receives authority to enter into inter-LATA
business, the parties will re-evaluate the business relationship and/or
renegotiate terms for in-region inter-LATA services.
(e) Contingent upon the subsequent mutual agreement of the parties,
USi will provide co-location space to U S WEST for U S WEST's firewall,
router and associated equipment for delivery of U S WEST's Virtual Private
Network service as part of the iMAP service package. U S WEST will compensate
USi for this space in an amount equal to the then current commercial rates
for such space.
9. BRANDING
(a) Both parties wish to promote their respective brands in this
service offering. The parties agree that, subject to the review and consent
of USi's third party software application providers, both logos will appear
together on application splash screens, or application pages as appropriate
and mutually agreed upon.
(b) In the case of unbundling of iMAP services, USi's brand will not
be utilized.
(c) In some instances, end user customer company name and logo may
also appear in specific applications upon the written consent of the
appropriate party(s).
(d) U S WEST and USi will jointly produce marketing literature that
features the application provider as well as the U S WEST / USi brands. U S
WEST and USi will share the cost of creating joint marketing literature. Each
party will bear the cost of producing the marketing literature for its sales
efforts.
(e) The parties anticipate making public statements from time to
time. In no case shall either party make any public announcement about this
contract or the resulting business relationship without the others written
consent.
(f) Each party shall follow the other party's branding guidelines
that are included as Schedule H.
10. SALES PROCESS
(a) U S WEST will, in its discretion, hire an appropriate number of
Application Sales Consultants (ASC) that will be trained by USi to provide
technical support to the sales organizations within its region. The ASC's
will carry quota on USi products as described in Schedule C. USi will provide
training and technical support at no cost, for the first 12 months, in the
same manner as for its own sales force. Thereafter, U S WEST will pay USi, at
its then current rates, for all training and technical support. U S WEST will
be responsible for any travel and incidental expenses incurred as a result of
attending USi training.
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cost. US WEST will be responsible for any travel and incidental expenses
incurred as a result of attending USi training.
(b) Each of the parties will manage their respective compensation
plans with the guiding principle to incent the two organizations to work
together where appropriate and develop their own sales leads where required
for incremental market coverage.
(c) USi may at its option also staff Account Representatives and
technical support in U S WEST territory in order to provide additional
support and cover other opportunities that either do not fit the U S WEST
sales and business model or that U S WEST abandons pursuant to section 5(e)
above.
(d) Outside of its 14-state region, U S WEST sales personnel may
only present USi iMAP applications to its National Accounts and protected
customers listed in Schedule D along with network services from U S WEST
partners and vendors. Out of region, National Accounts and protected accounts
may be added or subtracted contingent upon mutual agreement and process by
the Executive Vice Presidents of Sales for both parties.
(e) U S WEST and USi will follow a mutually agreed upon sales
process that will accomplish order and involvement by the appropriate parties
at the right time and is subject to change as agreed upon by the parties and
included in Schedule E.
(f) Service readiness coordination for iMAP services will be lead by
USi, irrespective of the selling party organization, to insure that all
phases of application hosting, testing, training and conformance are ready
and that all service elements are installed, functional, tested and secure.
(g) Customers will be surveyed to measure client satisfaction via
mutually agreed upon survey tools, by U S WEST. Feedback concerning iMAP
Services will be supplied to USi.
(h) The parties agree that there will be no joint sales or
customers. U S WEST will manage its customer relationships and as such will
be responsible for end user pricing, billing, and collections.
(i) Where U S WEST has qualified a prospect and chooses not to
pursue the sales process because of the lack of network elements present to
create an integrated solution, the pre-qualified lead will be turned over to
USi pursuant to section 5(e) above for follow up and closing.
(j) Progress towards sales objectives will be reviewed at quarterly
meetings and appropriate action taken. U S WEST will be responsible to manage
the sales activities of its account teams to meet or exceed sales objectives.
(k) The parties will forecast anticipated sales levels by product
and geographic area quarterly for the following quarter.
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11. CONSULTING, IMPLEMENTATION, AND SUPPORT
(a) Consulting and Implementation services for site assessment,
requirements analysis, statement of work, and project plan will be provided
by USi at the agreed upon discount levels found in Schedule C.
(b) U S WEST initiated sales activities will get the same priority
of sales support response as USi initiated sales projects. USi consulting and
implementation services will be reviewed as part of the regularly scheduled,
quarterly review meetings between USi and U S WEST
(c) USi reserves the right to contract with third party
implementation partners in order to manage its resource requirements. USi
will ALWAYS provide staff project management resources, even if third party
resources are used.
12. EXCLUSIVITY
(a) USi will be the exclusive systems integrator for iMAP solutions
as defined in Schedule B, sold by U S WEST, except in cases where 11.c.
applies. As the exclusive integrator, USi will bear the implementation labor
estimate risk for effort expended on implementing within the scope of
requirements analysis and statement of work developed by USi for US WEST
customers.
(b) USi will use U S WEST network services in USi lead sales,
contingent upon the provisioning of services in a timely manner, at
Competitive Prices, within industry standards for reliability and
availability, and to the extent such services are consistent with USi's iMAP
service architecture. USi will purchase from U S WEST vendor contracts on a
preferred basis where available at Competitive Prices.
(c) U S WEST will be the exclusive sales channel in its 14-state
region of USi iMAP services, with exclusivity defined below, unless, (1) U S
WEST chooses at its sole discretion to transfer the opportunity to USi due to
lack of fit with network integration model; or, (2) the Customer refuses to
negotiate or enter into an agreement with U S WEST, in which case, USi shall
be permitted sell iMAP services to that Customer. U S WEST's in-region
exclusivity is defined under this Agreement as excluding USi from entering
into any similar marketing/services agreements within U S WEST's 14-state
region with any of the following competitors of U S WEST: other Regional Bell
Operating Companies, all Independent/Competitive Local Exchange Carriers, and
all Interexchange Carriers or cable television operators. U S WEST's
exclusivity under this Agreement may be transferred to another party other
than USi only upon USi's written consent, which will not be unreasonably
withheld.
(d) USi will not compete directly with U S WEST sales personnel in
the 14-state U S WEST territory, or under any circumstances out of region on
U S WEST's National Account and protected customer lists, as mutually agreed
upon by the Executive Vice President's of Sales for both parties, as set
forth in Schedule D.
(e) The parties agree to put rules and incentives in place to
arbitrate any sales disputes in a timely, and good faith manner.
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13. LICENSE/AUTHORIZATION TO SELL
(a) Subject to the terms of this Agreement and the consent of USi's
software application providers, USi hereby grants to U S WEST a limited,
revocable authorization to demonstrate, market, and solicit orders for USi's
iMAP Services directly to U S WEST's Customers.
(b) Nothing in this Agreement shall permit the distribution of any
Services in violation of any United States export restriction.
(c) Prior to beginning to use any of the other party's marks, the
party desiring to utilize the other's marks shall notify the other in writing
of the intended use, providing a complete description of the intended use. If
the party's whose marks are to be used notifies the other of its objections
to the proposed use, the marks shall not be so utilized.
(d) Software licenses as used in iMAP solutions are not transferable
and USi will retain title to the licenses at all times.
(e) Subject to the existence, terms and conditions of its agreements
with its Third Party Software Application Providers, USi warrants that it has
the right or authority to grant to U S WEST a limited, revocable
authorization to demonstrate, market, and solicit orders for USi's iMAP
Services to U S WEST's Customers.
14. TERM
(a) The term of this Agreement shall be for a period of two years
after the date the Agreement is entered into, with mandatory performance
reviews on a quarterly basis. If the parties do not agree to a renewal or
extension of this Agreement, or if either of the parties fails to give the
other a written notice at least 90 days in advance of the termination of the
Agreement that they do not intend to extend or renew the Agreement, the
Agreement will continue in effect until such 90 day notice has been given.
15. TERMINATION OF AGREEMENT
(a) This Agreement may be terminated by either party for cause,
including among other reasons: 1) breach of any of the material provisions of
the Agreement; 2) a Change in Control of either party; 3) the termination or
material change of any of the agreements USi may have with a Third Party
Software Application Provider; or 4) any such Third Party Software
Application Provider's lack or withdrawal of consent to this Agreement. Or 5)
the failure to obtain approval for U S WEST to sell any of the third party
software applications listed in Schedule B; any restrictions on U S WEST's
ability to sell these third party applications may, in U S WEST's sole
discretion, be the basis for termination under this section. However, in the
event of a termination for cause under Section 15(a)(3-4) above, USi may not
terminate the entire Agreement, but only U S WEST's rights hereunder to
purchase, market and sell the specific Products or iMAP Services effected
and/or controlled by the particular Third Party Software Application
Provider(s).
(b) In the event that one party wishes to terminate the Agreement
for cause under Section 15 (a) (1) above, it shall provide the other party
with a ninety (90) days prior written
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notice specifying the breach(es). If at the end of the 90 day period, the
breach(es) has(ve) not been materially cured, the Agreement shall be
terminated. In the event of such a termination for cause by USi, all of U S
WEST's rights to demonstrate, market and solicit iMAP services as set forth
in this Agreement shall cease immediately, except that, to the extent
permitted by USi and its third party software application providers, U S WEST
shall be permitted to continue to use iMAP services solely to fulfill
existing customer contractual obligations. Each party shall continue to
maintain a direct relationship with all of the customers to whom that party
has sold services.
(c) In the event of a termination for cause under Section 15 (a)
(3-4) above, USi may terminate, all of U S WEST's rights under the Agreement
to purchase, market and sell the specific Products and iMAP Services effected
and/or controlled by the particular Third Party Software Application
Provider(s). The right to terminate under this section 15.e. may not be
invoked until after 45 days prior written notice has been provided to U S
WEST. If USi's rights to distribute any product may be terminated in less
than 45 days that time period shall be applicable to U S WEST.
(d) USi will be indemnified and held harmless by U S WEST from any
form of action or claim it or a third party may have against USi as a result
of a termination for cause under Section 15 (a) (3-4), assuming that such
termination is not the direct result of any action of USi.
16. TERMINATION OF EXCLUSIVITY
(a) Annual Total iMAP Quota performance below [CONFIDENTIAL TREATMENT]
of annual total iMAP Quota to be considered a breach of US West's exclusivity
rights. Upon breach there will be a 90-day cure period to assess and review
remedies. After the cure period, USi will have the right to remove US West's
exclusivity rights, at USi's discretion.
(b) Product Quotas will be established each year, for each iMAP
product. Annual Product Quota performance below [CONFIDENTIAL TREATMENT] for
any Product Quota may remove US West's exclusivity rights for this product,
at the discretion of USi, subject to the following: US West's Product Quota
performance will be reviewed against USi's own product sales performance in
each product category for the same period. US West Product Quotas may be
adjusted down (lower) based on USi's own product sales performance for the
period.
(c) US West's exclusivity shall terminate upon the acquisition or
change in control of USi.
17. NON-COMPETE
(a) During the term of this Agreement, USi shall not enter into any
similar marketing/services agreements within US West's 14-state region, with
any of the following competitors of U S WEST: other Regional Bell Operating
Companies, all Independent/Competitive Local Exchange Carriers, all
Interexchange Carriers or cable television operators.
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18. COMPLIANCE WITH LAWS
(a) The parties acknowledge that some of U S WEST's services are or
may be provided in accordance with the rules, regulations and tariffs of
state or federal regulatory agencies. To the extent that any conflict exists
between the rules, regulations or tariffs and this Agreement, the rules,
regulations or tariffs shall prevail.
19. YEAR 2000 COMPLIANCE
(a) USi warrants that its iMAP services, as provided by USi, are
capable of processing, recording, storing and presenting data containing
four-digit years after December 31, 1999, in substantially the same manner
and with substantially the same functionality as before January 1, 2000. USi
assumes no responsibilities or obligations to cause U S WEST's, customers' or
third parties' products or services to function with the iMAP services. USi
will not be in breach of this warranty for any failure of the iMAP services
to correctly create or process date-related data if such failure results from
the inability of any hardware, software or systems of U S WEST or any
customer or third party including Third Party Application Providers either to
correctly create or process date-related data in a manner consistent with the
method in which the iMAP services create or process date-related data. In the
event of a breach of this warranty, U S WEST'S sole and exclusive remedy and
USi's sole liability shall be to use its commercially reasonable efforts to
correct errors that cause breach of this warranty or if USi is unable to make
the corrections within a reasonable period of time considering the severity
of the error and the impact on U S WEST's customer as determined by USi, U S
WEST shall be entitled to terminate this Agreement pursuant to section 15
above.
20. SERVICE LEVELS
(a) Each party will provide the same quality of service to the
other's Customers as it does for any customer who obtains comparable services
directly from each such party. Notwithstanding anything to the contrary set
forth in this Agreement, neither party shall be obligated to provide services
or support of any kind to the other's Customers which exceeds that which it
is required to provide to its customers pursuant it's service agreements for
the applicable comparable services, as such agreements may be amended from
time to time. Each party shall be responsible for insuring that the service
agreements which it and/or its Customers distribute in connection with the
other party's Services sold pursuant to this Agreement reflect the most
current provisions of such other party's service agreements for comparable
services. Each party acknowledges that neither it, its Customers, nor their
respective agents is permitted to offer warranties or representations for the
other party's services which would obligate or otherwise bind the other party
beyond those stated in the applicable service agreements or to make any other
warranties, promises or representations with respect to the Services or the
Network.
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21. GOVERNANCE
(a) The parties' relationship with the other, to the extent not
defined by this Agreement, shall be managed by the parties meeting quarterly
to discuss issues and resolve conflicts to mutually acceptable conclusions.
At a minimum, the parties agree to address sales status, strategy, support,
implementation, management center operations, marketing, and network and
transport strategies and issues.
22. LIMITATION OF WARRANTY AND LIABILITY
(a) Except as otherwise specifically provided herein, neither party
warrants any connection to, transmission over, nor results or use of, any
network connection, service, equipment or facilities provided under this
agreement. Each party further disclaims all warranties, whether express,
implied or statutory, including, without limitation, any implied warranties
of merchantability and fairness for a particular purpose and non-infringement
of third party rights. Except as specifically provided herein, each party
specifically disclaims any responsibility for any damages suffered by the
other party or any third party, except for those caused by such party's gross
negligence or willful misconduct.
(b) Neither party shall be liable to the other or anyone claiming
through the other for an amount in excess of three hundred fifty thousand
dollars ($350,000.00) per incident, for any loss, damage, liability, claim or
expense ("claims") arising out of or in relation to this agreement or the
provision of any software, hardware, or service, however caused, whether
grounded in contract, tort (including negligence) or theory of strict
liability. In no event shall either party be liable for any indirect,
incidental, special, punitive or other consequential damages whether or not
foreseeable (including, without limitation, damages for the loss of data,
goodwill or profits) arising out of or in relation to this agreement even if
advised beforehand of the possibility of such liability.
23. PROPRIETARY RIGHTS
(a) Except for the limited licenses specifically granted by one
party to the other in this Agreement, each party shall at all times retain
full and exclusive right, title, and ownership interest in and to its
Services, software licenses, network, all names, logos, trade names,
trademarks, copyrights, service marks and all other intellectual property or
trade secret rights related thereto. Each party shall use reasonable efforts
to notify the other of any action by any third party known or suspected by it
to constitute an infringement of the other's proprietary rights. Each party
shall honor all reasonable requests by the other, other than engaging as a
party in litigation, to perfect and protect at such requesting party's
expense any rights of such party in its Services, network or such
intellectual property or trade secret rights.
24. INDEMNIFICATION
(a) Each party will defend, indemnify and hold the other harmless
from and against any claim by any Customer or End-user of such other party
which is based on any warranty,
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promise or representation made by the indemnifying party as part of a service
agreement and for which the indemnifying party is responsible in accordance
with the terms of this Agreement. Each party will defend, indemnify and hold
the other harmless from and against any claim or threat of claim which is
based on any warranty, promise or representation made by such other party or
any of its Customers to a third party which is in excess of those for which
the indemnifying party is responsible under this Agreement or which is in
violation of this Agreement.
25. DISPUTE RESOLUTION
(a) Any claim, controversy or dispute between the parties, their
agents, employees, officers, directors or affiliated agents ("Dispute"),
shall be resolved by arbitration conducted by a single arbitrator mutually
agreed upon by both parties who is engaged in the practice of law and
knowledgeable in the applicable areas of law, under the then current
Commercial Arbitration rules of the American Arbitration Association. The
Federal Arbitration Act, 9 U.S.C. Sections 1-16, not state law, shall govern
the arbitrability of all Disputes. The arbitrator shall have authority to
award compensatory damages only. The arbitrator's award shall be final and
binding and may be entered in any court having jurisdiction thereof. Each
party shall bear its own costs and attorneys' fees, and shall share equally
in the fees and expenses of the arbitrator.
26. GOVERNING LAW
(a) The laws of the State of New York shall govern the construction
and interpretation of the Agreement, and the arbitration shall occur in
Washington, D.C. It is expressly agreed that either party may seek injunctive
relief in an appropriate court of law or equity pending an award in
arbitration.
27. USE OF TRADEMARKS
(a) Subject to the terms of this Agreement, each party grants a
revocable, royalty-free, non-exclusive, non-transferable license to use the
other's trademarks, trade names, service marks and logos whether registered
or not (the "Marks"), solely to promote the sale of the other's Services or
to identify a relationship between the parties. This license shall apply only
to the parties, and shall not be construed as a license or authorization for
any customer, end user or other third party to use the Marks. The license
granted herein may be terminated at anytime by the party which owns the Marks
upon ten (10) business days written notice to the other party.
(b) Use of the Marks shall be subject to the appropriate party's
guidelines, as may be amended from time to time, (including but not limited
to size, placement, color and quality control) and further subject to any
restrictions that may appear in this and other sections of this Agreement.
Written documentation concerning the parties' guidelines for the use of their
Marks shall be provided to the other party. All uses of a party's Mark shall
clearly and properly identify that party's claim of ownership. In no event
shall a
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party use the other's Marks in a manner more prominent than its own Marks or
in a manner that causes confusion as to the identity of the parties.
(c) Prior to producing, distributing or displaying any advertising
or other material containing the other party's Marks, that party shall obtain
prior written approval from the owner of the Marks. Each party shall have the
right, at reasonable times to visit the other's facilities or inspect the
rendering of the Services to ensure compliance with this paragraph.
(d) The parties may agree to the joint branding of services, and any
such agreement shall be included as schedules to this Agreement.
(e) Neither party shall do anything that will in anyway impair the
other's rights in and to its Marks or the goodwill inherent in the Marks.
Neither party shall acquire or claim title to the other's Marks by virtue of
the license granted herein or that party's use of the Marks; it being
expressly agreed that all use of the Marks shall inure to the benefit of the
owner of the Marks.
28. CONFIDENTIALITY.
(a) Confidential Information: Except as otherwise stated herein, USi
and U S WEST each expressly undertake to retain in confidence all information
transmitted to it by the other party pursuant to this Agreement that the
disclosing party identifies as being proprietary and/or confidential or that,
by the nature of the circumstances surrounding the disclosure, ought in good
faith to be treated as proprietary and/or confidential ("Confidential
Information"), and will make no use of such Confidential Information except
under the terms and during the existence of this Agreement. Information
disclosed by USi, in any form, regarding iMAP Services, Products or Customers
to U S WEST by USi, shall be USi Confidential Information. USi and U S WEST
shall treat the terms and conditions of this Agreement as confidential:
however, either party may disclose such information in confidence to its
immediate legal and financial consultants as required in the ordinary course
of that party's business. The receiving party's obligations hereunder shall
extend for five (5) years following the disclosure of the Confidential
Information. Each party shall cause its affiliates to retain the other's
Confidential Information in accordance with the terms of this Section 28.
(b) Notwithstanding the termination of this Agreement, each party
agrees to treat such Confidential Information as confidential for a period of
two (2) years from the date of receipt of same unless otherwise agreed to in
writing by both parties. In handling the Confidential Information, each party
agrees: (a) not to copy such Confidential Information of the other unless
specifically authorized; (b) not to make disclosure of any such Confidential
Information to anyone except employees and subcontractors of such party to
whom disclosure is necessary for the purposes set forth above; and (c) to
appropriately notify such employees and subcontractors that the disclosure is
made in confidence and shall be kept in confidence in accordance with this
Agreement. The obligations set forth herein shall be satisfied by each party
through the exercise of at least
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the same degree of care used to restrict disclosure of its own information of
like importance.
(c) Each party agrees that in the event permission is granted by the
other to copy Confidential Information, or that copying is otherwise
permitted hereunder, each such copy shall contain and state the same
confidential or proprietary notices or legends, if any, which appear on the
original. Nothing herein shall be construed as granting to either party any
right or license under any copyrights, inventions, or patents now or
hereafter owned or controlled by the other party.
(d) Upon termination of this Agreement for any reason or upon
request of the disclosing party, all Confidential Information, together with
any copies of same as may be authorized herein, shall be returned to the
disclosing party or certified destroyed by the receiving party.
(e) The obligations imposed by this Agreement shall not apply to any
information that: (1) is already in the possession of, is known to, or is
independently developed by the receiving party; or (2) is or becomes publicly
available through no fault of the receiving party; or (3) is obtained by the
receiving party from a third person without breach by such third person of an
obligation of confidence with respect to the Confidential Information
disclosed; or (4) is disclosed without restriction by the disclosing party;
or (5) is required to be disclosed pursuant to the lawful order of a
government agency or disclosure is required by operation of the law.
29. CUSTOMER SUPPORT
(a) RESPONSIBLE ENTITY. When a party to this Agreement makes a sale
of Products to a Customer the selling party shall be the primary owner
("Primary Owner") of that Customer.
(b) CUSTOMER SUPPORT. The Primary Owner shall be responsible to the
Customer for the overall customer experience ("Customer Experience")
including, but not be limited to:
(b.1) All Customer contact;
(b.2) All provisioning and implementation of the Products;
(b.3) All issues related to Product performance, outages, and
repair; and
(b.4) All issues related to Customer billing and collections.
(c) PRODUCT PERFORMANCE. The party supplying the Product shall be
responsible for the performance of that Product and meeting the service level
expectations associated with it.
30. PRODUCT SUPPORT
(a) PRODUCT SUPPORT. The parties understand and acknowledge that
many Products have unique product support operations including call-in
number, help desk, customer database, trouble-ticketing system, billing
processes, and monitoring capabilities. They further understand and
acknowledge that the Primary Owner of a Customer may not be in
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the best position to manage the various back-end product support processes
that are internal to the other party.
With that understanding, and the awareness that the Primary Owner is
ultimately responsible for the Customer Experience as described in Section
2.2 above, the parties agree to certain product support processes below in
order to help the Primary Owner best serve the Customer's needs.
(b) USi PRODUCTS
(b.1) USi-Sold. When USi sells a USi-provided Product to a
Customer USi shall solely provide the necessary product support to itself and
U S WEST shall have no obligation to participate.
(b.2) U S WEST-Sold. When U S WEST sells a USi-provided
Product to a Customer USi shall make available to U S WEST their Customer
Assistance Team as a single point of contact to assist U S WEST in managing
the product support operations internal to USi.
(c) U S WEST PRODUCTS
(c.1) U S WEST-Sold. When U S WEST sells a U S
WEST-provided Product to a Customer U S WEST shall solely provide the
necessary product support to itself and USi shall have no obligation to
participate.
(c.2) USi-Sold. When USi sells a U S WEST-provided Product
to a Customer U S WEST shall make available to USi their Coordinated Services
Team as a single point of contact to assist USi in managing the product
support operations internal to U S WEST.
(d) RECORD KEEPING. The Primary Owner shall keep original, detailed
records ("Customer Records") of all aspects of the customer experience in an
appropriate manner (see Section V, Systems, below). These records shall
include, INTER ALIA, open and completed orders, all Customer contact, all
contact with the other party's support team (CAT or CST), implementation
information, open and closed trouble tickets, service level agreements, and
fully executed contracts.
(e) AVAILABILITY. To best serve the customer jointly, the original
Customer Records of one party shall be made available to the other party at
all times.
(f) BILLING. The parties agree that at least until a reliable
billing system can be put in place that will coordinate billing statements
for multiple Products, the Primary Owner, as the customer of record for the
Product purchased, shall receive a separate billing statement for each
Product purchased even if multiple Products are purchased together as a
"bundle." The Primary Owner is free to bill the Customer in any manner
mutually acceptable to the two parties.
(g) MONITORING. The parties agree that at least until a reliable
monitoring system can be put in place that will make available appropriate
network monitoring information, performance monitoring for the Products shall
be conducted by the business entity responsible for providing the Product.
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31. SERVICE LEVEL AGREEMENTS
(a) PRODUCTS. The parties understand and acknowledge that each
Product has its own unique service level agreement ("Product SLA"), that
these agreements may change from time to time at the discretion of the party
providing the Product, and that it would not be feasible to contemplate the
possible combinations of service level agreements for purposes of this
Agreement.
Therefore, the parties agree that for each Product purchased the
Customer will be given the Product SLA in place for the Product at the time
of the sale. Accordingly, the Customer will also be given opportunity to
negotiate the Product SLA wthin the framework provided by the party supplying
the Product.
(b) THIS AGREEMENT. The service level agreement regarding the
baseline service terms and conditions of this Agreement (Agreement SLA") is
on Schedule F attached hereto and made a part hereof.
32. SYSTEMS
(a) DEFINITION. For purposes of this Section the word "Systems"
shall be defined to include tools that provide functionality such as customer
order, customer of record distinction, trouble ticket tracking, network
monitoring, and billing for the Customers and Products.
(b) START-UP STATUS. The parties understand and acknowledge that at
the time of the execution of this Agreement there is no single System in
place that integrates information from the existing Systems relevant to the
parties needs. The parties agree that they will make the best and most
innovative use of the tools currently available, within the framework of
future planning, as they work together to support the Customers.
(c) DEVELOPMENT. Upon execution of this Agreement the parties will
jointly endeavor to design a process to transfer information between them
that will suit their needs.
(d) KNOWLEDGE BASE. In an effort to reduce the number of times one
party needs to call the other party for product support reasons, upon
execution of this Agreement the parties will jointly endeavor to create and
maintain on an ongoing basis a Web-based knowledge base of information, or
frequently asked questions, regarding the Products.
33. SERVICE REVIEWS
(a) QUARTERLY REVIEW. From time to time the parties shall meet at a
mutually agreeable time and place to discuss operations, customer support,
and product support issues addressed in this (Section/Exhibit) and any other
topics they deem appropriate. Such meetings shall not be less frequent than
once per quarter.
(b) METRICS. From time to time the parties may share Product
performance metrics with each other as they impact overall customer care. The
parties will agree to the relevant and appropriate scope of such metrics
sharing on a case-by-case basis.
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34. NOTICES
All notices required to be given under this Agreement shall be provided in
writing to the following representatives of the parties:
For U S WEST:
Vice President - Internet Services
1999 Broadway - 8th fl
Denver, Colorado 80202
Facsimile 303-965-9281
with a copy to:
Law Department
1801 California Street - Suite 5100
Denver, Colorado 80202
Facsimile 303-308-9455
For USinternetworking:
Senior Vice President, Worldwide Sales
One USi Plaza
Annapolis, MD 21401-7478
Facsimile 410-573-1906
with a copy to:
Legal Department
One USi Plaza
Annapolis, MD 21401-7478
Facsimile 410-263-8645
35. ASSIGNMENT
This agreement may be assigned by the parties to any corporate
affiliate in which the majority of ownership is held by the parent
corporation of the assigning entity.
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U S WEST COMMUNICATIONS SERVICES, INC.
BY: _______________________________________
TITLE:_____________________________________
US WEST INTERPRISE AMERICA, INC.
BY:________________________________________
TITLE:______________________________________
USINTERNETWORKING, INC.
BY:________________________________________
TITLE:_____________________________________
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Schedule A
1) U S WEST SERVICES PRICING GUIDELINES
[CONFIDENTIAL TREATMENT]
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[CONFIDENTIAL TREATMENT]
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[CONFIDENTIAL TREATMENT]
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SCHEDULE B
1) LIST OF PRODUCTS CONTRIBUTED BY USi
The following list contains the initial set of products that U S WEST
will represent.
USi ELECTRONIC COMMERCE SOLUTIONS SUITE
USi INTERNET SELLING POWERED BY MICROSOFT
USi has partnered with Microsoft to deliver an all-in-one solution
for selling on the Internet. Your company can now capture the attention of
customers and partners with targeted online promotions and advertising,
transact high volumes of business securely and reliably, and actively manage
and analyze sites to maximize return on investment.
USi INTERNET SELLING POWERED BY BROADVISION
BroadVision is recognized as the leader in one-to-one marketing and
relationship management over the Internet. It's a complete solution that
promotes increased customer satisfaction through fast, reliable service,
relationship marketing, and personalized electronic commerce.
USi INTERNET PUBLISHING POWERED BY BROADVISION
USi INTERNET FINANCIAL SERVICES POWERED BY BROADVISION
USi ENTERPRISE DATA WAREHOUSING SOLUTIONS SUITE
USi ENTERPRISE DATA MART POWERED BY SAGENT
Data warehousing empowers strategic and tactical business decisions
by quickly correlating and analyzing data across all dimensions of your
business. A data mart is a type of data warehouse database containing a
subset of corporate data, and it can be a key building block in a broader,
more powerful, enterprise data warehousing solution. Designed to address a
specific business area of an organization, data marts rely on data from
operational systems or from a data warehouse to deliver the business
intelligence that facilitates informed decision-making.
USi WEB SITE MANAGEMENT SOLUTIONS
USi builds each solution individually to meet specific client
requirements - there are never any pre-configured solutions. And USi designs
its solutions to be scalable so they can accommodate your company's growth.
After assessing your unique business needs, USi recommends an end-to-end
customized solution - including written service and security policies - and
delivers these documents along with a financial proposal. Upon acceptance,
USi implements, manages, and supports the complete solution for your company
2) ANTICIPATED FUTURE SOLUTIONS
ENTERPRISE RESOURCE PLANNING SOLUTIONS SUITE
Reserved for future offerings
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HUMAN RESOURCES SOLUTION SUITE
Reserved for future offerings
FINANCIAL MANAGEMENT SOLUTIONS SUITE
Reserved for future offerings
USi ENTERPRISE RELATIONSHIP MANAGEMENT SOLUTIONS SUITE
Reserved for future offerings
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SCHEDULE C
1) USi DISCOUNT STRUCTURE:
(a) [CONFIDENTIAL TREATMENT]
(b) Discount shall apply to all iMAP Services, pre-qualification and
requirements analysis consulting and post-sale implementation services sold
by US West.
(c) Discount off of quoted End-user Price established by USi GAP/
Requirements Analysis. USi price not to include US West offerings.
(d) [CONFIDENTIAL TREATMENT] of full-term contract value [CONFIDENTIAL
TREATMENT] payment due up-front to USi at each customer contract closing.
(e) Responsibilities delivered as outlined in Responsibility Matrix.
(f) USi to staff one Business Development Manager in-Region, and one
technical Sales Engineer per $ [CONFIDENTIAL TREATMENT] in quota assigned.
(g) USi to provide sales training [CONFIDENTIAL TREATMENT], and to
offer sales and product training services thereafter on a fee basis.
2) ANNUAL TOTAL iMAP SALES QUOTA:
(a) First year Total iMAP Sales Quota: [CONFIDENTIAL TREATMENT]
(b) Multi-year contracts will accrue towards quota attainment at
full multi-year contract value.
(c) Quota to be established each year of contract.
3) ANNUAL INDIVIDUAL iMAP PRODUCT SALES QUOTAS:
(a) First year individual iMAP Product Sales Quotas shall be as
follows:
iMAP Product Product Quota
E-Commerce [CONFIDENTIAL TREATMENT]
Complex Web [CONFIDENTIAL TREATMENT]
Sagent [CONFIDENTIAL TREATMENT]
Total [CONFIDENTIAL TREATMENT]
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SCHEDULE D
1) U S WEST HOUSE ACCOUNTS BY CITY AND DIVISION:
The Executive Vice President's of Sales for both parties shall
mutually agree on a list of House Accounts each quarter, by Account Name,
City, and Division. House Accounts for the commencement of the Agreement
shall be derived from the following list of U.S. corporations, educational
institutions and government entities. Within 30 days of the commencement of
the Agreement, the below list shall be refined to include the specific
Division(s) and City(Cities) of each entity below which shall be considered
House Accounts, by mutual agreement of the Executive Vice President's of
Sales for both parties.
ACCOUNT CITY ST
[CONFIDENTIAL TREATMENT]
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[CONFIDENTIAL TREATMENT]
2) U S WEST PROTECTED ACCOUNTS BY CITY AND DIVISION:
The Executive Vice President's of Sales for both parties shall
mutually agree on a list of protected accounts each quarter, by Account Name,
City and Division. Protected accounts for the commencement of the Agreement
shall be derived from the following list of U.S. corporations, educational
institutions and government entities. Within 30 days of the commencement of
the Agreement, the below list shall be refined to include the specific
Division(s) and City(Cities) of each entity below which shall be considered
protected accounts, by mutual agreement of the Executive Vice President's of
Sales for both parties.
ACCOUNT REGION SALES DIRECTOR
[CONFIDENTIAL TREATMENT]
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SCHEDULE E
1) USi SALES PROCESS
The guidelines below describe the expected sales process and associated
service intervals anticipated in a sale of iMAP services.
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SCHEDULE F
1) BASELINE SERVICE LEVEL AGREEMENTS
SERVICE LEVEL AGREEMENT:
USi's Service Level Goal:
USi's goal is to provide for [CONFIDENTIAL TREATMENT] Availability
for the iMAP Solution application services (as herein defined) within USi's
assumed control.
"Availability" refers to a User's ability to access the application
on the appropriate USi hosted server and receive a valid response, where a
"valid response" is any reply sent by the appropriate server that is either
normal application behavior or an exception notification that can be
identified and read by the user.
"Assumed control" includes all components below not otherwise
identified as outside of the USi Service Level Agreement:
- network services to the ISP (Internet Service Provider)
circuit termination point on the router in USi's data center (i.e. Public
Internet Connectivity)
- network services to the Private IP Carrier circuit
termination point on the router in USi's data center (i.e. Private IP
Network Connectivity)
- all USi provided hardware including servers, network
equipment and security components
- all USi provided software, including operating systems, web
servers, database servers, applications, utilities and customized components
- USi managed routers on customer premises
REMEDY:
In the event USi is unable to provide:
1. [CONFIDENTIAL TREATMENT] Availability in any given [CONFIDENTIAL
TREATMENT], Client shall receive a credit to their account equal to
[CONFIDENTIAL TREATMENT] of [CONFIDENTIAL TREATMENT] service fees excluding
rebilled circuit charges.
2. [CONFIDENTIAL TREATMENT] Availability in any given [CONFIDENTIAL
TREATMENT], Client shall receive a credit to their account equal to
[CONFIDENTIAL TREATMENT] of [CONFIDENTIAL TREATMENT] service fees excluding
rebilled circuit charges.
3. [CONFIDENTIAL TREATMENT] Availability in any given [CONFIDENTIAL
TREATMENT], Client shall receive a credit to their account equal to
[CONFIDENTIAL TREATMENT] of [CONFIDENTIAL TREATMENT] service fees, excluding
rebilled circuit charges.
If USi fails to meet [CONFIDENTIAL TREATMENT] Availability for
[CONFIDENTIAL TREATMENT], Client may terminate this Product Schedule without
penalty, regardless of any term remaining on the Agreement, without liability
to either party for penalties or damages associated with such termination and
upon thirty (30) days prior written notice to USi.
"Availability" percentage shall be calculated as follows:
x = ([CONFIDENTIAL TREATMENT] * 100) / n
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where "n" is the total number of hours in any given calendar month,
and "x" is the Availability percentage.
Specifically excluded from "n" in this calculation and exceptions to
the levels of Availability provided herein are (a) scheduled maintenance
windows; (b) reasons of Force Majeure (as defined in Section 12.8 of the
Agreement); (c) issues associated with Client provided hardware, software and
other equipment; (d) issues associated with Client provided or Client leased
local area networks or ISP connections; (e) use of unapproved or modified
hardware or software and/or; (f) issues arising from the misuse of the iMAP
Solution by Client, its employees, agents, customers or contractors.
In the event of a Force Majeure event, the Client shall have the
option of canceling this Product Schedule with USi if the resulting total
outage time is greater than [CONFIDENTIAL TREATMENT] consecutive days in any
[CONFIDENTIAL TREATMENT] month period, without liability to either party for
penalties or damages associated with such outages or termination and upon
thirty (30) days prior written notice to USi.
The remedies stated in this Section are Client's sole and exclusive
remedies for service interruption.
2) CLIENT RESPONSIBILITIES:
This section describes Client's additional responsibilities under
this Agreement.
1. Client will designate qualified personnel to act as liaisons between
Client and USi.
2. Client will adhere to and will require any Third Party (as defined
in the iMAP Agreement) having access to the iMAP Solution to adhere to USi's
Acceptable Use Policy as set forth at the following URL:
http://www.usi.net/usepolicy.
3. Client is responsible for obtaining and complying with license terms
for all Client-provided software, if any, which are sufficient to allow use
of the software on the Hardware.
4. Client is solely responsible for Content, including any subsequent
changes or updates made or authorized by Client. Client represents and
warrants that Content: (a) will not infringe or violate the rights of any
Third Party including, but not limited to, intellectual property, privacy or
publicity rights of others; (b) is not abusive, profane or offensive to a
reasonable person; or (c) will not be hateful or threatening. Violations of
the foregoing by Client may result in early termination of services by USi.
5. Client is solely responsible for the Contents of its transmissions
and the transmissions of Third Parties accessing the iMAP Solution through
Client. Client agrees to comply with U.S. and International law with regard
to the transmission of technical data which is exported from the United
States through the iMAP Solution. Client further agrees not to use the iMAP
Solution (a) for illegal purposes or (b) to interfere with or disrupt other
network users, network services or network equipment. Interference or
disruptions include, but are not limited to, distribution of unsolicited
advertising or chain letters, propagation of computer worms and viruses, and
use of the network to
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make unauthorized entry to any other machine accessible via the network.
Violations of the foregoing by Client may result in early termination of
services by USi.
6. Upon expiration of this Product Schedule, Client must relinquish use
of the IP address or address blocks assigned to it by USi in connection with
the services.
7. Client shall be responsible for providing USi with end user login
names and passwords for the purpose of authenticating and authorizing Global
Network access by end users to the iMAP Solution.
8. Client shall be responsible for handling all communication,
technical support to and business relations with end users who are the
customers of Client including but not limited to responding to inquiries and
questions.
9. Client shall provide USi with access to such hardware, software and
network connections as USi shall require.
10. Client shall be responsible for obtaining and maintaining the
following hardware and/or software:
_______________________________________
_______________________________________
_______________________________________
_______________________________________
11. Client shall be responsible for providing to USi all information
required for the Acceptance Test in a timely manner and in form directed by
USi. Client shall participate in the Acceptance Testing in good faith and
with all due diligence.
12. Client shall indemnify, defend and hold USi harmless against any
claims, damages, costs and attorneys fees incurred by USi arising from USi's
use of software licensed by or delivered through Client for use in the iMAP
Solution, including, but not limited to, claims for infringement of patents,
copyrights, trade secrets or other proprietary rights. This obligation shall
survive termination of the Product Schedule.
13. Client shall bear the entire risk of loss or damage to USi hardware
located at Client's premises. Client shall obtain and maintain adequate
liability insurance and insurance against loss or damage to the hardware.
Upon request, Client shall furnish to USi a Certificate of Insurance or other
evidence of insurance coverage. Client shall promptly notify USi of any loss
or damage to its hardware. In the event of loss or damage, Client, at USi's
sole option, shall either place the hardware in good condition and repair or
pay to USi the replacement value of the hardware. In the event that any such
loss or damage renders the hardware inoperable in any way so as to cause a
delay in the provision of the iMAP Solution to the Client, Client shall
indemnify and hold USi harmless under Section 8 of the Agreement from any
resulting claims Client or Third Parties may have. Furthermore, Client shall
not be entitled to any Service Level Agreement credits for any loss of
Availability due to the loss or damage to USi hardware located at Client's
premises.
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14. Client shall be responsible to perform the obligations set forth in
the incorporated provisions of the Proposal.
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Schedule G
1) VPN POP OVERVIEW
An IP services network infrastructure capable of delivering
differentiated network applications is an integral component to U S WEST's
strategy. U S WEST wants to integrate our leading-edge network services,
which will continually incorporate the latest, most powerful network
technology, with USi's Internet Managed Application Provider (iMAP)
solutions. U S WEST shares USi's objective of providing superior reliability
and wants to meet USi's reliability standards while delivering applications
over a network that is capable of differentiating the entire solution in the
marketplace by meeting end-to-end price/performance requirements of specific
applications and customers. U S WEST envisions that a mix of private and
IP/Internet-based network capabilities will be used to accomplish this goal.
This document outlines the U S WEST requirements to deliver these network
services to a USi facility.
2) U S WEST/USi POP ARCHITECTURE
THE FOLLOWING DIAGRAM DETAILS THE GENERAL ARCHITECTURE U S WEST WILL DEPLOY
AT THE USi FACILITY DURING THE FIRST PHASE OF THE DEPLOYMENT.
[CONFIDENTIAL TREATMENT]
The demarcation between the USW and USi networks will be
[CONFIDENTIAL TREATMENT]
USW will deploy [CONFIDENTIAL TREATMENT] in the configuration as
shown in the above diagram. Environmental and space requirements are
specified in a later section of this addendum.
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USW will manage [CONFIDENTIAL TREATMENT].
USW will maintain [CONFIDENTIAL TREATMENT].
[CONFIDENTIAL TREATMENT]
Additional equipment and facilities required to enhance USW network
service offerings will be added as addendums to the master contract.
3 FACILITY REQUIREMENTS
USW will need physical (cabinet) and power requirements, to include
HVAC requirements. USW requires [CONFIDENTIAL TREATMENT] 19-inch lockable
racks to hold the equipment required in the initial deployment, and the
ability to expand in the next six months. The equipment required in the
initial deployment has the following environmental requirements:
[CONFIDENTIAL TREATMENT]
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[CONFIDENTIAL TREATMENT]
4) NETWORK REQUIREMENTS
[CONFIDENTIAL TREATMENT]
5) STAFFING REQUIREMENTS
USW requires the following USi staff assistance:
1. A USi Point of Contact (POC) for receiving equipment and RMA support
2. A USi contact to provide facility access on a 24x7 basis 365 days
per year.
3. 24x7 USi staff support to provide assistance with initial
troubleshooting, including rebooting of the firewall servers. USi to provide
contacts names, phone and pager numbers to USW for this support.
4. An email address to use for non-critical support issues.
5. USi to provide USW with planned maintenance schedules at least 48
hours in advance. USW to identify contacts and methods to receive such
information.
6) PRICING
U S WEST will pay USi a monthly fee of [CONFIDENTIAL TREATMENT] per
19" rack, plus network costs associated with managing USWest's VPN equipment.
1. Quoted monthly price includes operations support costs (racks,
electric, HVAC,
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remote hands support), but does not include equipment/hardware (assumes U S
WEST will provide equipment to populate racks with routers, switches,
firewalls, servers, etc.).
2. Hosting fee does not include cost of network and telecommunications
(local loop, out of band management, etc.).
3. Network and telecommunications items specific to managing the VPN
equipment in U S WEST's VPN POP architecture will be passed through from USi
to U S WEST at [CONFIDENTIAL TREATMENT].
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SCHEDULE H
1) U S WEST AND USi BRAND USE GUIDELINES
Each party grants to the other a royalty-free, non-exclusive,
non-transferable license to use each party's Brand Names and Logos (subject
to the color and size restrictions as shown below) solely in connection with
the marketing and sales of iMAP Services or Products under this Agreement.
Each party may also use the other party's Brand Names and Logos on each
party's web site. Each party agrees to submit its samples of the proposed
use(s) of the other party's Brand Names and Logos for the other party's
inspection and approval prior to actual use. All uses of each party's Brand
Names and Logos by the other party must clearly and properly identify each
party's claim of ownership. The license granted herein by each party to the
other may be terminated at any time by each party's written notice to the
other party.
Each party acknowledges that it has no interest in the other party's
Brand Names or Logos except the license granted under this Agreement and that
each party is the sole and exclusive owner of all right, title and interest
in its Brand Names and Logos. Each party's use of the other's Brand Names or
Logos under this Agreement will not diminish the other party's title or
interest in its Brand Names or Logos. Each party agrees not to disparage the
other party's Brand Names or Logos in any manner.
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EXHIBIT 10.30
USINTERNETWORKING, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT, dated March 19, 1999, (the "Grant Date"), is made by and
between USINTERNETWORKING, INC., a Delaware corporation hereinafter referred
to as "Company," and Christopher R. McCleary, an employee of the Company,
hereinafter referred to as "Employee."
As of the Grant Date, the Employee has been granted an option (the
"Option") to purchase all or any part of 3,000,000 shares of fully paid and
non-assessable common stock, $.001 par value ("Common Stock"), of the Company
at a price per share equal to 50% of the mid-point range of the proposed
price range of the Company's initial public offering of its Common Stock,
without commission or other charge (the "Option Price"), subject to the terms
and conditions of the USINTERNETWORKING 1998 Stock Option Plan (the "Plan"),
which is incorporated herein by this reference and a copy of which may be
obtained by the Employee from the Company's Secretary during business hours.
Upon the Employee's Termination of Employment for any reason prior to
the fourth anniversary of the Grant Date, the Company shall have the right to
repurchase at the exercise price paid therefor (the "Repurchase Right") any
share of Common Stock acquired upon exercise of the Option; provided that
such Repurchase Right shall lapse with respect to such Common Stock as set
forth on Attachment #1, attached hereto and made a part hereof.
All capitalized terms used herein without definition shall have the
meanings ascribed to such terms in the Plan. The Option is not intended to be
an Incentive Stock Option. In consideration of the granting of this Option by
the Company, the Employee agrees to render faithful and efficient services to
the Company or a Subsidiary, with such duties and responsibilities as the
Company shall from time to time prescribe for a period of at least one (1)
year from the Grant Date. Nothing in this Agreement or in the Plan shall
confer upon the Employee any right to continue in the employ of the Company
or any Subsidiary or shall interfere with or restrict in any way the rights
of the Company and its Subsidiaries, which are hereby expressly reserved, to
discharge the Employee at any time for any reason whatsoever, with or without
cause.
The Option shall be exercisable in full as of the date hereof. The
Option is exercisable in the manner described in Section 6.2 of the Plan and
subject to the conditions of Section 6.3 of the Plan; PROVIDED, HOWEVER, that
each partial exercise shall be for not less than one hundred (100) shares (or
the minimum exercisable installment set forth herein, if a smaller number of
shares) and shall be for whole shares only. The Option may be adjusted as
described in Section 8.3 of the Plan. The Option may not be transferred or
assigned other than pursuant to the Employee's will or applicable laws of
descent and distribution or, with the consent of the Committee, pursuant to a
DRO.
No part of the Option may be exercised after the first to occur of the
following events:
(i) The tenth anniversary of the Grant Date; or
(ii) If the Employee owned (within the meaning of Section 424(d) of
the Code), at the Grant Date, more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or any
Subsidiary or parent corporation thereof (within the meaning of Section
422 of the Code), the fifth anniversary of the Grant Date; or
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(iii) The time of the Employee's Termination of Employment by the
Company for good cause, as determined by the Committee in its
discretion; or
(iv) The expiration of three (3) months from the date of the
Employee's Termination of Employment unless such Termination of
Employment results from his death, his disability (within the meaning of
Section 22(e)(3) of the Code) or his being discharged by the Company for
good cause, unless the Employee dies within said three-month period; or
(v) The expiration of one (1) year from the date of the Employee's
Termination of Employment by reason of his disability (within the
meaning of Section 22(e)(3) of the Code); or
(vi) The expiration of one (1) year from the date of the Employee's
death; or
The Employee shall also provide the Company with a copy of any election
made by him under Section 83(b) of the Code with respect to Common Stock
acquired upon exercise of the Option immediately after filing any such
election with the Internal Revenue Service.
Any notice to be given under the terms of this Agreement to the Company
shall be addressed to the Company in care of its Secretary, and any notice to
be given to the Employee shall be addressed to him at the address given
beneath his signature hereto. By a notice given pursuant hereto, either party
may hereafter designate a different address for notices to be given to him.
Any notice which is required to be given to the Employee shall, if the
Employee is then deceased, be given to the Employee's personal representative
if such representative has previously informed the Company of his status and
address by written notice under this provisions. Any notice shall be deemed
duly given when enclosed in a properly sealed envelope or wrapper addressed
as aforesaid, deposited (with postage prepaid) in a post office or branch
post office regularly maintained by the United States Postal Service;
PROVIDED, HOWEVER, that any notice to be given by the Employee relating to
the exercise of the Option or any portion thereof shall be deemed duly given
upon receipt by the Secretary or his office.
This Agreement shall be administered, interpreted and enforced under the
internal laws of the state of Delaware without regard to conflicts of laws
principles thereof.
This Agreement may be amended without the consent of the Employee,
provided that no amendment of this Agreement shall, without the consent of
the Employee, impair any rights of the Employee under this Agreement.
By signature below, the Employee acknowledges that the Option and this
Stock Option Agreement are issued pursuant to, and are subject to all the
terms and conditions of, the Plan, and the Employee intends to be bound by the
Plan as if the Plan were set forth verbatim in this Agreement. The Employee
agrees to comply with all rules the Company and the Committee may establish
with respect to the Plan. The Employee hereby further acknowledges that all
shares acquired upon exercise of the Option are subject to the terms of the
Plan and the Option Plan Stockholders Agreement to be executed in connection
with the exercise of any portion of the Option. The Employee hereby further
acknowledges and agrees that this Agreement and the Option issued hereunder
shall constitute satisfaction in full of all obligations of the Company, if
any, to grant to the Employee an option pursuant to the terms of any written
employment agreement or letter or other written offer or description of
employment with the Company executed prior to or coincident with the date
hereof, and
2
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in the event of any conflict between the terms of this Agreement and the
terms of any such other agreement, letter, offer or description, this
Agreement shall control.
[signature page follows]
3
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IN WITNESS WHEREOF, this Agreement has been executed and delivered by the
parties hereto.
USINTERNETWORKING, INC.
By: _____________________
Member of the Company's
Compensation Committee
________________________
Christopher R. McCleary
________________________
________________________
Address
Employee's Taxpayer
Identification Number: _____________________
4
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EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated March 3, 1999, with respect to the financial statements
of Advanced Communication Resources, Inc., included in the Registration
Statement (Form S-1 No. 333-70717) and related Prospectus of USINTERNETWORKING,
Inc. dated March 22, 1999.
/s/ Mahoney Cohen & Company, CPA, P.C.
New York, New York
March 22, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated August 20, 1998, with respect to the financial
statements of International Information Technology IIT, C.A., included in
Amendment No. 6 to the registration statement (Form S-1, No. 333-70717) and
related Prospectus of USINTERNETWORKING, Inc. dated March 18, 1999.
/s/ Bassan & Associados S.C.
Caracas, Venezuela
March 18, 1999
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated March 1, 1999, in Amendment No. 6, with respect to the
consolidated financial statements of I.I.T. Holding, Inc. and subsidiaries,
included in the registration statement (Form S-1 No. 333-70717) and related
Prospectus of USINTERNETWORKING, Inc. dated March 22, 1999.
/s/ Ernst & Young LLP
Baltimore, Maryland
March 22, 1999
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 22, 1999, except as to Note 21, as to which the
date is March 22, 1999, in Amendment No. 6, with respect to the consolidated
financial statements of USINTERNETWORKING, Inc., included in the registration
statement (Form S-1 No. 33-70717) and related Prospectus of USINTERNETWORKING,
Inc. dated March 22, 1999.
/s/ Ernst & Young LLP
Baltimore, Maryland
March 22, 1999
