<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 7, 1999
REGISTRATION NO. 333-70717
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 7
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. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED AMOUNTS OF
MAXIMUM AGGREGATE REGISTRATION
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) FEE(2)
<S> <C> <C>
Common Stock, $.001 par value........................................................... $124,200,000 $34,527.60
</TABLE>
(1) Estimated solely for purpose of calculating the amount of registration fee
pursuant to Rule 457(o) under the Securities Act.
(2) Of such amount, $23,977.50 has been previously paid by the Registrant.
------------------------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 APRIL 7, 1999
6,000,000 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 $16.00 and
$18.00 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 900,000 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..................................... 25
MANAGEMENT................................... 37
<CAPTION>
PAGE
---------
<S> <C>
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS............................... 48
PRINCIPAL STOCKHOLDERS....................... 53
DESCRIPTION OF CAPITAL STOCK................. 56
SHARES ELIGIBLE FOR FUTURE SALE.............. 58
UNDERWRITING................................. 60
NOTICE TO CANADIAN RESIDENTS................. 61
LEGAL MATTERS................................ 62
EXPERTS...................................... 62
WHERE YOU CAN FIND MORE INFORMATION.......... 63
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.................. 6,000,000 shares
Common stock to be outstanding after this
offering.................................... 38,868,276 shares
Over-allotment option........................ 900,000 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 historical consolidated statement of
operations data of IIT, a predecessor, historical consolidated statement of
operations data of USI and 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.
<TABLE>
<CAPTION>
FOR THE PERIOD JANUARY
14, 1998 (DATE OF PRO FORMA FOR THE
INCEPTION) THROUGH YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1998
PREDECESSOR FOR THE ------------------------ -----------------
PERIOD FROM JANUARY 1,
1998 THROUGH SEPTEMBER 7, (in thousands) (in thousands)
1998
-------------------------
(in thousands)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................. $ 4,406 $ 4,122 $ 13,938
Operating expenses........................ 4,830 36,575 49,067
Net loss.................................. (424) (32,453) (35,129)
</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 $94.0 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 $ 136,259
Working capital..................................................................... 22,551 115,008
Total assets........................................................................ 106,516 198,973
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) 157,881
</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 $30.1 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 $94.0 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
vendors may choose to compete with us directly or to enter into strategic
relationships with our competitors. These relationships may take the form of
strategic investments or marketing or other contractual arrangements. 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 either directly or through
strategic relationships with other of our competitors. These relationships may
take the form of strategic investments or marketing or other contractual
arrangements.
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 75.63% 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, 38,868,276 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 51.7% of the aggregate price paid by all purchasers of
our stock but will own only approximately 15.4% 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 6,000,000 shares of common
stock, at an assumed public offering price of $17.00 per share, estimated to be
approximately $94.0 million. This amount will be approximately $109.3 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 6,000,000 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 $ 136,259
--------- ----------- -----------
--------- ----------- -----------
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 38,868,276 shares issued and outstanding pro forma as adjusted......... 1 33 39
Additional paid-in capital..................................................... 29,985 97,157 191,111
Due from stockholders.......................................................... -- (47) (47)
Unearned compensation.......................................................... -- (769) (769)
Accumulated deficit............................................................ (32,453) (32,453) (32,453)
--------- ----------- -----------
Total stockholders' equity (deficit)......................................... (2,466) 63,921 157,881
--------- ----------- -----------
Total capitalization....................................................... $ 79,365 $ 79,365 $ 171,822
--------- ----------- -----------
--------- ----------- -----------
</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,
- 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, and
- 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 initially 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........................................................... $ 17.00
Net tangible book value as of December 31, 1998.................................. $ 1.18
Pro forma increase attributable to new investors in this offering................ 2.24
-----------
Pro forma net tangible book value after this offering 3.42
-----------
Pro forma dilution to new investors in this offering............................. $ 13.58
-----------
-----------
</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 84.6% $ 95,258 48.3% $ 2.90
Investors in this offering........................ 6,000,000 15.4% 102,000 51.7 17.00
------------ ----- ------------- ----- ------
Total........................................... 38,868,276 100.0% $ 197,258 100.0% $ 5.08
------------ ----- ------------- ----- ------
------------ ----- ------------- ----- ------
</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 initially 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
$13.84 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 operating statement data of IIT for the period
from January 1, 1998 through September 7, 1998, the date we acquired IIT,
and for the eight months ended August 31, 1997.
- 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 financial statement data for periods prior to 1996 and the operating
statement data for the eight months ended August 31, 1997 have been derived from
the unaudited financial statements of IIT. The selected financial data as of
December 31, 1996 and 1997 and for the years then ended, 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 audited 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 PREDECESSOR
PERIOD FROM --------------------------------- --------------
MAY 20, 1994 EIGHT MONTHS
(DATE OF INCEPTION) YEAR ENDED DECEMBER 31, ENDED
TO --------------------------------- AUGUST 31,
DECEMBER 31, 1994 1995 1996 1997 1997
-------------------- --------- --------- ----------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue................................ $ 156 $ 801 $ 747 $ 2,812 $ 1,499
---------- --------- --------- ----------- --------------
Costs and expenses
Cost of sales and services........... 108 613 519 1,881 1,112
Selling, general and administrative
expenses........................... 290 77 204 1,844 1,260
Depreciation and amortization........ 3 7 14 30 15
---------- --------- --------- ----------- --------------
Total costs and expenses........... 401 697 737 3,755 2,387
---------- --------- --------- ----------- --------------
Operating (loss) income................ (245) 104 10 (943) (888)
Other income (expense):
Interest income.................... -- -- -- -- --
Interest expense................... -- (5) (3) (9) (1)
Provision (benefit) for income taxes... -- 28 15 (58) (58)
---------- --------- --------- ----------- --------------
Net income (loss)...................... $ (245) $ 71 $ (8) $ (894) $ (831)
---------- --------- --------- ----------- --------------
Basic and diluted income (loss) per
common share attributable to common
stockholders......................... $ (2,578.95) $ 747.37 $ (84.21) $ (9,410.53) $ (8,742.00)
---------- --------- --------- ----------- --------------
---------- --------- --------- ----------- --------------
<CAPTION>
USI
----------------
PREDECESSOR PERIOD FROM
------------------- JANUARY 14, 1998
PERIOD FROM (DATE OF
JANUARY 1, 1998 INCEPTION) TO
TO SEPTEMBER 7, DECEMBER 31,
1998 1998
------------------- ----------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue................................ $ 4,406 $ 4,122
---------- --------
Costs and expenses
Cost of sales and services........... 2,976 6,658
Selling, general and administrative
expenses........................... 1,809 24,425
Depreciation and amortization........ 28 3,179
---------- --------
Total costs and expenses........... 4,813 34,262
---------- --------
Operating (loss) income................ (407) (30,140)
Other income (expense):
Interest income.................... -- 367
Interest expense................... (17) (2,681)
Provision (benefit) for income taxes... -- --
---------- --------
Net income (loss)...................... $ (424) $ (32,454)
---------- --------
Basic and diluted income (loss) per
common share attributable to common
stockholders......................... $ (4,464.37) $ (60.96)
---------- --------
---------- --------
</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>
17
<PAGE>
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 $32.5 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
18
<PAGE>
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--USINTERNETWORKING
REVENUE. For the period ended December 31, 1998, we generated $4.0 million
in professional IT services revenue primarily from ACR and IIT. The remaining
revenue during the period was generated through IMAP clients.
GROSS MARGIN, COSTS OF SALES AND EXPENSES. We incurred $2.5 million in the
delivery of professional IT services for the period ended December 31, 1998. Our
remaining costs of revenues for the period ended December 31, 1998 were the
costs associated with the delivery of our IMAP products. These costs, which
include the operations of our network and data centers, and the amortization of
customer specific hardware, software and integration costs, totaled $4.2 million
for the period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the period ended December
31, 1998, we incurred $2.4 million of selling, general and administrative
expenses. The majority of our selling, general and administrative expense for
1998 relates to USI's development stage activities and consists principally of
compensation ($16.7 million), benefits ($1.1 million), recruiting ($0.3
million), occupancy ($0.7 million), consulting services ($2.8 million) and
network costs ($2.4 million) prior to the implementation of the first IMAP
client. Included in these expenses is $0.2 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 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 at an exercise price of $6.00 per
share. We will recognize 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 estimated fair value of $12.00 at the grant date, the compensation expense
for all of these options would total approximately $10.6 million.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the period
ended December 31, 1998 totaled $3.2 million, comprised of depreciation expense
of $1.5 million related to the significant infrastructure built in 1998 to
support future IMAP services, and $1.6 million of amortization of the goodwill
created through the acquisitions of IIT and ACR in 1998.
INTEREST INCOME AND EXPENSE. For the period ended December 31, 1998, we
incurred $2.7 million in interest expense and generated interest income of $0.4
million. The interest expense is comprised of $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 interest expense
is attributable to our debt and capital leases in 1998. The interest income
generated for the period ended December 31, 1998 is attributable to our
temporary investment of excess cash.
We recorded a deferred tax asset of $10.9 million as of December 31, 1998.
This deferred tax asset consisted principally of start-up costs capitalized for
income tax purposes and net operating loss carryforwards. We have established a
valuation allowance for the entire amount of our deferred tax asset due to
uncertainties regarding future taxable income.
19
<PAGE>
HISTORICAL RESULTS OF OPERATIONS--PREDECESSOR
COMPARISON OF THE PERIOD ENDED SEPTEMBER 7, 1998 TO THE PERIOD ENDED AUGUST 31,
1997
REVENUE. Revenues for the period ended September 7, 1998, increased 194%
over the period ended August 31, 1997. This increase is attributable to the
growth in IIT's PeopleSoft implementation services.
GROSS MARGINS, COSTS OF SALES AND SERVICES. IIT incurred $3.0 million and
$1.1 million of expenses in the delivery of its PeopleSoft implementation
services for the periods ended September 7, 1998 and August 31, 1997,
respectively. As a result, IIT's PeopleSoft implementation services generated
gross margins of 32.4% and 25.8% for the periods ended September 7, 1998 and
August 31, 1997, respectively. The improved gross margins from period to period
is attributable to a reduction in the use of subcontractors, an increase in
IIT's staff utilization and continued improvement in the demand for PeopleSoft
implementation services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. IIT incurred $1.8 million and
$1.3 million of selling, general and administrative expenses for the periods
ended September 7, 1998, and August 31, 1997, respectively. Selling, general and
administrative expenses for the period ended August 31, 1997 include $1.0
million attributable to non-cash compensation expense related to the issuance of
stock to three of IIT's officers. Selling, general and administrative expenses
increased $0.8 million for the period ended September 7, 1998, as a result of
bonuses and related payroll taxes. The remaining increase of approximately $0.7
million is attributable to the additional selling, general and administrative
support required to support IIT's growing customer base.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 TO THE YEAR ENDED DECEMBER 31,
1996
REVENUE. Revenues for 1997 over 1996 increased 276%. The significant
increase in 1997 is attributable growth in IIT's PeopleSoft implementation
services.
GROSS MARGIN, COSTS OF SALES AND SERVICES. IIT incurred $0.5 million and
$1.9 million of expenses in the delivery of services for the years ended
December 31, 1996 and 1997, respectively. As a result, IIT services generated
gross margins of 30.5% and 33.1% for the years ended December 31, 1996 and 1997,
respectively. The improved gross margin 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 PeopleSoft implementation services
industry during this period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. IIT incurred $0.2 million and
$1.8 million in selling, general and administrative expenses for the years ended
December 31, 1996 and 1997, respectively. The primary factor in the $1.6 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 for IIT's
growing customer base.
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
20
<PAGE>
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. The agreement provides for
minimum payments of $2.5 million over eight fiscal quarters commencing on March
31, 1999, for the purchase of software licenses. Additionally, the agreement
provides for eight quarterly minimum payments of $312,500 commencing in March
1999 for co-marketed advertising campaigns.
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.
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
21
<PAGE>
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:
- 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.
22
<PAGE>
- 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 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
23
<PAGE>
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.
24
<PAGE>
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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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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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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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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- 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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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. USi believes that the building it
owns, due to its age, may contain limited amounts of asbestos containing
materials. USI does not believe that limited asbestos presence would subject it
to any material liability.
Due to our rapid expansion, we are currently examining a number of
alternatives for increasing the space available to us in the Annapolis area. On
March 26, 1999, we entered into a letter of intent to purchase land and a
building in Annapolis, Maryland. The letter of intent gives us the option to
purchase the real estate for $11,350,000 if we finance the purchase ourselves or
for $11,750,000 if the seller finances our purchase and agrees to lend us an
additional $1,500,000 for construction costs. The letter of intent will expire
on April 25, 1999 if we have not entered into a final agreement with the seller
at that time.
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.
36
<PAGE>
MANAGEMENT
The following sets forth certain information regarding our current directors
and executive officers and a nominee to become a director.
<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)................................... 43 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
Cathy M. Brienza..................................... 50 Director Nominee
</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
37
<PAGE>
international management and technology consulting firm with whom he was
employed from August 1981 to May 1993.
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.
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<PAGE>
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 SunGard Data Systems, Inc., Pegasus
Communications, Inc., Nitinol Medical Technology, Inc. and various other private
companies.
CATHY M. BRIENZA is a nominee to become a director as designee of
Waller-Sutton Media Partners, L.P. Since July 1997, Ms. Brienza has been a
member of Waller-Sutton Media, L.L.C., the general partner of Waller-Sutton
Media Partners, L.P. Prior to joining Waller-Sutton Media, she was a principal
of Sutton Capital Associates, Inc., and its affiliated companies which engaged
in the ownership and operation of cable television and cellular telephone
systems.
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
39
<PAGE>
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 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
40
<PAGE>
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 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
41
<PAGE>
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
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 July 1998-July 2001 $ 175,000 Executive Vice President of
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.
42
<PAGE>
- 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.
- 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.
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<PAGE>
- 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.
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
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<PAGE>
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 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 $17.00, 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 -- 5,385,000 --
</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
45
<PAGE>
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 initially
proposed price range. In addition, on March 22, 1999, we granted options to
various employees 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 was granted to our chief executive 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
46
<PAGE>
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.
- 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.
47
<PAGE>
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.
48
<PAGE>
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.
The Series B Preferred Stock financing was completed only after we had spent
several months attempting to identify sources of new capital. We sent
information to over 30 potential venture capital and strategic investors and by
mid-December had received only two offers which the board of directors deemed
suitable to pursue. By mid-December we had less than $100,000 in cash and would
have been unable to meet our next payroll without acquiring additional outside
capital. At the time we had less than $100,000 in IMAP revenues to date. In
addition, we were in risk of defaulting on a note issued in connection with the
acquisition of ACR. In mid-December the board of directors chose to accept a
proposal by the group of Series B investors described above for a financing
which valued the underlying common stock at $3.36 per share.
Purchasers in this offering will be paying substantially more for shares of
common stock than the amount paid by the Series B investors. We believe that
this difference in price is supported by a number of factors.
- We are in a substantially improved financial position due to the infusion
of cash from the Series B financing. The risks related to our lack of cash
that existed in December 1998 have been reduced or eliminated by the
Series B financing.
- During the first quarter of 1999, we increased our IMAP clients from 7 to
21.
- During the first quarter of 1999, we increased our total expected revenues
under contract from $4.9 million to over $20 million.
49
<PAGE>
- During the first quarter of 1999, we increased our 12-month backlog from
$1 million to $6.75 million.
- On January 31, we signed the SiebelNet agreement with Siebel which
provides that USI is the exclusive outsource provider of Siebel enterprise
relationship managment application hosting and rental services for direct
customers of Siebel in North America.
- On January 31, we signed a marketing services agreement with U S WEST
which provides for U S WEST to sell our products in its 14 state region
and terminated the right U S WEST had to require us to repurchase our
stock held by U S WEST if we were unable to enter into a marketing
agreement by January 31, 1999.
- In March, we reached an agreement with PeopleSoft on an amendment to our
outsource alliance agreement which resolved a dispute between the parties
that could have resulted in PeopleSoft terminating the agreement.
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 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
50
<PAGE>
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 for convenience if it pays a
termination fee ranging from $1,800,000 to $360,000, depending on how many
months are left in the term of the agreement. 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 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 term. If a U S WEST
customer terminates its contract for IMAP services prematurely, U S WEST will be
obligated to make an accelerated payment to USI of an amount equal to up to 36
months of contract payments under that customer's contract. 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 overall exclusivity if U S WEST fails
to reach performance levels equal to at least 75% of established sales quotas
for the IMAP services. USI can terminate U S WEST's exclusivity with respect to
a particular IMAP product if U S WEST fails to reach performance levels for that
product equal to at least 50% of established sales quotas so long as USI has
performance levels with respect to that product comparable to the performance
required from U S WEST. The exclusivity provisions will also terminate upon an
acquisition or change in control of USI.
51
<PAGE>
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 Lattice Partners, Ltd. becomes a customer of USI and 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 $108,000 in
thirty-six equal 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.
52
<PAGE>
PRINCIPAL STOCKHOLDERS
The table below sets forth, as of March 1, 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% 4.26%
Stephen E. McManus................................................ 625,000 1.90 1.61
Andrew A. Stern................................................... 625,000 1.90 1.61
Jeffery L. McKnight(4)............................................ 375,000 1.13 *
DIRECTOR
R. Dean Meiszer(5)................................................ 470,981 1.43 1.21
Ray A. Rothrock(6)................................................ 2,674,224 8.10 6.86
Frank A. Adams(7)................................................. 8,348,985 25.07 21.24
William F. Earthman(8)............................................ 1,412,676 4.30 3.63
John H. Wyant(9).................................................. 3,813,269 11.53 9.76
Benjamin Diesbach(10)............................................. 3,750 * *
David J. Poulin(11)............................................... 3,750 * *
Michael C. Brooks(12)............................................. 5,952,381 18.11 15.31
Joseph Zell(13)................................................... 0 * *
Cathy M. Brienza(14).............................................. 1,488,093 4.53 3.83
All Executive Officers and Directors as a group (15 persons)...... 27,540,727 79.77 67.96
BENEFICIAL OWNERS OF 5% OR MORE OF THE OUTSTANDING COMMON STOCK OF
USI
Blue Chip Group(15)............................................... 3,809,519 11.52 9.75
c/o Blue Chip Venture Company, Ltd.
2000 PNC Center
201 East Fifth Street
Cincinnati, Ohio 45202
Grotech Capital Group(16)......................................... 8,345,235 25.06 21.24
9690 Deereco Road, Suite 800
Timonium, Maryland 21093
Venrock Group(17)................................................. 2,670,474 8.09 6.85
c/o Venrock Associates
Room 5506
30 Rockefeller Plaza
New York, New York 10112
Whitney Group(18)................................................. 5,952,381 18.11 15.31
c/o J.H. Whitney & Co.
177 Broad Street
Stamford, CT 06901
U S WEST Communications, Inc.(19)................................. 3,188,868 9.67 8.18
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
53
<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 March 1, 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 March 1, 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 March 1, 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. Mr. McCleary's beneficial
ownership after the offering includes options to purchase 375,000 shares of
common stock issued on March 22, 1999 which are exercisable within 60 days
of March 1, 1999.
(4) Includes options to purchase 375,000 shares of common stock exercisable
within 60 days of March 1, 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 March 1, 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 March 1, 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 March 1, 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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<PAGE>
March 1, 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 March 1, 1999.
(10) Includes options to purchase 3,750 shares of common stock exercisable
within 60 days of March 1, 1999.
(11) Includes options to purchase 3,750 shares of common stock exercisable
within 60 days of March 1, 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 1,488,093 shares of common stock owned by Waller-Sutton Media
Partners, L.P. Ms. Brienza is a member of Waller-Sutton Media, L.L.C. the
general partner of Waller-Sutton Media Partners, L.P. Ms. Brienza disclaims
beneficial ownership of the shares held by Waller-Sutton Media Partners,
L.P.
(15) 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
March 1, 1999.
(16) 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 March 1, 1999.
(17) 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 March 1, 1999.
(18) 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.
(19) 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 March 1,
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
38,868,276 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
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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.
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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 38,868,276 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
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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."
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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.................................................................. 6,000,000
-----------------
-----------------
</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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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
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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. and
subsidiaries at December 31, 1996 and 1997, and September 7, 1998 and for the
period from January 1, 1998 through September 7, 1998 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.,
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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.
The financial statements of ACR as of September 30, 1998, December 31, 1997
and 1996 and for the nine months ended September 30, 1998 and for the years then
ended December 31, 1997 and 1996 included in this prospectus and registration
statement have been audited by Mahoney Cohen & Company, CPA, P.C., 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 Mahoney Cohen & Company, CPA, P.C. as experts
in accounting and auditing.
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.
63
<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
CONSOLIDATED FINANCIAL STATEMENTS OF I.I.T. HOLDING, INC. AND SUBSIDIARIES
Report of Independent Auditors..................................................... F-25
Report of Independent Auditors..................................................... F-26
Consolidated Balance Sheets as of December 31, 1997 and 1996 and as of September 7,
1998 (unaudited)................................................................. F-27
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-28
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1997 and 1996 and for the period ended September 7, 1998 (unaudited)............. F-29
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-30
Notes to Consolidated Financial Statements......................................... F-31
FINANCIAL STATEMENTS OF ADVANCED COMMUNICATION RESOURCES, INC.
Independent Auditor's Report....................................................... F-37
Balance Sheets as of December 31, 1997 and 1996 and September 30, 1998............. F-38
Statements of Operations for the years ended December 31, 1997 and 1996 and for the
nine months ended September 30, 1998............................................. F-39
Statements of Stockholders' Equity for the years ended December 31, 1997 and 1996
and for the nine months ended September 30, 1998................................. F-40
Statements of Cash Flows for the years ended December 31, 1997 and 1996 and for the
nine months ended September 30, 1998............................................. F-41
Notes to 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..................................................... 29,985,069 97,157,241
Due from stockholders.......................................................... -- (47,500)
Unearned compensation.......................................................... -- (768,865)
Accumulated deficit............................................................ (32,453,312) (32,453,312)
-------------- --------------
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................................... 24,424,432
Depreciation and amortization................................ 3,179,648
-----------
Total costs and expenses....................................... 34,262,084
-----------
Operating loss................................................. (30,139,635)
Other income (expense):
Interest income.............................................. 367,411
Interest expense............................................. (2,681,088)
-----------
(2,313,677)
-----------
Net loss....................................................... (32,453,312)
Dividends accrued on Series A Convertible Preferred Stock...... (1,503,004)
Accretion of common stock subject to repurchase to fair
value........................................................ (3,903,865)
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................. (3,903,865) (3,903,865)
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............ (32,453,312) (32,453,312)
---------- ------------ ------------
Balance at December 31, 1998.................................................... $29,985,069 ($32,453,312) $(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....................................................................... $(32,453,312)
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........ 231,135
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.
During 1998, the Company was obligated to purchase and purchased $9.6 million of
perpetual licenses from 4 software application vendors. The agreements to
purchase these licenses specify the maximum number of users permitted to utilize
the license in connection with the Company's service, and whether the licenses
may be later transferred to subsequent users by the Company. All amounts paid to
the vendors are non-refundable, regardless of the actual number of users
assigned a license in connection with IMAP services. The Company had no
F-7
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
other obligations to purchase software in 1998. It currently has an obligation
to purchase software and advertising more fully described in Note 21.
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 that transferrable and
non-transferrable licenses were first available to generate revenue, and the
average amortization period is expected to be three years.
The Company also purchases maintenance services from its software vendors
under agreements that require annual payments for software maintenance,
including technical support and software upgrades. These payments totaled
$710,000 in 1998 and are included in prepaid expenses and amortized ratably over
the annual service period.
PROPERTY AND EQUIPMENT
Property and equipment, including equipment used in providing IMAP services,
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.
F-8
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
F-9
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
F-10
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
2. ACQUISITIONS (CONTINUED)
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............................................................... $ (35,129)
Basic and diluted loss per common share................................ $ (56.21)
</TABLE>
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..................................................................... $(32,453,312)
Dividends on Series A Convertible Preferred Stock............................ (1,503,004)
Accretion of common stock subject to repurchase to fair value................ (3,903,865)
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.
F-11
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
3. LOSS PER SHARE (CONTINUED)
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..................................................................... $(32,453,312)
-----------
-----------
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................. $ (3.52)
-----------
-----------
</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 unearned compensation and is
being amortized over the 22 month period in which it is earned. 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
</TABLE>
F-12
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
5. PROPERTY AND EQUIPMENT (CONTINUED)
<TABLE>
<S> <C>
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>
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 acquisition 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.
F-13
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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
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............................................. $ 7,855,560
Start-up and organizational costs capitalized for tax purposes............... 3,632,867
Other........................................................................ 192,230
-----------
Total deferred tax assets...................................................... 11,680,657
Deferred tax liabilities:
Tax over book depreciation................................................... 314,930
Other........................................................................ 467,169
-----------
Total deferred tax liability................................................... 782,099
-----------
Net future income tax benefit.................................................. 10,898,558
Valuation allowance for net deferred tax assets................................ (10,898,558)
-----------
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............................................. $(11,358,659)
State income taxes, net of federal benefit..................................... (984,188)
Non-deductible goodwill........................................................ 559,839
Non-deductible interest expense................................................ 704,166
Non-deductible transactions costs.............................................. 154,777
Other.......................................................................... 25,507
Valuation allowance............................................................ 10,898,558
-----------
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................................... (27,302,374) 342,387 (26,959,987)
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........................ $(26,959,987)
Depreciation and amortization.................................. (3,179,648)
Interest income................................................ 367,411
Interest expense............................................... (2,681,088)
-----------
Net loss during the development stage.......................... $(32,453,312)
-----------
-----------
</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.................................... 29,985,069 67,172,172 97,157,241
Due from stockholders......................................... -- (47,500) (47,500)
Unearned compensation......................................... -- (768,865) (768,865)
Accumulated deficit........................................... (32,453,312) -- (32,453,312)
-------------- -------------- --------------
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. The agreement
provides for minimum payments of $2.5 million over eight fiscal quarters
commencing on March 31, 1999, for the purchase of software licenses.
Additionally, the agreement provides for eight quarterly minimum payments of
$312,500 commencing in March 1999 for co-marketed print advertising campaigns.
These commitments will be recorded by the Company in accordance with its
software licenses and advertising policies as more fully described in Note 1.
F-24
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
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 September
7, 1998, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for the years ended December 31, 1996 and 1997,
and for the period from January 1, 1998 through September 7, 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 did not audit the 1996 and 1997 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 for 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 September 7, 1998 and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1996 and 1997, and for the period from January 1, 1998
through September 7, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Baltimore, Maryland
March 23, 1999
F-25
<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-26
<PAGE>
I.I.T. HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1996 1997 SEPTEMBER 7, 1998
---------- ------------ -----------------
<S> <C> <C> <C>
ASSETS
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 (DEFICIT)
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 (loss)...................... 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-27
<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)
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-28
<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 (loss)......... -- -- -- -- (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 (loss)......... -- -- -- -- (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 loss................................ -- -- -- (424,115) (424,115)
Other comprehensive income--
translation adjustment................ -- -- 42,283 -- 42,283
-------------
Total comprehensive income (loss)......... -- -- -- -- (381,832)
----------- ------------ -------- ------------- -------------
Balances at September 7, 1998............... $ 475 $ 1,004,565 $ 21,365 $ (1,276,456) $ (250,051)
----------- ------------ -------- ------------- -------------
----------- ------------ -------- ------------- -------------
</TABLE>
- ------------------------
SEE ACCOMPANYING NOTES.
F-29
<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)
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 changes 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-30
<PAGE>
I.I.T. HOLDING, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE PERIOD ENDED AUGUST 31, 1997 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 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.
CONVERSION TO U.S. DOLLARS
The financial information for a Venezuelan subsidiary includes financial
information converted from Venezuelan Bolivares to U.S. Dollars.
Assets and liabilities were converted at the rate in effect at the balance
sheet date and the statement of operations was converted at the average rate
during the periods.
USE OF ESTIMATES
The preparation of the consolidated 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-31
<PAGE>
I.I.T. HOLDING, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE PERIOD ENDED AUGUST 31, 1997 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 its clients. As part of this ongoing procedure, the
Company monitors the creditworthiness of its clients. The Company does not
believe that it is subject to any unusual credit risk beyond the normal credit
risk inherent in its 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 $27,000 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-32
<PAGE>
I.I.T. HOLDING, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE PERIOD ENDED AUGUST 31, 1997 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 $47,476, $14,000, $32,000 and $17,000 for the periods ended
September 7, 1998, August 31, 1997, and for the years 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-33
<PAGE>
I.I.T. HOLDING, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE PERIOD ENDED AUGUST 31, 1997 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. In 1998, the Company recorded contributions to the plan of
$37,502.
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) (58,372) --
--------- ---------- -------------- --------
Total................ $ 14,832 $ (58,372) $ (58,372) $ --
--------- ---------- -------------- --------
--------- ---------- -------------- --------
</TABLE>
F-34
<PAGE>
I.I.T. HOLDING, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE PERIOD ENDED AUGUST 31, 1997 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>
DECEMBER 31
-----------------------
<S> <C> <C> <C>
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 -- --
Stock compensation........................ -- 219,150
U.S. net operating loss carryforward...... 11,871 163,092 143,267
---------- ----------- --------
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 begin to expire in 2012.
The Company's Venezuelan subsidiary had cumulative net operating losses in
the amount of $110,000 through December 31, 1997. These net operating losses
resulted in net deferred tax assets of approximately $23,000 and $5,000 at
December 31, 1997 and 1996, respectively. Management has determined that it is
more likely than not that these net operating losses will not be utilized;
therefore, a full valuation allowance was recorded against these deferred tax
assets at December 31, 1997 and 1996. During the period from January 1, 1998
through September 7, 1998, the subsidiary utilized approximately $92,000 of the
net operating loss carryforward, and increased the valuation allowance by
approximately $2,500 to $25,500, which fully offsets the net deferred tax asset
of $25,500 at September 7, 1998. The remaining net operating loss carryforward
of approximately $18,000 will expire in 2000.
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
F-35
<PAGE>
I.I.T. HOLDING, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE PERIOD ENDED AUGUST 31, 1997 IS UNAUDITED)
9. GEOGRAPHIC SEGMENT INFORMATION (CONTINUED)
31, 1997 and 1996. There were no service transfers between the United States and
South America. Operating profit (loss) 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-36
<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-37
<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-38
<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-39
<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 6).......................... (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-40
<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-41
<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-42
<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-43
<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-44
<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 500 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-45
<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-46
<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-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.............................. 25,697 2,172 2,299 30,168 3,738(b) 33,906
--------- --------- --------- ----------- --------------- ------------
Operating income (loss)................. (29,736) 449 820 (28,467) (4,308) (32,775)
Interest expense........................ 2,675 24 6 2,705 -- 2,705
Interest income......................... (365) -- -- (365) -- (365)
--------- --------- --------- ----------- --------------- ------------
Income (loss) before income taxes......... (32,046) 425 814 (30,807) (4,308) (35,115)
Provision for income taxes................ -- 14 -- 14 -- 14
--------- --------- --------- ----------- --------------- ------------
Net (loss) income......................... $ (32,046) $ 411 $ 814 $ (30,821) $ (4,308) $ (35,129)
--------- --------- --------- ----------- --------------- ------------
--------- --------- --------- ----------- --------------- ------------
Basic and diluted loss per common share
attributable to common stockholders..... $ (56.21)
------------
</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.................................................... $ 34,527
NASD Filing Fee......................................................... 9,125
Nasdaq National Market Listing Fee...................................... 95,000
Transfer Agent Fees..................................................... 10,000
Accounting Fees and Expenses............................................ 100,000
Legal Fees and Expenses................................................. 250,000
Printing and Mailing Expenses........................................... 300,000
Miscellaneous........................................................... 101,348
---------
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 initially 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
10.16+# 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
10.26+# 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 APRIL 7, 1999.
<TABLE>
<S> <C> <C>
USINTERNETWORKING, INC.
By: /s/ WILLIAM T. PRICE
-----------------------------------------
William T. Price
VICE PRESIDENT AND
GENERAL COUNSEL
</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 April 7, 1999
Christopher R. McCleary (Principal Executive Officer)
*
- ------------------------------------ President and Director April 7, 1999
Stephen E. McManus
* Executive Vice President and Chief Financial
- ------------------------------------ Officer (Principal Financial and Accounting April 7, 1999
Andrew A. Stern Officer)
*
- ------------------------------------ Director April 7, 1999
R. Dean Meiszer
*
- ------------------------------------ Director April 7, 1999
Benjamin Diesbach
*
- ------------------------------------ Director April 7, 1999
Ray A. Rothrock
*
- ------------------------------------ Director April 7, 1999
Frank A. Adams
*
- ------------------------------------ Director April 7, 1999
William F. Earthman
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
- --------------------------------------------- --------------------------------------------- ---------------
- ------------------------------------
John H. Wyant Director
<S> <C> <C>
- ------------------------------------
Joseph R. Zell Director
*
- ------------------------------------ Director April 7, 1999
Michael C. Brooks
*
- ------------------------------------ Director April 7, 1999
David J. Poulin
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ WILLIAM T. PRICE
-------------------------
William T. Price
ATTORNEY-IN-FACT
</TABLE>
<PAGE>
EXHIBIT INDEX
<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
10.10+ Stock Purchase Agreement between USI and certain other parties dated December 31, 1998
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
10.16+# 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
10.26+# 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.
<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
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<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.
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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
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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.
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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
--------------------------------- -------------------------
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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 $1,800,000
--------------------------------- ------------------------
43rd to 48th $1,260,000
--------------------------------- ------------------------
49th to 54th $ 720,000
--------------------------------- ------------------------
55th to 57th $ 360,000
--------------------------------- ------------------------
</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
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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 10.27
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
- ----------------------
[CONFIDENTIAL TREATMENT] means that certain confidential material has been
filed separately with the Securities and Exchange Commission.
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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 60% of: 1) the remaining
unpaid value of the Customer contract; or 2) the equivalent of 36 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 75% 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 50% 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]
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[CONFIDENTIAL TREATMENT]
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[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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[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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[CONFIDENTIAL TREATMENT]
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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,
CONFIDENTIAL
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with a need to know Page 44
<PAGE>
USW/USi Contract Execution Copy
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].
CONFIDENTIAL
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with a need to know Page 45
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USW/USi Contract Execution Copy
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 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 23, 1999, in Amendment No. 7, 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 April 7, 1999.
/s/ Ernst & Young LLP
Baltimore, Maryland
April 7, 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. 7, 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 April 7, 1999.
/s/ Ernst & Young LLP
Baltimore, Maryland
April 7, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
USinternetworking, Inc. and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0001076732
<NAME> USINTERNETWORKING, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-14-1998
<PERIOD-END> DEC-31-1998
<CASH> 43,802,465
<SECURITIES> 0
<RECEIVABLES> 3,024,119
<ALLOWANCES> (142,000)
<INVENTORY> 0
<CURRENT-ASSETS> 49,702,543
<PP&E> 23,208,030
<DEPRECIATION> (1,567,885)
<TOTAL-ASSETS> 106,516,478
<CURRENT-LIABILITIES> 27,151,544
<BONDS> 0
62,242,500
550
<COMMON> 625
<OTHER-SE> (1,458,147)
<TOTAL-LIABILITY-AND-EQUITY> 106,516,478
<SALES> 0
<TOTAL-REVENUES> 4,122,449
<CGS> 0
<TOTAL-COSTS> 6,658,004
<OTHER-EXPENSES> 27,604,080
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,681,088
<INCOME-PRETAX> (32,453,312)
<INCOME-TAX> 0
<INCOME-CONTINUING> (32,453,312)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (32,453,312)
<EPS-PRIMARY> (60.96)
<EPS-DILUTED> (60.96)
</TABLE>
