<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 15, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
---------------------
USINTERNETWORKING, INC.
(Exact name of registrant as specified in its charter)
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<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>
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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:
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<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
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<CAPTION>
PROPOSED MAXIMUM
AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C>
Common Stock, $.001 par value........................................................... $86,250,000 $23,977.50
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
The information in this Prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>
SUBJECT TO COMPLETION, DATED JANUARY 15, 1999
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 $ and $
per share. We will apply to list our Common Stock on the Nasdaq National
Market under the symbol "USIX."
The underwriters have an option to purchase a maximum of additional
shares to cover over-allotments of shares.
Investing in our Common Stock involves certain risks. See "Risk Factors"
beginning on page 5.
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<CAPTION>
Underwriting
Price to Discounts and Proceeds
Public Commissions to USI
----------------- ----------------- -----------------
<S> <C> <C> <C>
Per Share............................................. $ $ $
Total................................................. $ $ $
</TABLE>
Delivery of the shares of Common Stock will be made on or about ,
1999, against payment in immediately available funds.
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>
--------------
TABLE OF CONTENTS
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PAGE
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<S> <C>
PROSPECTUS SUMMARY........................... 3
RISK FACTORS................................. 5
USE OF PROCEEDS.............................. 15
DIVIDEND POLICY.............................. 15
CAPITALIZATION............................... 16
DILUTION..................................... 17
SELECTED UNAUDITED HISTORICAL FINANCIAL
DATA....................................... 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................. 19
BUSINESS..................................... 23
MANAGEMENT................................... 35
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PAGE
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<S> <C>
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS............................... 44
PRINCIPAL STOCKHOLDERS....................... 47
DESCRIPTION OF CAPITAL STOCK................. 50
SHARES ELIGIBLE FOR FUTURE SALE.............. 51
UNDERWRITING................................. 53
NOTICE TO CANADIAN RESIDENTS................. 54
LEGAL MATTERS................................ 55
EXPERTS...................................... 55
WHERE YOU CAN FIND MORE INFORMATION.......... 56
INDEX TO FINANCIAL STATEMENTS................ F-1
</TABLE>
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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 ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
We have applied for federal registration of the marks "USINTERNETWORKING,"
"USI," "Internet Managed Application Portfolio," "IMAP" and "USIView." This
Prospectus also includes trademarks, servicemarks and tradenames of other
companies.
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.
2
<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) DOES NOT REFLECT A 1 FOR STOCK SPLIT WHICH WILL BECOME EFFECTIVE
PRIOR TO THE CONSUMMATION OF THIS OFFERING. IN THIS PROSPECTUS, WE WILL REFER TO
USINTERNETWORKING, INC. AND ITS SUBSIDIARIES, COLLECTIVELY, AS "USI," "WE" AND
"US."
ABOUT USINTERNETWORKING
USI's service offerings make it possible for its clients to use leading
business software applications without the cost and burden of owning or managing
the underlying technology. Our clients access these applications through our
state-of-the-art Internet-based network. Our Internet Managed Application
Portfolio(sm) (IMAP(sm)) solutions integrate the implementation, operations,
communications and support of Internet-enabled packaged software applications.
USI has established its IMAP offerings as a leading single-source solution for
middle market enterprises implementing distributed business functions such as
sales force automation, customer support, e-commerce, and human resource and
financial systems. USI also provides Complex Web Hosting by making its
infrastructure available to clients who want to run their own applications in a
highly reliable and secure Internet environment.
THE OFFERING
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<S> <C>
Common Stock Offered by USI.................. shares
Common Stock to be Outstanding after this
Offering.................................... shares(1)
Use of Proceeds.............................. The continued expansion and enhancement of
our network, the addition of services to our
IMAP offerings, payment of preferred stock
dividend, working capital and general
corporate purposes.
Proposed Nasdaq National Market Symbol....... "USIX"
</TABLE>
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(1) Based on shares outstanding as of December 31, 1998. Does not include up to
shares of Common Stock that may be sold by us to the
Underwriters to cover over-allotments, if any. Also excludes 13,458,000
shares of Common Stock reserved for issuance under our stock option plan,
all of which were subject to outstanding options as of December 31, 1998 and
11,861,317 shares of Common Stock issuable upon the exercise of outstanding
warrants.
SUMMARY UNAUDITED PRO FORMA AND HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)
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<CAPTION>
PRO FORMA(1) FOR THE YEAR
ENDED
DECEMBER 31, 1998
------------------------------
<S> <C>
OPERATING STATEMENT DATA:
Revenues.......................................................................... $ 13,938
Expenses.......................................................................... 45,866
Net loss.......................................................................... (34,268)
OTHER DATA:
EBITDA(2)......................................................................... $ (27,636)
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED(3)
---------- ----------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................. $ 43,802 $ 40,302 $
Working capital........................................................... 24,016 24,016
Total assets.............................................................. 107,527 107,527
Long-term debt and capital lease obligations, excluding current portion... 8,407 8,407
Series B Convertible Redeemable Preferred Stock........................... 62,006 --
Stockholders' equity...................................................... 2,925 64,931
</TABLE>
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(1) Gives effect to the acquisition of ACR and IIT as if they had occurred as of
January 1, 1998.
(2) EBITDA consists of earnings (loss) before interest, taxes, depreciation and
amortization. EBITDA is a measure commonly used in our industry and is
presented to enhance an understanding of our operating results. It should
not be construed as an alternative to cash flow from operating activities or
net earnings (loss), determined in accordance with GAAP. It may be
calculated differently from EBITDA for other companies.
(3) As adjusted to give effect to receipt of the net proceeds from the sale of
shares of Common Stock offered hereby by USI (assuming an initial public
offering price of $ per share).
3
<PAGE>
ABOUT USINTERNETWORKING
USI's service offerings make it possible for its clients to use leading
business software applications without the cost and burden of owning or managing
the underlying technology. Our clients access these applications through our
state-of-the-art Internet-based network. Our IMAP solutions integrate the
implementation, operations, communications and support of Internet-enabled
packaged software applications. USI has established its IMAP offerings as a
leading single-source solution for middle market enterprises implementing
distributed business functions such as sales force automation, customer support,
e-commerce, and human resource and financial systems. USI also provides Complex
Web Hosting by making its infrastructure available to clients who want to run
their own applications in a highly reliable and secure Internet environment.
As a central element of our strategy, we have established relationships with
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 support; and BroadVision in
e-commerce. USI is the exclusive provider of outsourced solutions for direct
customers of Siebel in North America and is one of nine currently certified
outsourcing partners for PeopleSoft. The agreements with software providers
generally enable USI to 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 USI with an initial software portfolio that can meet a broad
range of clients' Enterprise Resource Planning (ERP), e-commerce and
communication needs.
To deliver its services, USI has built an advanced network of four
Enterprise Data Centers (EDCs) located in Annapolis, Milpitas (Silicon Valley),
Amsterdam and Tokyo. This global network was specifically engineered to provide
the highest possible performance in delivering Web-based content and information
to users worldwide. As a result, we believe our clients benefit from superior
response time and unsurpassed levels of reliability and security. Our unique
architecture offers redundant Internet connectivity and hardware systems,
bypasses congested public exchange points, and enables 100% mirroring of client
sites across dispersed geographies.
USI has developed modular product offerings and built implementation teams
with expertise in the specific business processes which our IMAP offerings
support. These teams can implement applications and generate value for clients
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 versus a more conventional implementation cycle of six months to more
than a year. In addition to our IMAP implementations, we also sell traditional
implementation services on a time and materials basis.
USI's integrated Client Care operation delivers 24x7 responsive personalized
service from dedicated multi-tier support teams with specialized knowledge of
each client's specific IMAP solution. USIView-TM- is designed to allow our
Client Care engineers to diagnose and correct clients' problems, wherever and
whatever their sources. USI's Client Care operation features directed calling
through a unique toll-free number for each client.
Because we are selling a service and not the underlying technology, our IMAP
clients sign contracts that provide for fixed monthly payments. Once a contract
is signed, we invest in the hardware, software and implementation needed to
deliver that client's service. This will require a substantial investment in the
early years to build our client base. We expect to benefit from a rapidly
growing recurring revenue base, which we believe will generate substantial
positive cash flow in later years.
USI was incorporated in Delaware in January 1998. Our principal executive
offices are located at One USI Plaza, Annapolis, Maryland 21401. Our telephone
number is (410) 897-4400.
4
<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.
ADDITIONAL RISKS AND UNCERTAINTIES NOT NOW KNOWN TO US OR THAT WE CURRENTLY
CONSIDER IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. 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 THE 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 COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THE RISKS AND UNCERTAINTIES
DESCRIBED BELOW AND ELSEWHERE IN THIS PROSPECTUS.
WE HAVE A LIMITED OPERATING HISTORY.
We began operating in January 1998. Since then, we have focused on
developing our business, identifying and entering into strategic relationships
with packaged application software vendors, recruiting key management and
technical personnel, raising capital to fund our operations and the acquisitions
that are part of our business strategy and building our network. Only since
September 1998 have we begun to contract with customers for our IMAP offerings.
Our limited operating history makes predicting future results difficult.
WE HAVE INCURRED LOSSES AND EXPECT TO CONTINUE TO INCUR LOSSES.
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 $29.9 million for the period from January 14,
1998 (our date of inception) through December 31, 1998, and net cash outflow
before financing of approximately $57.6 million for the same period. Further
developing our business and expanding our network will require significant
additional capital and other expenditures. We therefore expect to have
significant operating losses and to record significant net cash outflow before
financing in the near term.
OUR SUCCESS DEPENDS ON THE ACCEPTANCE OF INTERNET-BASED SERVICES.
The market for Internet services, private network management solutions and
widely distributed Internet-enabled package application software has only
recently begun to develop. It is now evolving rapidly and is likely to be
entered by an increasing number of competitors. We cannot be certain that this
market will become viable or, if it becomes viable, that it will grow. If this
market fails to develop or develops more slowly than we expect, our business,
results of operations and financial condition would be materially and adversely
affected.
In order to succeed in this market, we must differentiate ourselves from our
competitors through our products and services. We cannot be sure that we will do
so or, if we do, that our products and services will be accepted by the market.
Because our products and services are new and only partially tested, we cannot
be sure that businesses will buy them. We may face increased costs or, for
technical or other reasons, be unable to develop, introduce or market new
services or enhance existing services on a timely basis. Any of these events
could materially adversely affect our business, results of operations or
financial condition.
OUR VIABILITY, PROFITABILITY AND GROWTH LARGELY DEPEND ON SUCCESSFUL
IMPLEMENTATION OF OUR BUSINESS STRATEGY.
We cannot be sure that we will successfully implement our business strategy,
or that we will achieve the operating efficiencies and synergies upon which it
depends.
5
<PAGE>
A key element of our business strategy is rapid growth. Our growth will
depend on, among other things, establishing additional relationships with
strategic software vendors and developing and marketing new products and
services, particulary our IMAP solutions, all in a timely manner, at reasonable
cost and on satisfactory terms. Our ability to establish relationships with
strategic software vendors and acquire and integrate other businesses may be
affected by various factors, many of which are not within our control. These
include competition, technological developments and governmental regulation.
Implementing our business strategy involves risks, expenses and
difficulties, including those of:
- Negotiating acceptable software licensing agreements and strategic
partnerships.
- Developing our operational support and back office systems.
- Attracting and retaining customers.
- Integrating acquired businesses into our operations.
These risks, expenses and difficulties are increased by the market
uncertainties facing our products and services.
WE MAY NOT BE ABLE TO ACCURATELY ESTIMATE OR REALIZE OUR IMAP BACKLOG.
Because of our limited operating history, we may not be able to accurately
estimate our backlog (IMAP revenues under contract but not yet earned) or
convert it into revenue. The majority of our IMAP sales are made pursuant to
individual service contracts which we reflect in our backlog upon contract
signing. As of December 31, 1998, seven IMAP clients represented a backlog of
approximately $2.0 million, of which we expect $1.0 million will be recognized
as revenue in 1999. Our failure to convert our backlog into revenue would have a
material adverse effect on our business, financial condition and results of
operations.
MANAGING OUR GROWTH MAY BE DIFFICULT.
We expect our business to grow both geographically and in terms of the
number of products and services we offer. In order to successfully manage our
growth, and in particular to integrate the operations of newly acquired
businesses, 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. We cannot be sure that we will
successfully manage our growth. If we cannot manage our growth effectively, our
business, financial condition or results of operations could be adversely
affected.
Furthermore, we cannot be sure that our administrative, operating and
financial control systems, infrastructure, facilities and personnel will be
adequate to support our future operations or to effectively adapt to future
growth. The inability to continue to upgrade our systems, infrastructure and
facilities, the inability to recruit, hire and retain necessary personnel or the
emergence of unexpected expansion difficulties could have a material adverse
effect on our business, financial condition or results of operations.
6
<PAGE>
WE NEED TO RECRUIT ADDITIONAL SKILLED 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, particularly additional management personnel in the areas of
application integration and technical support. Competition for such personnel is
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. Our inability to attract
and retain such personnel could limit our growth and have a material adverse
effect on our business, results of operations and financial condition.
WE DEPEND ON KEY PERSONNEL.
Our success also depends in significant part on the continued services of
our key technical, sales and senior management personnel. We have employment
agreements with certain key employees, including Christopher R. McCleary,
Stephen E. McManus, Jeffery L. McKnight, Andrew A. Stern, Matthew D. Kanter and
L. Sebastian Alegrett, but few other officers or key employees are party to
employment agreements and each of those that are not can terminate his or her
relationship with us at any time. Losing one or more of our key employees could
have a material adverse effect on our business, results of operations and
financial condition.
WE WILL HAVE BROAD DISCRETION TO ALLOCATE THE PROCEEDS OF THIS OFFERING.
We estimate the net proceeds to us from this offering to be approximately
$ million (after deducting estimated offering expenses). We plan to use
these proceeds mainly to continue expanding and enhancing our network, to add
services to our IMAP offerings, and for working capital and other general
corporate purposes. Some of the net proceeds may also be used to repay current
or future debts, to pay accrued dividends on our convertible preferred stock,
fund acquisitions or acquire complementary products or to obtain the right to
use complementary technologies. Accordingly, our management will retain broad
discretion to allocate the proceeds of this offering. Management's failure to
apply such funds effectively could have a material adverse effect on our
business, results of operations and financial condition.
WE DEPEND ON THIRD-PARTY SUPPLIERS.
We depend on other companies to supply certain key components of our
telecommunications infrastructure and system and network management solutions.
Some of these 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. 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.
WE DEPEND ON STRATEGIC RELATIONSHIPS WITH APPLICATION SOFTWARE VENDORS.
We obtain software products pursuant to agreements with PeopleSoft USA,
Inc., Siebel Systems Inc., Sagent Technology, Inc., BroadVision, Inc. and Oracle
Corporation, and package them as part of our IMAP solutions. The agreements are
for terms ranging from one to four years. Our IMAP offerings are central to our
business strategy. If these agreements were to be terminated or not renewed, we
might have to discontinue products or services or delay or reduce their
introduction unless we could find, license and package equivalent technology.
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
7
<PAGE>
may need to keep our IMAP solutions competitive. If we cannot obtain such
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.
All but one of our third-party agreements are non-exclusive. Our competitors
may also license and utilize the same technology in competition with us. We
cannot be sure that the vendors of technology used in our products will continue
to support such technology in its current form. Nor can we be sure that we will
be able to adapt our own products to changes in such technology. In addition, we
cannot be sure that the financial or other difficulties of third party vendors
will not have a material adverse effect upon the technologies incorporated in
our products, or that, if such technologies become unavailable, we will be able
to find suitable alternatives.
DEVELOPING AND EXPANDING OUR OPERATIONS WILL DEPEND, AMONG OTHER THINGS, ON
MANAGEMENT'S ABILITY TO SUCCESSFULLY INTEGRATE THE COMPANIES WE HAVE ACQUIRED.
Acquisitions commonly involve risks. For instance:
- It may be difficult to assimilate acquired operations and personnel.
- Our ongoing business may be disrupted and resources and management time
diverted.
- 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.
- We may be entering markets in which we have little or no direct prior
experience.
- Changing management may impair relationships with an acquired business's
employees or customers.
In September and October of 1998, we acquired I.I.T. Holding, Inc. and
Advanced Communication Resources, Inc. 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.
OUR SYSTEMS COULD BE VULNERABLE TO SECURITY RISKS.
Questions about secure transmission of confidential information form a
significant barrier to e-commerce and communications. Our services rely on
encryption and authentication technology licensed from third parties to provide
the security and authentication needed to safely transmit confidential
information. Although we have designed and implemented a variety of network
security measures, unauthorized access, computer viruses, accidental or
intentional acts and other disruptions may occur. Our EDCs may experience delays
or service interruptions as a result of the accidental or intentional acts of
Internet users, current and former employees or others. Such acts could
potentially jeopardize the security of confidential information, such as credit
card and bank account numbers, stored in our and our clients' computer systems.
This could result in liability to us and in the loss of existing clients or the
deterrence of potential clients.
Although we plan to continue using industry-standard security measures, such
measures have been circumvented in the past, and ours may be circumvented in the
future. The costs required to eliminate computer viruses and alleviate other
security problems could be prohibitively expensive, and efforts to address such
problems could result in delays or interruption of service to our clients. These
could in turn have a material adverse effect on our business, results of
operations and financial condition. Concerns over
8
<PAGE>
transaction security and user privacy may also inhibit the growth of the
Internet, especially as a means of conducting commercial transactions, and
thereby inhibit the growth of our market.
OUR SUCCESS DEPENDS ON THE AVAILABILITY AND RELIABILITY OF THE CAPACITY WE LEASE
FROM OUR TELECOMMUNICATIONS NETWORK SUPPLIERS.
We depend on a number of telecommunications suppliers to provide our
backbone capacity and maintain its operational integrity. Although we lease
redundant capacity from multiple suppliers, degradation of services provided by
these suppliers could prevent us from maintaining our standard of service.
Furthermore, if we are unable to obtain additional bandwidth to make room for
increased traffic, we may not be able to continue to distribute content rapidly
and reliably through our network. If either of these things happen, our
business, results of operations and financial condition could be materially
adversely affected.
OUR SUCCESS DEPENDS LARGELY ON CONTINUED GROWTH IN INTERNET USE.
The Internet is a unique and relatively new medium for conducting business
and exchanging commercial information. Future levels of demand for and market
acceptance of the Internet are hard to predict and depend on a number of
factors, including increased consumer access to and acceptance of new
interactive technologies, and the development of technologies for interactive
communication between organizations and target audiences. If the Internet fails
to continue to develop as a commercial or business medium or develops more
slowly than we expect, our business, results of operations and financial
condition could be materially adversely affected.
The recent growth in Internet use has caused frequent periods of poor
performance. Internet Service Providers (ISPs) and other organizations with
links to the Internet have responded by upgrading routers and switches,
telecommunications links and other components forming the Internet
infrastructure. Any perceived degradation in the performance of the Internet as
a whole could undermine the value of the services we provide over the Internet.
Performance improvements in our services partly depend upon, and are ultimately
limited by, the speed and reliability of networks operated by others. In order
for the market for our services to emerge and grow, improvements must be made to
the entire Internet infrastructure to ease overloading and congestion.
WE WILL NEED ADDITIONAL CAPITAL TO FINANCE OUR GROWTH AND CAPITAL REQUIREMENTS.
We believe that we must continue to enhance and expand our network
infrastructure to maintain our competitive position and to meet growing demands
for service quality, capacity and competitive pricing. Our ability to grow
depends partly on being able to expand our operations through owned or leased
network capacity. This requires significant capital expenditures, which we often
incur before receiving the related revenue.
We believe that the estimated net proceeds from this offering, together with
our existing assets, currently available borrowing and expected revenue growth
and cost savings, will provide sufficient funds for the implementation of client
contracts, to purchase required capital equipment, and to fund our operations
for the next several years. If we grow beyond current expectations or identify
one or more attractive acquisitions, or our cash flow from operations is
insufficient to meet our working capital and capital expenditure requirements,
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.
9
<PAGE>
We are obligated under certain agreements to repurchase shares of our
capital stock. Employment agreements with three of our employees, holding in the
aggregate 10.75 million shares of Common Stock, require us to repurchase their
shares of Common Stock in the event of their death or disability, or with
respect to an employee holding 5 million shares, upon termination of his
employment. See "Management--Employment Agreements." In addition, in certain
limited circumstances U S WEST has the right to require us to repurchase our
stock that it holds. See "Certain Relationships and Related Transactions--
Purchases of Series A Preferred Stock."
FUNDAMENTAL CHANGES IN THE TECHNOLOGIES FOR DELIVERING INTERNET ACCESS AND
CONTENT, AND NETWORKING AND MANAGING CORPORATE INFORMATION TECHNOLOGY ASSETS,
EXPOSE US TO SUBSTANTIAL RISKS.
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 products, software and services and develop or
acquire new products, software and services that meet changing customer needs in
a timely and cost-effective way. We cannot be sure, however, that we will do
some or all of these things. For example, while our network is now accessed
mainly by computers through land lines, several companies have recently
developed or are developing wireless networking systems. If the Internet or
enterprise networks become accessible by other methods, or if there are
advancements in the delivery of networking services, we will need to develop new
technology or modify our existing technology to accommodate these developments.
This may require substantial time and expense, and even then we cannot be sure
that we will succeed in adapting our businesses to alternate access devices,
conduits or other technological developments.
We believe that our ability to compete successfully also depends on the
continued compatibility and interoperability of our services with products,
services and architectures offered by various vendors. 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 or, if they become established,
that we will be able to timely conform to these new standards and so stay
competitive. 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. 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.
There are few substantial barriers to entry, and we expect further
competition from existing and future competitors. The principal competitive
factors in these markets include:
- Internet system engineering expertise.
- Quality of customer service and support.
- Network capability.
- Reliability.
- Quality of service and scalability.
- Broad geographic presence.
- Brand name.
- Technical expertise and functionality.
10
<PAGE>
- Variety of services.
- The ability to maintain and expand distribution channels.
- Price.
- The timing of introductions of new services.
- Network security.
- Financial resources.
- Conformity with industry standards.
We cannot be sure that we will have the resources or expertise to compete
successfully in the future.
Our current and potential competitors include systems integrators, national
and regional ISPs, software and hardware vendors (including certain of our
strategic partners and suppliers), 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 certain subsidiaries of GTE Corporation; MCI WorldCom, Inc.;
International Business Machines Corporation; Frontier Corporation; UUNet
Technologies, Inc.; PSINet, Inc.; DIGEX, Inc.; Exodus Communications, Inc.;
Andersen Consulting; PricewaterhouseCoopers; AT&T Corporation; and Sprint
Corporation.
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.
As a result, some of 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 offset the effects of any such cost reductions. In addition, we believe
that there is likely to be consolidation in our markets sometime soon, which
could increase price and other competition in ways that materially adversely
affect our business, results of operations and financial condition.
IT MAY BE DIFFICULT TO PROTECT AND ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS.
We rely on a combination of copyright, trademark, service mark and trade
secret laws and contractual restrictions to establish and protect certain
proprietary rights in our products and services. We have no patented technology
that would bar competitors from our market. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy or otherwise obtain
and use our products or technology. Policing such unauthorized use is difficult,
and we cannot be certain that we can prevent it, particularly in countries where
the laws may not protect our proprietary rights as fully as in the United
States.
We also rely on certain technologies licensed from third parties. We cannot
be sure that these licenses will remain available to us on commercially
reasonable terms. The loss of such technology could require us to obtain
substitute technology of lower quality or performance standards or at greater
cost, which could materially adversely affect our business, results of
operations and financial condition.
11
<PAGE>
As the number of software products in our target markets increases and the
functionality of these products further overlap, software developers may become
increasingly subject to infringement claims. Someone may even claim that our
technology infringes their proprietary rights. Any such claims, whether with or
without merit, can be time consuming and expensive to defend, may divert
management's attention and resources, could cause product shipment delays and
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.
OUR INTERNATIONAL OPERATIONS PRESENT VARIOUS RISKS.
We intend to expand into international markets, and we have already
established EDCs in Europe and Japan. We cannot be sure that we will be able to
deliver our services outside the United States. In addition, there are certain
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.
Furthermore, certain foreign governments, such as 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.
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. In
addition, 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.
GOVERNMENT REGULATION OF OUR BUSINESS IS UNSETTLED.
Laws and regulations directly applicable to communications or commerce over
the Internet are becoming more prevalent. 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 and abroad, that may impose additional burdens on companies
conducting business online. The adoption or modification of laws or regulations
relating to the Internet could adversely affect our business.
12
<PAGE>
WE COULD BE VULNERABLE TO THE YEAR 2000 PROBLEM.
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. These date code fields
will need to accept four-digit entries in order for 20th century dates to be
distinguished from 21st century dates. As a result, before the end of this year,
computer systems and software used by many companies may need to be upgraded to
comply with these "Year 2000" requirements.
We recognize the need to ensure our operations will not be adversely
impacted by Year 2000 software failures. We have procedures for evaluating and
managing the risks and costs associated with this problem and believe that our
computer systems are Year 2000 compliant. However, many of our 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.
We face additional risks to the extent that services and systems purchased
by us, our suppliers, including suppliers of packaged application software
offered as a part of our IMAP offerings, and others with whom we do business are
not Year 2000 compliant. If any such third parties cannot provide us with
products, services or systems that are Year 2000 compliant, on a timely basis,
or if Year 2000 issues prevent others from the timely delivery of products,
services or systems to us, our business, results of operations and financial
condition could be materially adversely affected.
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. In addition, USI's acquired subsidiaries have several
contracts in which the subsidiaries' Year 2000 liabilities are not capped. As a
result, we may be subjected to Year 2000-related lawsuits whether or not our
products and services are Year 2000 compliant. We cannot be certain at this time
what the outcomes or impact of any such lawsuits may be.
WE HAVE NO PLANS TO PAY CASH DIVIDENDS ON OUR COMMON STOCK IN THE FORESEEABLE
FUTURE.
Whether or not we declare or pay dividends is up to the Board of Directors
and will depend on a number of factors, including our earnings, capital
requirements and overall financial condition. In addition, our ability to
declare and pay dividends may be substantially restricted under the terms of our
credit agreements.
OUR PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS WILL CONTINUE TO
CONTROL THE COMPANY.
When this offering is completed, our executive officers, directors and
existing greater-than-5% stockholders (and their affiliates) will, in the
aggregate, own shares representing approximately % 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 (including the
election and removal of directors and any merger, consolidation or sale of all
or substantially all of our assets), and to control our management and affairs.
A SUBSTANTIAL NUMBER OF SHARES ARE ELIGIBLE FOR FUTURE SALE.
After this offering is completed, shares of Common Stock
(assuming no exercise of the Underwriters' over-allotment option) will be issued
and outstanding. 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
13
<PAGE>
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. 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 or our Common
Stock in the market after this offering or the perception that such sales could
occur. These factors could also make it more difficult to raise funds through
future offerings of Common Stock.
THERE IS NO PRIOR PUBLIC MARKET FOR OUR STOCK AND OUR STOCK PRICE COULD BE
VOLATILE.
There has not been a public market for the Common Stock. We cannot be sure
that an active public market for the Common Stock will develop or continue after
this offering. 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. The
initial public offering price per share of the Common Stock has been determined
by negotiations among us and the representatives of the Underwriters. Investors
may not be able to sell their Common Stock at or above the initial public
offering price.
We believe that there are relatively few comparable companies that have
publicly-traded equity securities. This may also affect the trading price of the
Common Stock after this offering. In addition, the stock market has from time to
time experienced extreme price and volume volatility, and this volatility may
adversely affect the market price of the Common Stock.
PURCHASERS IN THIS OFFERING WILL EXPERIENCE DILUTION.
Purchasers of Common Stock offered hereby will experience immediate and
substantial dilution in the net tangible book value of the Common Stock.
WE ARE UNCERTAIN ABOUT THE RELIABILITY OF MARKET DATA.
Market data used throughout this Prospectus were obtained from internal
company surveys and industry publications. Industry publications generally state
that the information contained therein has been obtained from sources believed
to be reliable, but that the accuracy and completeness of such information is
not guaranteed. Although we believe such information to be reliable, we have not
independently verified such market data. Similarly, internal company surveys,
while believed by us to be reliable, have not been verified by any independent
sources.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS.
This Prospectus contains certain forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) and information
relating to us, our industry and the U.S. and international Internet and systems
integration businesses that is 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. Such statements reflect our current views
with respect to future events and are subject to risks and uncertainties that
could cause actual results to differ materially from those contemplated in such
forward-looking statements, including those discussed under "Risk Factors."
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. We do not undertake any
obligation to publicly release any revisions to these forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
14
<PAGE>
USE OF PROCEEDS
We will receive net proceeds from the sale of the shares of Common
Stock, at an assumed public offering price of share, estimated to be
approximately million ($ million if the Underwriters' over-allotment
option is exercised in full), after deducting underwriting discounts and
commissions and estimated offering expenses we will owe. We intend to use these
proceeds mainly to continue expanding and enhancing our network, to add
additional services to our IMAP offerings, to pay accrued dividends on our
shares of convertible preferred stock and for working capital and other general
corporate purposes. Some of the net proceeds may also be used to repay current
or future debts, 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 and we may find it necessary or
advisable to reallocate the net proceeds within the above-described categories
or to use portions thereof 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, in its discretion, and
will depend on a number of factors, including our earnings, capital requirements
and overall financial condition.
15
<PAGE>
CAPITALIZATION
The following table sets forth: (1) the actual capitalization of USI as of
December 31, 1998; (2) pro forma capitalization after giving effect to: (a) the
conversion of 55,000 shares of Series A Preferred Stock into 99,000,000 shares
of Common Stock upon consummation of this offering, (b) the conversion of 59,278
shares of Series B Preferred Stock into 148,196,429 shares of Common Stock upon
consummation of this offering; and (3) pro forma as adjusted capitalization
after giving effect to: (a) the pro forma capitalization adjustments and (b) the
consummation of this offering and the application of the net proceeds therefrom.
This table should be read in conjunction with the Financial Statements of USI,
ACR and IIT and the related Notes thereto and other financial information
included in this Prospectus. See "Use of Proceeds," "Dividend Policy," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" and "Unaudited Pro Forma Consolidated Statement of Operations."
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
<S> <C> <C> <C>
(IN THOUSANDS EXCEPT FOR SHARE
AMOUNTS)
Cash and cash equivalents.................................................... $ 43,802 $ 43,802
--------- ----------- -----------
--------- ----------- -----------
Long-term liabilities:
Long-term capital leases................................................... 3,427 3,427
Long-term debt............................................................. 4,980 4,980
--------- ----------- -----------
Total long-term liabilities................................................ 8,407 8,407
8% Series B Cumulative Convertible Redeemable Preferred Stock, $.01 par
value; 115,000 shares authorized; 59,451 shares issued and outstanding
actual, no shares issued and outstanding pro forma and pro forma as
adjusted(1)................................................................ 62,006 --
Stockholders' equity:
8% 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; 600,000,000 shares authorized; 15,750,000
shares issued and outstanding actual, 262,946,429 issued and outstanding
pro forma and shares issued and outstanding pro forma as
adjusted(2).............................................................. 16 263
Additional paid-in capital................................................... 36,671 98,431
Due from stockholders from sale of Common Stock.............................. (48) (48)
Accumulated deficit.......................................................... (33,715) (33,715)
--------- ----------- -----------
Total stockholder's equity................................................. 2,925 64,931
--------- ----------- -----------
Total capitalization..................................................... $ 73,338 $ 73,338
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
- ------------------------
(1) Series B Preferred Stock is not presented as a part of stockholders' equity
of the Company because it is mandatorily redeemable upon the eighth
anniversary of its issuance. Each outstanding share of our Preferred Stock
will convert into shares of Common Stock upon the closing of this offering.
See "Description of Capital Stock" and Note 9 of the Notes to the Financial
Statements.
(2) Does not include: (a) the 13,458,000 shares of Common Stock issuable upon
exercise of stock options outstanding as of December 31, 1998 at an exercise
price of $0.33 per share; and (b) 11,861,317 shares of Common Stock reserved
for issuance upon exercise of warrants exercisable as of December 31, 1998.
See "Management--Stock Option Plan".
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<PAGE>
DILUTION
Purchasers of the Common Stock offered hereby will experience immediate and
substantial dilution in the net tangible book value per share of their Common
Stock. At December 31, 1998, our net tangible book value was approximately $38.8
million, or $0.14 per share of Common Stock. The net tangible book value per
share is equal to our total tangible assets less total liabilities, divided by
the number of shares of Common Stock outstanding at December 31, 1998. After
giving effect to the sale of shares at an assumed initial public offering
price of $ per share and after deducting underwriting discounts and
commissions, our pro forma net tangible book value at , 1998 would have
been approximately $ million, or $ per share. This represents an immediate
increase in pro forma net tangible book value of $ per share to existing
stockholders and an immediate dilution of $ per share to new investors
purchasing shares of Common Stock in this offering. Dilution to new investors is
determined by subtracting pro forma net tangible book value per share of Common
Stock after giving effect to this offering, from the price to be paid by new
investors in this offering for a share of Common Stock. The following table
illustrates the per share dilution to investors in this offering:
<TABLE>
<CAPTION>
PER SHARE
-----------
<S> <C> <C>
Assumed offering price..................................................................... $
Net tangible book value as of December 31, 1998............................................ $ 0.14
Increase attributable to new investors in this offering.................................... $
-----------
Pro forma net tangible book value after this offering $
-----------
Dilution to new investors in this offering................................................. $
-----------
-----------
</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 the existing stockholders and by the 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................................. % % $
Investors in this offering............................
---------- --- ----------- ---
Total...............................................
---------- --- ----------- ---
---------- --- ----------- ---
</TABLE>
The foregoing tables are based on shares outstanding as of December 31, 1998
and exclude 13,458,000 shares of Common Stock reserved for issuance under our
stock option plan, all of which shares were subject to outstanding vested
options as of December 31, 1998, and 11,861,317 shares of Common Stock issuable
upon the exercise of outstanding warrants. If all such options eligible for
exercise and warrants had been exercised at December 31, 1998, dilution to the
new investors in this offering would be $ per share.
17
<PAGE>
SELECTED UNAUDITED HISTORICAL FINANCIAL DATA
The following table setting forth our summary historical data for the period
from January 14, 1998 (date of inception) through December 31, 1998 and as of
December 31, 1998, has been derived from, and is qualified by reference to, our
unaudited financial statements included elsewhere in this Prospectus. The
unaudited financial statements have been prepared in accordance with generally
accepted accounting principles. The information set forth below should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements and related Notes
thereto included in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 14, 1998
(DATE OF INCEPTION)
TO
DECEMBER 31, 1998
---------------------
<S> <C>
(AMOUNTS IN
THOUSANDS,
EXCEPT PER SHARE
DATA)
OPERATING STATEMENT DATA:
Revenue.................................................................................... $ 4,122
Expenses................................................................................... (34,020)
Operating loss............................................................................. (29,898)
Other income (expense):
Interest income.......................................................................... 367
Interest expense......................................................................... (2,681)
Net loss during the development stage...................................................... (32,212)
Basic and diluted loss per common share attributable to common stockholders, pro forma for
the conversion of the Series A Preferred Stock and Series B Preferred Stock.............. (0.46)
OTHER DATA:
EBITDA(1)................................................................................ $ (27,728)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
BALANCE SHEET DATA: 1998
--------------
<S> <C>
(AMOUNTS IN
THOUSANDS)
Cash and cash equivalents(2).............................................. $ 44,384
Working capital........................................................... 24,016
Total assets.............................................................. 107,527
Long-term debt and capital lease obligations, excluding current portion... 8,407
Series B Convertible Redeemable Preferred Stock........................... 62,006
Stockholders' equity...................................................... 2,925
</TABLE>
- ------------------------
(1) EBITDA consists of loss before interest and financing expense (net of
interest income), income taxes, depreciation and amortization. EBITDA is not
a measurement of financial performance under generally accepted accounting
principles and should not be considered as an alternative to, or more
meaningful than, net income or loss as a measure of performance or cash flow
as a measure of liquidity. It may be calculated differently from EBITDA for
other companies.
(2) Includes $581,712 in restricted cash.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH OUR
FINANCIAL STATEMENTS AND NOTES INCLUDED IN THIS PROSPECTUS. 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 SHOULD BE READ AS
BEING APPLICABLE 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 SUCH DIFFERENCES INCLUDE THOSE DISCUSSED IN "RISK FACTORS," AS
WELL AS THOSE DISCUSSED ELSEWHERE HEREIN. THE FORWARD-LOOKING STATEMENTS
CONTAINED HEREIN ARE MADE AS OF THE DATE OF THIS PROSPECTUS, AND WE ASSUME NO
OBLIGATION TO UPDATE SUCH FORWARD-LOOKING STATEMENTS OR TO UPDATE THE REASONS
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH
FORWARD-LOOKING STATEMENTS. SEE "RISK FACTORS."
OVERVIEW
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 $32.2 million.
REVENUE. We expect that future revenue will be generated primarily from the
delivery of IMAP services. Revenue from IMAP services will consist of monthly
recurring fees from ongoing services and will be recognized ratably as earned
over the contract term. Non-refundable client deposits, if any, will be
recognized as revenue ratably over the contract term. Revenue from the delivery
of professional IT services will be recognized as 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 certain 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 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.
Costs related to the integration of software applications for a client on our
network will be capitalized and amortized over the related contract period.
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
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market value of the identifiable net assets of an acquired company has been
accounted for as goodwill, which is being amortized over its estimated useful
life of 15 years.
HISTORICAL RESULTS OF OPERATIONS
REVENUE. For the period ending 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.
COSTS AND EXPENSES. We incurred $2.5 million in the delivery of
professional IT services for the period ending December 31, 1998. Our remaining
costs of goods sold for the period ending 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 totaled $4.1 million for the period.
For the period January 14, 1998 (inception) through December 31, 1998, we
incurred $25.2 million of selling, general and administrative expenses. These
expenses relate to our development stage activities and consist principally of
compensation, benefits, recruiting, occupancy, consulting services and network
costs prior to the implementation of the first IMAP client.
We recorded a deferred tax asset of $12.7 million as of December 31, 1998.
This deferred tax asset consisted principally of start-up costs capitalized for
income tax purposes and employee compensation not currently deductible for
income tax purposes. We have established a valuation allowance for the entire
amount of our deferred tax asset due to uncertainties regarding future taxable
income.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, we had cash and cash equivalents of $43.8 million
primarily generated through the sale of $33.0 million of Series A Preferred
Stock and $62.2 million of Series B Preferred Stock. Through December 31, 1998
we have used $19.9 million through operating activities, and $37.7 million in
investing activities. The principal investing activities were the acquisitions
of ACR and IIT for $16.9 million and the purchase of property and equipment
totaling $20.2 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.
We believe that these resources, together with the estimated net proceeds
from this offering, will provide sufficient funds for the implementation of
client contracts, to purchase required capital equipment, and to fund our
operations for the next several years. If we grow beyond current expectations or
identify one or more attractive acquisitions, or our cash flow from operations
is insufficient to meet our working capital and capital expenditure
requirements, 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).
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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, we expensed all costs related to the implementation of internal use
software. We will adopt SOP 98-1 in the first quarter of 1999.
In April 1998, the American Institute of Public Accountants issued Statement
of Position 98-5, REPORTING THE COSTS OF START-UP ACTIVITIES (SOP 98-5). This
SOP requires that start-up costs and organizational costs be expensed as
incurred. Start-up activities include one-time activities related to opening a
new facility, introducing a new product or service, conducting business in a new
territory, conducting business with a new class of customer, initiating new
process in an existing facility, or commencing some new operation. SOP 98-5 is
effective for years beginning after December 15, 1998. We currently expense the
costs of all start-up and organizational activities.
YEAR 2000 COMPLIANCE
YEAR 2000 ISSUE. The Year 2000 issue is a result of computer programs or
systems which store or process date-related information using only two digits to
represent the year. These programs or systems may not be able to properly
distinguish between a year in the 1900's and a year in the 2000's. Failure of
these programs or systems to distinguish between the two centuries could cause
the programs or systems to yield erroneous results or even to fail.
STATE OF READINESS. Since its inception in January 1998, USI has been
cognizant of the Year 2000 issue. Hardware and software selections, network
architecture, and client contract terms have all been designed with the Year
2000 issue in mind. As a result, in our core IMAP business we believe that we do
not have a Year 2000 problem, with the exception of one hardware platform which
we are currently bringing into compliance.
The companies we recently acquired (IIT and ACR) have been in existence
longer than USI. Since the acquisitions USI has worked with the acquired
companies' managements to address any Year 2000 exposures discovered.
USI recognizes the significance of the Year 2000 issue and plans to
implement a formal Year 2000 program in the first quarter of 1999. The Year 2000
Program will address both information technology and non-IT systems, for systems
used by the Company as well as those provided by the Company to its customers. A
Year 2000 Team, which includes members from all levels of management, will be
led by our Engineering and Operations organization to implement the Year 2000
Program. The Year 2000 Team will meet as a group on a regular basis, and
subgroups of the Team will meet as needed to address specific issues.
USI is using employees to identify and address the Year 2000 issue. The Year
2000 Program will involve six basic stages.
- 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.
- Change or replacement of the identified areas.
- Testing.
- Implementation of the changes or replacements.
- Contingency plans.
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, USI's Year 2000 Program will address both software products and
software-related services used by USI and those provided by USI to its clients.
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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 customers. USI has had in depth discussions with all of its
software suppliers. We have received assurances from all our software suppliers
that these programs are in compliance, and we do not believe that any of the
software applications provided to clients requires remediation. The acquired
companies also write some software for client's applications. Client
applications provided in recent years have been tested for Year 2000 compliance.
The Year 2000 Team will determine if additional analysis, remediation, testing
or implementation are required. USI plans to substantially complete
implementation of any necessary changes and replacements to software products
and software-related services used and provided by USI by the end of the third
quarter of 1999. We are also implementing 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 Program.
In the course of our business, USI uses certain software products provided
by third-parties, and certain of USI's products and services interface to
third-party 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.
COSTS. As of December 31, 1998, USI has not incurred material expenses in
connection with its Year 2000 Program. All expenses relating to Year 2000
compliance to date have been incurred in the normal course of USI's business, as
we have developed our products, network, and implemented specific client
applications. The cost of completing the Year 2000 Program is expected to be
principally in the form of the opportunity costs of employees' time. USI may
also need to purchase replacement products, though it does not currently expect
that this will prove necessary. USI has not yet determined its projected costs
of the entire Year 2000 Program.
RISKS. If a product or service provided by USI is found to cause damage or
injury to a client due to a failure of such product or service to operate
without any adverse effect due to date related processing associated with the
year 2000, USI could be liable to such client for a breach of warranty,
depending on the specific contractual arrangement between USI and such client.
Although USI's contractual arrangement with each of its clients generally limits
USI's liability to such client, USI cannot accurately predict whether or to what
extent any legal claims will be brought against USI, or whether USI will
otherwise be adversely affected by such claims. In addition, USI's acquired
subsidiaries have several contracts in which the subsidiaries' Year 2000
liabilities is not capped.
In addition, a failure by USI to make our products Year 2000 compliant could
result in a decrease in sales of USI's products and services, delays in the
development of other of USI's products and services, an increase in the costs
associated with Year 2000 remediation, and an increase in litigation costs. The
Year 2000 issue may also have an indirect effect on our business and operations
to the extent that potential clients of USI may be using significant resources
to address the Year 2000 issue, and therefore may have fewer resources to
evaluate and purchase other products and services such as the products and
services offered by USI, which could have a material adverse effect on USI's
business, general condition and results of operation. If a material third-party
product or system which USI uses or interfaces with fails to operate properly
due to the Year 2000 issue, such failure could have a material adverse effect on
its business, financial condition and results of operations.
CONTINGENCY PLAN. Our Year 2000 Team will be prepared to address the Year
2000 issue. We plan to develop additional contingency plans, which will be
implemented if necessary. We expect to complete development of the contingency
plans by the end of the third quarter of 1999.
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BUSINESS
ABOUT USI
USI's service offerings make it possible for its clients to use leading
business software applications without the cost and burden of owning or managing
the underlying technology. Our clients access these applications through our
state-of-the-art Internet-based network. Our IMAP solutions integrate the
implementation, operations, communications and support of Internet-enabled
packaged software applications. USI has established its IMAP offerings as a
leading single-source solution for middle market enterprises implementing
distributed business functions such as sales force automation, customer support,
e-commerce, and human resource and financial systems. USI also provides Complex
Web Hosting by making its infrastructure available to clients who want to run
their own applications in a highly reliable and secure Internet environment.
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 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.
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THE COMPETITIVE NEED OF MIDDLE MARKET ENTERPRISES TO AUTOMATE KEY BUSINESS
PROCESSES.
Middle market enterprises increasingly face competitive demands to automate
business processes, but have frequently not been able to afford the
functionality available to their larger competitors. This has been exacerbated
by the shortage of IT professionals. We believe that these enterprises have a
significant need for packaged application software to improve core business
processes, reduce costs and enhance their global competitive position.
We believe that many of the leading ERP software packages remain too complex
and too costly to be effective solutions for middle market companies. While many
ERP providers have begun offering products that are targeted for the middle
market (for example, PeopleSoft Select, aSAP and Oracle Fast Forward),
implementation of these packages still generally 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
ERP 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 ERP 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, Siebel, PeopleSoft, Lawson and others,
have Internet-enabled their software. This is particularly true for providers of
applications for distributed users such as e-commerce, ERP 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 IT 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 lack of available IT professionals.
- The challenges faced by a non-technical company in hiring, motivating and
retaining qualified application engineers and IT 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
increases capital expenditures as companies attempt to keep up with
leading-edge technologies.
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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 approach, as 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, allowing 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 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, backup across disparate
geographies 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 (C&I) 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 versus a more conventional implementation of six months to more than a
year. The C&I 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.
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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
support; and BroadVision in e-commerce. USI is the exclusive provider of
outsourced solutions for direct customers of Siebel in North America and is one
of nine currently certified outsourcing partners for PeopleSoft. The agreements
with software providers generally enable us to 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' ERP, 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 and Milpitas
(Silicon Valley), Amsterdam and Tokyo. These EDCs are monitored and managed from
our GEMC in Annapolis and a remote back-up GEMC in Milpitas. 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 the Company's customers to bypass congested public
exchange points. Large storage arrays in Annapolis and Milpitas 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 those geographies. 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.
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- 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 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. Each content server in an EDC is procured
and maintained by USI and is dedicated to a specific client. This is
designed to ensure responsiveness and allows clients to define which
groups will have full or limited access to the Web Site or 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 operated in USI's network of EDCs. 24x7 client support from
dedicated teams with specific knowledge of each client implementation is a
component of all IMAP solutions.
In addition to the specific application areas that USI supports, we make our
infrastructure available to clients who want to implement their own applications
in a high-performance Internet 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.
Our IMAP contracts are generally not less than three years in length
(although client contracts signed pursuant to our agreement with Siebel may have
a term as short as six months) and most provide for a modest initial payment.
The contracts are non-terminable, but do provide for payment reductions in the
event that agreed service levels are not met. As an inducement to attract
several of our earliest clients, we agreed to early termination clauses without
substantial penalties. We 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 certain
market-leading software providers whose platforms 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
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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, 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 (ERM) 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 whereby USI is the
exclusive provider of outsourced Siebel ERM applications for direct customers of
Siebel 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 C&I services. ERM 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 ERM applications as part
of its IMAP solutions. The agreement provides for payments to USI should Siebel
choose to move customers whose individual contracts have not expired at the
termination of the agreement, should the agreement not be extended. The
agreement mandates joint marketing programs, joint oversight of, and agreement
on, the program to sell outsourced ERM applications, 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 ERP software industry and the recognized leader in
human resource management solutions. USI is one of nine currently certified
PeopleSoft outsourcing partners.
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 solution. USI will pay PeopleSoft a
percentage of the total revenue received, in lieu of a standard licensing fee.
The agreement also provides for the sharing of rapid deployment methodologies,
complete 24x7 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, 24x7 technical support, joint
sales activity and co-marketing.
SAGENT. USI and Sagent have agreed to offer Sagent Enterprise Data Mart and
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.
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
solution without the need to establish a separate licensing arrangement for each
client. The agreement also provides for flexible use of the licenses
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worldwide, access to rapid deployment methodology, 24x7 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
ERP implementations. In addition, USI and Oracle are discussing a potential
arrangement allowing USI to offer certain Oracle applications as part of our
IMAP solutions.
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: (i) minimizing
integration of disparate vendors; (ii) utilizing component redundancy; (iii)
mirroring of client servers in separate EDCs; and (iv) the use of 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 (such as power
supplies) and telecommunications circuits, which maximizes the network
availability. In addition, we have redundant EDCs, GEMCs, and wide-area networks
(WANs) connecting our EDCs. This WAN connection is used to dynamically mirror or
provide a duplicate site for each client at one of our other EDC locations. 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; an event correlation
facility that collects, processes, and responds to management event information
from a variety of sources; and 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 specifically designed its
primary GEMC to support its integrated network. USI seeks to avoid the known
Internet congestion points at the Metro Area Exchanges (MAEs) and at the Network
Access Points (NAPs). In order to bypass the MAEs and NAPs, USI's network in
North America connects directly with six major Internet carriers' 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 such congested
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public exchange points. Independent benchmarking has confirmed that USI's
network delivers Web-based content to end users from two to seven times faster
than many other major Web Site hosting providers.
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 U.S.-based direct sales
organization. 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 18 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 U.S.-based medium-sized enterprises with annual
revenues ranging from $50 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.
In conjunction with its software partners, 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 insure 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 is finalizing 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 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 in the sale. 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
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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
To date, USI has acquired two companies. IIT, which was acquired in
September 1998, and ACR, which was acquired in October 1998. Described in more
detail below, these two companies have provided USI with an existing PeopleSoft
business partner relationship and Oracle and Sybase database integration and
implementation. The companies add expert product teams in ERP 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,
Software
Development
</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
software development, 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 United States. IIT was purchased for
$12.8 million and warrants to purchase 400,000 shares of Common Stock at an
exercise price of $2.00 per share. In addition, if IIT meets certain revenue,
EBITDA and employee retention goals, the total cash purchase price can be
increased by up to $4 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 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 35 technical consultants and 4 sales
representatives. ACR was acquired for $2.5 million in cash, a $3.5 million note
(repaid on January 6, 1999) and warrants to purchase 500,000 shares of Common
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Stock at an exercise price of $2.00 per share. In addition if ACR meets certain
revenue, EBITDA and employee retention goals, the total cash purchase price can
be increased by up to $5 million.
IIT and ACR are the primary providers of the traditional IT 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 and continuing growth in each
business. 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 IT 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 IT resources in middle market companies.
USI currently has clients for both its IMAP offerings and the traditional IT
services sold by IIT and ACR. As of December 31, 1998, USI had seven IMAP
clients representing a backlog (revenues under contract but not yet earned) in
excess of $2.0 million (of which approximately $1.0 million will be earned in
the next twelve months). USI and its acquired entities are currently serving in
excess of 35 customers with traditional IT services, many of whom are candidates
for cross-selling IMAP offerings. As of December 31, 1998, selected clients of
USI included:
<TABLE>
<CAPTION>
IMAP CLIENTS TRADITIONAL IT SERVICES CLIENTS
- ------------------------------------- -------------------------------------
<S> <C>
Sunburst Hospitality Kaiser Permanente
GE Capital Retirement Nike
Abaccy Group Southern California Edison
Legg Mason Lockheed Martin
Sagent Deutsche Bank
Lattice Prudential Insurance
</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 to each client and
support teams are designated to back up the account managers. This structure is
designed to ensure full 24x7 availability of service. 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 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
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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. Certain of these companies bundle their services
with software and hardware providers and perform a facilities management
outsourcing role for the customer. Also, certain competitors 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 ERP 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, including
certain of 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 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.
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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.
We lease offices and space in a number of locations, primarily for EDC and
GEMC installations. 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.
EMPLOYEES
As of December 31, 1998, we employed approximately 348 people, including
full-time and part-time employees at our corporate headquarters, our GEMCs and
EDCs and at our subsidiaries. We consider our employee relations to be good.
None of our employees are covered by a collective bargaining agreement.
LEGAL PROCEEDINGS
From time to time we may be involved in litigation that arises in the normal
course of business operations. As of the date of this Prospectus, we are not a
party to any litigation that we believe could reasonably be expected to have a
material adverse effect on our business or results of operations.
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MANAGEMENT
The following sets forth certain information regarding our current directors
and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Christopher R. McCleary(1)........................... 45 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
Matthew D. Kanter.................................... 36 Vice President and General Manager--Data Warehouse
Implementation and President of ACR
L. Sebastian Alegrett................................ 34 Vice President and General Manager-- PeopleSoft
Implementation Group and President of IIT
R. Dean Meiszer(3)................................... 42 Director
Benjamin Diesbach(2)................................. 52 Director
David J. Poulin(3)................................... 39 Director
Ray A. Rothrock(1)(3)................................ 43 Director
Frank A. Adams(1)(2)................................. 52 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).......................... 53 Director
</TABLE>
- ------------------------
(1) Member of the Executive Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
CHRISTOPHER R. MCCLEARY is a co-founder of USI and has served as the
Chairman and Chief Executive Officer of USI since January 1998. Prior to
founding USI, he was the Chairman and Chief Executive Officer of DIGEX, Inc.
from January 1995 to December 1997. Prior to serving at DIGEX, Mr. McCleary
served as Vice President and General Manager of a unit of American Mobile
Satellite Corporation, a satellite communications company, from January 1991 to
December 1994.
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, for 10 years. Prior to
ARINC, he held senior operations positions with Systems One, Inc.
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<PAGE>
ANDREW A. STERN has been Executive Vice President and Chief Financial
Officer of USI since July 24, 1998. Prior to joining USI, Mr. Stern held
positions at USF&G Corporation, an insurance company, from May 1993 to July
1998, most recently as Executive Vice President, Strategic Planning and
Reinsurance Operations. In addition, Mr. Stern was a partner of Booz Allen &
Hamilton, an international management and technology consulting firm with whom
he was employed from August 1981 to May 1993.
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.
MATTHEW D. KANTER has served as the Company's Vice President and General
Manager, Data Warehouse Implementations 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.
L. SEBASTIAN ALEGRETT has served as USI's Vice President & General Manager,
PeopleSoft Implementation Group, since September 1998. From February 1994 to
September 1998 he was the President and CEO of IIT, PeopleSoft Global Alliance
Partner founded by Mr. Alegrett. USI acquired IIT in September 1998.
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.
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
venture capital investment firm of the Rockefeller Family, since June 1988.
Prior to joining Venrock, Mr. Rothrock was President and Director of the New
York Venture Capital Forum. Mr. Rothrock has served on the Boards of Directors
of numerous technology companies, including DIGEX, CheckPoint Software
Technology, Spyglass, Inc., Appliant Inc. 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 the
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
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<PAGE>
1981 to November 1985 and First Nashville Corp. from December 1985 to December
1989. He currently serves on the board 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. 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. He has been
President of the division since March 1997.
MICHAEL C. BROOKS was elected as a director of USI in December 1998 as a
designee of the Whitney Group. He has been a general partner of J. H. Whitney &
Co. since 1984. He is also a director of SunGard Data Systems, Inc., Pegasus
Communications, Inc., Nitinol Medical Technology, Inc. and various other private
companies.
OTHER KEY EMPLOYEES
In addition, we employ the following other key employees:
L. 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 the product introduction. Prior to that he managed the Major
Opportunities, Server Hosting Division of UUNet Technologies.
LAWRENCE BRUNELLE has served as USI's Vice President of Consulting and
Implementation Services since he joined USI in June 1998. 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.
MICHAEL HARPER has been Vice President of Product Marketing of USI since
joining USI in April 1998. 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. with responsibility for
pre-sales and professional services to federal and commercial customers.
RICHARD A. HRONICEK has been Vice President and General Manager, North
America West for USI since joining USI in June 1998. Previously, he was a
consultant 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. Mr.
Hronicek was also President, CEO, and founder of Pacific Bell Internet Services.
WILLIAM G. KARPOVICH has been Vice President of Product Development, 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. Prior to that,
Mr. Karpovich was Director of Product Management at DIGEX.
JOHN W. LICCIONE has served as Vice President, Research and Development for
USI since joining USI in April 1998. Prior to joining USI, he was Director of
System Development in the Network Services Division of ARINC, Inc.
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., and of William Ryan Homes, Inc. Mr. McEneaney is a
CPA and was with Ernst & Young LLP as a Senior Audit Manager prior to joining
William Ryan Homes.
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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. Ms. Perry was also General
Manager of Software AG's Federal Systems Region and then General Manager of the
Capital Region.
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, where he represented major corporate clients in antitrust,
copyright, intellectual property and other commercial matters in various state
and federal courts.
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. Prior to ARINC, Mr. Robertson was with Sprint Corporation for 13
years.
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. Prior to that, Mr. Streeten was District
Sales Manager of Lotus Development Corporation, an IBM subsidiary. Mr. Streeten
was also Regional Sales Manager at CalComp, Inc., a $520 million manufacturer of
computer graphics hardware and peripherals.
BRENDA WOODSMALL has been Vice President Human Resources for USI since
joining USI in May 1998. Prior to joining USI, Ms. Woodsmall was an independent
consultant 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.
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 the Option Plan (as defined). 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.
38
<PAGE>
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 the Option Plan to purchase 30,000 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 employment agreements with Christopher R. McCleary,
Stephen E. McManus, Jeffery L. McKnight and Andrew A. Stern, each with a term of
three years subject to early termination.
Mr. McManus' agreement, entered into on June 2, 1998, Mr. Stern's agreement,
entered into on July 27, 1998, Mr. McCleary's agreement, entered into on May 29,
1998, and Mr. McKnight's agreement, entered into on December 15, 1998, provide
that we will employ them as President; Executive Vice President and Chief
Financial Officer; Chairman and Chief Executive Officer; and Executive Vice
President of Operations and Client Services, respectively, at an annual salary
of $175,000 each. Mr. McManus, Mr. McKnight and Mr. Stern are also eligible for
an annual bonus of at least $75,000 subject to increase based on the
accomplishments of USI as determined by the Compensation Committee of the Board
of Directors. Mr. McCleary's bonus is determined each year based upon whether he
meets or exceeds certain management objectives. There is no minimum bonus for
the first year of Mr. McCleary's contract. In the second and third years of his
contract if he is awarded a bonus, it must be at least $250,000 and $500,000,
respectively. The salaries and bonuses will be reviewed annually and are subject
to adjustment by the Compensation Committee.
In addition to the salary and bonus, we granted Mr. McManus and Mr. Stern
the opportunity to purchase, and each purchased, 5,000,000 shares of USI Common
Stock (the "Stock Grant"). As described in detail below, we have the right to
buy back the stock purchased pursuant to the Stock Grant upon the occurrence of
certain events. This right will expire if it is not exercised prior to a Change
of Control (as defined in the employment agreements). We have also agreed to
provide Mr. McManus and Mr. Stern each with a life insurance policy with a face
amount of twice the officer's annual salary, less the amount of any group
insurance selected by the officer as part of our standard group insurance plan.
In addition to salary and bonus, we granted to Mr. McKnight a fully exerciseable
option to purchase all or any part of 3,000,000 shares of our fully paid and
non-assessable Common Stock ("Option Grant"), subject to the terms and
conditions of our Option Plan.
We may terminate Mr. McManus', Mr. McKnight's or Mr. Stern's employment for
"cause." Cause is defined as (1) violating any provision of his employment
agreement, (2) engaging in any illegal or immoral practices or activities which
can reasonably be expected to be materially detrimental to our reputation, (3)
manifesting dishonesty, disloyalty, fraud, willful misconduct or material
dereliction in the discharge of duties, or (4) using, possessing, selling,
trading in, or delivering any illegal drug or controlled substance during
working hours or otherwise. If the event giving rise to the termination for
cause is not remedied during the 60-day cure period as provided for in the
agreement and the termination is deemed to be valid by an arbitrator, we shall
not be liable for salary, bonus or benefits payable after the date of
termination and shall have the option of buying back all the shares purchased by
the employee pursuant to the Stock Grant for $100 (or, in the case of Mr. Stern,
for an amount equal to the total federal, state, and local income tax liability
incurred as a result of the Stock Grant; or in the case of Mr. McKnight, he may
not exercise any part of his Option Grant from the date of termination). We may
repurchase at the strike price of $0.33 per share the number of shares still
subject to forfeiture in the event of Mr. McKnight's termination. If Mr.
McManus' or Mr. Stern's employment is terminated due to disability or death, USI
will
39
<PAGE>
repurchase the shares of Common Stock he purchased pursuant to the Stock Grant
at the fair market value of the shares. If Mr. McKnight's employment is
terminated due to disability or death, he or his estate shall have, pursuant to
the terms of the Option Plan, one year to exercise all or any part of the Option
Grant. Should any of Mr. McManus, Mr. McKnight or Mr. Stern elect to terminate
the agreement, we will not be liable for his salary, bonus or benefits payable
after the date of termination of his employment and will have the option of
buying back the stock purchased by the employee pursuant to the Stock Grant for
$100 (or, in the case of Mr. Stern, for an amount equal to the total federal,
state, and local income tax liability incurred as a result of the Stock Grant)
if the termination is before May 30, 2000, or fair market value as determined by
the Compensation Committee if the termination is after May 30, 2000. Should Mr.
McKnight elect to terminate his agreement, we will not be liable for his salary,
bonus or benefits payable after the date of termination of his employment and we
may repurchase at the strike price of $0.33 per share the number of options
still subject to forfeiture at the time of his termination under the Option
Plan. If either Mr. McManus or Mr. Stern is terminated without cause, or if Mr.
Stern is constructively terminated without cause, we may not repurchase the
stock purchased pursuant to his Stock Grant and we will be liable to pay his
salary for the remainder of the term of the employment agreement (and, in the
case of Mr. Stern, for a minimum of one year) and a bonus prorated for the
remaining term of the agreement. If Mr. McKnight is terminated without cause,
our right, if any, to repurchase his shares under the Option Plan shall lapse 24
hours prior to his termination.
We may terminate Mr. McCleary for cause upon a two-thirds vote of the Board
of the Directors, and will not have liability for payment of any salary, bonus
or benefits after the date of termination. Any such vote must be preceded by a
finding by a majority of the members of the Compensation Committee or Executive
Committee that Mr. McCleary has breached his employment agreement. The agreement
also will terminate upon Mr. McCleary's death or disability. Mr. McCleary is
entitled to his salary for the full term of the agreement if he is terminated
without cause or if he terminates his employment for "good reason" which is
defined as (i) USI's material breach of any provision of the agreement, (ii) any
material adverse change in job responsibilities, duties, functions, or reporting
relationships, or (iii) required relocation of Mr. McCleary's regular work
address that requires more than 50 miles of travel. If Mr. McCleary terminates
his employment other than for good reason, we will not be liable for his salary
or benefits; however, he shall be entitled to his bonus if it was awarded or if
its amount had been determined by the Compensation Committee prior to the
termination date.
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."
40
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION. The following table provides certain summary
information concerning compensation paid or accrued by the Company to or on
behalf of our Chief Executive Officer and each of the other executive officers
of the Company who earned more than $100,000 (salary and bonus) for all services
rendered in all capacities during the fiscal year ended December 31, 1998 (the
"Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL AWARDS
COMPENSATION(1) ------------------------
--------------------- 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 3,000,000
</TABLE>
- ------------------------
(1) With respect to each of the Named Executive Officers, the aggregate amount
of perquisites and other personal benefits, securities or property received
was less than either $50,000 or 10% of the total annual salary and bonus
reported for such Named Executive Officer.
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
<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(2)
UNDERLYING OPTIONS TO EMPLOYEES IN PRICE EXPIRATION ------------------------
NAME GRANTED (1) 1998 PER SHARE DATE 5% 10%
- ---------------------- ------------------- ------------------- ------------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Christopher R.
McCleary............ 0 -- -- -- -- --
Stephen E. McManus.... 0 -- -- -- -- --
Jeffery L. McKnight... 3,000,000 22.3% $ 0.33 12/2008 $ 622,606 $ 1,577,805
</TABLE>
- ------------------------
(1) The options are immediately exercisable and expire on the tenth anniversary
of the date of grant. Shares of Common Stock purchased pursuant to these
options will be subject to our right to repurchase them at the option
exercise price upon the termination of the holder's employment or business
relationship with us. The repurchase right will lapse with respect to
one-third of the shares purchasable upon exercise of an option on the first
anniversary of the date of grant of the option. The repurchase right with
respect to the remainder of the shares purchasable upon exercise of an
option will lapse in equal quarterly installments over the subsequent eight
calendar quarters.
(2) 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
41
<PAGE>
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 made to the
Named Executive Officers. 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. Assumes appreciation at the
independently appraised value of the Common Stock of 5% and 10% per year
over the ten-year option period as mandated by the rules and regulations of
the Securities and Exchange Commission, and does not represent our estimate
or projection of the future value of the Common Stock.
YEAR-END OPTION VALUES. The following table sets forth information
concerning option holdings through December 31, 1998 by each of the Named
Executive Officers:
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES OF VALUE OF UNEXERCISED
COMMON STOCK UNDERLYING IN-THE-MONEY
OPTIONS AT YEAR END(1) OPTIONS AT YEAR END(2)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Christopher R. McCleary................................... -- -- -- --
Stephen E. McManus........................................ -- -- -- --
Jeffery L. McKnight....................................... 3,000,000 $ --
</TABLE>
- ------------------------
(1) "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.
(2) 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 $ , multiplied by the number of shares underlying the options.
STOCK OPTION PLAN
Our 1998 Stock Option Plan (the Option Plan), approved by the Board of
Directors in July 1998, provides for the issuance of up to 13,458,000 shares of
Common Stock pursuant to the grant of stock options (both Nonqualified Stock
Options and Incentive Stock Options, as defined in the Option Plan) to
independent directors, employees and consultants, each as defined in the Option
Plan. As of December 31, 1998, 13,458,000 options had been awarded, each with an
exercise price of $0.33 per share. These options are intended to qualify as
Incentive Stock Options (ISO's) and will vest immediately upon the date of
grant. Shares of Common Stock purchased pursuant to these options will be
subject to our right to repurchase them at the option exercise price upon the
termination of the holder's employment or business relationship with us. The
repurchase right will lapse with respect to one-third of the shares purchasable
upon exercise of an option on the first anniversary of the date of grant of the
option. The repurchase right with respect to the remainder of the shares
purchasable upon exercise of an option will lapse in equal quarterly
installments over the subsequent eight calendar quarters.
The Compensation Committee appointed to administer the 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. During the
term of the 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 30,000 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 the Option Plan). Generally,
options granted to independent directors vest
42
<PAGE>
in annual one-third installments. The Compensation Committee (or the Board, 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 the Option Plan are as follows. In general, an employee will not
recognize taxable income upon the grant or exercise of an ISO and we will not be
entitled to any business expense deduction with respect to the grant or exercise
of an ISO. If the employee holds the shares for at least two years after the
date of grant and for at least one year after the date of exercise, the
difference, if any, between the sales price of the shares and the exercise price
of the option will be treated as long-term capital gain or loss upon subsequent
disposition of the shares. If the employee disposes of the shares prior to
satisfying the holding period requirements, the employee will recognize ordinary
income at the time of the disposition, generally in an amount equal to the
excess of the fair market value of the shares at the time the option was
exercised over the exercise price of the option. 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. Generally, we will be allowed a business expense deduction to the
extent an employee recognizes ordinary income.
The federal income tax consequences, in general, of the grant and exercise
of an Nonqualified Stock Option (a "NSO") under the 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. 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. Generally, we will be
entitled to a business expense deduction in the amount and at the time the
recipient recognizes ordinary income.
43
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PURCHASES OF SERIES A PREFERRED STOCK
On May 28, 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. (together, 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 million. In connection with the issuance of
those shares, 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. On June 22, 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 million and 1,166.67 shares of Series A
Preferred Stock to USI Partners, Ltd. ("USI Partners") for $700,002. On July 2,
1998, we issued 5,833.33 shares of Series A Preferred Stock to U S WEST for $3.5
million. The stock purchase agreement between USI and U S WEST, as amended (the
"U S WEST Agreement") provides that, if USI and U S WEST have not entered into a
definitive marketing agreement relating to a contractual teaming arrangement for
the creation and distribution of network hosted applications by January 30,
1999, then U S WEST will have the right for a period of 30 days to require us to
repurchase the Series A Preferred Stock then held by U S WEST at a purchase
price equal to its fair market value. On July 30, 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 (whose interest was subsequently transferred to his
affiliate, Southeastern Technology Fund, L.P.) and a series of purchasers
represented by Account Management Corporation (the "Account Management
Purchasers").
BRIDGE FINANCINGS AND PURCHASES OF SERIES B PREFERRED STOCK
On 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 amount of $9,095,000, together with warrants
to purchase 7,795,722 shares of Common Stock for $.01 per share. On December 31,
1998, the principal amount of the notes was converted into Series B Preferred
Stock as described below, the accrued interest was paid in cash, and the
warrants were exchanged for otherwise identical warrants having an exercise
price of $.43 per share. On December 16, 1998, Blue Chip Capital Fund II, L.P.
lent us $1 million, which was repaid (with interest) in cash as of December 31,
1998. On 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 million, all of which (other than accrued interest, which was paid
in cash) was converted into Series B Preferred Stock on December 31, 1998, as
described below. On December 29, 1999, U S WEST purchased our convertible
promissory note in the amount of $5 million, all of which (other than accrued
interest, which was paid in cash) was converted into Series B Preferred Stock on
December 31, 1998, as described below. On December 31, 1998, we issued 59,278.56
shares of Series B Preferred Stock for an aggregate purchase price of
$62,242,500 (a portion 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. The agreement pursuant to which we
issued the Series B Preferred Stock provides that if we become an "Affiliate" of
U S WEST, as that term is defined in Section 3(1) of the Communications Act of
1934, as amended, by virtue of U S WEST's ownership interest in USI at such time
as USI is providing certain communications services in U S WEST's region that U
S WEST is prohibited from providing, then U S WEST will have the right to
require us to purchase, and we will have the right to cause U S WEST to
44
<PAGE>
sell to us, the minimum number of shares of our capital stock that are required
to be disposed of in order that we not be deemed an Affiliate of U S WEST.
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. Pursuant to the terms of the Amended and Restated
Stockholders' Agreement, the holders of the Preferred Stock (together, the
Investors) have certain 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. 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 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 certain liabilities in connection with any registration
effected pursuant to the foregoing.
RESTRICTIONS ON TRANSFER. Subject to certain exceptions, we have a right of
first refusal if any stockholder receives and accepts a bona fide offer to
purchase our Securities (as defined in the Stockholders' Agreement) then owned
by such shareholder. In addition, each party to the Stockholders' Agreement has
the right to participate on a pro rata basis in any sale of our securities by
any party to the Stockholders' Agreement. Subject to certain exceptions, upon
our proposed issuance of any Common Stock or any other equity securities, each
party to the Stockholders' Agreement has the preemptive right to purchase that
number of New Securities (as defined in the Shareholders' Agreement) proposed to
be issued to maintain the shareholder's relative proportional equity interest in
USI.
GOVERNANCE PROVISIONS. The Stockholders' Agreement requires that the Board
of Directors consist of eleven members, six of whom are to be designated by each
of the Blue Chip Group, the Grotech Group, the Venrock Group, the Massey Burch
Group, the Whitney Group and U S WEST; and five of whom (including three persons
who are not our employees and are not affiliated with any of the Blue Chip
Group, the Grotech Group, the Venrock Group, the Massey Burch Group, the Whitney
Group and U S WEST) are designated by Christopher R. McCleary as long as he is
the Chief Executive Officer of USI. The designation of the three independent
directors is subject to the reasonable consent of the holders of two-thirds of
each series of preferred stock. Siebel Systems, Inc. has the right to designate
a director if it so chooses, (in which case McCleary designates only four
directors) and Waller-Sutton Media Partners, L.P. has the right to designate an
observer to the Board of Directors. The Stockholders' Agreement also requires
that the Board of Directors have an Executive Committee that has the right to
exercise all powers of the Board of Directors to the maximum extent permitted by
the Delaware General Corporation Law and which all 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; and an Audit Committee and a Compensation Committee, each of which
shall have one member named by the Whitney Group. A director may be removed only
by the person entitled to appoint such director.
45
<PAGE>
IMAP AGREEMENT WITH U S WEST
USI and U S WEST are in the final stages of negotiation with respect to an
agreement in which USI would grant to U S WEST a limited, nontransferable,
non-exclusive license to use the IMAP Solution developed for U S WEST by USI for
the sole purpose of supporting certain of U S WEST's operations described in the
agreement. The agreement will expire in three years unless terminated earlier in
a manner consistent with the agreement or unless extended by mutual written
agreement. U S WEST will pay USI a total of $4,121,250 in thirty-six monthly
installments for use of the IMAP Solution. The agreement contains standard
warranty, limitation of liability and indemnity provisions.
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.
46
<PAGE>
PRINCIPAL STOCKHOLDERS
The table below sets forth, as of January 15, 1999, information with respect
to the beneficial ownership of our Common Stock as adjusted to reflect the
consummation of this offering by (i) each person who we know to be the
beneficial owner of more than 5% of our outstanding Common Stock; (ii) each of
the directors and Named Executive Officers individually; and (iii) 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 --------------------------
EXECUTIVE OFFICERS BENEFICIALLY BEFORE THIS AFTER THIS
AND DIRECTORS OWNED(1)(2) OFFERING OFFERING
- ------------------------------------------------------------------ ---------------------- ------------- -----------
<S> <C> <C> <C>
Christopher R. McCleary........................................... 10,380,925 3.95%
Stephen E. McManus................................................ 5,000,000 1.90
Andrew A. Stern................................................... 5,000,000 1.90
Jeffery L. McKnight(3)............................................ 3,000,000 1.13
DIRECTOR
R. Dean Meiszer(4)................................................ 3,767,850 1.43
Ray A. Rothrock(5)................................................ 21,393,761 8.14
Frank A. Adams(6)................................................. 66,791,597 25.40
William F. Earthman(7)............................................ 11,301,396 4.30
John H. Wyant(8).................................................. 30,506,136 11.60
Benjamin Diesbach(9).............................................. 30,000 *
David J. Poulin(10)............................................... 30,000 *
Michael C. Brooks(11)............................................. 47,618,600 18.11
Joseph Zell(12)................................................... 30,000 *
All Executive Officers and Directors as a group (16 persons)...... 206,115,265 77.07
BENEFICIAL OWNERS OF 5% OR MORE OF THE OUTSTANDING COMMON STOCK OF
USI
Blue Chip Group(13)............................................... 30,476,136 11.59
c/o Blue Chip Venture Company, Ltd.
2000 PNC Center
201 East Fifth Street
Cincinnati, Ohio 45202
Grotech Capital Group(14)......................................... 66,761,597 25.39
9690 Deereco Road, Suite 800
Timonium, Maryland 21093
Massey Burch Group(15)............................................ 11,271,396 4.29
c/o Massey Burch Capital Corporation
310 25th Avenue North, Suite 103
Nashville, Tennessee 37203
Venrock Group(16)................................................. 21,363,761 8.12
c/o Venrock Associates
Room 5506
30 Rockefeller Plaza
New York, New York 10112
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF
OWNERSHIP(1)(2)
NUMBER OF SHARES --------------------------
EXECUTIVE OFFICERS BENEFICIALLY BEFORE THIS AFTER THIS
AND DIRECTORS OWNED(1)(2) OFFERING OFFERING
- ------------------------------------------------------------------ ---------------------- ------------- -----------
<S> <C> <C> <C>
Whitney Group(17)................................................. 47,618,600 18.11%
c/o J.H. Whitney & Co.
177 Broad Street
Stamford, CT 06901
U S WEST Communications, Inc...................................... 25,480,811 9.69
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 pursuant to applicable community
property laws or as indicated in the footnotes of this 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 such stockholder. The number of shares beneficially
owned by a person includes shares of Common Stock subject to options and
warrants held by that person that are currently exercisable within 60 days
of January 15, 1999. Shares issuable pursuant to options and warrants are
deemed outstanding for computing the percentage ownership of the person
holding such 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 262,945,025. This number includes
15,750,000 shares of Common Stock outstanding on January 15, 1999 and an
additional 247,195,025 shares issuable upon conversion of our Preferred
Stock. For purposes of calculating the percentage beneficially owned by any
person, shares of common stock issuable to such person upon the exercise of
any options exercisable within 60 days of January 15, 1999 are also assumed
to be outstanding. The number of shares of common stock deemed outstanding
after this offering includes the additional underwriters' over-allotment
option.
(3) Includes options to purchase 3,000,000 shares of Common Stock exercisable
within 60 days of January 15, 1999.
(4) Includes 3,737,850 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
30,000 shares of Common Stock exercisable within 60 days of January 15,
1999.
(5) Includes 9,266,079 shares of Common Stock owned by Venrock Associates and
12,097,682 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 30,000
shares of Common Stock exercisable within 60 days of January 15, 1999.
(6) Includes 23,857,086 shares of Common Stock owned by Grotech Partners IV,
L.P. and 42,904,511 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 30,000 shares of Common
Stock exercisable within 60 days of January 15, 1999.
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<PAGE>
(7) Includes 6,000,000 shares of Common Stock owned by Southern Venture Fund
SBIC, L.P. and 5,271,396 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 30,000 shares of Common Stock exercisable
within 60 days of January 15, 1999.
(8) Includes 25,904,718 shares of Common Stock owned by Blue Chip Capital Fund
II Limited Partnership and 4,571,418 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 30,000 shares of Common Stock exercisable within 60 days of
January 15, 1999.
(9) Includes options to purchase 30,000 shares of Common Stock exercisable
within 60 days of January 15, 1999.
(10) Includes options to purchase 30,000 shares of Common Stock exercisable
within 60 days of January 15, 1999.
(11) Includes 46,498,150 shares of Common Stock owned by J.H. Whitney III, L.P.
and 1,120,450 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.
(12) Includes options to purchase 30,000 shares of Common Stock exercisable
within 60 days of January 15, 1999.
(13) Includes 25,904,718 shares of Common Stock owned by Blue Chip Capital Fund
II Limited Partnership and 4,571,418 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.
(14) Includes 23,857,086 shares of Common Stock owned by Grotech Partners IV,
L.P. and 42,904,511 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.
(15) Includes 6,000,000 shares of Common Stock owned by Southern Venture Fund
SBIC, L.P. and 5,271,396 shares of Common Stock owned by Southern Venture
Fund II, L.P., 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.
(16) Includes 9,266,079 shares of Common Stock owned by Venrock Associates and
12,097,682 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.
(17) Includes 46,498,150 shares of Common Stock owned by J.H. Whitney III, L.P.
and 1,120,450 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.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary of the terms and provisions of our capital stock does
not purport to be complete 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 (the "Certificate") which will become
effective immediately prior to the consummation of this offering and our Bylaws,
as they will be amended at the same time.
The Certificate will authorize shares of Common Stock, par value
$ per share and shares of Preferred Stock, par value $ 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 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 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 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
11,861,317 shares of Common Stock. Warrants to purchase 7,795,722 shares at $.43
per share will expire in September 2008, warrants to purchase 900,000 shares at
$2.00 per share will expire in September and October 2008, warrants to purchase
738,095 shares at $.42 per share will expire in September 30, 2005, and warrants
to purchase 2,427,500 shares at $.42 per share will expire in June 30, 2004.
CERTAIN ANTI-TAKEOVER, LIMITED LIABILITY AND INDEMNIFICATION PROVISIONS
As noted above, our Board of Directors, without stockholder approval, will
have the authority under the Certificate 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
50
<PAGE>
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 the Company. 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 a committee thereof.
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 (i) the
corporation has elected in its certificate of incorporation not to be governed
by Section 203 (we have not made such an election), (ii) 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, (iii) 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 (iv) 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. The three-year prohibition also does not apply to
certain business combinations proposed by an interested stockholder following
the announcement or notification of certain extraordinary transactions 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 provides that an officer or director of ours 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 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
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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 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 (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.
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
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 outstanding
shares of Common Stock (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 shareholders, our executive officers and directors and
the Underwriters, which will occur 180 days after the consummation of this
offering (the "Closing Date") and exercise of all options granted under the
Stock Option Plan, 276,403,025 shares of Common Stock will become eligible for
sale, subject to compliance with Rule 144 of the Securities Act as described
below.
In general, under Rule 144 as currently in effect, 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: (i) 1% of the number of shares of
Common Stock then outstanding or (ii) 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 pursuant to 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 such shares pursuant to Rule 144(k) without regard to the limitations
and requirements described above.
Certain of our stockholders and our executive officers and directors will
agree with the Underwriters that until 180 days after the Closing Date 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 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
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 Closing Date, without the prior written consent of Credit Suisse First
Boston Corporation, subject to certain limited exceptions, including issuance by
us pursuant to the exercise of employee stock options outstanding on the date
hereof. 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."
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Certain 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."
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..................................................................
-------
-------
</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 additional shares of Common Stock at the initial public
offering price, less the underwriting discounts and commissions. Such 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
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180 days after the date of this Prospectus, except in the case of issuances by
us pursuant to the exercise of employee stock options outstanding on the date
hereof.
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 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 respect thereof.
We will apply to list the shares of Common Stock 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 received 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.
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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 (i) such purchaser is entitled under
applicable provincial securities laws to purchase such Common Stock without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, that such purchaser is purchasing as principal and not as
agent, and (iii) 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. Certain legal
matters in connection with this offering will be passed upon for the
underwriters by Cahill Gordon & Reindel, a partnership including a professional
corporation, New York, New York.
EXPERTS
The combined financial statements of International Information Technology,
Inc. and International Information Technology IIT, C.A. at December 31, 1997 and
1996, and for each of the two years in the period ended December 31, 1997,
appearing in this Prospectus and the related registration statement, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing herein which, as to the years 1997 and 1996, is based in part
on the report of Bassan & Associates S.C.,
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independent auditors. The combined financial statements referred to above are
included in reliance upon such reports given upon the authority of such firms as
experts in accounting and auditing.
The combined financial statements of ACR as of December 31, 1997 and 1996
and for the years then ended, included in this Prospectus have been audited by
Mahoney Cohen & Company, CPA, P.C., independent auditors, as stated in their
report appearing herein.
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 set forth in the registration
statement and the exhibits and schedules to the registration statement. Certain
items are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to USI and the Common Stock
offered under this prospectus, we refer you to the registration statement and
the exhibits and schedules files as a part of the registration statement.
Statements contained in this prospectus as to the contents of any contract or
any other document referred to are not necessarily complete, and, in each
instance, if the contract or document is filed as an exhibit, reference is made
to the copy of the contract or document filed as an exhibit to the registration
statement, each such statement being qualified in all respects by such reference
to such exhibit. The registration statement, including exhibits and schedules
thereto, may be inspected without charge at the public reference facilities
maintained by the Commission in Room 1024, 450 Fifth Street, N.W., Washington,
D.C., 20549, and the 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 of all or any part thereof may be
obtained from the Commission after payment of fees prescribed by the Commission.
The 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 Commission. The address of this site is
http://www.sec.gov. You may also contact the Commission by telephone at (800)
732-0330.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF USINTERNETWORKING, Inc. (Unaudited)
Consolidated Balance Sheet as of December 31, 1998.................................. F-2
Consolidated Statement of Operations for the period January 14, 1998 (date of
inception) through December 31, 1998.............................................. F-3
Consolidated Statement of Changes in Stockholders' Equity for the period January 14,
1998 (date of inception) through December 31, 1998................................ F-4
Consolidated Statement of Cash Flows for the period January 14, 1998 (date of
inception) through December 31, 1998.............................................. F-5
Notes to Consolidated Financial Statements.......................................... F-6
COMBINED FINANCIAL STATEMENTS OF ADVANCED COMMUNICATION RESOURCES, INC. AND AFFILIATES
Independent Auditor's Report........................................................ F-19
Combined Balance Sheets as of December 31, 1997 and 1996 and September 30, 1998
(unaudited)....................................................................... F-20
Combined Statements of Operations for the years ended December 31, 1997 and 1996 and
for the six months ended September 30, 1998 (unaudited)........................... F-21
Combined Statements of Stockholders' Equity for the years ended December 31, 1997
and 1996 and for the six months ended September 30, 1998 (unaudited).............. F-22
Combined Statements of Cash Flows for the years ended December 31, 1997 and 1996 and
for the six months ended September 30, 1998 (unaudited)........................... F-23
Notes to Combined Financial Statements.............................................. F-24
COMBINED FINANCIAL STATEMENTS OF INTERNATIONAL INFORMATION TECHNOLOGY, INC. AND
INTERNATIONAL INFORMATION TECHNOLOGY IIT, C.A.
Report of Independent Auditors...................................................... F-30
Combined Balance Sheets as of December 31, 1997 and 1996 and as of June 30, 1998
(unaudited)....................................................................... F-31
Combined Statements of Operations for the years ended December 31, 1997 and 1996 and
for the six months ended June 30, 1998 (unaudited)................................ F-32
Combined Statements of Stockholders' Equity for the years ended December 31, 1997
and 1996 and for the six months ended June 30, 1998 (unaudited)................... F-33
Combined Statements of Cash Flows for the years ended December 31, 1997 and 1996 and
for the six months ended June 30, 1998 (unaudited)................................ F-34
Notes to Combined Financial Statements.............................................. F-36
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1998................................................................. P-1
</TABLE>
F-1
<PAGE>
USINTERNETWORKING, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET (UNAUDITED)
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
Property and equipment, net of accumulated depreciation of $1,567,885............ 31,236,905 31,236,905
Goodwill, net of accumulated amortization of $601,667............................ 26,147,392 26,147,392
Other assets..................................................................... 439,734 439,734
-------------- --------------
Total assets..................................................................... $ 107,526,574 $ 107,526,574
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 4,854,217 $ 4,854,217
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.............................. 7,326,735 7,326,735
Current portion of capital lease obligations................................... 1,503,947 1,503,947
Current portion of long-term debt.............................................. 5,509,483 5,509,483
-------------- --------------
Total current liabilities........................................................ 25,685,889 25,685,889
Short-term obligations expected to be refinanced................................. 7,000,000 7,000,000
Capital lease obligations, less current portion.................................. 3,427,254 3,427,254
Long-term debt, less current portion............................................. 4,979,899 4,979,899
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, 59,278 shares issued and outstanding actual, none pro forma........ 62,005,509 --
Commitments and contingent liabilities........................................... --
Stockholders' equity:
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, 600,000,000 shares authorized, 15,750,000 shares
issued and outstanding actual, 262,945,025 shares issued pro forma........... 15,750 262,945
Additional paid-in capital..................................................... 36,671,304 98,430,168
Due from officers from sale of Common Stock.................................... (47,500) (47,500)
Deficit accumulated during the development stage............................... (33,715,085) (33,715,085)
-------------- --------------
Total stockholders' equity..................................................... 2,925,019 64,930,528
-------------- --------------
Total liabilities and stockholders' equity....................................... $ 107,526,574 $ 107,526,574
-------------- --------------
-------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-2
<PAGE>
USINTERNETWORKING, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE PERIOD JANUARY 14, 1998 (DATE OF INCEPTION) THROUGH DECEMBER 31,
1998
<TABLE>
<S> <C>
Revenue........................................................ $ 4,122,449
Costs and expenses:
Direct costs of revenue...................................... 6,658,004
General and administrative................................... 25,193,297
Depreciation and amortization................................ 2,169,552
-----------
Total costs.................................................... 34,020,853
-----------
Operating loss................................................. (29,898,404)
Other income (expense):
Interest income.............................................. 367,411
Interest expense............................................. (2,681,088)
-----------
(2,313,677)
-----------
Net loss during the development stage.......................... (32,212,081)
Dividends accrued on Series A Convertible Preferred Stock...... (1,503,004)
-----------
Net loss attributable to common stockholders................... $(33,715,085)
-----------
-----------
Supplemental pro forma basic and diluted loss per common share
attributable to common stockholders.......................... $ (.46)
-----------
-----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
USINTERNETWORKING, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE PERIOD JANUARY 14, 1998 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------ ---------------------- PAID-IN
SHARES PAR VALUE SHARES PAR VALUE CAPITAL
--------- ------------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance at January 14, 1998...................................... -- $ -- -- $ -- $ --
Issuance of 10,750,000 shares of Common Stock upon inception... -- -- 10,750,000 10,750 51,750
Issuance of 38,333 shares of Series A Convertible Preferred
Stock on May 31, 1998........................................ 38,333 383 -- -- 22,999,617
Issuance of 1,667 shares of Series A Convertible Preferred
Stock on May 26, 1998........................................ 1,667 17 -- -- 999,983
Issuance of 10,833 shares of Series A Convertible Preferred
Stock on June 18, 1998....................................... 10,833 108 -- -- 6,499,892
Issuance of 1,167 shares of Series A Convertible Preferred
Stock on June 19, 1998....................................... 1,167 12 -- -- 699,988
Issuance of 3,000 shares of Series A Convertible Preferred
Stock on June 19, 1998....................................... 3,000 30 -- -- 1,799,970
Transaction costs associated with the issuance of Series A
Convertible Preferred Stock.................................. -- -- -- -- (205,225)
Issuance of 5,000,000 shares of Common Stock on July 24,
1998......................................................... -- -- 5,000,000 5,000 995,000
Issuance of 400,000 Common Stock warrants associated with the
acquisition of IIT on September 7, 1998...................... -- -- -- -- 40,000
Issuance of warrants to purchase 7,795,712 shares of Common
Stock in connection with $9,095,000 of debt on September 7,
1998......................................................... 1,948,930
Issuance of warrants to purchase 595,238 shares of Common Stock
in connection with a $5,000,000 financing commitment on
September 30, 1998........................................... 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
Issuance of 500,000 Common Stock warrants associated with the
acquisition of ACR on October 2, 1998........................ -- -- -- -- 50,000
Issuance of warrants to purchase 142,857 shares of Common Stock
in connection with a $2,000,000 financing commitment on
December 18, 1998............................................ 35,714
Dividends accrued on Series A Convertible Preferred Stock...... -- -- -- -- --
Net loss for the period January 14, 1998 through December 31,
1998......................................................... -- -- -- -- --
--------- ----- --------- ----------- ----------
Balance at December 31, 1998 (unaudited)......................... 55,000 $ 550 15,750,000 $ 15,750 $36,671,304
--------- ----- --------- ----------- ----------
--------- ----- --------- ----------- ----------
<CAPTION>
DEFICIT
DUE FROM ACCUMULATED
STOCKHOLDERS DURING THE TOTAL
FROM SALE OF DEVELOPMENT STOCKHOLDERS'
COMMON STOCK STAGE EQUITY
--------------- ------------ ------------
<S> <C> <C> <C>
Balance at January 14, 1998...................................... $ -- $ -- $ --
Issuance of 10,750,000 shares of Common Stock upon inception... (47,500) -- 15,000
Issuance of 38,333 shares of Series A Convertible Preferred
Stock on May 31, 1998........................................ -- -- 23,000,000
Issuance of 1,667 shares of Series A Convertible Preferred
Stock on May 26, 1998........................................ -- -- 1,000,000
Issuance of 10,833 shares of Series A Convertible Preferred
Stock on June 18, 1998....................................... -- -- 6,500,000
Issuance of 1,167 shares of Series A Convertible Preferred
Stock on June 19, 1998....................................... -- -- 700,000
Issuance of 3,000 shares of Series A Convertible Preferred
Stock on June 19, 1998....................................... -- -- 1,800,000
Transaction costs associated with the issuance of Series A
Convertible Preferred Stock.................................. -- -- (205,225)
Issuance of 5,000,000 shares of Common Stock on July 24,
1998......................................................... -- -- 1,000,000
Issuance of 400,000 Common Stock warrants associated with the
acquisition of IIT on September 7, 1998...................... -- -- 40,000
Issuance of warrants to purchase 7,795,712 shares of Common
Stock in connection with $9,095,000 of debt on September 7,
1998......................................................... 1,948,930
Issuance of warrants to purchase 595,238 shares of Common Stock
in connection with a $5,000,000 financing commitment on
September 30, 1998........................................... 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
Issuance of 500,000 Common Stock warrants associated with the
acquisition of ACR on October 2, 1998........................ -- -- 50,000
Issuance of warrants to purchase 142,857 shares of Common Stock
in connection with a $2,000,000 financing commitment on
December 18, 1998............................................ 35,714
Dividends accrued on Series A Convertible Preferred Stock...... -- (1,503,004) (1,503,004)
Net loss for the period January 14, 1998 through December 31,
1998......................................................... -- (32,212,081) (32,212,081)
--------------- ------------ ------------
Balance at December 31, 1998 (unaudited)......................... $ (47,500) ($33,715,085) $2,925,019
--------------- ------------ ------------
--------------- ------------ ------------
</TABLE>
F-4
<PAGE>
USINTERNETWORKING, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE PERIOD JANUARY 14, 1998 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1998
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net loss during the development stage.......................................... $(32,212,081)
Adjustments to reconcile net loss during the development stage to net cash used
in operating activities:
Depreciation and amortization................................................ 2,169,552
Non-cash compensation expense related to the issuance of Common Stock........ 1,000,000
Non-cash interest expense.................................................... 2,740,329
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.......................................... (19,874,250)
INVESTING ACTIVITIES
Purchases of property and equipment............................................ (20,163,563)
Increase in restricted cash.................................................... (581,712)
Acquisition of IIT and ACR, net of cash acquired............................... (16,899,991)
Increase in other assets....................................................... (59,080)
-----------
Net cash used in investing activities.......................................... (37,704,346)
FINANCING ACTIVITIES
Proceeds from issuance of Series A Convertible Preferred Stock................. 32,794,775
Proceeds from issuance of Series B Convertible Redeemable Preferred Stock...... 52,910,509
Proceeds from issuance of Common Stock......................................... 15,000
Proceeds from issuance of long-term debt....................................... 7,794,258
Proceeds from issuance of notes, subsequently converted into Series B
Convertible Redeemable Preferred Stock....................................... 9,095,000
Payments on long-term debt..................................................... (804,876)
Payments on capital lease obligations.......................................... (423,605)
-----------
Net cash provided by financing activities...................................... 101,381,061
-----------
Cash and cash equivalents at end of period..................................... $43,802,465
-----------
-----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
USINTERNETWORKING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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-", or "IMAP-SM-". This service
offering integrates 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 computer consulting services.
Since its inception in January 1998, the Company has devoted substantially
all of its efforts to raising capital, developing its network infrastructure,
recruiting and training personnel and establishing strategic business
partnerships with software application providers. Substantially all revenues
since inception have been earned from computer consulting services. Accordingly,
insignificant revenue has been generated from planned principal operations, and
the Company is considered a development stage company at December 31, 1998.
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.
F-6
<PAGE>
USINTERNETWORKING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is computed for owned assets using the straight-line method over
estimated useful lives of the assets. Assets capitalized 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 computer
consulting services. Revenues are recognized as services are provided.
GOODWILL AMORTIZATION
The Company amortizes goodwill arising from certain purchase business
combinations on a straight-line basis over its estimated useful life of 15
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
the estimated fair value of the underlying stock on the date of grant, no
compensation expense is generally recognized.
F-7
<PAGE>
USINTERNETWORKING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
2. ACQUISITIONS
Effective September 7, 1998, the Company acquired all of the outstanding
common stock of IIT 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 400,000 shares
of Common Stock for $2.00 per share valued at $40,000. 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 7, 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 income taxes
and 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
500,000 shares of common stock for $2.00 per share valued at $50,000. 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 likely
amount of additional consideration due to the sellers is $5,000,000 and
therefore has recorded that amount as additional goodwill.
The following summarizes unaudited pro forma consolidated results of
operations for 1998 assuming the IIT and ACR acquisitions had occurred at the
beginning of the year. The results are not necessarily
F-8
<PAGE>
USINTERNETWORKING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
DECEMBER 31, 1998
2. ACQUISITIONS (CONTINUED)
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
consolidated companies (in thousands):
<TABLE>
<CAPTION>
PRO FORMA (UNAUDITED)
---------------------
<S> <C>
Revenue................................................................ $ 13,938
Net loss............................................................... $ (34,268)
Basic and diluted loss per common share (supplemental)................. $ (.48)
</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..................................................................... $(32,212,081)
Dividends on Series A Convertible Preferred Stock............................ (1,503,004)
-----------
$(33,715,085)
-----------
-----------
Denominator:
Weighted-average number of shares of Common Stock outstanding during the
period..................................................................... 9,472,222
Shares of Common Stock issued for a nominal value............................ 5,000,000
-----------
14,472,222
-----------
-----------
Basic and diluted loss per common share........................................ $ (2.33)
-----------
-----------
</TABLE>
Basic loss per share is based upon the average number of shares of Common
Stock outstanding during the period. As required by the Securities and Exchange
Commission in Staff Accounting Bulletin No. 98, all securities issued by the
Company for a nominal value have been included in the computation as if they
were outstanding since inception.
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
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 convertible securities which will convert into Common
Stock upon the closing of the proposed initial public offering. For purposes of
the pro forma computation, the convertible securities are assumed to have been
converted on the issuance date.
F-9
<PAGE>
USINTERNETWORKING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (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..................................................................... $(32,212,081)
Dividends on Series A Convertible Preferred Stock............................ (1,503,004)
-----------
$(33,715,085)
-----------
-----------
Denominator:
Shares used in historical calculation........................................ 14,472,222
Add:
Pro forma conversion of Series A Convertible Preferred Stock............... 58,928,205
Pro forma conversion of Series B Convertible Redeemable Preferred Stock.... 406,699
-----------
Denominator for pro forma loss per share................................... 73,807,126
-----------
-----------
Supplemental pro forma basic and diluted loss per common share................. $ (.46)
-----------
-----------
</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.
Interest paid during the period was approximately $368,000.
During the period from January 14, 1998 (date of inception) through December
31, 1998, the Company acquired equipment of $7,000,000 that was included in
accounts payable at December 31, 1998.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1998:
<TABLE>
<S> <C>
Building...................................................................... $ 1,007,499
Furniture and fixtures........................................................ 779,332
Equipment and automobiles..................................................... 2,800,742
Computers and software........................................................ 24,918,085
Leasehold improvements........................................................ 3,299,132
-----------
32,804,790
Accumulated depreciation...................................................... (1,567,885)
-----------
Total......................................................................... $31,236,905
-----------
-----------
</TABLE>
F-10
<PAGE>
USINTERNETWORKING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
DECEMBER 31, 1998
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.................................................... 5,868,639
Amounts representing interest................................................... (937,438)
----------
Present value of capital lease obligations...................................... 4,931,201
Current portion................................................................. (1,503,947)
----------
Capital lease obligations, non-current.......................................... $3,427,254
----------
----------
</TABLE>
7. LONG-TERM DEBT
Long-term debt at December 31, 1998 consists of the following:
<TABLE>
<S> <C>
Note payable due January 6, 1999 resulting from the Company's acquisition of
ACR in October, 1998. This note, which is due to a former stockholder of ACR,
is unsecured, accrues interest at 8.25% per annum, and is payable in full,
plus interest at maturity.................................................... $3,500,000
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
$23,151 and $54,278 and are collateralized by certain furniture, fixtures,
equipment and software purchased by the Company.............................. 1,945,154
</TABLE>
F-11
<PAGE>
USINTERNETWORKING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
DECEMBER 31, 1998
7. LONG-TERM DEBT (CONTINUED)
<TABLE>
<S> <C>
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......... 3,944,873
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.......................................................................... 10,489,382
Less: current portion.......................................................... 5,509,483
----------
$4,979,899
----------
----------
</TABLE>
Aggregate maturities of long-term debt at December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999........................................................................... $5,509,483
2000........................................................................... 2,342,948
2001........................................................................... 3,283,700
2002........................................................................... 25,337
2003 and thereafter............................................................ 20,625
----------
Total.......................................................................... $11,182,093
----------
----------
</TABLE>
At December 31, 1998, the fair value of long-term debt approximates its
carrying value.
8. 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 $7,000,000
of the obligations as long-term in the December 31, 1998 consolidated balance
sheet, or the portion of the $7,500,000 financing that will be due after 1999.
These obligations will bear interest at rates from 9% to 17% per annum, and will
mature in varying installments through January 2002.
9. 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,
F-12
<PAGE>
USINTERNETWORKING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
DECEMBER 31, 1998
9. PREFERRED STOCK (CONTINUED)
the Company issued 55,000 shares of Series A for a total aggregate purchase
price of $33 million, and 59,278 shares of Series B for a total aggregate
purchase price of $62.2 million.
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 1,800 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 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 2,500 shares of Common Stock. This conversion ratio is subject
to adjustment upon the occurrence of certain specified dilutive events.
F-13
<PAGE>
USINTERNETWORKING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
DECEMBER 31, 1998
9. PREFERRED STOCK (CONTINUED)
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.
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
10. STOCK WARRANTS
In 1998, in connection with the issuance of debt or capital leases, the
Company issued warrants to purchase 8,533,817 shares of Common Stock and
warrants to purchase 971 shares of Series B. The Common Stock warrants expire
from 2005 through 2008, and are exerciseable for $0.42 or $0.43 per share. The
warrants to purchase Series B expire in 2005 and are exerciseable for $1,050 per
share (or $0.42 per common equivalent share).
Upon issuance, the Company estimated the value of the warrants to be $0.25
per share, or an aggregate estimated value of $2,470,329. 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.
Also, as discussed in Note 2, the Company issued warrants to purchase
900,000 shares of Common Stock in connection with the acquisition of IIT and
ACR. These warrants expire in 2008 and are exerciseable for $2.00 per share.
During 1998, none of the warrants issued to purchase Common Stock or Series
B were exercised, and at December 31, 1998, warrants to purchase 9,433,817
shares of Common Stock and 971 shares of Series B were outstanding.
F-14
<PAGE>
USINTERNETWORKING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
DECEMBER 31, 1998
11. SHARES RESERVED FOR FUTURE ISSUANCE
As of December 31, 1998, the Company has reserved 99,000,000 shares and
148,195,025 shares of Common Stock for future issuance upon the conversion of
the Series A and Series B, respectively. In addition, the Company has reserved
13,458,000 shares of Common Stock for future issuance upon the exercise of stock
options eligible for granting under the 1998 Stock Option Plan (see Note 12),
and 11,861,317 shares of Common Stock attributable to outstanding warrants
issued in 1998.
12. 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
13,458,000 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.............................................................................. 13,673,000 $ 0.33
Exercised............................................................................ -- --
Forfeited............................................................................ (215,000) 0.33
Outstanding, end of year............................................................. 13,458,000
Exercisable at end of year........................................................... 13,458,000
Weighted-average grant-date fair value of options granted during the year............ $ 0.00
</TABLE>
Exercise prices for options outstanding as of December 31, 1998 equaled
$0.33. 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 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 those options is 9.7 years.
For the year ended December 31, 1998, pro forma net loss and loss per share
information required by Statement 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
F-15
<PAGE>
USINTERNETWORKING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
DECEMBER 31, 1998
12. STOCK COMPENSATION PLAN (CONTINUED)
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 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 $0.00, 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.
13. INCOME TAXES
At December 31, 1998, the Company has a U.S. federal net operating loss
carryforward of $23 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. state net
operating loss carryforwards available of which the utilization 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............................................. $ 9,186,067
Start-up and organizational costs capitalized for tax purposes............... 3,627,600
Other........................................................................ 824,318
-----------
Total deferred tax assets...................................................... 13,637,985
Deferred tax liabilities:
Tax over book depreciation................................................... 318,923
Other........................................................................ 626,077
-----------
Total deferred tax liability................................................... 945,000
-----------
Net future income tax benefit.................................................. 12,692,985
Valuation allowance for net deferred tax assets................................ (12,692,985)
-----------
Net deferred tax assets........................................................ $ --
-----------
-----------
</TABLE>
F-16
<PAGE>
USINTERNETWORKING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
DECEMBER 31, 1998
13. INCOME TAXES (CONTINUED)
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............................................. $(11,274,228)
Effect of permanent differences................................................ 151,299
State income taxes, net of federal benefit..................................... (1,570,056)
Increase in valuation allowance................................................ 12,692,985
-----------
Total.......................................................................... $ --
-----------
-----------
</TABLE>
14. 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 and rental escalation clauses. Future minimum payments under
noncancelable operating leases with initial terms of one year or more consists
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.
15. 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.
16. BUSINESS AND GEOGRAPHIC SEGMENT INFORMATION
In June 1997, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, [DISCLOSURES ABOUT SEGMENTS OF AND
ENTERPRISE AND RELATED INFORMATION], which the Company adopted in 1998.
The Company is organized into two business units. The Company's IMAP
division provides an Internet-based network which enables customers 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.
F-17
<PAGE>
USINTERNETWORKING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
DECEMBER 31, 1998
16. BUSINESS AND GEOGRAPHIC SEGMENT INFORMATION (CONTINUED)
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 and interest expense. 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.
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 PERIOD JANUARY 14, 1998
(INCEPTION) THROUGH
DECEMBER 31, 1998
----------------------------------------------
<S> <C> <C> <C>
PROFESSIONAL
IT
IMAP(SM) SERVICES CONSOLIDATED
-------------- -------------- --------------
Revenues.......................................................... $ 69,467 $ 4,052,982 $ 4,122,449
Operating loss.................................................... (29,856,900) (41,504) (29,898,404)
Interest expense.................................................. 2,674,764 6,324 2,681,088
Interest income................................................... 365,180 2,231 367,411
Depreciation and amortization..................................... 2,142,267 27,285 2,169,552
Total assets...................................................... 101,240,375 6,404,199 107,644,574
Capital expenditures.............................................. 21,358,476 38,752 21,397,228
</TABLE>
F-18
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Advanced Communication Resources, Inc.
We have audited the accompanying combined balance sheets of Advanced
Communication Resources, Inc. as of December 31, 1997 and 1996, and the related
combined statements of operations, stockholders' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of Advanced
Communication Resources, Inc. as of December 31, 1997 and 1996, and the results
of its operations and its cash flows for the years then ended, in conformity
with generally accepted accounting principles.
New York, New York
July 23, 1998, except for
Note 11, as to which the
date is October 2, 1998
F-19
<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>
(UNAUDITED)
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 $100,000 as of September 30,
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)..................................... 70,150 -- 43,570
Due from affiliate (Note 9)........................................ 342,994 -- --
------------ ------------ -------------
Total current assets........................................... 1,291,735 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
------------ ------------ -------------
$1,456,285 $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.............................. 366,372 435,998 461,086
Deferred income taxes (Note 7)..................................... 50,000 117,000 118,000
Due to stockholders (Note 9)....................................... -- 120,000 --
Due to affiliate................................................... -- -- 1,828
------------ ------------ -------------
Total current liabilities...................................... 1,141,372 1,197,998 980,914
Commitments and contingencies (Note 10)
Stockholders' equity (Note 6):
Common stock....................................................... 1,500 1,500 1,500
Additional paid-in capital......................................... -- -- --
Retained earnings.................................................. 363,413 747,906 1,063,245
------------ ------------ -------------
364,913 749,406 1,064,745
Less: Treasury stock, at cost...................................... 50,000 50,000 50,000
------------ ------------ -------------
Total stockholders' equity..................................... 314,913 699,406 1,014,745
------------ ------------ -------------
$1,456,285 $1,897,404 $ 1,995,659
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
See accompanying notes
F-20
<PAGE>
ADVANCED COMMUNICATION RESOURCES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
--------------------------- -------------------
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1997 1998
------------- ------------ -------------------
<S> <C> <C> <C>
(UNAUDITED)
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................................... 1,395,758 1,574,654 1,152,227
------------- ------------ -------------------
Total operating expenses................................... 1,941,009 1,952,437 1,523,738
------------- ------------ -------------------
Income (loss) before provision for (benefit from) income
taxes........................................................ (861,031) 463,232 356,840
Provision for (benefit from) income taxes...................... (86,947) 78,739 41,500
------------- ------------ -------------------
Net income (loss).............................................. $ (774,084) $ 384,493 $ 315,340
------------- ------------ -------------------
------------- ------------ -------------------
</TABLE>
See accompanying notes.
F-21
<PAGE>
ADVANCED COMMUNICATION RESOURCES, INC. AND AFFILIATES
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK TOTAL
----------- ------------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996........................... $ 2,500 $ -- $ 1,081,161 $ -- $ 1,083,661
Formation of ACR Consulting, Inc................... 1 9 -- -- 10
Purchase of treasury stock (Note 6)................ -- -- -- (50,000) (50,000)
Net loss........................................... -- -- (525,553) -- (525,553)
----------- ----- ------------ ---------- ------------
Balance, December 31, 1996......................... 2,501 9 555,608 (50,000) 508,118
Net income......................................... -- -- 281,867 -- 281,867
----------- ----- ------------ ---------- ------------
Balance, December 31, 1997......................... $ 2,501 $ 9 $ 837,475 $ (50,000) $ 789,985
Liquidation of ACR NY, Inc......................... (1,000) -- 1,000 -- --
Net Income (Unaudited)............................. 306,605 -- 258,432
----------- ----- ------------ ---------- ------------
Balance, September 30, 1998 (Unaudited)............ $ 1,501 $ 9 $ 1,145,080 $ (50,000) $ 1,096,590
----------- ----- ------------ ---------- ------------
----------- ----- ------------ ---------- ------------
</TABLE>
See accompanying notes.
F-22
<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>
(UNAUDITED)
Cash flows from operating activities:
Net income (loss).................................................. $ (774,084) $ 384,493 $ 315,340
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization.................................... 101,480 80,062 100,680
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
Due to affiliate............................................... -- -- 1,828
Accounts payable and accrued expenses.......................... (88,006) 69,626 25,088
------------ ------------ -------------
Net cash provided by (used in) operating activities.......... 43,481 (154,209) 467,245
------------ ------------ -------------
Cash flows from investing activities:
Purchase of property and equipment................................. (55,995) (33,157) (169,670)
Purchase of computer software...................................... -- -- (160,490)
------------ ------------ -------------
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........................... (288,668) 342,994 --
Purchase of common stock for treasury.............................. (50,000) -- --
------------ ------------ -------------
Net cash provided by (used in) financing activities.......... (24,818) 333,144 (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.................................................... $ 34,204 $ 179,982 $ 28,317
------------ ------------ -------------
------------ ------------ -------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest........................................................... $ 60,421 $ 6,132 $ 17,196
Income taxes....................................................... $ 10,093 $ 14,414 $ 6,220
</TABLE>
See accompanying notes.
F-23
<PAGE>
ADVANCED COMMUNICATION RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS
UNAUDITED)
NOTE 1--THE COMPANY
Advanced Communication Resources, Inc. (the "Company") provides computer
consulting services, including consultation on Year 2000 compliance matters, to
Fortune 500, financial services and other companies located in the New York
metropolitan area.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION
The September 30, 1998 balance sheet, statements of operations, equity and
cash flows for the nine months then ended and certain information and footnote
disclosures related thereto are unaudited. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the financial position, results of operations and cash flows with
respect to the interim financial statements, have been included. The results of
operations for the nine months ended September 30, 1998 are not necessarily
indicative of result for the entire fiscal year.
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.
F-24
<PAGE>
ADVANCED COMMUNICATION RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS
UNAUDITED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
COMPUTER SOFTWARE COSTS
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. Amortization 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 1996, respectively.
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 27% of the Company's outstanding
accounts receivable. These customers accounted for approximately 39% of net
revenues for the nine months ended September 30, 1998. At December 31, 1997, two
customers comprised approximately 40% of the Company's outstanding accounts
receivable. These customers accounted for approximately 30% of net revenue for
the year ended December 31, 1997. Additionally, three customers accounted for
approximately 50% 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.
NOTE 4--PROPERTY AND EQUIPMENT
At December 31, property and equipment is comprised of:
<TABLE>
<CAPTION>
SEPTEMBER 30
1996 1997 1998
---------- ---------- ------------
<S> <C> <C> <C>
Machinery and equipment................................ $ 247,047 $ 280,204 $ 354,037
Furniture and fixtures................................. 45,042 45,042 65,528
Leasehold improvements................................. 57,079 57,079 68,743
---------- ---------- ------------
349,168 382,325 488,307
Less: Accumulated depreciation and amortization........ 204,978 271,468 308,281
---------- ---------- ------------
$ 144,190 $ 110,857 $ 180,026
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
F-25
<PAGE>
ADVANCED COMMUNICATION RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS
UNAUDITED)
NOTE 5--NOTES PAYABLE
At December 31, 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 all of the assets of the Company 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 -- --
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>
- ------------------------
(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.
F-26
<PAGE>
ADVANCED COMMUNICATION RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS
UNAUDITED)
NOTE 6--STOCKHOLDERS' EQUITY
COMMON STOCK
<TABLE>
<CAPTION>
At September 30, 1998, December 31, 1997 and 1996,
common stock consists of the following:
Advanced Communication Resources, Inc., no par
value:
Authorized--200 shares
<S> <C> <C> <C>
Issued--150 shares
Outstanding--100 shares........................... $ 1,500
------
------
</TABLE>
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.
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-27
<PAGE>
ADVANCED COMMUNICATION RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS
UNAUDITED)
NOTE 7--INCOME TAXES
The provision for (benefit from) state and local income taxes for the
periods ended consistent 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 years ended December
31, 1997 and 1996 was determined under the alternative tax method.
The Company's effective state and local tax rate for nine months ended
September 30, 1998 and the years ended December 31, 1997 and 1996 was 3%, 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.
DUE FROM AFFILIATE
During 1996, the Company made non-interest bearing advances to an affiliate.
These advances were repaid in full during 1997.
The Company occupies office space leased by an affiliate without a rent
charge.
DUE TO/FROM STOCKHOLDERS
Advances to and from the Company's stockholders are non-interest bearing and
are due (payable) on demand.
F-28
<PAGE>
ADVANCED COMMUNICATION RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS
UNAUDITED)
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.
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.
NOTE 11--SUBSEQUENT EVENTS
CHANGE OF OWNERSHIP
On October 2, 1998, the Company's stockholders sold all outstanding common
stock to USinternetworking, Inc.
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>
F-29
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders of
International Information Technology, Inc. and
International Information Technology IIT, C.A.
We have audited the accompanying combined balance sheets of International
Information Technology, Inc. and International Information Technology IIT, C.A.
as of December 31, 1997 and 1996, and the related combined statements of
operations, stockholders' equity, and cash flows for the years then ended. These
combined financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits. We did not audit the financial
statements of International Information Technology IIT, C.A., a combined company
under common control, which statements reflect total assets of $76,361 and
$68,247 as of December 31, 1997 and 1996, respectively, and total revenues of
$147,797 and $3,336, for the year ended December 31, 1997 and for the period
from March 6, 1996 (inception) through December 31, 1996. 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 statements 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
combined financial statements referred to above present fairly, in all material
respects, the combined financial position of International Information
Technology, Inc. and International Information Technology IIT, C.A. as of
December 31, 1997 and 1996, and the results of their operations and their cash
flows for the years then ended in conformity with generally accepted accounting
principles.
Miami, Florida
September 23, 1998
F-30
<PAGE>
INTERNATIONAL INFORMATION TECHNOLOGY, INC. AND
INTERNATIONAL INFORMATION TECHNOLOGY IIT, C.A.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1996 1997 JUNE 30, 1998
---------- ---------- -------------
<S> <C> <C> <C>
(UNAUDITED)
<CAPTION>
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 69,563 $ 14,443 $ 219,739
Accounts receivable--trade............................................... 225,500 634,215 883,723
Other current assets..................................................... 2,451 13,902 44,046
---------- ---------- -------------
Total current assets....................................................... 297,514 662,560 1,147,508
Equipment and vehicles:
Computer equipment....................................................... 30,407 116,850 115,061
Vehicles................................................................. 45,119 45,119 45,119
---------- ---------- -------------
75,526 161,969 160,180
Less: accumulated depreciation........................................... (25,831) (56,084) (45,954)
---------- ---------- -------------
49,695 105,885 114,226
Other assets............................................................... 654 618 33,472
---------- ---------- -------------
---------- ---------- -------------
Total assets............................................................... $ 347,863 $ 769,063 $ 1,295,206
---------- ---------- -------------
---------- ---------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft........................................................... $ -- $ 157,056 $ --
Accounts payable......................................................... 13,899 7,162 5,370
Accrued expenses......................................................... 60,000 366,685 784,688
Income taxes payable..................................................... -- 18,124 113,813
Current portion of note payable.......................................... 4,443 10,036 --
Current portion of capital lease obligations............................. -- 18,230 11,994
Unsecured demand note payable to stockholder, non-interest bearing....... 99,951 62,160 54,384
Client advances.......................................................... 55,824 -- --
Current deferred income taxes............................................ 49,270 93,166 50,235
---------- ---------- -------------
Total current liabilities.................................................. 283,387 732,619 1,020,484
Note payable............................................................... 10,676 -- --
Capital lease obligations, net of current portion.......................... -- 15,953 11,031
Deferred income taxes...................................................... 9,103 9,570
Commitments and contingent liabilities
Stockholders' equity:
Common stock............................................................. 2,724 2,724 2,724
Cumulative translation adjustment........................................ 835 (20,918) 22,716
Retained earnings........................................................ 41,138 29,115 238,251
---------- ---------- -------------
44,697 10,921 263,691
---------- ---------- -------------
---------- ---------- -------------
Total liabilities and stockholders' equity................................. $ 347,863 $ 769,063 $ 1,295,206
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-31
<PAGE>
INTERNATIONAL INFORMATION TECHNOLOGY, INC. AND
INTERNATIONAL INFORMATION TECHNOLOGY IIT, C.A.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 SIX MONTHS
-------------------------- ENDED
1996 1997 JUNE 30, 1998
------------ ------------ -------------
<S> <C> <C> <C>
(UNAUDITED)
Consulting revenue..................................................... $ 747,023 $ 2,812,011 $ 3,073,248
Cost of revenue........................................................ 519,261 1,881,031 1,366,799
------------ ------------ -------------
Gross profit........................................................... 227,762 930,980 1,706,449
Operating expenses:
General and administrative........................................... 131,037 778,342 1,403,074
Sales and marketing.................................................. 73,305 62,943 8,449
Depreciation......................................................... 13,556 30,253 17,979
------------ ------------ -------------
217,898 871,538 1,429,502
------------ ------------ -------------
Income from operations................................................. 9,864 59,442 276,947
Interest expense....................................................... (2,917) (8,977) (13,623)
------------ ------------ -------------
Income before provision for income taxes............................... 6,947 50,465 263,324
Provision for income taxes............................................. 14,832 62,488 54,188
------------ ------------ -------------
Net loss............................................................... $ (7,885) $ (12,023) 209,136
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-32
<PAGE>
INTERNATIONAL INFORMATION TECHNOLOGY, INC. AND
INTERNATIONAL INFORMATION TECHNOLOGY IIT, C.A.
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
INTERNATIONAL
INFORMATION INTERNATIONAL INFORMATION
TECHNOLOGY, INC. (1) TECHNOLOGY IIT, C.A. (2)
--------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMON RETAINED COMMON CUMULATIVE RETAINED
STOCK EARNINGS STOCK ADJUSTMENT EARNINGS TOTAL
--------- ---------- --------- ----------- ----------- ----------
Balances at January 1, 1996........................ $ 1,000 $ 49,023 $ $ $ $ 50,023
Net income (loss)................................ 22,304 (30,189) (7,885)
Issuance of common stock......................... 1,724 1,724
Translation adjustment........................... 835 835
--------- ---------- --------- ----------- ----------- ----------
Balances at December 31, 1996...................... 1,000 71,327 1,724 835 (30,189) 44,697
Net income (loss)................................ 91,010 (103,033) (12,023)
Translation adjustment........................... (21,753) (21,753)
--------- ---------- --------- ----------- ----------- ----------
Balances at December 31, 1997...................... $ 1,000 $ 162,337 $ 1,724 $ (20,918) $ (133,222) $ 10,921
--------- ---------- --------- ----------- ----------- ----------
--------- ---------- --------- ----------- ----------- ----------
Net income....................................... 86,822 122,314 209,136
Translation adjustment........................... 43,634 43,634
--------- ---------- --------- ----------- ----------- ----------
Balances at June 30, 1998.......................... $ 1,000 $ 249,159 $ 1,724 $ 22,716 $ (10,908) $ 263,691
--------- ---------- --------- ----------- ----------- ----------
--------- ---------- --------- ----------- ----------- ----------
</TABLE>
- ------------------------
(1) $1 par value common stock, 1,000 shares authorized, issued and outstanding.
(2) No par value common stock, 500 shares authorized, issued and outstanding.
SEE ACCOMPANYING NOTES.
F-33
<PAGE>
INTERNATIONAL INFORMATION TECHNOLOGY, INC. AND
INTERNATIONAL INFORMATION TECHNOLOGY IIT, C.A.
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31 SIX MONTHS
---------------------- ENDED
1996 1997 JUNE 30, 1998
---------- ---------- -------------
<S> <C> <C> <C>
(UNAUDITED)
OPERATING ACTIVITIES
Net loss................................................................... $ (7,885) $ (12,023) $ 209,136
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation............................................................. 13,556 30,253 17,789
Deferred taxes........................................................... 14,832 44,364 (52,501)
Change in assets and liabilities:
Accounts receivable.................................................... (72,937) (408,715) (249,508)
Other current assets................................................... (1,655) (11,415) (30,144)
Other assets........................................................... -- -- (32,854)
Accounts payable....................................................... 13,899 (6,737) (1,792)
Accrued expenses....................................................... 59,200 306,685 418,003
Income taxes payable................................................... -- 18,124 95,689
Client advances........................................................ 55,824 (55,824) --
---------- ---------- -------------
Net cash provided by (used in) operating activities........................ 74,834 (95,288) 373,818
INVESTING ACTIVITIES
Issuance of common stock................................................... 1,724 --
Acquisition of equipment and vehicle....................................... (19,154) (63,532)
Sale of vehicle............................................................ -- -- 17,504
---------- ---------- -------------
Net cash (used in) investing activities.................................... (17,430) (63,532) 17,504
FINANCING ACTIVITIES
(Repayments) proceeds from note payable to stockholder..................... 68,890 (37,791) (7,776)
Bank overdraft............................................................. (50,733) 157,056 (157,056)
Repayments of note payable................................................. (5,998) (5,083) (10,036)
Repayments of capital leases............................................... -- (10,482) (11,158)
---------- ---------- -------------
Net cash provided by financing activities.................................. 12,159 103,700 (186,026)
---------- ---------- -------------
Net increase (decrease) in cash and cash equivalents....................... 69,563 (55,120) 205,296
Cash and cash equivalents at beginning of year............................. -- 69,563 14,443
---------- ---------- -------------
Cash and cash equivalents at end of year................................... $ 69,563 $ 14,443 $ 219,739
---------- ---------- -------------
---------- ---------- -------------
SUPPLEMENTAL INFORMATION
Interest paid.............................................................. $ 2,917 $ 8,977 $ 13,623
---------- ---------- -------------
---------- ---------- -------------
SCHEDULE OF NONCASH INVESTING ACTIVITIES
Property and equipment acquired under capital leases....................... $ -- $ 44,465 $ --
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-34
<PAGE>
INTERNATIONAL INFORMATION TECHNOLOGY, INC. AND
INTERNATIONAL INFORMATION TECHNOLOGY IIT, C.A.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND YEARS ENDED DECEMBER 31, 1997 AND 1996
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION AND BASIS OF PREPARATION
The combined financial statements include the accounts of International
Information Technology, Inc. (the Company) and International Information
Technology IIT, C.A. (the Foreign Affiliate) (collectively referred to as "the
Companies") which are affiliated through common ownership and management.
International Information Technology, Inc. provides internet consulting,
integration, and support services principally to commercial companies located
throughout the United States. The Company was incorporated, under the laws of
the State of California, in May 1994.
International Information Technology IIT, C.A. provides internet consulting,
integration, and support services principally to commercial companies located
throughout Venezuela. The Foreign Affiliate was incorporated under the laws of
Venezuela, on March 5, 1996 (inception).
All significant intercompany transactions have been eliminated in
preparation of the combined financial statements.
CONVERSION FOR U.S. DOLLARS
The financial information from the Foreign Affiliate includes financial
information converted from Venezuelan Bolivares to U.S. Dollars. A summary of
the conversion method used to convert the financial statements to U.S. Dollars
is as follows:
- monetary assets and liabilities were converted at the rate in effect at
the balance sheet date.
- non-monetary assets and liabilities were converted at their historical
rates.
- the statement of operations was converted at the average rate during the
periods.
USE OF ESTIMATES
The preparation of the combined financial statements in conformity with
generally accepted accounting principles, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Companies consider 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.
F-35
<PAGE>
INTERNATIONAL INFORMATION TECHNOLOGY, INC. AND
INTERNATIONAL INFORMATIONAL TECHNOLOGY IIT, CA
NOTES TO THE COMBINED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND YEARS ENDED DECEMBER 31, 1997 AND 1996
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments that subject the Companies to concentrations of credit
risks consist primarily of accounts receivable. The Companies grant credit in
the normal course of business to their clients. As part of this ongoing
procedure, the Companies monitor the creditworthiness of their clients. The
Companies do not believe that they are subject to any unusual credit risk beyond
the normal credit risk inherent in their business.
For the six months ended June 30, 1998, three clients accounted for 27%, and
11% of total revenue, and two customers accounted for 32%, and 19% of accounts
receivable at June 30, 1998.
For the year ended December 31, 1997, three clients accounted for 33%, 17%,
and 11% of total revenues, and three clients accounted for 44%, 16%, and 11% of
accounts receivable at December 31, 1997. For the year ended December 31, 1996,
three clients accounted for 57%, 29%, and 11% of total revenues, and three
clients accounted for 42%, 24%, and 11% of accounts receivable at December 31,
1996.
REVENUE RECOGNITION
Revenue is recognized in the period the services are performed.
ADVERTISING COSTS
The Companies expense advertising costs as incurred. Advertising expense was
approximately $73,000 and $30,000 in 1997 and 1996, respectively.
Advertising expense was approximately $8,000 for the six months ended June
30, 1998.
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. SFAS No. 130 only impacts display as opposed to actual
amounts recorded. Other comprehensive income includes all non-owner changes in
equity that are excluded from net income, such as foreign currency translation
adjustments. SFAS No. 130 is required to be adopted in 1998.
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. Upon adoption of this pronouncement, additional disclosures will be
required
F-36
<PAGE>
INTERNATIONAL INFORMATION TECHNOLOGY, INC. AND
INTERNATIONAL INFORMATIONAL TECHNOLOGY IIT, CA
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1998 AND YEARS ENDED DECEMBER 31, 1997 AND 1996
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (CONTINUED)
by the Company. This statement is effective for fiscal years beginning after
December 15, 1997. Earlier application is encouraged. The impact of the adoption
of SFAS No. 131 in 1998 has not been determined.
2. LEASES
The Companies entered into various capital leases for computer equipment
during 1997. Computer equipment under capital lease obligations were acquired
for approximately $44,000. Depreciation expense for the year ended December 31,
1997 was $6,000.
Future lease payments under capital and operating leases are summarized as
follows:
<TABLE>
<CAPTION>
CAPITAL
LEASES OPERATING LEASES
------------- ----------------
<S> <C> <C>
1998........................................................ $ 25,118 $ 31,936
1999........................................................ 13,503 3,111
2000........................................................ 5,844 2,592
------------- -------
Total minimum lease payments.............................. 44,465 $ 37,639
-------
-------
Less amounts representing interest.......................... 10,282
-------------
Present value of minimum lease payments (including current
portion of $18,230)....................................... $ 34,183
-------------
-------------
</TABLE>
Rent expense was $17,000, $32,000 and $17,000 for the six months ended June 30,
1998 and for the year ended December 31, 1997 and 1996, respectively.
Capital leases have effective interest rates which range primarily from 6% to
25%.
3. ACCRUED EXPENSES
Accrued expenses are comprised of the following
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1996 1997 1998
---------- ---------- -------------
<S> <C> <C> <C>
Accrued bonuses, payroll and payroll taxes............. $ 60,000 $ 287,120 $ 784,688
Accrued consulting..................................... -- 67,965 --
Accrued expenses....................................... -- 11,600 --
---------- ---------- -------------
Total accrued expenses............................... $ 60,000 $ 366,685 $ 784,688
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
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.
F-37
<PAGE>
INTERNATIONAL INFORMATION TECHNOLOGY, INC. AND
INTERNATIONAL INFORMATIONAL TECHNOLOGY IIT, CA
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1998 AND YEARS ENDED DECEMBER 31, 1997 AND 1996
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
5. NOTE PAYABLE
The note payable is due to a financing organization, and requires monthly
installments of $552, including interest at 9.90%. The note is secured by a
vehicle and is personally guaranteed by a stockholder.
6. 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
31 SIX MONTHS
-------------------- ENDED
1996 1997 JUNE 30, 1998
--------- --------- -------------
<S> <C> <C> <C>
Current............................................ $ -- $ 18,124
Deferred........................................... 14,832 44,364
--------- --------- -------------
Total............................................ $ 14,832 $ 62,488
--------- --------- -------------
--------- --------- -------------
</TABLE>
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
the Companies' net deferred income taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------
<S> <C> <C> <C>
1996 1997
---------- -----------
Deferred tax assets:
Payroll accrual............................... $ 23,964 $ 71,734
Bonus accrual................................. -- 30,934
Other accruals................................ 5,239 40,537
Contributions................................. 40 --
Net operating loss carryforward............... 11,871 --
---------- -----------
41,114 143,205
Deferred tax liabilities
Depreciation.................................. (9,103) (9,570)
State tax..................................... (319) (627)
Accounts receivable........................... (90,065) (235,744)
---------- -----------
(99,487) (245,941)
---------- -----------
Total net deferred tax...................... $ (58,373) $ (102,736)
---------- -----------
---------- -----------
</TABLE>
A valuation allowance is required to reduce the deferred tax assets reported
if, based on the weight of the evidence, it is more likely than not that some
portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, management has
determined
F-38
<PAGE>
INTERNATIONAL INFORMATION TECHNOLOGY, INC. AND
INTERNATIONAL INFORMATIONAL TECHNOLOGY IIT, CA
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1998 AND YEARS ENDED DECEMBER 31, 1997 AND 1996
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
6. INCOME TAXES (CONTINUED)
that no valuation allowance at December 31, 1997 is necessary to reduce the
deferred tax assets related to the U.S. operations to the amount that will more
likely than not be realized.
The Foreign Affiliate has experienced net operating losses in the amount of
$82,000 and $28,000 for the year ended December 31, 1997 and for the period from
March 6, 1996 (inception) through December 31, 1996, respectively. These net
operating losses result in deferred tax assets of approximately $23,000 at
December 31, 1997 and $5,000 at December 31, 1996. Net operating losses of
$28,000 will expire in 1999 and $82,000 will expire in 2000. Management has
determined that it is more likely than not that these net operating losses will
not be utilized, and therefore has determined that a full valuation allowance of
$23,000 and $5,000 is needed at December 31, 1997 and December 31,1996,
respectively.
7. GEOGRAPHIC SEGMENT INFORMATION
The Companies are 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 1997 and
1996. There were no service transfers between the United States and South
America. Operating profit is total service revenue less cost of service revenue,
general and administrative expenses, sales and marketing and depreciation.
<TABLE>
<CAPTION>
UNITED
STATES SOUTH AMERICA TOTAL
------------ ------------- ------------
<S> <C> <C> <C> <C>
Consulting revenue:
1997 $2,664,214 $ 147,797 $ 2,812,011
1996 743,687 3,336 747,023
Depreciation:
1997 $ 26,919 $ 3,334 $ 30,253
1996 12,720 836 13,556
Operating profit:
1997 $ 158,280 $ (98,838) $ 59,442
1996 39,481 (29,617) 9,864
Other expense:
1997 $ (4,782) (4,195) $ (8,977)
1996 $ (2,345) (572) $ (2,917)
Identifiable assets:
1997 $ 878,732 $ 76,361 $ 769,063
1996 279,616 68,247 347,863
</TABLE>
8. 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
F-39
<PAGE>
INTERNATIONAL INFORMATION TECHNOLOGY, INC. AND
INTERNATIONAL INFORMATIONAL TECHNOLOGY IIT, CA
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1998 AND YEARS ENDED DECEMBER 31, 1997 AND 1996
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
8. IMPACT OF YEAR 2000 (UNAUDITED) (CONTINUED)
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
The Companies are 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 Companies do 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.
9. SUBSEQUENT EVENTS
On February 25, 1998, the stockholders, together with other Company
management, formed I.I.T. Holding, Inc. The stockholders contributed 100% of the
common stock of the Companies for 52% of I.I.T. Holding.
On August 28, 1998, the stockholders of I.I.T. Holding entered into an
agreement to exchange 100% of their outstanding shares in I.I.T. Holding for
cash and warrants of the acquiring entity on September 8, 1998.
F-40
<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 the Company 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 Pro Forma Consolidated Statement of Operations does not purport to
represent what the Company's results of operations would actually have been had
the acquisitions in fact occurred on such dates or to project the Company's
results of operations for any future date or period. The Pro Forma Consolidated
Statement of Operations should be read in conjunction with the consolidated
financial statements of the Company, 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
FOR THE TWELVE MONTHS 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 3,470 12,496 -- 12,496
Selling, general and administrative
expenses............................... 26,466 2,172 2,610 31,248 2,122(b) 33,370
--------- --------- --------- ----------- --------------- ------------
Operating income (loss).................. (30,505) 449 820 (29,236) ((2,692) (31,928)
Interest expense......................... 2,675 24 6 2,705 -- 2,705
Interest income.......................... (365) -- -- (365) -- (365)
--------- --------- --------- ----------- --------------- ------------
Income (loss) before income taxes.......... (32,815) 425 814 (31,576) (2,692) (34,268)
Provision (benefit) for income taxes....... -- 14 116 130 (130)(c) --
--------- --------- --------- ----------- --------------- ------------
Net (loss) income.......................... $ (32,815) $ 411 $ 698 $ (31,706) $ (2,562) $ (34,268)
--------- --------- --------- ----------- --------------- ------------
--------- --------- --------- ----------- --------------- ------------
Basic and diluted loss per common share
attributable to common stockholders
(3)...................................... $ (0.46)
------------
</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 15 years as well as the elimination of
intercompany expenses.
(c) The Company, after considering the pro forma effects of the
acquisitions, has a pro forma net loss of $34,268. The tax benefits of
such loss are offset by a valuation allowance based on uncertainties
surrounding the realization of the income tax benefit.
(3) Assumes conversion of all Series A and Series B preferred stock, in
connection with the offering. See Note 3 to the 1998 consolidated financial
statements.
P-2
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses, all of which will be
borne by the Registrant, in connection with the sale and distribution of the
securities being registered, other than the underwriting discounts and
commissions. All amounts shown are estimates except for the Securities and
Exchange Commission registration fee, the NASD filing fee and the Nasdaq
National Market Listing Fee.
<TABLE>
<S> <C>
SEC Registration Fee...................................................... $ 23,978
NASD Filing Fee........................................................... 9,125
Nasdaq National Market Listing Fee........................................ *
Transfer Agent Fees....................................................... *
Accounting Fees and Expenses.............................................. *
Legal Fees and Expenses................................................... *
Printing and Mailing Expenses............................................. *
Miscellaneous............................................................. *
---------
Total................................................................. $ *
</TABLE>
- ------------------------
* To be supplied by amendment.
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.
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
II-1
<PAGE>
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 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.
II-2
<PAGE>
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 13,458,000 shares of Common Stock with an exercise price of
$0.33. 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 February 13, 1998, we issued 100 shares of Common Stock to Christopher R.
McCleary.
3. On May 28, 1998, we issued 15,750,000 shares of Common Stock to Christopher
R. McCleary, Stephen E. McManus, Andrew A. Stern and Christopher Poelma at
par value. The purchase price for the Common Stock was paid with cash and
notes payable to the Company.
4. On May 28, 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 22, 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 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.
6. On July 2, 1998, we issued 5,833.33 shares of Series A Preferred Stock for
$3.5 million to US West. The purchase price for such shares was paid in cash
at the time of issuance.
7. On July 30, 1998, we issued 3,000 shares of Series A Preferred Stock for an
aggregate purchase price of $1.6 million to the purchasers represented by
Account Management Corporation. The purchase price for such shares was paid
in cash at the time of issuance.
8. On September 8, 1998, we issued convertible promissory notes in the
aggregate amount of $9,095,000, together with warrants to purchase 7,795,722
shares of Common Stock for $.01 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.
9. 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.
10. On December 29, 1998, we issued convertible promissory notes in the amount
of $5 million to US West. The purchase price for such notes was paid in cash
at the time of issuance.
11. 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 a number of new investors. The purchase price for such
shares was paid in cash and/or by conversion of certain outstanding
convertible promissory notes at the time of issuance.
All of the shares of preferred stock described in paragraphs 3 through 11
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 on 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.
II-3
<PAGE>
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 By-Laws 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 certain other parties thereto dated May 13, 1998
10.2* Stock Purchase Agreement between USI and certain other parties thereto dated June 18, 1998
10.3* Stock Purchase Agreement between USI and U S WEST Communications, Inc. dated June 19, 1998
10.4* Stock Purchase Agreement Between USI and certain other parties thereto dated June 19, 1998
10.5* Stock Purchase Agreement between USI and certain other parties thereto dated December 31, 1998
10.6* Stock Purchase Agreement between USI and Chris Horgen dated June 19, 1998
10.7* Stock Purchase Agreement by and among USI, IIT Holding, Inc., Luis Sebastian Alegrett, Michael Mai,
Carlos E. Bravo, and Vicente Perez de Tudela dated August 28, 1998
10.8* Amended and Restated Stock Purchase Agreement by and among USI, Advanced Communication Resources, Inc.,
Mathew D. Kanter, The Benjamin Kanter 1997 QSST Trust, The Ronald Kanter 1997 QSST Trust and David S.
Walden dated October 2, 1998.
10.9* Amended and Restated Stockholders Agreement between USI and certain other parties thereto dated December
31, 1998
10.10* Employment Agreement between USI and Christopher McCleary dated May 29, 1998
10.11* Employment Agreement between USI and Stephen McManus dated June 2, 1998
10.12* Employment Agreement between USI and Andrew Stern dated July 27, 1998
10.13* Employment Agreement between USI and Jeffrey L. McKnight dated December 15, 1998
10.14* Outsource Alliance Agreement between USI and PeopleSoft dated September 28, 1998
10.15* Software License Agreement between USI and Siebel dated December 23, 1998
10.16* Software License Agreement between USI and Sagent dated June 25, 1998
10.17* Software License and Service Agreement between USI and Broadvision dated July 22, 1998
10.18* Note Purchase Agreement by and among USI and certain other parties thereto dated September 8, 1998
10.19* Note Purchase Agreement between USI and U S WEST Communications, Inc., dated December 29, 1998
10.20* Note Purchase Agreement by and among USI and certain other parties thereto dated December 24, 1998
10.21* Note Purchase Agreement between USI and certain other parties thereto, dated December 16, 1998
21.1 Subsidiaries of the Registrant
23.1 Consent of Mahoney Cohen & Company, P.C.
23.2 Consent of Bassan & Associates S.C.
23.3 Consent of Ernst & Young LLP
24.1 Power of Attorney (included on signature page)
27.1 Financial Data Schedule
99.1 Report of Independent Auditors
</TABLE>
- ------------------------
* To be filed by amendment.
II-4
<PAGE>
(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 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-5
<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 JANUARY 15, 1999.
<TABLE>
<S> <C> <C>
USINTERNETWORKING, INC.
By: /s/ CHRISTOPHER R. MCCLEARY
-----------------------------------------
Christopher R. McCleary
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below constitutes and appoints Christopher R. McCleary, Andrew A. Stern and
William T. Price, and each of them, his true and lawful attorneys-in-fact and
agents with full power of substitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments thereto
(including post-effective amendments) to this Registration Statement, and to
sign any registration statement for the same offering covered by this
Registration Statement that is to be effective upon filing pursuant to Rule
462(b) promulgated under the Securities Act of 1933, and all post-effective
amendments thereto, and to file the same, with all exhibits thereto and all
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents or any of them, or his or their
substitute or substitutes may lawfully do or cause to be done by virtue hereof.
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>
/s/ CHRISTOPHER R. MCCLEARY Chairman of the Board and Chief
- ------------------------------------ Executive Officer January 15, 1999
Christopher R. McCleary (Principal Executive Officer)
/s/ STEPHEN E. MCMANUS
- ------------------------------------ President and Director January 15, 1999
Stephen E. McManus
/s/ ANDREW A. STERN Executive Vice President and Chief
- ------------------------------------ Financial Officer (Principal January 15, 1999
Andrew A. Stern Financial and Accounting Officer)
/s/ R. DEAN MEISZER
- ------------------------------------ Director January 15, 1999
R. Dean Meiszer
/s/ BENJAMIN DIESBACH
- ------------------------------------ Director January 15, 1999
Benjamin Diesbach
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
- --------------------------------------------- -------------------------------------- ----------------------
<S> <C> <C>
/s/ RAY A. ROTHROCK
- ------------------------------------ Director January 15, 1999
Ray A. Rothrock
/s/ FRANK A. ADAMS
- ------------------------------------ Director January 15, 1999
Frank A. Adams
/s/ WILLIAM F. EARTHMAN
- ------------------------------------ Director January 15, 1999
William F. Earthman
- ------------------------------------ Director January 15, 1999
John H. Wyant
- ------------------------------------ Director January 15, 1999
Joseph R. Zell
/s/ MICHAEL C. BROOKS
- ------------------------------------ Director January 15, 1999
Michael C. Brooks
/s/ DAVID J. POULIN
- ------------------------------------ Director January 15, 1999
David J. Poulin
</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 By-Laws 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 certain other parties thereto dated May 13, 1998
10.2* Stock Purchase Agreement between USI and certain other parties thereto dated June 18, 1998
10.3* Stock Purchase Agreement between USI and U S WEST Communications, Inc. dated June 19, 1998
10.4* Stock Purchase Agreement Between USI and certain other parties thereto dated June 19, 1998
10.5* Stock Purchase Agreement between USI and certain other parties thereto dated December 31, 1998
10.6* Stock Purchase Agreement between USI and Chris Horgen dated June 19, 1998
10.7* Stock Purchase Agreement by and among USI, IIT Holding, Inc., Luis Sebastian Alegrett, Michael Mai,
Carlos E. Bravo, and Vicente Perez de Tudela dated August 28, 1998
10.8* Amended and Restated Stock Purchase Agreement by and 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
10.9* Amended and Restated Stockholders Agreement between USI and certain other parties thereto dated December
31, 1998
10.10* Employment Agreement between USI and Christopher McCleary dated May 29, 1998
10.11* Employment Agreement between USI and Stephen McManus dated June 2, 1998
10.12* Employment Agreement between USI and Andrew Stern dated July 27, 1998
10.13* Employment Agreement between USI and Jeffrey L. McKnight dated December 15, 1998
10.14* Outsource Alliance Agreement between USI and PeopleSoft dated September 28, 1998
10.15* Software License Agreement between USI and Siebel dated December 23, 1998
10.16* Software License Agreement between USI and Sagent dated June 25, 1998
10.17* Software License and Service Agreement between USI and Broadvision dated July 22, 1998
10.18* Note Purchase Agreement by and among USI and certain other parties thereto dated September 8, 1998
10.19* Note Purchase Agreement between USI and U S WEST Communications, Inc. dated December 29, 1998
10.20* Note Purchase Agreement by and among USI and certain other parties thereto dated December 24, 1998
10.21* Note Purchase Agreement between USI and certain other parties thereto dated December 16, 1998
21.1 Subsidiaries of the Registrant
23.1 Consent of Mahoney Cohen & Company, P.C.
23.2 Consent of Bassan & Associates S.C.
23.3 Consent of Ernst & Young LLP
24.1 Power of Attorney (included on signature page)
27.1 Financial Data Schedule
99.1 Report of Independent Auditors
</TABLE>
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* To be filed by amendment.
<PAGE>
Exhibit 3.1
FIRST AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
USINTERNETWORKING, INC.
USINTERNETWORKING, Inc., a corporation organized and existing
under the laws of the State of Delaware (the "Corporation"), hereby certifies as
follows:
1. Pursuant to Section 242 and 245 of the General Corporation
Law of the State of Delaware, this First Amended and Restated Certificate of
Incorporation restates, integrates and further amends the provisions of the
Certificate of Incorporation of the Corporation. The Corporation filed its
original Certificate of Incorporation with the Secretary of State of the State
of Delaware on January 14, 1998 and certain Amendments to the Certificate of
Incorporation of the Corporation were filed with the Secretary of State of the
State of Delaware on February 12, 1998, May 27, 1998, July 28, 1998, and
September 8, 1998. This First Amended and Restated Certificate of Incorporation
has been duly adopted by the directors of the Corporation with the approval of
its stockholders.
2. The text of the Certificate of Incorporation, as amended by
the foregoing Amendments, is hereby restated and amended to read in its entirety
as follows:
ONE: The name of the Corporation is USINTERNETWORKING,
Inc.
TWO: The address of the Corporation's registered office in the
State of Delaware is 1209 Orange Street, Wilmington, Delaware 19801 in New
Castle County. The name of it registered agent at such address is The
Corporation Trust Company.
THREE: The purpose of the Corporation is to engage in
any lawful act or activity for which corporations may be organized under the
General Corporation Law of Delaware.
FOUR: The aggregate number of shares which the
Corporation shall have authority to issue is 600,225,000, consisting of:
(i) 600,000,000 shares of Common Stock, $.001 par value
per share (the "Common Stock"),
(ii) 110,000 shares of 8% Series A Cumulative Convertible
Preferred Stock, $.01 par value per share (the "Series A Preferred Stock"),
and
(iii) 115,000 shares of 8% Series B Cumulative Convertible
Redeemable Preferred Stock, $.01 par value per share (the "Series B Preferred
Stock").
A statement of the designations, powers, preferences, rights, qualifications,
limitations and restrictions in respect of the shares of the Series A
Preferred Stock, the Series B Preferred Stock and the Common Stock is as
follows:
<PAGE>
1. CERTAIN DEFINITIONS.
Unless the context otherwise requires, the terms defined in
this Section 1 shall have, for all purposes of this resolution, the meanings
herein specified (with terms defined in the singular having comparable
meanings when used in the plural).
BUDGET. The term "Budget" means a fiscal year operating
budget, which shall include monthly capital and operating expense budgets,
cash flow statements, capital expenditure budgets, profit and loss
projections and employee hiring projections approved by the Executive
Committee of the Corporation's Board of Directors.
BUSINESS. The term "Business" means the acquisition of
interests in, and the operation of, companies engaged in activities related
to the provision of internet computing services to enterprise customers
worldwide, and all services related thereto.
BUSINESS DAY. The term "Business Day" shall mean a day
other than a Saturday or Sunday or any federal holiday.
CERTIFICATE. The term "Certificate" means this First
Amended and Restated Certificate of Incorporation.
COMMON EQUITY. The term "Common Equity" shall mean all
shares now or hereafter authorized of any class of common stock of the
Corporation, including the Common Stock, and any other stock of the
Corporation, howsoever designated, authorized after the Initial Issue Date,
which has the right (subject always to prior rights of any class or series of
preferred stock) to participate in the distribution of the assets and
earnings of the Corporation without limit as to per share amount.
COMMON STOCK. The term "Common Stock" shall mean the
common stock, par value $.001 per share, of the Corporation.
CONVERSION DATE. The term "Conversion Date" shall have the
meaning set forth in Subsection 4(b) below.
CONVERSION PRICE. The term "Conversion Price" with respect
to the Series A Preferred Stock shall initially mean $.33-1/3 and with
respect to the Series B Preferred Stock shall initially mean $.42 and
thereafter each shall be subject to adjustment from time to time pursuant to
the terms of Section 4 below.
CONVERTIBLE PREFERRED STOCK. The term "Convertible
Preferred Stock" shall mean the Series A Preferred Stock and the Series B
Preferred Stock.
DIVIDEND PAYMENT DATE. The term "Dividend Payment Date"
shall have the meaning set forth in Subsection 2(a) below.
2
<PAGE>
EMPLOYEE STOCK OPTION PLAN. The term "Employee Stock Option
Plan" shall mean an employee stock option plan substantially in the form as
such plan is in effect on the date of the filing of the First Amended and
Restated Certificate of Incorporation adopted by the Compensation Committee
of the Board of Directors of the Company providing for the issuance to
certain employees of the Company of options to purchase a certain number of
shares of Common Stock at a certain exercise price per share; the total
number of shares of Common Stock which may be issued under such plan shall
not exceed 6.5% of the total number of outstanding shares of common stock
calculated on a fully diluted basis, not including the options and shares
issuable or issued on exercise of options pursuant to the Employee Stock
Option Plan.
INITIAL ISSUE DATE. The term "Initial Issue Date" shall
mean the date that shares of Series B Preferred Stock are first issued by the
Corporation.
IPO. The term "IPO" shall mean an underwritten initial
public offering of the Corporation's Common Stock representing not less than
$300 million pre-money valuation of the Company's fully-diluted Common
Equity, resulting in net proceeds to the Company of not less than $50 million.
JUNIOR STOCK. Except as otherwise used herein, the term
"Junior Stock" shall mean, for purposes of Section 2 below, Common Equity and
any class or series of stock of the Corporation authorized after the Initial
Issue Date which is not entitled to receive any dividends unless all
dividends required to have been paid or declared and set apart for payment on
the Series B Preferred Stock and the Series A Preferred Stock shall have been
so paid or declared and set apart for payment, and for purposes of Section 3
below, shall mean Common Equity and any class or series of stock of the
Corporation authorized after the Initial Issue Date which is not entitled to
receive any assets upon a Liquidation Preference Occurrence (as defined
below) until the Series B Preferred Stock and the Series A Preferred Stock
shall have received the entire amount to which such stock is entitled upon
such Liquidation Preference Occurrence.
LEGAL HOLIDAY. The term "Legal Holiday" shall mean any day
that is an official government holiday in the applicable jurisdiction or any
day that is not a Business Day.
LIQUIDATION PREFERENCE. The term "Liquidation Preference"
shall mean (i) in the case of Series A Preferred Stock, an amount equal to
$600 per share of Series A Preferred Stock, and (ii) in the case of Series B
Preferred Stock, an amount equal to $1,050 per share of Series B Preferred
Stock.
LIQUIDATION PREFERENCE OCCURRENCE. The term "Liquidation
Preference Occurrence" shall mean the liquidation, dissolution, winding up of
the affairs of the Corporation, the sale of all or substantially all of the
assets of the Corporation, or the sale of the lesser of 100% of the issued
and outstanding shares of Common Stock or 50% of all outstanding voting
securities for cash or marketable securities, or a merger or consolidation as
a result of which the holders of the voting securities of the Corporation
immediately prior to such event own less than 50% of the voting securities,
or securities convertible into or having a right to purchase the voting
securities, of the surviving corporation.
3
<PAGE>
PARITY STOCK. Except as otherwise used herein, the term
"Parity Stock" shall mean for purposes of Section 2 below, any class or
series of stock of the Corporation authorized after the Initial Issue Date
which is entitled to receive payment of dividends on a parity with the Series
B Preferred Stock and Series A Preferred Stock, and for purposes of Section 3
below, shall mean any class or series of stock of the Corporation authorized
after the Initial Issue Date which is entitled to receive assets upon
Liquidation Preference Occurrences on a parity with the Series B Preferred
Stock.
PIK QUOTED PRICE. The term "PIK Quoted Price" shall have
the meaning set forth in Subsection (2)(b) below.
PIK DIVIDENDS. The term "PIK Dividends" shall have the
meaning set forth in Subsection (2)(b) below.
QUOTED PRICE. The term "Quoted Price" with respect to any
of the Common Stock, Series A Preferred Stock or Series B Preferred Stock,
shall mean the last reported sales price of the applicable security as
reported by the National Association of Securities Dealers, Inc., Automatic
Quotations System, National Market System, or, if the applicable security is
listed or admitted for trading on a securities exchange, the last reported
sales price of the applicable security on the principle exchange on which the
applicable security is listed or admitted for trading (which shall be
consolidated trading if applicable to such exchange), or if neither so
reported or listed or admitted for trading, the last reported bid price of
the applicable security in the over-the-counter market. In the event that the
Quoted Price cannot be determined as aforesaid, a committee composed of
disinterested members of the Board of Directors of the Corporation shall
determine the Quoted Price of the Common Stock in such a manner as it in good
faith considers appropriate, without regard, however, to relative seniority.
Such determination may be challenged in good faith by holders of not less
than a majority of the outstanding Series A Preferred Stock (the "Series A
Objecting Shares") or by holders of not less than one-third of the
outstanding shares of Series B Preferred Stock (the "Series B Objecting
Shares"), and any dispute shall be resolved at the Corporation's cost, by an
investment banking firm of recognized national standing selected by the
Corporation and acceptable to holders of a majority of the Series A Objecting
Shares or the Series B Objecting Shares, as the case may be, and shall be
made in good faith and be conclusive absent manifest error. The Quoted Price
of each series of the Convertible Preferred Stock shall equal the Quoted
Price of the Common Stock as determined above multiplied by the Liquidation
Preference of the applicable series of Convertible Preferred Stock and
divided by the then current Conversion Price of such series of Convertible
Preferred Stock.
RECORD DATE. The term "Record Date" shall mean the date
designated by the Board of Directors of the Corporation at the time a
dividend is declared for the purpose of establishing which holders of record
are entitled to receive payment thereof; provided, however, that such Record
Date shall not be more than thirty (30) days nor less than ten (10) days
prior to the respective Dividend Payment Date or such other date designated
by the Board of Directors for the payment of dividends.
4
<PAGE>
SENIOR STOCK. The term "Senior Stock" shall mean for
purposes of Section 2 below, any class or series of stock of the Corporation
authorized after the Initial Issue Date ranking senior to the Series B
Preferred Stock and Series A Preferred Stock in respect of the right to
receive dividends, and for purposes of Section 3 below, shall mean any class
or series of stock of the Corporation authorized after the Initial Issue Date
ranking senior to the Series B Preferred Stock in respect of the right to
receive dividend or to participate in any distribution upon any Liquidation
Preference Occurrence.
TRADING DAY. The term "Trading Day" with respect to any of
the Common Stock, Series A Preferred Stock or Series B Preferred Stock, shall
mean any day on which any market in which the applicable security is then
traded and in which a Quoted Price may be ascertained is open for business.
2. DIVIDENDS.
(a) Dividends, at the rate provided in this subsection (a),
shall accrue with respect to the Convertible Preferred Stock on the last day
of each quarter with respect to the calendar quarter immediately then ending,
commencing on the date of issuance of such securities. To the extent not
paid, dividends on the Convertible Preferred Stock will accumulate. Subject
to the prior preferences and other rights of any Senior Stock as to
dividends, the record holder on the Record Date of each share of Convertible
Preferred Stock shall be entitled to receive dividends quarterly on the first
day of each calendar quarter, commencing January 1, 2000 (each, a "Dividend
Payment Date"), with respect to the prior calendar quarter. Notwithstanding
the foregoing, any accrued but unpaid dividends, including any dividend
applicable to the pro rata portion of the then-current dividend period, shall
be paid upon the earliest of (i) the consummation of an initial public
offering of Common Stock, (ii) the conversion of such share of Convertible
Preferred Stock, or (iii) a Liquidation Preference Occurrence. In any case,
dividends shall be paid only to the extent that funds are legally available
for payment of dividends. Such dividends shall be payable at the rate of
eight percent (8%) per annum of the applicable Liquidation Preference.
(b) Dividends on the Convertible Preferred Stock shall be
paid in cash, or at the option of the Corporation, unless such dividend is
payable upon consummation of an initial public offering of Common Stock,
conversion of the Convertible Preferred Stock or a Liquidation Preference
Occurrence and at such time sufficient funds are legally available for
payment of such dividends, in substitute in whole or in part for such cash,
in additional fully paid and nonassessable shares of Series A Preferred
Stock, with respect to the Series A Preferred Stock, and Series B Preferred
Stock, with respect to the Series B Preferred Stock, legally available for
such purpose (such dividends paid in kind being herein called "PIK
Dividends"). The Board of Directors shall determine, prior to the setting of
the Record Date for a given period, whether the dividends on the Convertible
Preferred Stock for such period shall be paid in cash or as PIK Dividends,
and such decision must be the same for all series of Convertible Preferred
Stock for that period. Dividends of additional shares of Convertible
Preferred Stock shall be paid by delivering to the record holders thereof a
number of shares of Convertible Preferred Stock determined by dividing the
total amount of the cash dividend which otherwise would be payable on the
Dividend Payment Date to such holders (rounded to the nearest whole cent) by
the average Quoted Price per share of the applicable
5
<PAGE>
series of Convertible Preferred Stock for the twenty (20) Trading Days
immediately preceding the date on which such PIK Dividends were accrued ("PIK
Quoted Price"). The issuance of any such PIK Dividend in such amount shall
constitute full payment of such dividend. The Corporation shall not issue
fractional shares of Convertible Preferred Stock to which holders may become
entitled pursuant to this subsection, but in lieu thereof, the Corporation
shall deliver its check in an amount equal to the applicable fraction of the
PIK Quoted Price. In no event shall the election by the Corporation to pay
dividends, in whole or in part, in cash or in additional shares of
Convertible Preferred Stock preclude the Corporation from making a different
election with respect to all or a portion of the dividends to be paid on the
Convertible Preferred Stock on any subsequent Dividend Payment Date. Any
additional shares of Convertible Preferred Stock issued pursuant to this
section shall be governed by this Certificate and shall be subject in all
respects, except as to the date of issuance and date from which dividends
accrue and cumulate as set forth below, to the same terms as the shares of
Convertible Preferred Stock originally issued hereunder. All dividends
(whether payable in cash or in whole or in part in additional shares of
Convertible Preferred Stock) paid pursuant to this section shall be paid in
equal pro rata proportions of such cash and/or shares of the applicable class
or series of Convertible Preferred Stock to the holders entitled thereto,
except with respect to cash payable in lieu of fractional shares which would
otherwise be paid as PIK Dividends.
(c) [Intentionally Omitted]
(d) So long as any shares of Convertible Preferred Stock
shall be outstanding, the Corporation shall not declare, pay or set apart for
payment on any Junior Stock, any dividends whatsoever, whether in cash,
property or otherwise (other than PIK Dividends or dividends payable on
Common Stock in additional shares of Common Stock together with cash in lieu
of fractional shares), nor shall the Corporation make any distribution on any
Junior Stock, nor shall any Junior Stock be purchased, redeemed or otherwise
acquired by the Corporation or any of its subsidiaries of which it owns not
less than a majority of the outstanding voting power (other than repurchases
of Junior Stock from employees pursuant to the terms of employment agreements
in existence as of the date of this Certificate or approved pursuant to
Section 5(a)(12) hereof or pursuant to the Employee Stock Option Plan), nor
shall any moneys be paid or made available for a sinking fund for the
purchase or redemption of any Junior Stock, unless all dividends to which the
holders of Convertible Preferred Stock shall have been entitled for all
previous periods plus an amount equal to the dividends such holders would
have received had the Convertible Preferred Stock been converted into Common
Stock immediately prior to the record date for such dividend or distribution
shall have been paid in cash or declared and a sum of money sufficient for
the payment thereof has been set apart. For purposes of this subparagraph,
the Series A Preferred Stock shall be deemed Junior Stock to the Series B
Preferred Stock. Notwithstanding anything in the foregoing, no dividends
shall be paid on any shares of the Series A Preferred Stock unless equivalent
dividends, on an as-converted basis, are paid on the Series B Preferred Stock.
(e) In the event that full dividends are not paid or made
available to the holder of all outstanding shares of Convertible Preferred
Stock and of any Parity Stock and funds available for payment of dividends
shall be insufficient to permit payment in full to holders of all such stock
of the full preferential amounts to which they are then entitled, then the
entire amount available for
6
<PAGE>
payment of dividends shall be distributed ratably among all such holders of
Convertible Preferred Stock and any Parity Stock in proportion to the full
amount to which they would otherwise be respectively entitled; PROVIDED,
HOWEVER, that such distribution shall first be made in full to the holders of
all outstanding shares of Series B Stock before any distribution is otherwise
made hereunder. For purposes of this subsection, the amount of legally
available PIK Dividends shall be deemed funds available for payment of
dividends but shall not require payment of PIK Dividends on Parity Stock.
(f) Notwithstanding anything contained herein to the
contrary, no dividends on shares of Convertible Preferred Stock shall be
declared by the Board of Directors of the Corporation or paid or set apart
for payment by the Corporation at such time as the terms and provisions of
any agreement of the Corporation relating to its funded indebtedness
prohibits such declaration, payment or setting apart for payment or provides
that such declaration, payment or setting apart for payment would constitute
a breach thereof or a default thereunder, or if such declaration or payment
shall be restricted or prohibited by law, and any dividend must comply with
the requirements of Section 5(b)(8) hereof.
3. DISTRIBUTIONS UPON LIQUIDATION PREFERENCE
OCCURRENCE.
(a) In the event of any voluntary or involuntary
Liquidation Preference Occurrence,
(i) subject to the prior preferences and other rights of any Senior
Stock as to liquidation preferences, but before any payment or
distribution, including without limitation any accrued but unpaid
dividends, shall be made to the holders of Series A Preferred Stock or
Junior Stock, the holders of Series B Preferred Stock shall be entitled
to be paid out of the assets of the Corporation in cash the greater of
the following:
(A) the Liquidation Preference for such series per share plus
an amount equal to all dividends accrued and unpaid thereon to
the date of such Liquidation Preference Occurrence, or
(B) the amount to which the holders would be entitled upon
liquidation of the Corporation had the shares of Series B
Preferred Stock been converted to Common Stock immediately
prior to the Liquidation Preference Occurrence (assuming for
this purpose that the shares of Series A Preferred Stock had
also been converted to Common Stock at such time), and
(ii) subject to the prior preferences and other rights of any Senior
Stock (including, for this purpose, the Series B Preferred Stock) as to
liquidation preferences, but before any payment or distribution shall
be made to the holders of Junior Stock, the holders of Series A
Preferred Stock shall be entitled to be paid out of the assets of the
Corporation in cash the greatest of the following:
7
<PAGE>
(A) the Liquidation Preference for such series per share plus
an amount equal to all dividends accrued and unpaid thereon to
the date of such Liquidation Preference Occurrence, or
(B) the amount to which the holders would be entitled upon
liquidation of the Corporation had the shares of Series A
Preferred Stock been converted to Common Stock immediately
prior to the Liquidation Preference Occurrence (assuming for
this purpose that the shares of Series B Preferred Stock had
also been converted to Common Stock at such time), or
(C) only in the event that (1) the holders of Series B
Preferred Stock are entitled to receive the distribution
referred to in Section 3(a)(i)(A) above (and not the
distribution referred to in Section 3(a)(i)(B) above), and (2)
the Corporation's Net Equity Value (as defined below) as of
the date of such Liquidation Preference Occurrence is less
than the Trigger Amount (as defined below), then an amount
equal to (X) the Liquidation Preference for such series per
share plus an amount equal to all dividends accrued and unpaid
thereon to the date of such Liquidation Preference Occurrence
plus (Y) the Additional Per Share Preference (as defined
below).
Except as provided in this section, and Section 3(b) below with respect to the
Series A Preferred Stock, holders of Convertible Preferred Stock shall not be
entitled to any other distribution in the event of a Liquidation Preference
Occurrence.
(b) In the event that the conditions identified in Section
3(a)(ii)(C) above have been satisfied (an "Additional Preference Event"), the
"Additional Per Share Preference" per share of Series A Preferred Stock shall be
determined in accordance with the following formula:
EDA
---------
OCS + CPS
"EDA" means (x) the Distribution Amount, minus (y) the
aggregate amount required to be distributed to the holders of all outstanding
shares of Convertible Preferred Stock pursuant to Section 3(a) above (other than
pursuant to Section 3(a)(ii)(C)(Y)).
"Distribution Amount" means the aggregate amount of cash and
the fair market value of property (as determined in good faith by the Board of
Directors) of the Corporation legally available for distribution to all
stockholders of the Corporation on the date of a Liquidation Preference
Occurrence.
"OCS" means the number of shares of Common Stock issued and
outstanding as of such Liquidation Preference Occurrence.
8
<PAGE>
"CPS" means the number of shares of Common Stock which
would be issuable upon conversion of all of the issued and outstanding shares
of Series A Preferred Stock as of the date of such Liquidation Preference
Occurrence.
"Enterprise Value" means the fair market value of the
assets of the Corporation without consideration to any obligations of the
Corporation, and without subtracting therefrom any cash or property
distributed or distributable under this Section 3. For purposes of this
definition, Enterprise Value shall be as determined in good faith by the
Board of Directors; PROVIDED HOWEVER, that if the holders of a majority of
the Common Stock, holders of a majority of the Series A Preferred Stock or
holders of one-third of Series B Preferred Stock object to the fair market
value determination, then Enterprise Value shall be determined by an
investment banking firm of nationally recognized standing selected by and
agreeable to both the Board of Directors and the holders of a majority of the
Common Stock, a majority of the Series A Preferred Stock or two-thirds of the
Series B Preferred Stock (the "Necessary Holders") and such determination
shall be conclusive; PROVIDED, FURTHER that if the Board of Directors and the
Necessary Holders cannot agree on an investment banking firm, then each shall
select an investment banking firm and these firms shall select an investment
banking firm of nationally recognized standing to determine Enterprise Value
and the determination of such investment banking firm shall be conclusive.
"Net Equity Value" means the Enterprise Value of the
Corporation less Debt (as defined).
"Debt" means the aggregate amount of all outstanding
indebtedness of the Corporation and its consolidated subsidiaries for
borrowed money as of the date of such Liquidation Preference Occurrence.
"Trigger Amount" means, on the date of an applicable
Liquidation Preference Occurrence, that Net Equity Value of the Corporation
that, assuming conversion of all of the Convertible Preferred Stock, would
upon liquidation of the Corporation on such date return to the holders of
Series A Preferred Stock an amount equal to five times the amount originally
paid to the Company for such stock in connection with its original issuance
or issuances.
(c) If, upon any such Liquidation Preference Occurrence,
(i) the assets of the Corporation shall be insufficient to permit the payment
in full of the Liquidation Preference per share plus an amount equal to all
dividends accrued and unpaid on the Series B Preferred Stock and the full
liquidating payments on all Parity Stock, then the assets of the Corporation
remaining after the distributions to holders of any Senior Stock of the full
amounts to which they may be entitled shall be ratably distributed among the
holders of Series B Preferred Stock and of any Parity Stock in proportion to
the full amounts to which they would otherwise be respectively entitled if
all amounts thereon were paid in full and (ii) the assets of the Corporation
shall be insufficient to permit the payment in full of the Liquidation
Preference per share plus an amount equal to all dividends accrued and unpaid
on the Series A Preferred Stock and/or the Additional Per Share Preference if
there is an Additional Preference Event and the full liquidating payments on
all Parity Stock, then the assets of the Corporation remaining after the
distributions to holders
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<PAGE>
of any Senior Stock (including, for this purpose, the Series B Preferred
Stock) of the full amounts to which they may be entitled shall be ratably
distributed among the holders of Series A Preferred Stock and of any Parity
Stock in proportion to the full amounts to which they would otherwise be
respectively entitled if all amounts thereon were paid in full, provided,
however, that holders of Series A Preferred Stock shall not be entitled to
receive the Additional Per Share Preference and such Additional Per Share
Preference shall not be considered in the calculation of the amounts to which
they would be entitled to receive.
(d) All shares of Convertible Preferred Stock for which
payments have been made under this Section 3 shall be retired and shall be
restored to the status of authorized and unissued shares of preferred stock,
without designation as to series and may thereafter be reissued as shares of
any series of preferred stock other than Convertible Preferred Stock.
(e) In the event that a Liquidation Preference Occurrence
has not taken place by the eighth anniversary of the issue date of the Series
B Preferred Shares (the "Redemption Date"), then the Redemption Date shall be
deemed a Liquidation Preference Occurrence with respect to the Series B
Preferred Stock only, and each holder of Series B Preferred Stock shall be
entitled to receive within ten business days of the Redemption Date an amount
in cash equal to the amount payable under Section 3(a)(i) as of such
Redemption Date. Upon such payment, such shares of Series B Preferred Stock
shall be deemed to have been redeemed and shall no longer be outstanding.
4. CONVERSION RIGHTS.
(a) A holder of shares of Convertible Preferred Stock may
convert such shares into Common Stock at any time. Convertible Preferred
Stock will convert automatically upon consummation of an IPO. The Series A
Preferred Stock shall automatically convert upon the conversion of one-third
or more of the shares of Series B Preferred Stock issued pursuant to the
terms of the Stock Purchase Agreement by and among the Corporation and the
parties thereto dated as of December 31, 1998. For the purposes of
conversion, each share of Convertible Preferred Stock shall be valued at the
applicable Liquidation Preference, which shall be divided by the Conversion
Price in effect on the Conversion Date to determine the number of shares
issuable upon conversion. Immediately following such conversion, the rights
of the holders of converted Convertible Preferred Stock (other than the right
to receive accrued and unpaid dividends on such conversion as provided
herein) shall cease and the persons entitled to receive the Common Stock upon
the conversion of Convertible Preferred Stock shall be treated for all
purposes as having become the owners of such Common Stock.
(b) To convert Convertible Preferred Stock, a holder must
(i) surrender the certificate or certificates evidencing the shares of
Convertible Preferred Stock to be converted, duly endorsed in a form
satisfactory to the Corporation, at the office of the Corporation or transfer
agent for the Convertible Preferred Stock, (ii) notify the Corporation at
such office that he elects to convert Convertible Preferred Stock, and the
number of shares he wishes to convert, and (iii) state in writing the name or
names in which he wishes the certificate or certificates for shares of Common
Stock to be issued. In the event that a holder fails to notify the
Corporation
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<PAGE>
of the number of shares of Convertible Preferred Stock which he wishes to
convert, he shall be deemed to have elected to convert all shares represented
by the certificate or certificates surrendered for conversion. The date on
which the holder satisfies all those requirements is the "Conversion Date."
As soon as practical, the Corporation shall deliver a certificate for the
number of full shares of Common Stock issuable upon the conversion of the
shares of Convertible Preferred Stock represented by the certificate or
certificates surrendered for conversion. The person in whose name the Common
Stock certificate is registered shall be treated as the stockholder of record
on and after the Conversion Date. However, dividends will be paid on any
Dividend Payment Date with respect to Convertible Preferred Stock surrendered
for conversion after a record date for the payment of a dividend to the
registered holder of Convertible Preferred Stock on such record date. If the
last day on which Convertible Preferred Stock may be converted is a Legal
Holiday in a place where the Corporation or the transfer agent is located,
Convertible Preferred Stock may be surrendered for conversion on the next
succeeding day that is not a Legal Holiday.
(c) The Corporation will not issue a fractional share of
Common Stock upon conversion of Convertible Preferred Stock. Instead, the
Corporation will deliver its check for the current market value of the
fractional share. The current market value of a fraction of a share is
determined as follows: Multiply the current market price of a full share by
the fraction. Round the result to the nearest cent. The current market price
of a share of Common Stock is the Quoted Price of the Common Stock on the
last Trading Day prior to the Conversion Date.
(d) If a holder converts shares of Convertible Preferred
Stock, the Corporation shall pay any documentary, stamp or similar issue or
transfer tax due on the issue of shares of Common Stock upon the conversion.
However, the holder shall pay any such tax which is due because the shares
are issued in a name other than the holder's name.
(e) The Corporation has reserved and shall continue to
reserve out of its authorized but unissued Common Stock or its Common Stock
held in treasury enough shares of Common Stock to permit the conversion of
the Convertible Preferred Stock in full. All shares of Common Stock which may
be issued upon conversion of Series B Preferred Stock shall be fully paid and
nonassessable. The Corporation will endeavor to comply with all securities
laws regulating the offer and delivery of shares of Common Stock upon
conversion of Convertible Preferred Stock and will endeavor to list such
shares on each national securities exchange, or national securities
association on which the Common Stock is listed.
(f) If the Corporation:
(i) pays a dividend or makes a distribution
on its Common Stock in shares of its
Common Stock;
(ii) subdivides its outstanding shares of Common
Stock into a greater number of shares;
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<PAGE>
(iii) combines its outstanding shares of Common
Stock into a smaller number of shares; or
(iv) issues by reclassification of its Common
Stock any shares of its capital stock;
then the Conversion Price in effect immediately prior to such action shall be
adjusted so that the holder of Convertible Preferred Stock thereafter
converted may receive the number of shares of capital stock of the
Corporation which he would have owned immediately following such action if he
had converted Convertible Preferred Stock immediately prior to such action.
The adjustment shall become effective immediately after the record date in
the case of dividend or distribution and immediately after the effective date
of a subdivision, combination or reclassification. Such adjustment shall be
made successively whenever any event listed above shall occur. If, after an
adjustment referred to in clauses (i) through (iv) above, a holder of
Convertible Preferred Stock upon conversion of it may receive shares of two
or more classes of capital stock of the Corporation, the Corporation shall
determine the allocation of the adjusted Conversion Price between the classes
of capital stock. After such allocation, the Conversion Price of each class
of capital stock shall thereafter be subject to adjustment on terms
comparable to those applicable to Common Stock in this Subsection (f).
(g) If the Corporation distributes any rights or warrants
to all holders of its Common Stock entitling them for a period expiring
within sixty (60) days after the Record Date mentioned below to purchase
shares of Common Stock at a price per share less than the greater of the
current market price per share on that Record Date or the Conversion Price on
such date, the Conversion Price shall be adjusted in accordance with the
formula:
(P)
0+ ---
M
C'=C x ------
O+N
where:
C' = the adjusted Conversion Price.
C = the then current Conversion Price.
O = the number of shares of Common Stock
outstanding on the Record Date, calculated
on a fully diluted basis but not including
in such calculation any shares issuable upon
exercise of such rights or warrants.
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<PAGE>
N = the number of additional shares of Common
Stock issuable upon exercise of such rights
or warrants.
P = the aggregate consideration received for
the issuance of such rights or warrants and
receivable upon issuance of the additional
shares of Common Stock issuable upon
exercise of such rights or warrants.
M = the greater of the then-current Conversion
Price or the then-current market price per
share of Common Stock on the Record Date.
The adjustment shall be made successively whenever any such rights or warrants
are issued and shall become effective immediately after the Record Date for the
determination of stockholders entitled to receive the rights or warrants. If at
the end of the period during which such warrants or rights are exercisable, not
all warrants or rights shall have been exercised, the Conversion Price shall be
immediately readjusted to what it would have been if "N" in the above formula
had been the number of shares actually issued.
(h) [intentionally omitted]
(i) If the Corporation issues shares of Common Stock for
a consideration per share less than the greater of the then-current
Conversion Price or the then-current market price per share on the
date the Corporation fixes the offering price of such additional
shares, the Conversion Price shall be adjusted in accordance with the
formula:
P
0+ ---
M
C"=C x ------
A
where:
C' = the adjusted Conversion Price.
C = the then-current Conversion Price.
O = the number of shares outstanding
immediately prior to the issuance of such
additional shares, calculated on a fully
diluted basis (and not including in that
calculation such additional shares).
P = the aggregate consideration received for
the issuance of such additional shares.
M = the greater of the then-current Conversion
Price or the then-current market price per
share on the date of issuance of such
additional shares.
A = the number of shares outstanding
immediately after the issuance of such
additional shares, calculated on a fully
diluted basis.
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<PAGE>
The adjustment shall be made successively whenever any such
issuance is made, and shall become effective immediately after such issuance.
(x) This Subsection 4(i) does not apply to (i) any transaction or issuance
described in Subsection 4(g) or 4(h) above or Subsection 4(j) below, (ii) the
conversion of Convertible Preferred Stock, or the conversion, exchange or
exercise of other securities convertible into or exchangeable or exercisable
for Common Stock, (iii) Common Stock issued to the Corporation's employees
under the Employee Stock Option Plan (at or above the market price at time of
grant), (iv) Common Stock issued to acquire, or in the acquisition of, all or
any portion of a business as a going concern, in an arm's-length transaction
between the Corporation and an unaffiliated third party, whether such
acquisition shall be effected by purchase of assets, exchange of securities,
merger, consolidation or otherwise, or (v) Common Stock issued in a bona fide
public offering pursuant to a firm commitment underwriting. (y)
Notwithstanding the foregoing, the Corporation shall make all necessary
adjustments (including successive adjustments if required) to the Conversion
Price in accordance with subsection 4(i) to the extent that any anti-dilution
adjustments which may be made under the terms of any outstanding securities
of the Corporation (other than Convertible Preferred Stock) would, in the
absence of clause (x) above, require such adjustments to be made to the
Conversion Price.
(j) If the Corporation issues any options, warrants or
other securities convertible into or exchangeable or exercisable for Common
Stock (other than Convertible Preferred Stock or securities issued in
transactions described in Subsection 4(g) or 4(h) above) and for a
consideration per share of Common Stock initially deliverable upon
conversion, exchange or exercise of such securities less than the greater of
the then current Conversion Price or the then-current market price per share
on the date of issuance of such securities, the Conversion Price shall be
adjusted in accordance with the formula:
P
0+ ---
M
C"=C x ------
O+D
where:
C' = the adjusted Conversion Price.
C = the then current Conversion Price.
O = the number of shares of Common Stock
outstanding immediately prior to the
issuance of such securities, calculated on a
fully diluted basis but not including in
such calculation any shares issuable upon
conversion, exchange or exercise of such
securities.
P = the aggregate consideration received for
the issuance of such options, warrants or
other securities and receivable for the
Common Stock issuable upon conversion,
exchange or exercise of such securities.
M = the greater of the then-current Conversion
Price or the then-current market price per
share of Common Stock on the date of
issuance of such options, warrants or other
securities.
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<PAGE>
D = the maximum number of shares of Common
Stock deliverable upon conversion or in
exchange for or upon exercise of such
options, warrants or other securities at the
initial conversion, exchange or exercise
rate.
The adjustment shall be made successively whenever any such
issuance is made, and shall become effective immediately after such issuance.
If all of the Common Stock deliverable upon conversion, exchange or exercise
of such securities has not been issued when such securities are no longer
outstanding, then the Conversion Price shall promptly be readjusted to the
Conversion Price which would then be in effect had the adjustment upon the
issuance of such securities been made on the basis of the actual number of
shares of Common Stock issued upon conversion, exchange or exercise of such
securities. (x) This Subsection 4(j) does not apply to (i) the issuance of
any such securities to acquire, or in the acquisition of, all or any portion
of a business as a going concern, in an arm's-length transaction between the
Corporation and an unaffiliated third party, whether such acquisition shall
be effected by purchase of assets, exchange of securities, merger,
consolidation or otherwise, (ii) the issuance of any such securities in a
bona fide public offering pursuant to a firm commitment underwriting, (iii)
the issuance of any such securities to the Corporation's employees under the
Employee Stock Option Plan (at or above the market price at time of grant) or
(iv) the issuance of any warrants to purchase Common Stock, exercisable at
$.43 per share, or shares of Series B Preferred Stock, each pursuant to those
certain Note Purchase Agreements dated as of September 8, 1998, December 18,
1998, and December 24, 1998 between the Corporation and the parties thereto,
as such agreement, or the warrants issued thereunder, may be modified from
time to time. (y) Notwithstanding the foregoing, the Corporation shall make
all necessary adjustments (including successive adjustments if required) to
the Conversion Price in accordance with subsection 4(j) to the extent that
any anti-dilution adjustments which may be made under the terms of any
outstanding securities of the Corporation (other than Convertible Preferred
Stock) would, in the absence of clause (x) above, require such adjustments to
be made to the Conversion Price.
(k) In Subsections 4(g), 4(h), 4(i) and 4(j) above, the
current market price per share of Common Stock on any date is the average of
the Quoted Prices for twenty (20) consecutive Trading Days commencing
twenty-five (25) Trading Days before the date in question, PROVIDED, HOWEVER,
if the Common Stock is not then registered for trading on any public
securities market, the current market price shall be the Quoted Price
otherwise determined under this Certificate on such date in question.
(l) For purposes of any computation respecting
consideration received pursuant to Subsections 4(i) and 4(j) above, the
following shall apply:
(i) in case of the issuance of shares
of Common Stock for cash, the consideration shall be the net amount
of such cash received by the Corporation, after deducting all
commissions, discounts or other expenses incurred by the Corporation
for any underwriting of the issue or otherwise in connection therewith;
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<PAGE>
(ii) in the case of the issuance of
shares of Common Stock for a consideration in whole or in part other
than cash, the consideration other than cash shall be deemed to be
the fair market value thereof as determined by the Board of Directors
of the Corporation (irrespective of the accounting treatment
thereof); and
(iii) in the case of the issuance of
options, warrants or other securities convertible into or exchangeable
or exercisable for shares, the aggregate consideration received
therefor shall be deemed to be the consideration received by the
Corporation for the issuance of such options, warrants or other
securities plus the additional minimum consideration, if any, to be
received by the Corporation upon the conversion or exchange or
exercise thereof (the consideration in each case to be determined
in the same manner as provided in clauses (i) and (ii) of this
Subsection 4(l)).
(m) No adjustment in the Conversion Price need be made
unless the adjustment would require an increase or decrease of at least 1% in
the Conversion Price. Any adjustments that are not made shall be carried
forward and taken into account in any subsequent adjustment. All calculations
under this Section 4 shall be made to the nearest cent or to the nearest
1/100th of a share, as the case may be.
(n) No adjustment in the Conversion Price need be made
under this Section 4 for (i) rights to purchase Common Stock pursuant to a
Corporation plan for reinvestment of dividends or interest, (ii) any change
in the par value or no par value of the Common Stock, (iii) issuances of
securities, even if below the then-current Conversion Price (but at or above
the then-current market price), pursuant to the Employee Stock Option Plan as
authorized by the Compensation Committee of the Board of Directors; or (iv)
issuances of warrants, options, convertible securities or other rights to
acquire Common Stock in connection with the Corporation's secured financing
activities if the waiver of the anti-dilution provisions hereof that would
otherwise apply has been approved by the holders of two-thirds of the
outstanding Series A Preferred Stock and two-thirds of the outstanding Series
B Preferred Stock. The Corporation shall not, without the approval of 66-2/3%
of the outstanding shares of each series of Convertible Preferred Stock,
engage or agree to engage in any transaction which, but for this subsection
(n), would result in an adjustment to the Conversion Price below par value of
the Common Stock. If an adjustment is made to the Conversion Price upon the
establishment of a Record Date for a distribution subject to Subsections 4(g)
or 4(h) above and if such distribution is subsequently canceled, the
Conversion Price then in effect shall be readjusted, effective as of the date
when the Board of Directors of the Corporation determines to cancel such
distribution, to the Conversion Price which would have been in effect if such
Record Date had not been fixed. No adjustment in the Conversion Price
applicable to the Series A Preferred Stock need be made under Subsections
4(g) and 4(h) above if the Corporation issues or distributes to each holder
of Series A Preferred Stock the shares of Common Stock, evidences of
indebtedness, assets, rights, options or warrants referred to in those
subsections which each holder would have been entitled to receive had such
Series A Preferred Stock been converted into Common Stock prior to the
happening of such event or the Record Date with respect thereto.
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<PAGE>
(o) Whenever the Conversion Price is adjusted, the
Corporation shall promptly mail to holders of Convertible Preferred Stock,
first class, postage prepaid, a notice of the adjustment. The Corporation
shall file with the transfer agent, if any, for Convertible Preferred Stock a
certificate from the Corporation's independent public accountants briefly
stating the facts requiring the adjustment and the manner of computing it.
Subject to Subsection 4(t) below, the certificate shall be conclusive
evidence that the adjustment is correct.
(p) The Corporation from time to time may reduce the
Conversion Price of both series of the Convertible Preferred Stock by any
amount on a proportionate basis for any period of time if the period is at
least twenty (20) Business Days and if the reduction is irrevocable during
the period, but in no event may the Conversion Price be less than the par
value of a share of Common Stock. Whenever the Conversion Price is reduced,
the Corporation shall mail to all holders of Convertible Preferred Stock a
notice of the reduction. The Corporation shall mail, first class, postage
prepaid, the notice at least 15 days before the date the reduced Conversion
Price takes effect. The notice shall state the reduced conversion price and
the period it will be in effect. A reduction of the Conversion Price does not
change or adjust the Conversion Price otherwise in effect for purposes of
Subsections 4(f), 4(g), 4(h), 4(i) and 4(j) above.
(q) If:
(i) the Corporation takes any action
which would require an adjustment in the Conversion Price;
(ii) the Corporation consolidates or
merges with, or transfers all or substantially all of its assets to,
another corporation, and stockholders of the Corporation must
approve the transaction; or
(iii) there is a dissolution or
liquidation of the Corporation or other Liquidation Preference Event;
a holder of Convertible Preferred Stock may wish to convert such stock into
shares of Common Stock prior to the record date for or the effective date of the
transaction so that he may receive the rights, warrants, securities or assets
which a holder of shares of Common Stock on that date may receive. Therefore,
the Corporation shall mail to such holders, first class, postage prepaid, a
notice stating the proposed record or effective date, as the case may be. The
Corporation shall mail the notice at least twenty (20) days before such date.
Failure to mail the notice or any defect in it shall not affect the validity of
any transaction referred to in clause (i), (ii) or (iii) of this Subsection
4(q).
(r) If the Corporation is party to a merger which reclassifies
or changes its Common Stock, upon consummation of such transaction the
Convertible Preferred Stock shall automatically become convertible into the kind
and amount of securities, cash or other assets which the holder of Convertible
Preferred Stock would have owned immediately after the
17
<PAGE>
consolidation, merger, transfer or lease if such holder had converted
Convertible Preferred Stock immediately before the effective date of the
transaction, and appropriate adjustment (as determined by the Board of
Directors of the Corporation) shall be made in the application of the
provisions herein set forth with respect to the rights and interests
thereafter of the holders of Convertible Preferred Stock, to the end that the
provisions set forth herein (including provisions with respect to changes in
and other adjustment of the Conversion Price) shall thereafter be applicable,
as nearly as reasonably may be, in relation to any shares of stock or other
securities or property thereafter deliverable upon the conversion of
Convertible Preferred Stock. If this Subsection 4(r) applies, Subsection
4(f)(iv) does not apply.
(s) In any case in which this Section 4 shall require that
an adjustment as a result of any event become effective from and after a
record date, the Corporation may elect to defer until after the occurrence of
such event (i) the issuance to the holder of any shares of Convertible
Preferred Stock converted after such record date and before the occurrence of
such event of the additional shares of Common Stock issuable upon such
conversion over and above the shares issuable on the basis of the Conversion
Price in effect immediately prior to adjustment and (ii) a check for any
remaining fractional shares of Common Stock as provided in Subsection 4(c)
above.
(t) Except as provided in the immediately following
sentence, any determination that either or both of the Corporation or its
Board of Directors must make pursuant to this Section 4 shall be conclusive.
Whenever the Corporation or its Board of Directors shall be required to make
a determination under this Section 4, such determination shall be made in
good faith and may be challenged in good faith by holders of a majority of
the outstanding Series A Preferred Stock (the "Series A Objecting Shares") or
one-third of the outstanding Series B Preferred Stock (the "Series B
Objecting Shares"), and any dispute shall be resolved, at the Corporation's
expense, by an investment banking firm of recognized national standing
selected by the Corporation and acceptable to holders of a majority of the
Series A Objecting Shares and of two-thirds of the Series B Objecting Shares.
(u) All shares of Convertible Preferred Stock converted
pursuant to this Section 4 shall be retired and shall be restored to the
status of authorized and unissued shares of preferred stock, without
designation as to series and may thereafter be reissued as shares of any
series of preferred stock other than Convertible Preferred Stock.
(v) The Corporation will not, by amendment of its
Certificate or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other action, avoid
or seek to avoid the observance or performance of any term of this
Certificate, but will at all times and in good faith assist in carrying out
all of such terms and in taking all such actions as may be necessary or
appropriate in order to protect the rights of the holders of the Convertible
Preferred Stock against dilution or other impairment. Without limiting the
generality of the foregoing, the Corporation (a) will not increase the par
value of any shares of stock receivable on the conversion of either series of
Convertible Preferred Stock, (b) will at all times reserve and keep available
the maximum number of its authorized shares of Common Stock, free from all
preemptive rights therein, which will be sufficient to permit the full
18
<PAGE>
conversion of the Convertible Preferred Stock, and (c) will take such action
as may be necessary or appropriate in order that all shares of Common Stock
as may be issued pursuant to the conversion of the Convertible Preferred
Stock will, upon issuance, be duly and validly issued, fully paid and
nonassessable, and free from all taxes, liens and charges with respect to the
issuance thereof.
5. VOTING RIGHTS.
(a) Except as otherwise provided by law or in Section 5(b)
below, the holders of record of shares of Convertible Preferred Stock shall
be entitled to vote with the Common Stock as a single class as if their
shares had been converted to shares of Common Stock, giving the Convertible
Preferred Stockholders the same voting rights as the holders of Common Stock.
(b) Without the consent of the holders of two-thirds of the
outstanding shares of each series of Convertible Preferred Stock voting
separately, the Corporation shall not take, and shall not permit any
subsidiary to take, the following actions:
(1) fail to continue the Business as its
principal line of business or engage in any business other than the Business;
(2) amend or otherwise alter the Corporation's
Certificate of Incorporation or Bylaws (whether by merger, consolidation or
otherwise) in any respect that affects the rights of the Convertible
Preferred Stock (including the issuance of a new series of Preferred Stock
that is PARI PASSU with the Series B Preferred Stock);
(3) enter into any transaction with any
shareholder, director, officer or affiliate, or any relative of any of the
foregoing, other than on terms which are (i) no less favorable to the
Corporation than a similar transaction with an unaffiliated third party and
(ii) are approved by the Executive Committee of the Corporation's Board of
Directors after full disclosure;
(4) be a party to any merger or consolidation or
sell, lease, exchange or otherwise transfer all or substantially all of its
capital stock or assets, or agree to do any of the foregoing except for the
merger of a subsidiary with another subsidiary or the Corporation;
(5) enter into any material transaction that is
outside the ordinary course of its business;
(6) effect or commence any voluntary dissolution
or liquidation;
(7) establish any subsidiary other than a wholly
owned subsidiary;
(8) directly or indirectly purchase, redeem or
otherwise acquire for value (other than repurchases of capital stock from
employees pursuant to the terms of employment agreements in existence as of
the date of this Certificate or pursuant to the Employee Stock
19
<PAGE>
Option Plan) any of its outstanding capital stock other than as required by
this Certificate of Incorporation or, directly or indirectly declare or pay
any dividend or make any distribution on its capital stock, except for
dividends on the Convertible Preferred Stock and dividends by subsidiaries
payable to the Corporation or to other subsidiaries;
(9) borrow or agree to borrow, or amend any
existing agreement for the borrowing of any funds, grant a security interest
in or lien, mortgage or other encumbrance on any of its assets or give any
guaranty of indebtedness or obligations of another, in any case in excess of
Five Million Dollars ($5,000,000) or at such time as aggregate indebtedness
of the Corporation exceeds Twenty-Five Million Dollars ($25,000,000);
(10) buy all or substantially all of the stock or
assets of any person or any ongoing business or enter any agreement to do any
of the foregoing;
(11) grant any options, warrants or other
securities convertible into or exchangeable or exercisable for Common Stock
or any other shares of its capital stock to employees, officers, directors or
independent contractors of the Corporation or any of its subsidiaries or to
any other person; PROVIDED, HOWEVER, that the Corporation may issue options
granted pursuant to the Employee Stock Option Plan (the "Permitted Options");
(12) issue or enter into any agreement providing
for the issuance (contingent or otherwise) of any shares of its capital stock
or any other securities, other than the Permitted Options or shares of
subsidiaries issued to the Corporation or to subsidiaries of the Corporation
or securities issuable upon exercise, conversion or exchange of securities
outstanding on the date of this Certificate, or which by its terms restricts
the right of the Corporation to declare or pay dividends or make
distributions of the Liquidation Preference;
(13) make or agree to make aggregate capital
expenditures for property, plant or equipment more than ten percent in excess
of the amount set forth in the then-current Budget;
(14) enter into or be a party to any lease
providing for annual rental payments more than ten percent in excess of the
amount set forth in the then-current Budget; or
(15) reduce the current Conversion Price for any
series of Convertible Preferred Stock pursuant to Section 4(p) of this
Certificate.
6. EXCLUSION OF OTHER RIGHTS.
Except as may otherwise be required by law, the shares of
Convertible Preferred Stock shall not have any voting powers, preferences and
relative, participating, optional or other special rights, other than those
specifically set forth in this Certificate (as such Certificate may be
amended from time to time). The shares of Convertible Preferred Stock shall
have no preemptive or subscription rights hereunder.
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<PAGE>
7. HEADINGS OF SUBDIVISIONS.
The headings of the various subdivisions hereof are for
convenience of reference only and shall not affect the interpretation of any
of the provisions hereof.
8. SEVERABILITY OF PROVISIONS.
If any voting powers, preferences and relative,
participating, optional and other special rights of the Convertible Preferred
Stock and qualifications, limitations and restrictions thereof set forth in
this First Restated Certificate (as such Certificate may be amended from time
to time) is invalid, unlawful or incapable of being enforced by reason of any
rule of law or public policy, all other voting powers, preferences and
relative, participating, optional and other special rights of Convertible
Preferred Stock and qualifications, limitations and restrictions thereof set
forth in this Certificate (as so amended) which can be given effect without
the invalid, unlawful or unenforceable voting powers, preferences and
relative, participating, optional and other special rights of Convertible
Preferred Stock and qualifications, limitations and restrictions thereof
shall, nevertheless, remain in full force and effect, and no voting powers,
preferences and relative, participating, optional or other special rights of
Convertible Preferred Stock and qualifications, limitations and restrictions
thereof herein set forth shall be deemed dependent upon any other such voting
powers, preferences and relative, participating, optional or other special
rights of Convertible Preferred Stock and qualifications, limitations and
restrictions thereof unless so expressed herein.
FIVE: The authorized number of directors of the Corporation
shall be eleven (11) until changed by a duly adopted amendment to this First
Amended and Restated Certificate of Incorporation.
SIX: The Board of Directors of the Corporation is expressly
authorized to make, alter or repeal bylaws by the Corporation, but the
stockholders may make additional bylaws and may alter or repeal any bylaw
whether adopted by them or otherwise.
SEVEN: Elections of directors need not by written ballot
except and to the extent provided in the bylaws of the Corporation.
EIGHT: Pursuant to Section 102(b)(7) of the Delaware
General Corporation Law, the Corporation hereby eliminates the personal
liability of a director to the Corporation and its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that this
Article EIGHT does not eliminate or limit the liability of a director (i) for
any breach of such director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law (iii) under Section 174
of the Delaware General Corporation Law, or (iv) for any transaction from
which the director derived an improper personal benefit.
NINE: The Corporation shall indemnify and hold harmless any
director and may indemnify and hold harmless any officer, employee or agent
of the Corporation from and
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<PAGE>
against any and all expenses and liabilities (including, without limitation,
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and
settlement payments) that may be imposed upon or reasonably incurred by the
indemnified party in connection with, or as a result of, any proceeding
(whether civil, criminal, administrative or investigatory) in which the
indemnified party may become involved, as a party or otherwise, by reason of
the fact that he or she is or was such a director, officer, employee or agent
of the Corporation or any subsidiary or parent of the Corporation, or by
reason of the fact that he or she served at the Corporation's request or on
behalf of the Corporation as a director, officer, employee, agent, trustee or
administrator of any other corporation, partnership, trust, plan (including
employee benefit plan) or entity, whether or not he or she continues to be
such at the time such expenses and liabilities shall have been imposed or
incurred, to the fullest extent permitted by the laws of the State of
Delaware, as they may be amended from time to time.
The right to indemnification conferred in this ARTICLE NINE
shall be a contract right and shall include the right to be paid by the
Corporation the expenses incurred in defending any such proceeding in advance
of its final disposition upon delivery to the Corporation of an undertaking,
by or on behalf of such director, to repay all amounts so advanced if it
shall ultimately be determined that such director is not entitled to be
indemnified under this ARTICLE NINE or otherwise.
IN WITNESS WHEREOF, this First Amended and Restated
Certificate of Incorporation has been signed under the seal of the Company
this 31st day of December, 1998.
USINTERNETWORKING, INC.
By: /s/ William T. Price
------------------------------
Name: William T. Price
Title: Vice President &
General Counsel
[SEAL]
22
f<PAGE>
Exhibit 3.3
BYLAWS
of
USinternetworking, Inc.
a Delaware Corporation
ARTICLE I.
STOCKHOLDERS
1. PLACE OF MEETINGS. All meetings of stockholders shall be held at
the principal office of the corporation unless a different place is fixed by
the Directors or the Chief Executive Officer and stated in the notice of the
meeting.
2. ANNUAL MEETING. An annual meeting of the stockholders entitled to
vote shall be held on the third Tuesday in April at 11:00 o'clock A.M. If it
shall not have been held on the date fixed or by adjournment therefrom, a
meeting in lieu of the annual meeting shall be held within six (6) months
after the end of the fiscal year.
3. BUSINESS AT ANNUAL MEETING. In addition to the election of
directors, other proper business may be transacted at an annual meeting of
stockholders, provided that such business is properly brought before such
meeting. After the completion of a Public Offering, as defined in Article I,
Section 4, to be properly brought before an annual meeting, business must be
(a) brought by or at the direction of the Board or (b) brought before the
meeting by a Stockholder pursuant to written notice thereof, in accordance
with Section 5 hereof, and received by the Secretary not fewer than sixty
(60) nor more than ninety (90) days prior to the date specified in Article I,
Section 2 hereof for such annual meeting. Any such stockholder notice shall
set forth (i) the name and address of the stockholder proposing such
business; (ii) a representation that the stockholder is entitled to vote at
such meeting and a statement of the number of shares of the corporation which
are beneficially owned by the stockholder, (iii) a representation that the
stockholder intends to appear in person or by proxy at the meeting to propose
such business; and (iv) as to each matter the stockholder proposes to bring
before the meeting, a brief description of the business desired to be brought
before the meeting, the reasons for conducting such business at the meeting,
the language of the proposal (if appropriate), and any material interest of
the stockholder in such business. No business shall be conducted at any
annual meeting of stockholders except in accordance with this section. If the
facts warrant, the Board, or the chairman of an annual meeting of
stockholders, may determine and declare that (a) a proposal does not
constitute proper business to be transacted at the meeting or (b) business
was not properly brought before the meeting in accordance with the provisions
of this section, and, if, in either case, it is so determined, any such
business shall not be transacted. The procedure set forth in this section for
business to be properly brought before an annual meeting by a stockholder are
in addition to, and not in lieu of, the requirements set forth in Rule
14(a)-8 promulgated under Section 14 of the Securities Exchange Act of 1934,
as amended, or any successor provision.
4. PUBLIC OFFERING. For purposes of these Bylaws a "Public Offering"
means underwritten public offering of common stock designed to achieve broad
distribution of such
<PAGE>
common stock and resulting in the listing of such common stock on a national
securities exchange or NASDAQ
5. SPECIAL MEETINGS. Special meetings of the stockholders entitled
to vote may be called by the Chairman of the Board of Directors, by the Chief
Executive Officer, or by a majority of the Directors, and shall be called by
the Secretary, or in case of the death, absence, incapacity or refusal of the
Secretary, by any other officer, on written application of one or more
stockholders who are entitled to vote and who hold at least ten percent (10%)
interest of the capital stock entitled to vote, stating the date, time, place
and purpose of the meeting.
6. NOTICE OF MEETINGS. A written notice of every meeting of
stockholders, stating the date, time, place and purpose for which the meeting
is called shall be given by the Secretary or other person calling the meeting
not less than ten nor more than sixty (60) days before the meeting, to each
stockholder entitled to vote thereat and to each stockholder who, by the
Certificate of Incorporation or Bylaws, is entitled to such notice, by
leaving such notice with him or at his residence or usual place of business,
or by mailing it postage prepaid and addressed to him at his address as it
appears on the books of the corporation. No notice of any regular or special
meeting of the stockholders need be given to any stockholder if a written
waiver of notice executed before or after the meeting by the stockholder, or
his attorney thereunto authorized, is filed with the records of the meeting.
7. ADJOURNMENTS. Any meeting of the stockholders may be adjourned to
any other time and to any other place in the United States by the
stockholders present or represented at the meeting, although less than a
quorum, or by any officer entitled to preside or to act as Secretary of such
meeting if no stockholder is present. It shall not be necessary to notify any
stockholder of any adjournment. Any business that could have been transacted
at any meeting of the stockholders as originally called may be transacted at
any adjournment thereof.
8. QUORUM OF STOCKHOLDERS. At any meeting of the stockholders, more
than fifty percent (50%) in interest of the capital stock issued and
outstanding and entitled to vote shall constitute a quorum.
9. VOTES AND PROXIES. Each stockholder shall have one (1) vote for
each share of stock having voting power owned by him. Stockholders may vote
in person or by proxy. No proxy that is dated more than six (6) months before
the meeting named therein shall be accepted. Proxies shall be filed with the
Secretary of the meeting, or of any adjournment thereof, before being voted.
Except as otherwise limited therein, proxies shall entitle the person named
therein to vote at any adjournment of such meeting, but shall not be valid
after final adjournment of such meeting. A proxy with respect to stock held
in the name of two (2) or more persons shall be valid if executed by one (1)
of them unless at or prior to exercise of the proxy the corporation receives
a specific written notice to the contrary from any one (1) of them. A proxy
purporting to be executed by or on behalf of a stockholder shall be deemed
valid unless challenged at or prior to its exercise. The holders of record of
shares of Series A Convertible Preferred Stock ("Series A Preferred Stock")
shall be entitled to vote as if their shares had been converted to shares of
Common Stock, giving the holders of Series A Preferred Stock the same voting
rights as the
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<PAGE>
holders of Common Stock.
10. ACTION OF MEETING. When a quorum is present, the holders of a
majority of the stock present or represented and voting on a matter (or if
there are two (2) or more classes of stock entitled to vote as separate
classes then, in the case of each such class, the holders of a majority of
the stock of that class present or represented and voting on a matter) shall
decide any matter to be voted on by the stockholders, except where a larger
vote is required by law, the Certificate of Incorporation or these Bylaws.
Any election by stockholders shall be determined by a plurality of the votes
cast by the stockholders entitled to vote at the election. No ballot shall be
required for any such election unless requested by a stockholder present or
represented at the meeting and entitled to vote in the election. The
corporation shall not, directly or indirectly, vote any share of its stock.
11. ACTION WITHOUT MEETING. Any action to be taken by the
stockholders at a meeting may be taken without a meeting, without prior
notice and without a vote, if a written consent(s), setting set forth the
action so taken, shall be signed by the holder of outstanding stock having
not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted and shall be delivered to the corporation
by delivery to its registered office in the State of Delaware, its principal
place of business, or an office or agent of the corporation having custody of
the book in which proceedings of stockholder meetings are recorded. Delivery
made to a corporation's registered office shall be by hand or by certified or
registered mail, return receipt required.
ARTICLE II.
BOARD OF DIRECTORS
1. POWERS. The business of the corporation shall be managed by a
Board of Directors which may exercise all the powers of the corporation
except as otherwise provided by law, the Certificate of Incorporation or
these Bylaws. In the event of a vacancy in the Board of Directors, the
remaining Directors, except as otherwise provided by law, may exercise the
powers of the full Board until the vacancy is filled.
2. ELECTION. The Board of Directors shall consist of such number of
directors not less than one (1) as shall be fixed from time to time by the
Directors. Directors shall be elected by the stockholders at a regular or
special meeting called for that purpose, and shall be elected at each annual
meeting. A Director need not be a stockholder.
3. NOMINATION. Following the completion of a Public Offering, only
persons who are nominated in accordance with the following procedures shall
be eligible for election as Directors. Nominations for the election of
Directors may be made (a) by or at the direction of the Board or (b) by any
stockholder of record entitled to vote for the election of Directors at such
meeting; provided, however, that a stockholder may nominate persons for
election as Directors only if written notice (in accordance with Article I,
Section 5 hereof) of such stockholder's intention to make such nominations is
received by the Secretary (i) with respect to an election to be held at an
annual meeting of the stockholders, not fewer than 60 nor more than 90 days
prior
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<PAGE>
to the date specified in Article I, Section 2 hereof for such annual meeting
and (ii) with respect to an election to be held at a special meeting of the
stockholders for the election of Directors, not later than the close of
business on the seventh business day following the date on which notice of
such meeting is first given to stockholders. Any such stockholder's notice
shall set forth (a) the name and address of the stockholder who intends to
make a nomination; (b) a representation that the stockholder is entitled to
vote at such meeting and a statement of the number of shares of the
corporation which are beneficially owned by the stockholder; (c) a
representation that the stockholder intends to appear in person or by proxy
at the meeting to nominate the person or persons specified in the notice; (d)
as to each person the stockholder proposes to nominate for election or
re-election as a Director, the name and address of such person and such other
information regarding such nominee as would be required in a proxy statement
filed pursuant to the proxy rules of the Securities and Exchange Commission
had such nominee been nominated by the Board, and a description of any
arrangements or understandings between the stockholder and such nominee and
any other persons (including their names), pursuant to which the nomination
is to be made; and (e) the consent of each such nominee to serve as a
Director if elected. If the facts warrant, the Board, or the chairman of a
stockholder's meeting at which Directors are to be elected, shall determine
and declare that a nomination was not made in accordance with the foregoing
procedure and if, it is so determined, the effective nomination shall be
disregarded. The right of stockholders to make nominations pursuant to the
foregoing procedure is subject to the rights, of the holders of any class or
series of stock having a preference over the Common Stock as to dividends or
upon liquidation. The procedures set forth in this Section for nomination for
election of Directors of stockholders are in addition to, and not in
limitation of, any procedures now in effect or hereafter adopted by or at the
direction of the Board of any committee thereof.
4. TENURE. The Directors shall hold office until the next annual
meeting of stockholders and thereafter until their successors are chosen and
qualified, except as otherwise provided in these Bylaws. Any Director may
resign by giving written notice of his resignation to the corporation at its
principal office or to the Chief Executive Officer, the President, Secretary
or Directors, and such resignation shall become effective upon receipt unless
another time is specified therein.
5. REMOVAL. A Director may be removed from office with or without
cause at any meeting of the stockholders by vote of the stockholders holding
more than fifty percent (50%) interest of the capital stock issued and
outstanding and entitled to vote in the election of Directors, or for cause
by vote of a majority of the Directors then in office. A Director may be
removed for cause only after reasonable notice and opportunity to be heard
before the body proposing to remove him.
After the completion of a Public Offering, any Director or
the entire Board may be removed only for cause by the holders of not less
than two-thirds of the shares entitled to elect the Director or Directors
whose removal is sought. Such action may only be taken at a special meeting
of the stockholders called expressly for that purpose, provided that notice
of the proposed removal, which shall include a statement of the charges
alleged against the Director,
4
<PAGE>
shall have been duly given to the stockholders together with or as a part of
the notice of the meeting.
Where a question of the removal of a Director for cause is
to be presented for stockholder consideration, an opportunity must be
provided to such Director to present his or her defense to the stockholders
by a statement which must accompany or precede the notice of the special
meeting of stockholders or, if provided to stockholders prior to the notice
of special meeting, the initial solicitation of proxies seeking authority to
vote for the removal of such Director for cause. If not provided, then such
proxies may not be voted for removal. The Director involved shall be served
with notice of the meeting at which such action is proposed to be taken
together with a statement of the specific charges and shall be given an
opportunity to be present and to be heard at the meeting at which his or her
removal is considered.
The vacancy created by the removal of a Director under this
Section shall be filled only by a vote of the holders of two-thirds of the
shares then entitled to elect the Director removed. Such vote may be taken at
the same meeting, annual or special, as the stockholders may decide.
6. MEETINGS. Regular meetings of the Directors may be held without
notice at such places and at such times as the Directors may from time to
time determine. All directors holding office at the time such determination
is made shall be given notice of the determination. A regular meeting of the
Directors shall be held without notice at the same place as the annual
meeting of stockholders, or the special meeting held in lieu thereof,
following such meeting of stockholders. Special meetings of the Directors may
be called by the Chairman of the Board of Directors, the Chief Executive
Officer or two (2) or more Directors.
7. NOTICE OF MEETING. Notice of the date, time, place and purpose of
every special meeting of the Directors shall be given to each Director by the
Secretary, or in case of the death, absence, incapacity or refusal of the
Secretary, by the officer or one of the Directors calling the meeting. Notice
shall be given to each Director in person or by telephone or by telegram or
facsimile sent to his business or home address at least twenty-four (24)
hours in advance of the meeting, or by written notice mailed to his business
or home address at least forty-eight (48) hours in advance of the meeting.
Notice need not be given to any Director if a written waiver of notice
executed by him before or after the meeting is filed with the records of the
meeting, or to any Director who attends the meeting without objecting to the
lack of notice prior to the meeting or at the commencement thereof. A waiver
of notice of Directors' meeting need not specify the purposes of the meeting.
8. QUORUM OF DIRECTORS. At any meeting the Directors, a majority of
the Directors at the time in office shall constitute a quorum, but a lesser
number may adjourn any meeting from time to time without further notice.
Unless otherwise provided by law, the Certificate of Incorporation or these
Bylaws, business may be transacted by vote of a majority of those in
attendance at any meeting at which a quorum is present.
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<PAGE>
9. VACANCIES AND NEWLY CREATED DIRECTORSHIP. Unless otherwise
provided in the Certificate of Incorporation, vacancies and newly created
directorships resulting from any increase in the authorized number of
Directors elected by all of the stockholders having the right to vote as a
single class may be filled by a majority of the Directors then in office,
although less than a quorum, or by a sole remaining Director.
10. CHAIRMAN OF THE BOARD OF DIRECTORS. The Board of Directors may
elect a Chairman of the Board of Directors from among its members, who shall
serve at the pleasure of the Board and shall preside at all meetings of the
Directors and at all meetings of the stockholders.
11. COMMITTEES.
(A) (1) Executive Committee. By
resolution duly adopted by a majority of the whole Board, the Board
of Directors may designate two or more directors to constitute an
Executive Committee. Each member of the Executive Committee shall
continue as a member thereof until the expiration of his term as a
director, or until his earlier resignation from the Executive
Committee, in either case unless sooner removed as a member of the
Executive Committee or as a director by any means authorized by
these Bylaws.
(2) The Executive Committee
shall have and may exercise all of the rights, powers and authority
of the Board of Directors, except as expressly limited by the General
Corporation Law of the State of Delaware, as amended from time to time.
(3) The Executive Committee shall
fix its own rules of procedure and shall meet at such times and at
such place or places as may be provided by its rules. The Chairman of
the Executive Committee, or, in the absence of a Chairman, a member
of the Executive Committee chosen by a majority of the members
present, shall preside at meetings of the Executive Committee, and
another member thereof chosen by the Executive Committee shall act
as Secretary. A majority of the Executive Committee shall constitute
a quorum for the transaction of business, and the affirmative vote
of a majority of the members thereof shall be required for any action
of the Executive Committee. The Executive Committee shall keep
minutes of its meeting and deliver such minutes to the Board
of Directors.
(B) (1) Compensation Committee: By
resolution duly adopted by a majority of the whole Board, the Board
of Directors may designate two or more directors to constitute a
Compensation Committee. Each member of the Compensation Committee
shall continue as a member thereof until the expiration of his term
as a director, or until his earlier resignation from the Compensation
Committee, in either case unless sooner removed as a member of the
Compensation Committee or as a director by any means authorized by
these Bylaws.
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<PAGE>
(2) The Compensation Committee
shall have and may exercise all of the rights, powers and authority
of the Board of Directors to, among other things, adopt an employee
stock option plan, except as expressly limited by the General
Corporation Law of the State of Delaware, as amended from time to
time.
(3) The Compensation Committee shall
fix its own rules of procedure and shall meet at such times and at
such place or places as may be provided by its rules. The Chairman
of the Compensation Committee, or, in the absence of a Chairman a
member of the Compensation Committee chosen by a majority of the
members present, shall preside at meetings of the Compensation
Committee, and another member thereof chosen by the Compensation
Committee shall act as Secretary. A majority of the Compensation
Committee shall constitute a quorum for the transaction of business,
and the affirmative vote of a majority of the members thereof shall
be required for any action of the Compensation Committee. The
Compensation Committee shall keep minutes of its meeting and deliver
such minutes to the Board of Directors.
(D) Other Committees. The Board of Directors may, by
resolution passed by a majority of the whole Board, designate one or
more committees, each committee to consist of one or more of the
directors of the Corporation. The Board may designate one or more
members as alternate members of any committee, who may replace any
absent or disqualified member at any meeting of the committee. In
the absence or disqualification from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in the place of any
such absent or disqualified member. Any such committee, to the
extent provided in the resolution of the Board, shall have and may
exercise the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation with the
exception of any authority the delegation of which is prohibited by
Section 141 of the General Corporation Law, and may authorize the
seal of the Corporation to be affixed to all papers which may
require it.
12. ACTION WITHOUT MEETING. Any action that may be taken by the
Directors at a meeting may be taken without a meeting if all Directors
entitled to vote thereon consent thereto by a writing filed with the records
of the Directors' meetings. Such consent shall be treated for all purposes as
a vote at a meeting of the directors.
13. PRESUMPTION OF ASSENT. A Director who is present at a meeting of
the Directors at which action on any corporate matter is taken shall be
presumed to have assented to the action taken unless his dissent shall be
recorded in the minutes of the meeting or unless he shall file his written
dissent to such action with the Secretary of the meeting before the
adjournment thereof or shall forward such dissent by certified mail to the
Secretary of the corporation immediately after the adjournment of the
meeting. Such right of dissent shall not apply to a Director who voted at the
meeting in favor of such action.
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<PAGE>
14. ACTION BY TELEPHONE. The Board of Directors or any committee
designated thereby may participate in a meeting of such Board or committee by
means of a conference telephone or similar communications equipment by means
of which all persons participating in the meeting can hear each other at the
same time, and participation by such means shall constitute presence in
person at a meeting.
ARTICLE III.
OFFICERS
1. ENUMERATION. The officers of the corporation shall consist of a
Chairman, Chief Executive Officer, a President, a Secretary, and such other
officers, including one or more Vice Presidents, and Assistant Secretaries as
the Directors may determine.
2. ELECTION. The Chairman, Chief Executive Officer, a President, and
Secretary shall be elected annually by the Directors at their first meeting
following the annual meeting of stockholders. Other office may be chosen by
the Directors at such meeting or at any other meeting.
3. QUALIFICATION. No officer need be a Director or a stockholder.
Any two or more offices may be held by the same person. The Secretary shall
be a resident of Delaware unless the corporation has a resident agent
appointed for the purpose of service of process. Any officer may be required
by the Directors to give bond for the faithful performance of his duties to
the corporation in such amount and with such sureties as the Directors may
determine.
4. TENURE. Except as otherwise provide bylaw, the Certificate of
Incorporation or these Bylaws, the Chairman, the Chief Executive Officer, a
President, and Secretary shall hold office until the first meeting of the
Directors following the annual meeting of stockholders and thereafter until
his or her successor is chosen and qualified; and all other officers shall
hold office until the first meeting of the Directors following the annual
meeting of stockholders, unless a shorter term is specified in the vote
choosing or appointing them. Any officer may resign by delivering his written
resignation to the corporation at its principal office or to the Chief
Executive Officer or Secretary, and such resignation shall be effective upon
receipt unless it is specified to be effective at some other time or upon the
happening of some other event.
5. VACANCIES. Any vacancy in any office may be filled by the
Directors at a meeting called for that purpose. When any officer is, in the
opinion of the Directors, unable to perform his or her duties, they may by
vote appoint a temporary officer to act until further vote by them, with
power to perform all or part of the duties of such officer.
6. REMOVAL. The Directors may remove any officer with or without
cause by a vote of majority of the Directors then in office, provided, that
an officer may be removed for cause only after reasonable notice and
opportunity to be heard by the Board of Directors.
7. CHAIRMAN AND CHIEF EXECUTIVE OFFICER. The Chairman shall serve as
the chief executive officer of the Corporation and shall, subject to the
direction of the Directors, have general supervision and control of its
business.
8
<PAGE>
8. PRESIDENT AND CHIEF OPERATING OFFICER. The President shall be the
Chief Operating Officer of the Corporation and shall, subject to the
direction of the Directors, have such duties and powers as are customarily
incident to his or her office.
9. SECRETARY AND ASSISTANT SECRETARIES. The Secretary shall keep a
record of the meetings of the stockholders and the Directors. Unless a
Transfer Agent is appointed, the Secretary shall keep or cause to be kept at
the principal office of the corporation or at his office, the stock and
transfer records of the corporation, in which are contained the names of all
stockholders and the record address, and the amount to stock held by each.
Any Assistant Secretary shall have such powers as the Directors may from time
to time designate. In the absence of the Secretary from any meeting of
stockholders, an Assistant Secretary, if one be elected, otherwise a
Temporary Secretary designated by the person presiding at the meeting, shall
perform the duties of the Secretary.
10. VICE PRESIDENTS; OTHER POWERS AND DUTIES. Each Vice President
and other officer shall, subject to these Bylaws, have in addition to the
duties and powers specifically set forth in these Bylaws, such duties and
powers as are customarily incident to his office, and such duties and powers
as the Directors my from time to time designate.
ARTICLE IV.
CAPITAL STOCK
1. CERTIFICATE OF STOCK. Each stockholders shall be entitled to a
certificate of the capital stock of the corporation in such form as may be
prescribed from time to time by the Directors. The certificate shall be
signed by the Chairman, the Chief Executive Officer, the President or a Vice
President, or the Secretary or an Assistant Secretary, but when a certificate
is countersigned by a transfer agent or a registrar, other than a Director,
officer or employee of the corporation, such signatures may be facsimiles. In
case any officer who has signed or whose facsimile signature has been placed
on such certificate shall have ceased to be such officer before such
certificate is issued, it may be issued by the corporation with the same
effect as if he were such officer at the time of its issue.
Every certificate for shares of stock that are subject to
any restriction on transfer pursuant to the Certificate of Incorporation, the
Bylaws or any agreement to which the corporation is a party, shall have the
restriction noted conspicuously on the certificate and shall also set forth
on the face or back either the full text of the restriction or a statement of
the existence of such restriction and a statement that the corporation will
furnish a copy to the holder of such certificate on written request and
without charge. Every certificate issued when the corporation is authorized
to issue more than one class or series of stock shall set forth on its face
or back either the full text of the preferences, voting powers,
qualifications and special and relative rights of the shares of each class
and series authorized to be issued or a statement of the existence of such
preferences, powers, qualifications and rights, and a statement that the
corporation will furnish a copy thereof to the holder of such certificate on
written request and without charge.
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2. TRANSFER ON BOOKS. All shares of stock shall be transferable on
the books of the corporation except when closed as provided by the Bylaws,
upon surrender of the certificate therefor duly endorsed, or accompanied by a
separate document containing an assignment of the certificate or a power of
attorney to sell, assign, or transfer the same, or the shares represented
thereby, with all such endorsements or signatures guaranteed if required by
the corporation. The corporation shall be entitled to recognize as exclusive
the rights of a person registered on its books as the owner of legal title to
shares, to the full extent permitted bylaws. The stock-transfer and other
books of the corporation may be closed by order of the Directors for sixty
(60) days or any lesser period previous to any meeting of stockholders or any
day appointed for the payment of a dividend or for any other purpose.
3. LOST CERTIFICATE. In case any certificate of stock of the
corporation shall be lost or destroyed, a new certificate may be issued in
lieu thereof on reasonable evidence of such loss or destruction, and upon
such indemnity being given within the limits permitted by law as the
Directors may require for the protection of the corporation or any transfer
agent or registrar.
4. ISSUE OF STOCK. Unless otherwise voted by the Incorporator or
stockholders, the whole or any part of any unissued balance of the authorized
capital stock of the corporation or the whole or any part of any capital
stock of the corporation held in its treasury may be issued or disposed of by
vote of the Directors in such manner, for such consideration, and on such
terms as the directors may determine.
ARTICLE V.
MISCELLANEOUS PROVISIONS
1. FISCAL YEAR. The fiscal year of the corporation shall end
on the last day in December each year.
2. SEAL. The seal of the corporation shall bear its name and the
year of its incorporation or such other device or inscription as the
Directors may determine.
3. EXECUTION OF INSTRUMENTS. All deeds, leases, transfers,
contracts, bonds, notes and other obligations authorized to be executed by an
officer of the corporation in its behalf shall be signed by the Chairman, the
Chief Executive Officer or the except as the Directors may generally or in
particular cases otherwise determine.
4. VOTING OF SECURITIES. Except as the Directors may otherwise
designate, the Chairman, the Chief Executive Officer or may waive notice of,
and appoint any person or persons to act as proxy or attorney in fact for
this corporation (without power of substitution) at any meeting of
stockholders of any other corporation or organization, the securities of
which may be held by this corporation.
5. CERTIFICATE OF INCORPORATION. All references in these Bylaws to
the Certificate of Incorporation shall be deemed to be to the Certificate of
Incorporation of the corporation, as amended and in effect from time to time.
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6. DEPOSITORY AUTHORITY. Any Chairman, Chief Executive Officer,
President, or Vice President, together with the Secretary of any Assistant
Secretary, shall designate the banks and the name, whether it be the
Corporate name or the name of one of them or the name of other persons
connected with the Corporation of tradenames, in which such accounts shall be
opened and kept and shall designate the persons who shall have authority on
behalf of the Corporation to sign checks against such funds, to the extent of
such funds in said accounts only, and the person who shall have authority to
endorse and make payable to the order of said banks, checks, drafts and other
negotiable instruments, for deposit in said banks, and to deposit such checks
drafts and other negotiable instruments in said accounts.
ARTICLE VI.
AMENDMENTS
These Bylaws may be amended at any annual or special
meeting by vote of the stockholders holding a majority of the shares having
voting power, provided that the nature of substance of the proposed amendment
shall be stated in the notice of the meeting. These Bylaws may also be
amended by a majority of the Board of Directors then in office. Not later
than the time of giving notice of the meeting and stockholders next following
the adoption of an amendment by the Directors, notice thereof stating the
substance of such change shall be given to the stockholders. The authority of
the Board of Directors to amend the Bylaws shall be subject to the
limitations that no change may be made in the date fixed in the Bylaws for an
annual meeting of stockholders within sixty (60) days before the date stated
in the Bylaws and the notice of any change in the date of an annual meeting
of stockholders shall be given to all stockholders at least twenty (20) days
before the new date is fixed.
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Exhibit 21.1
Subsidiaries
<TABLE>
<CAPTION>
Name State of Incorporation
- ---- ----------------------
<S> <C>
IIT Holding Inc. FL
International Information Technology, Inc. CA
International Information Technology IIT, C.A. Venezuela
Advanced Communication Resources, Inc. NY
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated September 23, 1998, with respect to the combined
financial statements of International Information Technology, Inc. and
International Information Technology IIT, C.A., included in the Registration
Statement (Form S-1) and related Prospectus of USINTERNETWORKING, Inc. dated
January 15, 1999.
/s/ Ernst & Young LLP
---------------------
Baltimore, Maryland
January 15, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated July 23, 1998, with respect to the financial
statements of Advanced Communication Resources, Inc., included in the
Registration Statement (Form S-1) and related Prospectus of
USINTERNETWORKING, Inc. dated January 15, 1999.
/s/ Mahoney Cohen
-----------------
New York, New York
January 14, 1999
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our Firm under the caption "Experts" and to
the use of our report dated August 20, 1998, with respect to the financial
statements of International Information Technology IIT, C.A., included in the
Registration Statement (Form S-1) and related Prospectus of
USINTERNETWORKING, Inc. dated January 15, 1999.
/s/ Bassan & Asociados S.C.
Caracas, Venezuela
January 14, 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> 2,882,119
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 49,702,543
<PP&E> 32,804,790
<DEPRECIATION> 1,567,885
<TOTAL-ASSETS> 107,526,574
<CURRENT-LIABILITIES> 25,685,889
<BONDS> 0
62,005,509
550
<COMMON> 15,750
<OTHER-SE> 2,908,719
<TOTAL-LIABILITY-AND-EQUITY> 107,526,574
<SALES> 0
<TOTAL-REVENUES> 4,122,449
<CGS> 0
<TOTAL-COSTS> 6,658,004
<OTHER-EXPENSES> 27,362,849
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,681,088
<INCOME-PRETAX> (32,212,081)
<INCOME-TAX> 0
<INCOME-CONTINUING> (32,212,081)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (32,212,081)
<EPS-PRIMARY> (0.46)
<EPS-DILUTED> (0.46)
</TABLE>
<PAGE>
Exhibit 99.1
[LETTERHEAD]
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. 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
