<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 21, 1999
REGISTRATION NO. 333- -
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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)
<TABLE>
<S> <C> <C>
DELAWARE 7379 522078325
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
------------------------
ONE USI PLAZA
ANNAPOLIS, MARYLAND 21401-7478
(410) 897-4400
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------
WILLIAM T. PRICE, ESQ.
VICE PRESIDENT, SECRETARY AND GENERAL COUNSEL
ONE USI PLAZA
ANNAPOLIS, MARYLAND 21401-7478
(410) 897-4400
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
JOHN D. WATSON, JR., ESQ.
LATHAM & WATKINS
1001 PENNSYLVANIA AVENUE, N.W., SUITE 1300
WASHINGTON, DC 20004
(202) 637-2200
------------------------
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: /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNTS OFFERING PRICE PER AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED TO BE REGISTERED UNIT OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
7% Convertible Subordinated Notes due 2004... $125,000,000 100%(1) $125,000,000(1) $33,000
Common Stock, $.001 par value................ 5,030,181 shares(2) --(3) --(3) --(3)
Common Stock, $.001 par value................ 112,701 shares(4) $44.438 $5,008,207 $1,392
</TABLE>
(1) Calculated pursuant to Rule 457(i) under the Securities Act of 1933.
(2) This number represents the number of shares of Common Stock that are
issuable upon conversion of the 7% Convertible Subordinated Notes due
November 1, 2004 registered hereby.
(3) No additional consideration will be received for the Common Stock issuable
upon conversion of the Notes and, therefore, no registration fee is required
pursuant to Rule 457(i).
(4) This number represents shares of Common Stock being offered by seven of our
stockholders.
(5) Calculated pursuant to Rule 457(c) 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 21, 1999
THIS PROSPECTUS AND THE INFORMATION CONTAINED HEREIN ARE SUBJECT TO CHANGE,
COMPLETION OR AMENDMENT WITHOUT NOTICE. THESE SECURITIES MAY NOT BE SOLD NOR MAY
AN OFFER TO BUY BE ACCEPTED PRIOR TO THE TIME THE PROSPECTUS IS DELIVERED IN
FINAL FORM. UNDER NO CIRCUMSTANCES SHALL THIS PROSPECTUS CONSITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER BY BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD
BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH JURISDICTION.
<PAGE>
PROSPECTUS
[LOGO]
USINTERNETWORKING, INC.
$125,000,000
7% CONVERTIBLE SUBORDINATED NOTES DUE NOVEMBER 1, 2004
AND 5,030,181 SHARES OF COMMON STOCK ISSUABLE
UPON CONVERSION OF THE NOTES
112,701 SHARES OF COMMON STOCK
------------------
Holders of our 7% Convertible Subordinated Notes due 2004 may offer for sale
the Notes and the shares of our common stock into which the Notes are
convertible at any time at market prices prevailing at the time of sale or at
privately negotiated prices. The selling holders may sell the Notes or the
common stock directly to purchasers or through underwriters, broker-dealers or
agents, who may receive compensation in the form of discounts, concessions or
commissions. We will not receive any proceeds from the sale of the Notes or the
common stock by the selling holders. We will pay all expenses (other than
selling commissions and fees and stock transfer taxes) of the registration and
sale of the Notes and the common stock into which the Notes are convertible.
Holders of the Notes may convert any portion of the note (in multiples of
$1,000) at any time on or before November 1, 2004 into shares of our common
stock at a conversion price of $24.85 per share, subject to adjustment in
certain events. We will pay Interest on the Notes on May 1 and November 1 of
each year, beginning on May 1, 2000. We may redeem some or all of the Notes at
any time on or after November 5, 2002 at the redemption prices described under
the caption "Description of the Notes--Optional Redemption." If we experience a
change in control, holders of the Notes will have the right to require us to
purchase their Notes at a price equal to 100% of the principal amount plus
accrued interest.
The Notes are unsecured obligations that are subordinated in right of
payment to all of our existing and future senior indebtedness. See "Description
of the Notes--Subordination of Notes." The Notes are not entitled to any sinking
fund.
In addition, this Prospectus relates to the offering by seven of our
stockholders of up to 112,701 shares of our common stock acquired in private
placement transactions. As part of these transactions, we granted these
stockholders the right to include resales of their shares in this Prospectus. We
will not receive any proceeds from the sale of the common stock by these
stockholders.
Our common stock is quoted on The Nasdaq National Market under the symbol
"USIX." On December 20, 1999, the last reported sale price of the common stock
was $44.63 per share. The Notes are eligible for trading in The PORTAL(Sm)
Market, a subsidiary of The Nasdaq Stock Market, Inc., however, no assurance can
be given as to the continued development or liquidity of any market for the
Notes.
INVESTING IN THE NOTES OR OUR COMMON STOCK INVOLVES SUBSTANTIAL RISKS. SEE
"RISK FACTORS" BEGINNING ON PAGE 9.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is December , 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 9
Use of Proceeds....................... 21
Common Stock Price Range.............. 21
Dividend Policy....................... 21
Dilution.............................. 21
Capitalization........................ 22
Selected Historical Consolidated
Financial Data...................... 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 27
Business.............................. 35
Management............................ 48
</TABLE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Certain Relationships and Related
Transactions........................ 57
Principal Stockholders................ 61
Description of Certain Credit
Facilities.......................... 64
Description of the Notes.............. 65
Description of Capital Stock.......... 79
Certain United States Federal Income
Tax Considerations.................. 82
Selling Security Holders.............. 86
Plan of Distribution.................. 89
Legal Matters......................... 91
Experts............................... 91
Available Information................. 91
Index to Financial Statements......... F-1
Unaudited Pro Forma Consolidated
Statement of Operations............. P-1
</TABLE>
This Prospectus references and depicts certain trademarks, service marks and
trade names of other companies. We have applied for federal registration of the
marks "USINTERNETWORKING," "USI," "Internet Managed Application Provider,"
"IMAP," "PriorityPeering," "USIView," "AppHost," "Global Enterprise Management
Center" and "GEMC."
WE HAVE NOT AUTHORIZED ANY PERSON TO GIVE YOU ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. YOU SHOULD NOT
RELY ON ANY INFORMATION OR REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS. THIS PROSPECTUS IS NOT ANY OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE CONVERTIBLE SUBORDINATED NOTES AND
THE COMMON STOCK INTO WHICH THE NOTES ARE CONVERTIBLE. IT IS NOT AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY SECURITIES IF THE OFFER OR
SOLICITATION WOULD BE UNLAWFUL. THE AFFAIRS OF USINTERNETWORKING MAY HAVE
CHANGED SINCE THE DATE OF THIS PROSPECTUS. YOU SHOULD NOT ASSUME THAT THE
INFORMATION IN THIS PROSPECTUS IS CORRECT AT ANY TIME SUBSEQUENT TO ITS DATE.
<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 REFLECTS A THREE- FOR-TWO STOCK SPLIT
EFFECTED BY A STOCK DIVIDEND TO ALL SHAREHOLDERS OF RECORD AT THE CLOSE OF
BUSINESS ON DECEMBER 3, 1999. THIS STOCK DIVIDEND WAS DISTRIBUTED ON DECEMBER
17, 1999.
ABOUT USINTERNETWORKING
USI implements, operates, and supports packaged software applications that
can be accessed and used over the Internet. These IMAP, or Internet Managed
Application Provider, services are based on packaged applications from leading
software vendors and are designed to meet the needs of middle market companies
for business functions such as e-commerce, sales force automation and customer
support, human resource and financial management, messaging and collaboration
and professional services automation. In order to deliver and support our IMAP
solutions, we have constructed a highly reliable, secure, global network,
including four Enterprise Data Centers located around the world. We implement
selected packaged software applications in our data centers, configure them to
meet the needs of our clients and bundle them with Internet access, back-up,
security and operational support. We integrate these elements of technology and
sell them to clients as a service for a recurring monthly fee over a fixed term.
In addition, as part of our IMAP services, we offer complex web hosting services
to clients who want to run their own software applications using our highly
reliable and secure network.
The advantages our clients realize by purchasing our IMAP services rather
than purchasing the application software and implementing it themselves include:
- faster time to benefit;
- reduced technical and integration risk;
- reduced reliance on internal IT staff; and
- lower costs and reduced up-front investment.
We are able to deliver these benefits to our clients in part because we have
designed and implemented a network of four Enterprise Data Centers located in
Annapolis, Silicon Valley, Amsterdam and Tokyo. The data centers are linked by a
dedicated network and by robust transit connections to twelve major Internet
backbones--eight in North America and two each in Europe and Asia. Our data
centers comprise standardized hardware environments to support our applications,
embedded security, EMC disk arrays for storage and real-time back-up and
significant levels of infrastructure redundancy. Our network is monitored and
managed through USIView, which enables a client engineer to see all hardware,
software and network elements of a client application in a single view. Cisco
assisted in the design of our network and has designated it as a Cisco Powered
Network.
We believe that controlling all elements of the network from the client's
Internet backbone provider or LAN enables us to deliver superior response time,
reliability and security for our clients. We can substantially reduce
implementation time because we implement our applications in a consistent and
pre-configured environment. Moreover, our clients do not need to mediate among
disparate vendors, because we take total responsibility for application support
and system performance and availability.
We implement and manage applications that are developed by others. To
execute this strategy, we have established agreements with leading software
vendors in key application areas, including:
- BroadVision and Microsoft in e-commerce;
- Ariba in business to business electronic commerce;
3
<PAGE>
- Siebel in sales force automation, customer service and enterprise
marketing;
- PeopleSoft and Lawson in human resources and financial management;
- Microsoft in enterprise messaging and collaboration;
- Niku in professional services automation; and
- Sagent in decision-making support.
Our IMAP clients sign contracts that provide for fixed monthly service fees,
typically for a three- to five-year term, in exchange for the service we
provide. Once a client signs an IMAP contract, we invest in the hardware,
software and implementation needed to deliver that client's service. This
requires a substantial investment in the early years to build our client base.
Because we own or provide most of the elements and operational support for a
client's implementation, we anticipate that we will experience a high level of
client retention, even at the end of the contract's term. We also expect to
benefit from rapidly growing recurring revenue, which we believe will generate
substantial positive cash flow in later years.
We introduced our IMAP services in late 1998. For the nine months ended
September 30, 1999, we generated $20.9 million in revenues, of which 54.2% was
derived from IMAP sales and the balance from traditional IT services. As of
September 30, 1999, we had 81 signed contracts with 64 clients for our IMAP
services. The total expected revenue from these contracts, assuming payment over
the full contract terms, exceeds $100 million.
MARKET TREND HIGHLIGHTS
We believe there are several key trends occurring in our marketplace that
create a substantial market opportunity for a single-source service solution
that combines implementation and operation of software, hardware, systems
integration and Internet-based communications for middle market businesses at a
competitive price.
INCREASING ACCEPTANCE OF THE APPLICATION SERVICE PROVIDER MODEL.
The application service provider model is being increasingly validated by
the emergence of new entrants into this market. International Data Corporation
estimates that the market opportunity in the high-end Application Service
Provider market will reach $2 billion by 2003, representing a four-year compound
annual growth rate of 91%.
RAPID GROWTH OF E-COMMERCE AND INTERNET-BASED COMMUNICATIONS.
E-commerce is becoming a critical element of many businesses' strategies, as
companies increasingly demand that their vendors communicate ordering, invoicing
and payment transactions through Internet-enabled applications. International
Data Corporation estimates that commerce on the Internet will be more than $1
trillion by 2003, reflecting a four-year compound annual growth rate of 85%.
COMPETITIVE NEED OF MIDDLE MARKET ENTERPRISES TO AUTOMATE KEY BUSINESS
PROCESSES.
Middle market enterprises increasingly face competitive demands to automate
business processes, but they frequently have not been able to afford the
functionality available to their larger competitors. Many businesses recognize
that they do not have an infrastructure sufficient to ensure reliable and
responsive deployment of mission-critical applications on the Internet, and so
they are increasingly turning to Application Service Providers for outsourced
solutions. Moreover, many middle market enterprises lack the staff to implement,
operate and maintain these complex applications.
4
<PAGE>
AVAILABILITY OF INTERNET-ENABLED PACKAGED SOFTWARE APPLICATIONS.
Packaged software providers are increasingly Internet-enabling their
software. This trend is particularly true for those applications with
distributed users such as e-commerce, enterprise resource planning applications
and sales force automation, where the increasing ubiquity of the Internet makes
it a cost-efficient mechanism for implementing distributed functions.
COMPETITIVE STRENGTHS
We have built and are capitalizing on a number of key strengths to develop a
leading market position as a facilities-based application service provider.
These strengths include:
SPECIALIZED GLOBAL NETWORK ALREADY IN PLACE.
We have a highly reliable, redundant global network specifically designed to
support our IMAP solutions. Our network is designed to provide the fastest
possible response time, the highest level of security and 99.9% availability to
our clients.
FIRST MOVER ADVANTAGE.
We believe we have created a recognized brand name in the emerging
Application Service Provider market by establishing relationships with leading
software providers in key application areas and by promoting our superior levels
of client service. We believe this is a first mover advantage that should give
us leverage in attracting new customers and in building additional partnerships
with leading software application providers.
SINGLE POINT OF RESPONSIBILITY.
Our IMAP solutions enable clients to buy the functionality of leading
enterprise software applications as a service from a single service provider,
rather than as a collection of technologies from multiple vendors. We take full
responsibility for the deployment and maintenance of these IMAP best-of-breed
packaged software applications. This allows our clients to focus on their core
competencies without mediating among disparate vendors.
KEY ALLIANCES WITH LEADING APPLICATION PROVIDERS.
We have established relationships with vendors in key application areas.
These agreements provide us with a software portfolio that can meet a broad
range of clients' e-commerce, enterprise resource planning and communication
needs. Some of these agreements also provide USI with an advantageous market
position. For example, we are the exclusive application service provider of
Siebel enterprise relationship management applications for direct customers of
SiebelNet, Inc. headquartered in North America.
RECURRING REVENUE AND CLIENT RETENTION MODEL.
Our business model is designed to capture significant recurring revenue
because our clients sign contracts that provide for fixed monthly service fees,
generally over a three- to five-year term. Furthermore, our ongoing support of
our clients provides us the opportunity to identify and supply additional IMAP
solutions. We believe that the level of integration and complexity associated
with our service offerings will create a significant inducement for our clients
to remain with us after their contract terms expire.
5
<PAGE>
EXPERIENCED MANAGEMENT.
We have assembled a highly qualified management team that has considerable
experience in the management and growth of Internet, software, hardware and
telecommunications businesses. We believe that our management's experience in
the development of similar systems and services will be of significant value in
ensuring the quality and success of the IMAP service offerings. Key members of
management have previously held senior operating and management positions with
ARINC, Booz Allen & Hamilton, Clarus, Data General Corporation, DIGEX, EDS, IBM,
Silicon Graphics, Sprint, Sun Microsystems and Sybase.
BUSINESS STRATEGY
The focus of our strategy is to deliver timely, reliable and secure IMAP
services to our clients. We believe that by doing so we will rapidly build our
client base and secure long-term relationships, especially with those clients in
the middle market. We intend to continue investing to maintain a value advantage
over our competitors and to capitalize on our first mover advantages, as
follows:
DEVELOP NEW BUSINESS.
We will continue to develop new business by soliciting potential clients
through joint marketing campaigns with our hardware, software and integration
partners, advertising in industry specific periodicals and newspapers,
sponsoring seminars and trade shows in selected markets and conducting targeted
mass mailings of marketing material.
CROSS-SELL PRODUCTS TO INCREASE PENETRATION OF ACCOUNTS.
We are able to provide a range of packaged software applications and complex
web hosting services to our clients. We actively seek to increase our sales to
clients by cross-selling our products and services. Our aim is to increase our
implementation and provision of our clients' mission-critical business
processes.
EXPAND OUR PORTFOLIO OF IMAP SOLUTIONS.
We have entered into strategic partnerships with numerous application
software vendors. These vendors are offering or developing additional
applications in specific vertical market segments which we expect to deploy in
order to expand our portfolio of IMAP solutions.
ENHANCE THE CAPACITY AND FUNCTIONALITY OF OUR GLOBAL NETWORK.
We will continue to deploy enhanced value features into our network. In
addition, as we begin to address clients located in Europe and Asia, we will
expand our capacity in those regions. Today, we provide European and Asian
mirror sites to our clients from co-located Enterprise Data Centers in Amsterdam
and Tokyo.
EMPHASIZE THE IMAP BRAND.
We have focused our sales and marketing efforts to distinguish IMAP as a
branded product offering focused on the middle market and selected divisions of
larger multi-national organizations. Our direct sales organization allows our
sales representatives to understand each client's specific business needs better
and provide the ongoing support that facilitates effective cross-selling.
------------------------
We were incorporated in Delaware in January 1998. In this Prospectus, we
will refer to USINTERNETWORKING, INC. and its subsidiaries, collectively, as
"USI," "we" and "us." Our principal executive offices are located at One USI
Plaza, Annapolis, Maryland 21401-7478. Our telephone number is
(410) 897- 4400. Our web site is located at www.usi.net. The information on our
web site is not part of this Prospectus.
6
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
The summary historical financial data for the period from our date of
inception, January 14, 1998, through December 31, 1998 presented below was
derived from our audited consolidated financial statements. The summary
historical consolidated financial data for the period from January 14, 1998
through September 30, 1998 and for the nine-month period ended September 30,
1999 presented below was derived from our unaudited consolidated financial
statements. This data is unaudited but in our opinion reflects all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of results for interim periods. Operating results for interim
periods are not necessarily indicative of results to be expected for the full
fiscal years. You should read this information in conjunction with the sections
of this Prospectus entitled "Selected Historical Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in conjunction with the historical consolidated financial
statements and Notes included in the back of this Prospectus.
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
FROM FROM
JANUARY 14, 1998 JANUARY 14, 1998
(DATE OF INCEPTION) (DATE OF INCEPTION)
THROUGH THROUGH NINE MONTHS ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
------------------- ------------------- ------------------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue..................................... $ 4,122 $ 515 $ 20,852
Costs and expenses:
Direct cost of services................... 3,425 343 13,898
Network and infrastructure costs.......... 2,186 -- 11,360
Selling, general and administrative....... 25,240 12,469 42,400
Non-cash stock compensation expense....... 231 90 6,805
Depreciation and amortization............. 3,179 269 14,794
-------- -------- --------
Total costs and expenses.................... 34,261 13,171 89,257
-------- -------- --------
Operating loss.............................. (30,139) (12,656) (68,405)
Interest (expense) income................... (2,314) 233 (647)
-------- -------- --------
Net loss.................................... (32,453) (12,423) (69,052)
Dividends accrued on Series A and Series B
Convertible Preferred Stock............... (1,503) (843) (2,328)
Accretion of common stock subject to
repurchase to fair value.................. (3,904) (1,475) (23,938)
Accretion of Series B Convertible Redeemable
Preferred Stock to fair value............. (237) -- (99)
-------- -------- --------
Net loss attributable to common
stockholders.............................. $(38,097) $(14,741) $(95,417)
======== ======== ========
Basic and diluted loss per common share
attributable to common stockholders....... $ (40.64) $ (15.72) $ (2.49)
======== ======== ========
OTHER DATA:
Capital expenditures...................... 20,128 16,219 58,868
EBITDA(a)................................. (26,729) (12,387) (45,546)
Cash used in operating activities......... (20,603) (7,794) (56,412)
Cash used in investing activities......... (37,669) (31,258) (100,055)
Cash provided by financing activities..... 102,074 50,282 141,241
Ratio of earnings to fixed charges(b)..... -- -- --
</TABLE>
7
<PAGE>
The following table summarizes consolidated balance sheet data as of
September 30, 1999 and as adjusted to give effect to the issuance of the Notes,
including the receipt by us of $120.1 million in net proceeds from the issuance.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
--------------------------
ACTUAL AS ADJUSTED
-------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 28,577 $148,677
Available-for-sale securities............................... 40,425 40,425
Working capital............................................. 46,736 166,836
Total assets................................................ 205,072 330,072
Current portion of long-term debt and capital lease
obligations............................................... 13,805 13,805
Long-term debt and capital lease obligations, excluding
current portion........................................... 34,572 159,572
Stockholders' equity........................................ 132,859 132,859
</TABLE>
- ------------------------
(a) EBITDA consists of earnings (loss) before net interest, income taxes,
depreciation and amortization, stock option compensation expense (a non-cash
charge) and amortization of deferred IMAP costs. EBITDA is presented to
clarify our operating results and they are not intended to represent cash
flow or results of operations in accordance with generally accepted
accounting principles. EBITDA is not calculated under generally accepted
accounting principles and is not necessarily comparable to similarly titled
measures of other companies. For a presentation of cash flows calculated
under generally accepted accounting principles, see our historical
consolidated financial statements contained in the back of this Prospectus.
(b) The ratio of earnings to fixed charges is computed by dividing net loss
before fixed charges by fixed charges. Fixed charges consist of interest
charges, and amortization of discount related to indebtedness and that
portion of rental expense we believe to be representative of interest.
Earnings were insufficient to cover fixed charges by $26.8 million for the
period from our date of inception, January 14, 1998, through December 31,
1998, $12.0 million for the period January 14, 1998 (date of inception)
through September 30, 1998 and $62.8 million for the nine months ended
September 30, 1999.
8
<PAGE>
RISK FACTORS
INVESTING IN THE NOTES OR 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 THAT WE
FACE OR THAT MAY ADVERSELY AFFECT OUR BUSINESS. IF ANY OF THE FOLLOWING RISKS OR
UNCERTAINTIES ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF
OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED. THIS PROSPECTUS ALSO CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL
RESULTS MAY DIFFER FROM THOSE DESCRIBED IN THE FORWARD-LOOKING STATEMENTS. THIS
COULD OCCUR BECAUSE OF THE RISKS DESCRIBED BELOW AND ELSEWHERE IN THIS
PROSPECTUS.
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE HAVE A LIMITED OPERATING
HISTORY.
We began operating in January 1998. Our limited operating history makes
predicting future results difficult. Since our inception, we have focused on
developing our business and only since September 1998 have we begun to contract
with customers for our IMAP offerings. Because of our limited operating history
and the emerging nature of our markets, our historical financial information is
of limited value in projecting our future results. Therefore, it is difficult to
evaluate our business and prospects.
THE SIGNIFICANT AMOUNT OF OUR INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL
HEALTH AND PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER THE NOTES.
The issuance of the Notes increased our indebtedness and, therefore, made us
highly leveraged. The following chart shows certain important as adjusted credit
statistics, assuming we had completed the issuance of the Notes as of the date
specified below and had applied the proceeds as intended.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
AS ADJUSTED
------------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Long-term debt and capital lease obligations, excluding
current portion...................................... $159,572
Stockholders' equity................................... 132,859
Debt to equity ratio................................... 1.20:1
</TABLE>
Earnings were insufficient to cover fixed charges by $26.8 million for the
period from our date of inception, January 14, 1998, through December 31, 1998,
$12.0 million for the period from our date of inception, January 14, 1998,
through September 30, 1998, and $62.8 million for the nine months ended
September 30, 1999.
Our leverage could have important consequences to you. For example, it
could:
- make it more difficult for us to satisfy our obligations with respect to
the Notes or our other indebtedness;
- increase our vulnerability to general adverse economic and industry
conditions;
- limit our ability to fund future working capital, capital expenditures,
acquisitions and other general corporate requirements;
- require us to dedicate a substantial portion of our cash flow from
operations to repaying indebtedness, thereby reducing the availability of
our cash flow to fund working capital, capital expenditures, acquisitions
and other general corporate purposes;
- limit our flexibility in planning for, or reacting to, changes in our
business and industry; and
- limit our ability to borrow additional funds.
9
<PAGE>
Any additional borrowings would further increase the amount of our leverage
and the associated risks.
THE NOTES ARE SUBORDINATED TO OUR OTHER INDEBTEDNESS.
The Notes are unsecured and subordinated in right of payment to all of our
existing and future Senior Indebtedness. As of September 30, 1999, we had
approximately $48.4 million of Senior Indebtedness outstanding. We are also
presently pursuing a variety of sources of other debt financing which, if
obtained, would constitute additional Senior Indebtedness. As a result of this
subordination, in the event of bankruptcy, liquidation or reorganization or
certain other events, our assets will be available to pay obligations on the
Notes only after all Senior Indebtedness has been paid in full, and we may not
have sufficient assets remaining to pay amounts on any or all of the Notes then
outstanding. In addition, the Notes will be effectively subordinated to all
existing and future indebtedness and other liabilities (including trade
payables) of our subsidiaries, including any subsidiaries which we may acquire
or establish in the future. As of September 30, 1999, our subsidiaries had no
outstanding indebtedness. Our right to receive assets of one of our subsidiaries
upon its liquidation or reorganization (and the consequent right of the holders
of the Notes to participate in those assets) would be effectively subordinated
to the claims of a subsidiary's creditors (including trade creditors), except to
the extent that we are recognized as a creditor of a subsidiary. In that case,
our claims would still be subordinate to any security interests in the assets of
the subsidiary.
THE NOTES ARE NOT PROTECTED BY RESTRICTIVE COVENANTS THAT LIMIT OUR BUSINESS
ACTIVITIES.
The Indenture governing the Notes does not contain any financial covenants
or restrictions on the payment of dividends, the incurrence of indebtedness,
including Senior Indebtedness, or the issuance or repurchase of securities by us
or any of our subsidiaries. The Indenture contains no covenants or other
provisions to afford protection to holders of the Notes in the event of a highly
leveraged transaction or a change in control of the Company except to the extent
described under "Description of Notes--Purchase of Notes at the Option of
Holders Upon a Change in Control."
WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH TO SERVICE OUR INDEBTEDNESS.
Our ability to make payments on our indebtedness, including the Notes, and
to fund planned capital expenditures, development and operating costs will
depend on our ability to generate cash in the future through sales of our
services. We cannot assure you that our available liquidity will be sufficient
to service our indebtedness, including the Notes, or to fund our other cash
needs. We may need to refinance all or a portion of our indebtedness, including
the Notes, on or before maturity, but we may not be able to do so on
commercially reasonable terms, or at all. Without sufficient funds to service
our indebtedness, we would have serious liquidity constraints and would need to
seek additional financing from other sources, but we may not be able to do so on
commercially reasonable terms, or at all.
WE EXPECT TO CONTINUE TO INCUR LOSSES AND EXPERIENCE NEGATIVE CASH FLOW.
We expect to have significant operating losses and to record significant net
cash outflow before financing in the near term. Our business has not generated
sufficient cash flow to fund our operations without resorting to external
sources of capital. Starting up our company and building our network required
substantial capital and other expenditures. As a result, we reported a net loss
of $69.1 million for the first nine months of 1999 and EBITDA of negative
$45.6 million for the same period. Further developing our business and expanding
our network will require significant additional capital and other expenditures.
10
<PAGE>
WE MAY NEED ADDITIONAL CAPITAL TO FUND OUR OPERATIONS AND FINANCE OUR GROWTH,
AND WE MAY NOT BE ABLE TO OBTAIN IT ON TERMS ACCEPTABLE TO US OR AT ALL.
We believe that the net proceeds from the sale of the Notes, together with
cash on hand and our existing and anticipated debt and capital lease financing,
will be sufficient to fund our operations for the next twelve months. However,
if we expand more rapidly than currently anticipated, if our working capital
needs exceed our current expectations or if we make acquisitions, we will need
to raise additional capital from equity or debt sources. If we cannot obtain
financing on terms acceptable to us or at all, we may be forced to curtail our
planned business expansion and may be unable to fund our ongoing operations.
OUR HISTORICAL REVENUES WERE DERIVED FROM SERVICES THAT WE DO NOT EXPECT TO BE
THE FOCUS OF OUR BUSINESS IN THE FUTURE.
We currently derive a significant portion of our revenue from professional
services. We acquired two professional services businesses in the fall of 1998
and their services are substantively different than our IMAP offerings. As a
result, historical financial information of the acquired businesses does not
reflect the results we expect from our core business offering in the future.
OUR SUCCESS DEPENDS ON THE ACCEPTANCE AND INCREASED USE OF INTERNET-BASED
BUSINESS SOFTWARE SOLUTIONS, AND WE CANNOT BE SURE THAT THIS WILL HAPPEN.
Our business model depends on the adoption of Internet-based business
software solutions by commercial users. Our business could suffer dramatically
if Internet-based solutions are not accepted or not perceived to be effective.
The market for Internet services, private network management solutions and
widely distributed Internet-enabled packaged application software has only
recently begun to develop. It is now evolving rapidly.
The growth of Internet-based business software solutions could also be
limited by:
- concerns over transaction security and user privacy;
- inadequate network infrastructure for the entire Internet; and
- inconsistent performance of the Internet.
We cannot be certain that this market will become viable or, if it becomes
viable, that it will grow.
THE GROWTH IN DEMAND FOR OUTSOURCED BUSINESS SOFTWARE APPLICATIONS BY MIDDLE
MARKET COMPANIES IS HIGHLY UNCERTAIN.
Growth in demand for and acceptance of outsourced business software
applications, including our IMAP offerings, by middle market companies is highly
uncertain. We believe that many of our potential customers are not fully aware
of the benefits of outsourced solutions. It is possible that these solutions may
never achieve market acceptance. If the market for our products does not grow or
grows more slowly than we currently anticipate, our business, financial
condition and operating results would be materially adversely affected.
OUR BUSINESS STRATEGY MAY NOT EFFECTIVELY ADDRESS OUR MARKET AND WE MAY NEVER
REALIZE A RETURN ON THE RESOURCES WE HAVE INVESTED TO EXECUTE OUR STRATEGY.
We have made substantial investments to pursue our strategy. These
investments include:
- building a global network of data centers;
- allying with particular software providers;
11
<PAGE>
- expanding our work force;
- investing to develop unique service offerings; and
- developing implementation resources around specific applications.
These investments may not be successful. More cost effective strategies may
be available to compete in this market. We may have chosen to focus on the wrong
application areas or to work with the wrong partners. Potential customers may
not value the specific product features in which we have invested. There is no
assurance that our strategy will prove successful.
OTHERS MAY SEIZE THE MARKET OPPORTUNITY WE HAVE IDENTIFIED BECAUSE WE MAY NOT
EFFECTIVELY EXECUTE OUR STRATEGY.
If we fail to execute our strategy in a timely or effective manner, our
competitors may be able to seize the marketing opportunities we have identified.
Our business strategy is complex and requires that we successfully and
simultaneously complete many tasks. In order to be successful, we will need to:
- build and operate a highly-reliable, complex global network;
- negotiate effective partnerships and develop economically attractive
service offerings;
- attract and retain IMAP customers;
- attract and retain highly-skilled employees;
- integrate acquired companies into our operations;
- evolve our business to gain advantages in an increasingly competitive
environment; and
- expand our international operations.
In addition, although most of our management team has worked together for
approximately one year, there can be no assurance that we will be able to
successfully execute all elements of our strategy.
FAILURE OF COMPUTER SYSTEMS AND SOFTWARE PRODUCTS TO BE YEAR 2000 COMPLIANT
COULD INCREASE OUR COSTS, DISRUPT OUR SERVICE AND REDUCE DEMAND FROM OUR
CLIENTS.
We confront the Year 2000 problem in three contexts.
OUR SERVICES. We sell computer-related services, so our risk of lawsuits
relating to Year 2000 issues is likely to be greater than that of companies in
some other industries. Because computer products and services may incorporate
component may cause a Year 2000 problem. As a result, we may be subjected to
Year 2000-related lawsuits whether or not our products and services are Year
2000 compliant. We have executed contracts that make Year 2000 warranties. Some
of these contracts make broader warranties than those made by the manufacturers
of the hardware and software provided. The potential liability arising from
these warranties is not capped. We cannot be certain at this time what the
outcomes or impact of any lawsuits may be.
OUR CLIENTS. Many of our clients and potential clients maintain their
Internet operations on UNIX-based servers, which may be affected by Year 2000
complications. The failure of our clients 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. In addition, clients or potential clients may delay
purchasing software and related products, including our IMAP offerings, due to
concerns related to the Year 2000 problem.
OUR SUPPLIERS. Our business could be adversely affected if we cannot obtain
products, services or systems that are Year 2000 compliant when we need them. In
addition, if vendors and service providers
12
<PAGE>
cannot deliver their products because of Year 2000 compliance problems, our
business, results of operations and financial condition could be materially
adversely affected.
WE PLAN TO EXPAND VERY RAPIDLY, AND MANAGING OUR GROWTH MAY BE DIFFICULT.
We have rapidly expanded our operations since USI was founded in
January 1998. We expect our business to continue to grow both geographically and
in terms of the number of products and services we offer. We cannot be sure that
we will successfully manage our growth. In order to successfully manage our
growth we must:
- enlarge our network and infrastructure;
- improve our management, financial and information systems and controls;
and
- 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 relatively early stage of our operations. If we cannot manage our growth
effectively, our business, financial condition or results of operations could be
adversely affected.
OUR GROWTH COULD BE LIMITED IF WE ARE UNABLE TO ATTRACT AND RETAIN QUALIFIED
PERSONNEL.
We believe that our short- and long-term success depends largely on our
ability to attract and retain highly skilled technical, managerial and marketing
personnel. We particularly require additional management personnel in the areas
of application integration and technical support. Individuals with information
technology skills are in short supply and competition for application
integration personnel is particularly intense. We may not be able to hire the
necessary personnel to implement our business strategy, or we may need to pay
higher compensation for employees than we currently expect. We cannot be sure
that we will succeed in attracting and retaining the personnel we need to
continue to grow.
WE DEPEND ON A LIMITED NUMBER OF KEY PERSONNEL WHO WOULD BE DIFFICULT TO
REPLACE.
Our success also depends in significant part on the continued services of
our key technical, sales and senior management personnel. Losing one or more of
our key employees could have a material adverse effect on our business, results
of operations and financial condition. We have employment agreements with most
of our vice presidents and other key employees, including Christopher R.
McCleary, Stephen E. McManus, Jeffery L. McKnight, Andrew A. Stern, Harold C.
Teubner, Jr. and Gary J. Rogers.
WE MAY NOT BE ABLE TO DELIVER OUR IMAP SERVICES IF THIRD PARTIES DO NOT PROVIDE
US WITH KEY COMPONENTS OF OUR INFRASTRUCTURE.
We depend on other companies to supply key components of our
telecommunications infrastructure and system and network management solutions.
Any failure to obtain needed products or services in a timely fashion and at an
acceptable cost could have a material adverse effect on our business, results of
operations and financial condition. Although we lease redundant capacity from
multiple suppliers, a disruption in telecommunications capacity could prevent us
from maintaining our standard of service. Some of the key components of our
system and network are available only from sole or limited sources in the
quantities and quality we demand. For example, the hardware we use to support
our real-time mirroring and disaster recovery functions is supplied only by EMC
Corporation. We buy these components from time to time, do not carry significant
inventories of them and have no guaranteed supply arrangements with our vendors.
13
<PAGE>
OUR ABILITY TO PROVIDE OUR IMAP SERVICES DEPENDS ON STRATEGIC RELATIONSHIPS WITH
SOFTWARE VENDORS THAT WE MAY NOT BE ABLE TO MAINTAIN.
Our IMAP offerings are central to our business strategy. We obtain software
products under license agreements with BroadVision, Inc.; Ariba, Inc.; Siebel
Systems, Inc.; PeopleSoft USA, Inc.; Lawson Software Sagent Technology;
Microsoft Corporation; and Niku and package them as part of our IMAP solutions.
The agreements are for terms ranging from one to three years. All the agreements
may be terminated upon a breach of the agreement, subject to cure periods. The
agreement with PeopleSoft may be terminated by either party for convenience upon
90 days notice after an annual review, scheduled to first occur on or about
June 22, 2000. Under an earlier version of our contract, PeopleSoft on one
occasion notified us of its intention to terminate the agreement. After
significant discussion, the issues in dispute were resolved, our agreement with
PeopleSoft was renegotiated and PeopleSoft retracted its notification of its
intent to terminate the agreement. However, we cannot be sure that one or more
of our agreements with software vendors will not be terminated in the future. If
these agreements were to be terminated or not renewed or we otherwise could not
continue to use this software, we might have to discontinue products or services
or delay or reduce their introduction unless we could find, license and package
equivalent technology.
All but one of our agreements with software vendors are non-exclusive. Our
agreement with SiebelNet, Inc., a wholly owned subsidiary of Siebel
Systems, Inc., gives us exclusivity as the application service provider of
Siebel enterprise relationship management applications for direct customers of
SiebelNet headquartered in North America. Our vendors may choose to compete with
us directly or to enter into strategic relationships with our competitors. These
relationships may take the form of strategic investments or marketing or other
contractual arrangements. Our competitors may also license and utilize the same
technology in competition with us. We cannot be sure that the vendors of
technology used in our products will continue to support this technology in its
current form. Nor can we be sure that we will be able to adapt our own products
to changes in this technology. In addition, we cannot be sure that the financial
or other difficulties of our vendors will not have a material adverse effect
upon the technologies incorporated in our products, or that, if these
technologies become unavailable, we will be able to find suitable alternatives.
THE LOSS OF A KEY CUSTOMER COULD DECREASE OUR REVENUES.
During the nine months ended September 30, 1999, sales to SiebelNet
accounted for approximately 16% of our revenues. We expect sales to SiebelNet to
continue to constitute a significant portion of our revenues in the near term.
During that period, if our sales to SiebelNet decrease, our business will
suffer.
IF WE CANNOT OBTAIN ADDITIONAL APPLICATION SOFTWARE WE WILL BE UNABLE TO EXPAND
OR ENHANCE OUR IMAP SERVICE OFFERINGS.
Our business strategy also depends on obtaining additional application
software. We cannot be sure, however, that we will be able to obtain the new or
enhanced applications we may need to keep our IMAP solutions competitive. If we
cannot obtain these applications and as a result must discontinue, delay or
reduce the availability of our IMAP solutions or other products or services, our
business, results of operations and financial condition may be materially
adversely affected.
DEVELOPING AND EXPANDING OUR OPERATIONS WILL DEPEND, AMONG OTHER THINGS, ON OUR
MANAGEMENT'S ABILITY TO SUCCESSFULLY INTEGRATE NEWLY ACQUIRED OPERATIONS.
In October 1999, we acquired Conklin & Conklin, Inc. We cannot be sure that
we will be able to continue to successfully integrate the business of Conklin
into our own, or that the Conklin business will perform as expected. In
addition, we cannot be sure that we will be able to successfully integrate
14
<PAGE>
any business acquired in the future into our own. Our failure to successfully
integrate an acquired company or its subsequent underperformance could have a
material adverse effect on our business, results of operations and financial
condition.
WE MAY UNDERTAKE ADDITIONAL ACQUISITIONS WHICH POSE RISKS TO OUR BUSINESS.
From time to time, we may undertake additional acquisitions. If we do, our
risks may increase because:
- we may pay more than the acquired company is worth;
- we may not fully understand the business we acquire;
- we may be entering markets in which we have little or no direct prior
experience;
- our ongoing business may be disrupted and resources and management time
diverted; and
- our accounting for acquisitions could require us to amortize substantial
goodwill, adversely affecting our reported results of operations.
In addition, once we have made an acquisition we will face additional risks:
- it may be difficult to assimilate acquired operations and personnel;
- we may not be able to retain the management and other key personnel of the
acquired business;
- we may not be able to maintain uniform standards, controls, procedures and
policies; and
- changing management may impair relationships with an acquired business's
employees or customers.
WE MAY MAKE INVESTMENTS IN ENTITIES THAT WE DO NOT CONTROL.
In the future, we may make investments in joint ventures or other entities
over which we do not exercise control. We may make these investments in
connection with entering into strategic partnerships with software vendors,
systems integrators or Internet service providers or as strategic investments.
Our inability to control the entity in which we may invest may have consequences
on our ability to receive distributions from such entity or to implement our
business plan. Debt agreements, if entered into by a non-control entity, may
restrict or prohibit such entity from paying distributions to us. Applicable
state or local law may also limit the amount that a non-control entity is
permitted to pay a distribution on its equity interest, and we may not be able
to influence the payment of dividends. If any of the other investors in a
non-control entity fail to observe their commitments, that entity may not be
able to operate according to its business plans or we may be required to
increase our level of commitment to give effect to the plan. In addition, our
ability to implement a business plan for a non-control entity may be limited or
non-existent.
TECHNOLOGY MAY CHANGE FASTER THAN WE CAN UPDATE OUR NETWORK AND TECHNOLOGY.
The markets we serve are characterized by rapidly changing technology,
evolving industry standards, emerging competition and the frequent introduction
of new services, software and other products. Our success depends partly on our
ability to enhance existing or develop new products, software and services that
meet changing customer needs in a timely and cost-effective way. We cannot be
sure, however, that we will do some or all of these things. For example, if
software application architecture changes in significant ways, the software for
which we have licenses could become obsolete, we may be forced to update our
hardware and network configurations or we may be forced to replace our mirroring
technology. This may require substantial time and expense, and even then we
cannot be sure that we will succeed in adapting our businesses to these and
other technological developments.
15
<PAGE>
WE COULD BE HARMED IF OUR SYSTEMS ARE NOT COMPATIBLE WITH OTHER PRODUCTS AND
SERVICES.
We believe that our ability to compete successfully also depends on the
continued compatibility of our services with products, services and
architectures offered by various vendors. Our failure to conform to a prevailing
standard, or the failure of a common standard to emerge, could have a material
adverse effect on our business, results of operations and financial condition.
Although we will work with vendors to test new products, we cannot be sure that
their products will be compatible with ours or that they will adequately address
changing customer needs. Although we currently plan to support emerging
standards, we cannot be sure what new industry standards will develop. We also
cannot be sure that we will be able to conform to these new standards quickly
enough to stay competitive. In addition, we cannot be sure that products,
services or technologies developed by others will not make ours noncompetitive
or obsolete.
THE MARKETS WE SERVE ARE HIGHLY COMPETITIVE AND MANY OF OUR COMPETITORS HAVE
MUCH GREATER RESOURCES.
Our current and potential competitors include companies focused exclusively
on the application hosting business, such as Aristasoft, Breakaway Solutions,
Corio, Futurelink, Interliant, Interpath and Telecomputing; web hosting
companies, such as Concentric, Digex and Exodus; enterprise applications
vendors, such as Oracle, Siebel and SAP; business Internet Service Providers,
such as MCI WorldCom, PSINet and Verio; and telecommunications companies, such
as AT&T, GTE and Qwest (which has agreed to acquire our customer and significant
stockholder, U S WEST); and systems integrators, such as Andersen Consulting,
EDS, IBM and KPMG. Our strategic partners and suppliers could also become
competitors either directly or through strategic relationships with some of our
other competitors. These relationships may take the form of strategic
investments or marketing or other contractual arrangements.
Many of our competitors have substantially greater financial, technical and
marketing resources, larger customer bases, longer operating histories, greater
name recognition and more established relationships in the industry than we do.
We cannot be sure that we will have the resources or expertise to compete
successfully in the future. Our competitors may be able to:
- more quickly develop and expand their network infrastructures and service
offerings;
- better adapt to new or emerging technologies and changing customer needs;
- take advantage of acquisitions and other opportunities more readily;
- negotiate more favorable licensing agreements with software application
vendors;
- devote greater resources to the marketing and sale of their products; and
- adopt more aggressive pricing policies.
Some of our competitors may also be able to provide customers with
additional benefits at lower overall costs. We cannot be sure that we will be
able to match cost reductions by our competitors. In addition, we believe that
there is likely to be consolidation in our markets. Consolidation could increase
price competition and other competitive forces in ways that materially adversely
affect our business, results of operations and financial condition. Finally,
there are few substantial barriers to entry, and we have no patented technology
that would bar competitors from our market.
BECAUSE WE HAVE INTERNATIONAL OPERATIONS, WE FACE ADDITIONAL RISKS RELATED TO
FOREIGN POLITICAL AND ECONOMIC CONDITIONS.
We have established Enterprise Data Centers in Europe and Japan. We intend
to expand further into international markets. We cannot be sure that we will be
able to obtain the necessary
16
<PAGE>
telecommunications infrastructure in a cost-effective manner or compete
effectively in international markets. In addition, there are risks inherent in
conducting business internationally. These include:
- unexpected changes in regulatory requirements;
- export restrictions;
- tariffs and other trade barriers;
- challenges in staffing and managing foreign operations;
- differing technology standards;
- employment laws and practices in foreign countries;
- political instability;
- fluctuations in currency exchange rates;
- imposition of currency exchange controls; and
- potentially adverse tax consequences.
Any of these could adversely affect our international operations. We cannot
be sure that one or more of these factors will not have a material adverse
effect on our current or future international operations and, consequently, on
our business, results of operations and financial condition.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD ADD ADDITIONAL COSTS TO
DOING BUSINESS ON THE INTERNET AND COULD LIMIT OUR CLIENTS' USE OF THE
INTERNET.
Laws and regulations directly applicable to communications or commerce over
the Internet are becoming more prevalent. The adoption or modification of laws
or regulations relating to the Internet could adversely affect our business. The
last session of the United States Congress resulted in Internet laws regarding
children's privacy, copyrights, taxation and the transmission of sexually
explicit material. The European Union recently enacted its own privacy
regulations. The law of the Internet, however, remains largely unsettled, even
in areas where there has been some legislative action. It may take years to
determine whether and how existing laws such as those governing intellectual
property, privacy, libel and taxation apply to the Internet. In addition, the
growth and development of the market for online commerce may prompt calls for
more stringent consumer protection laws, both in the United States and abroad,
that may impose additional burdens on companies conducting business online. For
example, Germany and the European Union have enforced laws and regulations on
content distributed over the Internet that are more strict than those currently
in place in the United States.
THE OUTCOME OF PROPOSALS PUT TO A VOTE OF STOCKHOLDERS WILL BE DETERMINED BY OUR
EXISTING PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS.
Our executive officers, directors, existing 5% or greater stockholders and
their affiliates, in the aggregate, own shares representing approximately 75.8%
of our outstanding voting capital stock as of November 30, 1999. As a result,
these persons, acting together, are able to control all matters submitted to our
stockholders for approval and to control our management and affairs. For
example, these people, acting together, control the election and removal of
directors and any merger, consolidation or sale of all or substantially all of
our assets.
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE THE CHANGE
IN CONTROL OFFER REQUIRED BY THE INDENTURE.
Upon the occurrence of change in control events, holders of the Notes will
have the right to require us to purchase their Notes at a price equal to 100% of
the principal amount, plus accrued
17
<PAGE>
interest. Our ability to repurchase the Notes upon a change in control event
will be limited by the terms of our other debt agreements. Upon such a change of
control event, we may also be required immediately to repay the outstanding
principal and other amounts owed by us under our other financing agreements.
We may not be able to repay amounts outstanding under our other financing
agreements or obtain necessary consents, if any, to repurchase the Notes. Any
requirement to offer to purchase the Notes may result in our having to refinance
our outstanding indebtedness, which we may not be able to do. In addition, even
if we were able to refinance that debt, the financing may be on unfavorable
terms. If we are not able to make the required repurchases, we would be in
default under the Indenture. See "Description of the Notes--Repurchase of Notes
at the Option of Holders Upon a Change in Control."
WE CANNOT ASSURE YOU THAT AN ACTIVE TRADING MARKET WILL DEVELOP FOR THE NOTES.
The Notes were originally issued on October 29, 1999. Since that time, the
initial purchasers have engaged in market-making activities with respect to the
Notes. However, the initial purchasers may cease their market-making at any
time. In addition, the liquidity of the trading market in the Notes, and the
market price quoted for the Notes, may be adversely affected by changes in the
overall market for high yield securities and by changes in our financial
performance or prospects or in the prospects for companies in our industry
generally. As a result, you cannot be sure that an active trading market will
develop for the Notes.
THE TRADING PRICE OF OUR SECURITIES COULD BE SUBJECT TO SIGNIFICANT
FLUCTUATIONS.
The trading price of our common stock has been volatile, and the trading
price for the Notes also may be volatile. Factors such as announcements of
fluctuations in our or our competitors' operating results and market conditions
for Internet related and other technology stocks in general could have a
significant impact on the future trading prices of our common stock and the
Notes. In particular, the trading price of the common stock of many Internet
related and other technology companies has experienced extreme price and volume
fluctuations, which have at times been unrelated to the operating performance of
such companies whose stocks were affected. In addition, the trading prices of
our common stock and the Notes could be subject to significant fluctuations in
response to variations in our prospects and operating results, which may in turn
be affected by changes in interest rates and other factors. There can be no
assurance that these factors will not have an adverse effect on the trading
prices of our common stock and the Notes.
THE MARKET PRICE OF OUR COMMON STOCK COULD BE AFFECTED BY THE SUBSTANTIAL NUMBER
OF SHARES THAT ARE ELIGIBLE FOR FUTURE SALE.
As of September 30, 1999, we had 60,803,240 shares of common stock issued
and outstanding, excluding 1,736,675 shares issuable upon the exercise of
warrants and 6,978,033 shares issuable upon the exercise of options granted
under our 1998 Stock Option Plan. We cannot predict the effect, if any, that
future sales of the Notes or shares of common stock, including common stock
issuable upon conversion of the Notes, or the availability of the Notes or
shares of common stock for future sale, will have on the market price of common
stock prevailing from time to time.
USI, our officers and directors and some of our other stockholders have
agreed that they will not offer, sell, contract to sell, pledge or otherwise
dispose of, directly or indirectly, or file a registration statement under the
Securities Act relating to, any shares of common stock or securities convertible
or exchangeable or exercisable for any shares of our common stock for the
periods described below, subject to limited exceptions as described under "Plan
of Distribution," without the prior written consent of Credit Suisse First
Boston Corporation. These agreements expire on January 5, 2000 with
18
<PAGE>
respect to 5% of the shares that were subject to lock-up agreements entered into
in connection with our initial public offering and, with respect to the
remaining shares, on January 24, 2000.
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS AGAINST US, EVEN WITHOUT MERIT, COULD
COST A SIGNIFICANT AMOUNT OF MONEY TO DEFEND AND DIVERT MANAGEMENT'S ATTENTION
AWAY FROM OUR BUSINESS.
As the number of software products in our target markets increases and the
functionality of these products further overlap, software industry participants
may become increasingly subject to infringement claims. Someone may even claim
that our technology infringes their proprietary rights. Any infringement claims,
even if without merit, can be time consuming and expensive to defend. They may
divert management's attention and resources and could cause service
implementation delays. They also could require us to enter into costly royalty
or licensing agreements. If successful, a claim of product infringement against
us and our inability to license the infringed or similar technology could
adversely affect our business.
WE COULD BE REQUIRED TO USE OUR FINANCIAL RESOURCES TO REPURCHASE SHARES OF
COMMON STOCK FROM U S WEST.
We could be required to repurchase for cash some of the shares of our
capital stock owned by U S WEST. This would require us to divert our resources
at a time of rapid growth. If we engage in activities in which U S WEST would be
prohibited from engaging and we were considered an affiliate of U S WEST under
regulations of the Federal Communications Commission, U S WEST could force us to
repurchase the number of shares required to make us no longer an affiliate. We
are not presently considered an affiliate of U S WEST under these regulations.
See "Certain Relationships and Related Transactions--Purchases of Series A
Preferred Stock." Although we believe the possibility of this occurring is
remote, repurchasing the shares held by U S WEST could be costly.
FORWARD-LOOKING STATEMENTS CONTAINED IN THIS PROSPECTUS ARE SUBJECT TO RISKS AND
UNCERTAINTIES.
This Prospectus includes forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements relate
to, among other things, analyses and other information that are based on
forecasts of future results and estimates of amounts not yet determinable. These
statements also relate to our future prospects, developments and business
strategies.
These forward-looking statements are identified by their use of terms and
phrases such as "anticipate," "believe," "could," "estimate," "expect,"
"intend," "may," "plan," "predict," "project," "will" or the negative of those
or other variations, or comparable expressions, including references to
assumptions. These statements are contained in sections entitled "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and other sections of this
Prospectus.
The forward-looking statements in this Prospectus, including statements
concerning projections of our future results, operating profits and earnings,
are based on current expectations and are subject to risks and uncertainties
that could cause actual results to differ materially from those expressed or
implied by those statements. The risks and uncertainties include but are not
limited to our continued ability to:
- build and operate a highly-reliable, complex global network;
- establish and maintain relationships with key software vendors and develop
economically attractive products;
- attract and retain IMAP customers;
19
<PAGE>
- attract and retain highly skilled employees;
- effectively manage our rapid growth;
- evolve our business to gain advantages in an increasingly competitive
environment; and
- manage any Year 2000 compliance issues.
Our risks are more specifically described in "Risk Factors." If one or more
of these risks or uncertainties materializes, or if underlying assumptions prove
incorrect, our actual results may vary materially from those expected, estimated
or projected. Given these uncertainties, you should not place undue reliance on
forward-looking statements.
We undertake no obligation to update forward-looking statements or risk
factors, whether as a result of new information, future events or otherwise.
20
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the sale of the Notes by the selling
security holders, the issuance of the common stock issuable to the holders of
the Notes upon conversion of the Notes or the sale of any common stock under
this Prospectus.
COMMON STOCK PRICE RANGE
Our common stock has been traded on The Nasdaq National Market under the
symbol "USIX" since the completion of our initial public offering in
April 1999.
The folowing table sets forth, for the periods indicated, the high and low
prices of our common stock on The Nasdaq National Market for the second, third
and fourth quarters of 1999 from the commencement of trading on April 9, 1999
through December 20, 1999.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
YEAR ENDING DECEMBER 31, 1999:
Second Quarter (from April 9, 1999)..................... $40.00 $15.33
Third Quarter........................................... 27.96 9.54
Fourth Quarter (through December 20, 1999).............. 55.00 16.92
</TABLE>
DIVIDEND POLICY
We have never paid cash dividends on our common stock and have no plans to
do so in the forseeable future. The declaration and payment of any dividends in
the future will be determined by the board of directors and will depend on a
number of factors, including our earnings, capital requirements and overall
financial condition. The payment of dividends is also restricted by the terms of
our indebtedness.
DILUTION
The Notes currently represent the right to acquire 5,030,181 shares of our
common stock, or 6.75% of our outstanding common stock, assuming exercise of all
options and warrants to purchase shares of our common stock outstanding at
September 30, 1999 and the conversion of the Notes. To the extent that we grant
additional employee and director stock options, or we otherwise issue additonal
equity securities, the ownership interest represented by the common stock
issuable upon conversion of the Notes will be diluted.
21
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999.
We have presented our capitalization:
- on an actual basis; and
- on an as adjusted basis to reflect the issuance of the Notes and our
receipt of the net proceeds from the sale of the Notes.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
--------------------------
ACTUAL AS ADJUSTED
----------- ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR
SHARE AMOUNTS)
<S> <C> <C>
Cash, cash equivalents and available-for-sale securities.... $ 69,002 $189,122
Long-term liabilities:
Long-term debt, excluding current portion................. 26,485 26,485
Capital lease obligations, excluding current portion...... 8,087 8,807
Convertible subordinated notes due 2004................... -- 125,000
-------- --------
Total long-term liabilities............................. 34,572 159,572
Stockholders' equity (deficit):
Common stock, $.001 par value; 75,000,000 shares
authorized; 60,813,704 shares issued and outstanding
actual, and as adjusted................................. 61 61
Additional paid-in capital................................ 236,631 236,631
Note receivable from officer for purchase of common
stock................................................... (2,250) (2,250)
Unearned compensation..................................... (362) (362)
Accumulated deficit....................................... (101,505) (101,505)
Accumulated other comprehensive income.................... 284 284
-------- --------
Total stockholders' equity.............................. 132,859 132,859
-------- --------
Total capitalization.................................. $167,431 $292,431
======== ========
</TABLE>
The share numbers in the table exclude:
- 6,978,033 shares of common stock issuable upon exercise of stock options
outstanding as of September 30, 1999 at a weighted-average exercise price
of $6.36;
- 2,223,972 shares of common stock reserved for issuance upon exercise of
warrants exercisable as of September 30, 1999 at a weighted-average
exercise price of $2.91; and
- the shares of common stock issuable upon conversion of the Notes.
Please read this capitalization table together with the sections of this
Prospectus entitled "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and the financial statements of
USI, ACR and IIT included in this Prospectus.
22
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table summarizes:
- our historical consolidated financial data for the period from our date of
inception, January 14, 1998, through December 31, 1998 and as of December
31, 1998;
- our historical consolidated operating statement data for the period from
the date of our inception, January 14, 1998, through September 30, 1998;
and
- our historical consolidated financial data for the nine month period ended
September 30, 1999.
The selected financial data for the period from our date of inception,
January 14, 1998, through December 31, 1998 and as of December 31, 1998 have
been derived from, and is qualified by reference to, our audited consolidated
financial statements for that period. Our audited consolidated financial
statements for the period from our inception through December 31, 1998 include
the results of I.I.T. Holding, Inc., or IIT, from September 8, 1998 through
December 31, 1998 and the results of Advanced Communication Resources, Inc., or
ACR, from October 2, 1998 through December 31, 1998.
The financial statement data for the nine month period ended September 30,
1999 and as of September 30, 1999 and for the period from the date of our
inception through September 30, 1998 has been derived from our unaudited
consolidated financial statements. This data is unaudited but in our opinion
reflects all adjustments, consisting of only normal recurring adjustments,
necessary for a fair presentation of results for interim periods. Operating
results for interim periods are not necessarily indicative of results to be
expected for the full fiscal years. You should also read "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and related notes of USI, ACR and IIT included in this
Prospectus.
In the table below:
- the Series B preferred stock is not presented as a part of our
stockholders' equity in 1998 because it was mandatorily redeemable upon
the eighth anniversary of its issuance (the Series B was converted into
common stock upon the closing of our initial public offering); and
- we do not present 2,015,625 shares of common stock held by three officers
as part of our stockholders' equity in 1998 because we would have been
obligated to repurchase these shares at fair market value if any of these
officers had died or had become disabled before our initial public
offering. See Note 11 of the Notes to USI's Consolidated Financial
Statements. These provisions terminated upon the consummation of our
initial public offering.
23
<PAGE>
USINTERNETWORKING, INC.
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JANUARY 14, 1998 JANUARY 14, 1998
(DATE OF INCEPTION) (DATE OF INCEPTION) NINE MONTHS
THROUGH DECEMBER 31, THROUGH SEPTEMBER 30, ENDED
1998 1998 SEPTEMBER 30, 1999
-------------------- --------------------- ------------------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue................................ $ 4,122 $ 515 $ 20,852
Costs and expenses:
Direct cost of services.............. 3,425 343 13,898
Network and infrastructure costs..... 2,186 -- 11,360
Selling, general and
administrative..................... 25,240 12,469 42,400
Non-cash stock compensation
expense............................ 231 90 6,805
Depreciation and amortization........ 3,179 269 14,794
-------- -------- --------
Total costs and expenses............. 34,261 13,171 89,257
-------- -------- --------
Operating (loss)....................... (30,139) (12,656) (68,405)
Other income (expense):
Interest income...................... 367 305 2,117
Interest expense..................... (2,681) (75) (2,793)
-------- -------- --------
Net loss............................... $(32,453) $(12,423) $(69,052)
======== ======== ========
Basic and diluted loss per common share
attributable to common stockholders.... $ (40.64) $ (15.72) $ (2.49)
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 43,802 $ 28,577
Available-for-sale securities............................... -- 40,425
Working capital............................................. 22,551 46,736
Total assets................................................ 106,516 205,072
Current portion of long-term debt and capital lease
obligations............................................... 3,262 13,805
Short-term obligations expected to be refinanced............ 5,282 --
Long-term debt and capital lease obligations, excluding
current portion........................................... 8,659 34,572
Series B Convertible Redeemable Preferred Stock............. 62,242 --
Common stock subject to repurchase.......................... 4,145 --
Stockholders' (deficit) equity.............................. (2,467) 132,859
Ratio of earnings to fixed charges(a)....................... -- --
</TABLE>
- ------------------------
(a) The ratio of earnings to fixed charges is computed by dividing net loss
before fixed charges by fixed charges. Fixed charges consist of interest
charges, amortization of discount related to indebtedness and that portion
of rental expense we believe to be representative of interest. Earnings were
insufficient to cover fixed charges by $26.8 million for the period January
14, 1998 (date of inception) through December 31, 1998, $12.0 million for
the period January 14, 1998 (date of inception) through September 30, 1998
and $62.8 million for the nine months ended September 30, 1999.
24
<PAGE>
On September 8, 1998, we acquired I.I.T. Holding, Inc. and its two
wholly-owned subsidiaries, International Information Technology Inc., a U.S.
subsidiary, and International Information Technology IIT, C.A., a Venezuelan
subsidiary. We refer to these businesses collectively as IIT. IIT's operations
commenced on May 20, 1994 upon the incorporation of the U.S. subsidiary. The
Venezuelan subsidiary was formed on March 6, 1996. For accounting purposes, IIT
is the predecessor of USI, which was incorporated in January 1998.
The following table summarizes:
- the historical consolidated financial data of IIT for the period from May
20, 1994, its date of inception, through December 31, 1994 and for the
fiscal years ended December 31, 1995, 1996 and 1997 and as of December 31,
1994, 1995, 1996 and 1997; and
- the historical consolidated operating statement data of IIT for the period
from January 1, 1998 through September 7, 1998.
The financial statement data for periods prior to 1996 and eight months
ended August 31, 1997 have been derived from the unaudited financial statements
of IIT. The selected financial data as of December 31, 1996 and 1997 and for the
years then ended and the selected financial data for the period from January 1,
1998 through September 7, 1998, has been derived from, and is qualified by
reference to, the audited consolidated financial statements of IIT included
elsewhere in this Prospectus. You should also read "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and related notes of USI, ACR and IIT included in this Prospectus.
25
<PAGE>
PREDECESSOR--IIT HOLDING, INC.
<TABLE>
PERIOD
FROM
MAY 20, PERIOD
1994 FROM
(DATE OF EIGHT JANUARY 1,
INCEPTION) MONTHS 1998
TO YEAR ENDED DECEMBER 31, ENDED TO
DECEMBER -------------------------------- AUGUST 31, SEPTEMBER
31, 1994 1995 1996 1997 1997 7, 1998
---------- -------- -------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE
<S> <C> <C> <C> <C> <C> <C>
DATA)
STATEMENT OF OPERATION DATA:
Revenue........................... $ 156 $ 801 $ 747 $ 2,812 $ 1,499 $ 4,406
------- ------- ------- ---------- ---------- ----------
Costs and expenses
Cost of revenue................. 108 613 519 1,881 1,112 2,976
Selling, general and
administrative expenses....... 32 77 204 1,844 1,260 1,809
Depreciation and amortization... 3 7 14 30 15 28
------- ------- ------- ---------- ---------- ----------
Total costs and expenses...... 143 697 737 3,755 2,387 4,813
------- ------- ------- ---------- ---------- ----------
Operating (loss) income........... 13 104 10 (943) (888) (407)
Interest expense.................. -- (5) (3) (9) (1) (17)
------- ------- ------- ---------- ---------- ----------
Income (loss) before income
taxes........................... 13 99 7 (952) (889) (424)
Provision (benefit) for income
taxes........................... -- 28 15 (58) (58) --
Net income (loss)................. $ 13 $ 71 $ (8) $ (894) $ (831) $ (424)
======= ======= ======= ========== ========== ==========
Basic and diluted income (loss)
per common share attributable to
common stockholders............. $136.84 $747.37 $(84.21) $(9,410.53) $(8,747.37) $(4,464.37)
======= ======= ======= ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------
1994 1995 1996 1997
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ -- $ -- $ 70 $ 14
Working capital (deficit)................................... (15) 70 14 42
Total assets................................................ 40 147 348 769
Long-term debt and capital lease obligations, excluding
current position.......................................... 25 47 11 16
Stockholder's equity........................................ 2 66 45 132
</TABLE>
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ TOGETHER WITH THE
FINANCIAL STATEMENTS AND RELATED NOTES OF USI, ACR AND IIT INCLUDED IN THIS
PROSPECTUS. THE DISCUSSION IN THIS PROSPECTUS CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF OUR
PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. THE CAUTIONARY STATEMENTS MADE
IN THIS PROSPECTUS APPLY TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY
APPEAR IN THIS PROSPECTUS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO DIFFERENCES INCLUDE THOSE DISCUSSED IN "RISK FACTORS," AS WELL AS
THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS. THE FORWARD-LOOKING STATEMENTS
CONTAINED IN THIS PROSPECTUS ARE MADE AS OF THE DATE OF THIS PROSPECTUS, AND WE
ASSUME NO OBLIGATION TO UPDATE THESE FORWARD-LOOKING STATEMENTS OR TO UPDATE THE
REASONS ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS. SEE "RISK FACTORS."
OVERVIEW
I.I.T. Holding, Inc., the predecessor of USI for accounting purposes,
specialized in systems analysis and design and systems integration solutions.
IIT provided PeopleSoft human resource management and financial system
implementation. IIT's consulting professionals have expertise in human resource
management as well as accounting and financial systems.
We acquired IIT in September 1998 as a part of our program to develop a new
Internet-based service offering. IIT provides implementation capabilities that
enable us to provide human resource and financial management functionality as
part of our IMAP offerings.
We have developed an advanced, integrated service offering that provides our
clients the ability to use leading business software applications through our
state-of-the-art Internet-based network. Since our inception in January 1998, we
have devoted substantially all of our efforts to developing our network
infrastructure, recruiting and training personnel, establishing strategic
business partnerships with application software providers, completing three
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 September 30, 1999, we had an accumulated deficit of
approximately $101.5 million.
In April 1999, we completed an initial public offering of our common stock.
The net proceeds from the sale of the 10,350,000 shares of common stock were
approximately $132.7 million. The initial public offering of common stock met
the criteria for the automatic conversion of our outstanding Series A
Convertible Preferred Stock and Series B Redeemable Convertible Preferred Stock
into common stock. In addition, the repurchase rights lapsed with respect to all
common stock subject to repurchase.
In November 1999, we completed the sale of the Notes for net proceeds of
approximately $120.1 million.
REVENUE. We currently generate revenue from both traditional IT services
and IMAP services. We expect that as IMAP services grow, they will represent an
increasing proportion of our revenue. Revenue from IMAP services consists of
monthly recurring fees from ongoing services and is recognized ratably as earned
over the contract term. Non-refundable client deposits, if any, are recognized
as revenue ratably over the contract term. Revenue from the delivery of
professional information technology services not included in IMAP solutions is
recognized as the services are performed.
COSTS AND EXPENSES. We incur operating costs and expenses related to the
delivery of IMAP services.
27
<PAGE>
Costs and expenses include product development, network and data center
support, marketing, and selling, 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 incur up-front costs related to the delivery of IMAP services. Product
development costs and the cost to operate our network and data centers are
recognized as period costs. Costs related to the acquisition of hardware are
capitalized and depreciated over the estimated useful life of the hardware of
five years. Costs related to the acquisition of software licenses are
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 is based on current and future revenue from each
product and annual amortization will not be less than that computed on a
straight-line basis over the remaining useful life. Direct costs related to the
integration of software applications for a client on our network are capitalized
and amortized over the related contract period.
HISTORICAL RESULTS OF OPERATIONS--USINTERNETWORKING
COMPARISON OF THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1999 TO THE PERIOD ENDED
SEPTEMBER 30, 1998
REVENUE. For the nine months ended September 30, 1999, we generated $11.3
million in IMAP revenue, and $9.5 million in professional IT services revenue.
We generated $0.5 million in professional IT services revenue for the period
January 14, 1998, our date of inception, through September 30, 1998 primarily
from our newly acquired subsidiary, IIT.
GROSS MARGINS, DIRECT COSTS OF SERVICES, NETWORK AND INFRASTRUCTURE
COSTS. For the nine months ended September 30, 1999, we incurred $7.6 million
and $6.3 million of direct costs related to the delivery of our IMAP and
professional IT services, respectively. For the period from January 14, 1998,
our date of inception, through September 30, 1998, we incurred no and $0.3
million of direct costs related to the delivery of our IMAP and professional IT
services, respectively. Additionally, we also incurred $11.3 million of costs
related to the maintenance of our network and infrastructure for the nine months
ended September 30, 1999 and no related costs during the same period in 1998.
Gross margins, including IMAP network and infrastructure costs, for the nine
months ended September 30, 1999 were (67.8)% and 33.5% for IMAP and professional
IT services, respectively.
GENERAL AND ADMINISTRATIVE EXPENSES. For the nine months ended
September 30, 1999, we incurred $15.8 million of general and administrative
expenses compared to $10.4 million for the period from January 14, 1998, our
date of inception, through September 30, 1998. The increase of $5.4 million
reflects the costs required to support three full quarters of operations in 1999
that were not incurred during the same period in 1998, offset by one time
start-up costs incurred in 1998.
SALES AND MARKETING EXPENSES. For the nine months ended September 30, 1999,
we incurred $24.6 million of sales and marketing expenses compared to $1.8
million for the period from January 14, 1998, our date of inception, through
September 30, 1998. The increase of $22.8 million reflects the costs associated
with the sales and marketing initiatives required to support our IMAP services
during three quarters of operations in the period ended September 30, 1999,
compared to start-up sales activities during 1998.
PRODUCT RESEARCH AND DEVELOPMENT EXPENSES. For the nine months ended
September 30, 1999, we incurred $2.0 million of product research and development
expenses compared to $0.3 million for the period from January 14, 1998, our date
of inception, through September 30, 1998. The increase of $1.7 million reflects
the costs associated with the continued development of our new products and
infrastructure during a full quarter of operation in the period ended
September 30, 1999, compared to start-up activities during 1998.
28
<PAGE>
NON-CASH STOCK COMPENSATION EXPENSE. For the nine months ended
September 30, 1999, we incurred $6.8 million in non-cash compensation expense.
Of this amount, $6.2 million reflects the period's expense in connection with
employee stock options issued at an exercise price of $4.00 and an estimated
fair market value of $13.33 to $22.33 per share at the date of grant. The
remaining amount of $0.6 million reflects our contribution of common stock to
the employee benefit plan and the amortization of unearned compensation. There
was minimal non-cash stock compensation expense for the comparable period in
1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the nine
months ended September 30, 1999 totaled $14.8 million. Of this amount, $4.1
million represents the amortization of the goodwill recorded upon our
acquisitions of ACR and IIT; the remaining $10.7 million represents depreciation
of our property and equipment and the amortization of our prepaid software
licenses. There was minimal depreciation and no amortization expense for the
comparable period in 1998.
INTEREST INCOME AND EXPENSE. For the three months ended September 30, 1999,
we incurred $2.1 million in interest expense and generated $2.8 million of
interest income. We had minimal interest income and expense during the period
ended September 30, 1998.
HISTORICAL RESULTS OF OPERATIONS--PREDECESSOR
COMPARISON OF THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1999 OF USI TO THE
PERIOD FROM JANUARY 1, 1998 THROUGH SEPTEMBER 7, 1998 OF PREDECESSOR
REVENUE. For the nine months ended September 30, 1999, we generated $11.3
million in IMAP revenue, and $9.5 million in professional IT services revenue.
For the period from January 1, 1998, through September 7, 1998, IIT generated
$4.4 million in professional IT services revenue and no IMAP revenue. The
increase in professional IT services revenue is attributable to the acquisition
of ACR in October 1998, and the inclusion of its professional IT services
revenue in the period ended September 30, 1999.
GROSS MARGINS, DIRECT COSTS OF SERVICES, NETWORK AND INFRASTRUCTURE
COSTS. For the nine months ended September 30, 1999, we incurred $13.9 million
of direct costs related to the delivery of our IMAP and professional IT
services. For the period from January 1, 1998, through September 7, 1998, IIT
incurred $3.0 million of direct costs related to the delivery of professional IT
services. Additionally, we also incurred $11.3 million of costs related to the
maintenance of our network and infrastructure. Our gross margin, including IMAP
network and infrastructure costs, for the nine months ended September 30, 1999
was (67.8)%. The gross margin for IIT for the period from January 1, 1998,
through September 7, 1998, was 32.4%.
GENERAL AND ADMINISTRATIVE EXPENSES. For the nine months ended
September 30, 1999, we incurred $15.8 million of general and administrative
expenses compared to IIT's $1.8 million for the period from January 1, 1998,
through September 7, 1998. The significant increase reflects costs associated
with the continued development and maintenance of a much larger infrastructure
required to support our IMAP services in the period ended September 30, 1999.
SALES AND MARKETING EXPENSES. For the nine months ended September 30, 1999,
we incurred $24.6 million of sales and marketing expenses compared to IIT's $0.1
million for the period from January 1, 1998, through September 7, 1998. The
significant difference reflects costs associated sales and marketing efforts
required to support our IMAP services in the period ended September 30, 1999.
PRODUCT RESEARCH AND DEVELOPMENT EXPENSES. For the nine months ended
September 30, 1999, we incurred $2.0 million of product research and development
expenses. IIT incurred no related expenses for the period from January 1, 1998,
through September 7, 1998. The difference reflects the costs
29
<PAGE>
associated with the continued development of our new products and infrastructure
during three full quarters of operations for the period ended September 30,
1999.
NON-CASH STOCK COMPENSATION EXPENSE. For the nine months ended
September 30, 1999, we incurred $6.8 million in non-cash compensation expense.
IIT had no non-cash stock compensation expense for the period from January 1,
1998, through September 7, 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the nine
months ended September 30, 1999, totaled $14.8 million. Of this amount, $4.1
million represents the amortization of the goodwill created through our
acquisitions of ACR and IIT; the remaining $10.7 million represents depreciation
of our property and equipment and the amortization of our prepaid software
licenses. IIT incurred approximately $28,000 in depreciation expense for the
period from January 1, 1998, through September 7, 1998.
INTEREST INCOME AND EXPENSE. For the nine months ended September 30, 1999,
we incurred $2.1 million in interest expense and generated $2.8 million of
interest income. IIT had minimal interest expense and no interest income during
the period from January 1, 1998, through September 7, 1998.
ACQUIRED COMPANIES
The acquisitions of IIT and ACR were made primarily with cash and were
accounted for using the purchase method of accounting. The assets and
liabilities of the acquired companies have been recorded at their fair market
value as of the acquisition closing date. The excess of the purchase price over
the fair market value of the identifiable net assets of IIT and ACR has been
accounted for as goodwill, which is being amortized over its estimated useful
life of 5 years.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, we had cash and cash equivalents of $28.6 million and
available-for-sale securities of $40.4 million.
For the nine months ended September 30, 1999, we have used $56.4 million in
operating activities, $100.1 million in investing activities and generated
$141.2 million through financing activities. Included in financing activities
was $132.7 million raised from an initial public offering in April 1999.
We have used debt and capital leases to partially finance our capital
purchases. As of September 30, 1999, 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), Finova
Capital Corporation ($11.7 million), Transamerica Business Credit Corporation
($4.0 million) and EMC Corporation ($6.4 million). At September 30, 1999, the
total of our secured financing commitments was $73.3 million, of which $56.5
million had been funded.
In the fourth quarter of 1999, we issued $125 million in principal amount of
Notes. The net proceeds from the issuance were approximately $120.1 million. The
Notes pay interest at 7% and are convertible into common stock at the holder's
option at a price of $24.85 per common share.
In April 1999 we purchased an office building for $11.8 million. The seller
financed $7.1 million of the purchase price through a first mortgage note due
May 2006 bearing interest at 7.5% per annum. We expect to spend approximately
$12 million in 1999 on improvements to the building and have arranged financing
for $5.0 million of these improvements.
We believe that these resources will be sufficient to fund our operations
for the next twelve months. The majority of the base infrastructure required to
provide our IMAP services has been purchased. As a result, our capital
expenditures for the next several years will now largely be success-based,
consisting of software licenses and hardware required to implement IMAP
solutions for our new
30
<PAGE>
customers. These new customer contracts are expected to have an average term of
three to five years; however, we anticipate that many of our customers will
renew their contracts due to the cost and complexity of switching service
providers.
If we expand more rapidly than currently anticipated, if our working capital
needs exceed our current expectations or if we make acquisitions, we will need
to raise additional capital from equity or debt sources. We cannot be sure that
we will be able to obtain the additional financing to satisfy our cash
requirements or to implement our growth strategy on acceptable terms or at all.
If we cannot obtain such financing on terms acceptable to us, we may be forced
to curtail our planned business expansion and may be unable to fund our ongoing
operations. We are presently pursuing a variety of sources of other debt
financing, but no additional commitments have been obtained to date.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
DEVELOPED FOR OR OBTAINED FOR INTERNAL USE (SOP 98-1). This SOP requires the
capitalization of costs to purchase or develop internal-use software, including
external direct costs of materials and services, payroll and payroll related
costs for employees who are directly associated with and devote time to an
internal-use software development project. Allocations of overhead to
capitalized costs are not permitted. Computer software costs related to research
and development are expensed as incurred, as are training and maintenance costs.
SOP 98-1 is effective for years beginning after December 15, 1998 and
application is prospective. Through December 31, 1998, approximately $1 million
of costs related to the implementation of internal use software were expensed.
We have adopted SOP 98-1 in 1999, and have capitalized $1.5 million of costs in
implementing our internal use software.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, REPORTING THE COSTS OF START-UP ACTIVITIES (SOP
98-5). This SOP requires that start-up costs and organizational costs be
expensed as incurred. Start-up activities include one-time activities related to
opening a new facility, introducing a new product or service, conducting
business in a new territory, conducting business with a new class of customer,
initiating new process in an existing facility, or commencing some new
operation. SOP 98-5 is effective for years beginning after December 15, 1998. We
currently expense the costs of all start-up and organizational activities.
YEAR 2000 COMPLIANCE
YEAR 2000 ISSUE. The Year 2000 issue is a result of computer programs or
systems, which store or process date-related information using only two digits
to represent the year. These programs or systems may not be able to properly
distinguish between a year in the 1900's and a year in the 2000's. Failure of
these programs or systems to distinguish between the two centuries could cause
the programs or systems to yield erroneous results or even to fail.
STATE OF READINESS. Since its inception in January 1998, USI has been
cognizant of the Year 2000 issue. Hardware and software selections, network
architecture, and client contract terms have all been designed with the Year
2000 issue in mind.
We have established a Year 2000 compliance team to carry out a program of
testing and remediation on our information technology and
non-information-technology systems, for systems used by USI as well as those
provided by USI to its clients. The compliance team includes a Year 2000 outside
consulting firm and members from all levels of our management, engineering and
operations organization. The compliance team meets as a group on a regular basis
and subgroups of the team will
31
<PAGE>
meet as needed to address specific issues. The compliance team is in the process
of carrying out a program consisting of the following phases:
- inventory of all potentially affected software products and
software-related services;
- analysis of such products and services to identify any areas that require
change or replacement;
- development of appropriate changes or replacements for the identified
areas;
- testing;
- implementation of the changes or replacements; and
- contingency planning.
Because USI is not only a user of software products and software-related
services, but also provides software products and software-related services to
its clients, the compliance program is addressing both software products and
software-related services used by USI and those provided by USI to its clients.
While different areas of USI face different Year 2000 problems, USI has given
priority to software products and software-related services that it provides to
its clients.
Our compliance team has completed the following tasks under our compliance
program.
- We have conducted in depth discussions with all of our software suppliers.
We have received assurances from all our software suppliers that the
programs provided to us are in compliance, and we do not believe that any
of the software applications provided to our clients requires remediation.
Even so, we continue to perform testing on the programs and applications
in production.
- We have inventoried existing hardware and software used in our systems.
Our hardware and software purchases were made beginning in March 1998 and
no systems were in service before then, excluding systems maintained by
the acquired companies. Systems manufactured and released after 1996 are
generally believed to be free of Year 2000 compliance problems.
- Although the companies we recently acquired have been in existence longer
than we have and have older systems in place, we have concluded, based on
Year 2000 assessments performed for the acquired companies, that there are
no material exposures related to the hardware or software used by the
acquired companies.
- We have performed Year 2000 and subsequent leap year roll-over tests up to
the year 2008 on each of our server platforms. To date, these tests have
found only one system to be non-compliant. This system was brought into
compliance with an operating system upgrade in October 1998.
- We have put our network infrastructure units, like routers and switches,
through a Year 2000 roll-over test and we have found these units to be
compliant.
- We have inventoried our internally developed source code and determined
that there is a minimal amount, consisting primarily of custom web scripts
and UNIX shell scripts, which require testing.
- We have inventoried and analyzed our existing systems and implemented
required changes or replacements to existing systems identified as having
a high risk of non-compliance.
The Year 2000 compliance team has the following tasks to complete.
- Analyze and, if necessary, test and remediate warranted consulting
services provided by Conklin.
- Verify implementation of any necessary changes and replacements to
software products and software-related services used and provided by USI.
32
<PAGE>
- Verify that vendor OS remediation requirements identified by completed
testing have been applied.
- Enforce moratorium of changes to software products and software-related
services effective December 15, 1999.
- Monitor ongoing vendor driven efforts to identify additional Year 2000
problems for applicability to USI client systems.
- Execute the contingency and business continuation plans, which are in
place to provide on-site and vendor-supported correction in the event of
unanticipated failure of the systems used by USI due to the Year 2000
millenium change.
COSTS. As of September 30, 1999, USI has incurred approximately $0.8
million in expenses in connection with its Year 2000 compliance program. All
expenses relating to Year 2000 compliance to date have been incurred in the
normal course of our business, as we have developed our products, network, and
implemented specific client applications. The cost of completing the Year 2000
compliance program is expected to be principally in the form of the opportunity
costs of employees' time and consulting fees. USI may also need to purchase
replacement products or other providers to assist in Year 2000 compliance
efforts. Currently, the estimated final cost of the Year 2000 compliance program
is approximately $1.0 million, which includes internal labor costs, the hiring
of the Year 2000 consulting firm and reserves for additional outside consultants
and additional hardware and software. We expect that this estimate will be
refined as the analysis testing and implementation phases are completed.
RISKS. Should we fail to solve a Year 2000 compliance problem to one of our
systems the result could be a failure or interruption of normal business
operations. We believe that, due to the relative newness of our systems and the
tasks undertaken and completed by our compliance team, the potential for
significant interruptions to normal operations should be minimized. Our primary
risks with regard to Year 2000 failures are those which impact our IMAP
business.
The reasonably likely worst-case risks inherent in our business are as
follows.
- If a product or service provided by USI or its subsidiaries is found to
cause damage or injury to a client because of Year 2000 noncompliance, USI
could be liable to the client for breach of warranty. USI's client
contracts generally limit USI's liability. USI cannot accurately predict
what legal claims may be brought against it. In addition, USI cannot
predict the outcome of any legal claims. USI has contracts which make Year
2000 warranties. Some of these contracts make broader warranties than
those made by the manufacturers of the software provided. The potential
liability arising from some of these warranties is not capped and does not
exclude consequential damages.
- Significant and protracted interruption of electrical power to our data
center operations could materially and negatively impact our ability to
provide data center operations. To mitigate this risk, we have deployed
back-up power systems at our data centers and have the capability to
transfer all of the operations of one data center to another. However,
electrical power interruptions that impact Internet connectivity providers
could adversely impact us because of our reliance upon Internet-based
operations for our day-to-day business.
- Significant and protracted interruption of telecommunications and data
network services in any of our data centers could materially and
negatively impact our ability to provide data center operations. We have
conducted detailed assessments of the components of our telecommunications
infrastructure and are working to identify appropriate system testing
guidelines. In addition, we have plans to seek additional assurances and a
better understanding of the compliance programs of its telecommunications
and data circuit providers.
33
<PAGE>
- The failure of components of our systems used in the data centers could
materially and negatively impact our business. However, based on the time
period in which the data centers were developed we believe the risk of
failure is small. In addition, we have conducted a technical assessment of
the current systems and believe them to be compliant.
- In the course of our business, we use software products provided by other
companies, and some of our products and services interface to other
companies' systems. We have received information from various other
third-party providers regarding the Year 2000 readiness of their products
and we continue to review such information. We are also sending requests
to other third parties for information regarding the Year 2000 readiness
of their products and systems. As we do not have any control over these
third parties, we cannot guarantee that such third-party products and
systems will not suffer any adverse effects due to the Year 2000 issue,
which may result in a material adverse effect on our business.
- We have completed our Year 2000 contingency plans. However, if the
contingency plans prove inadequate, our potential Year 2000 liabilities
may be increased.
34
<PAGE>
BUSINESS
ABOUT USI
USI's service offerings integrate leading packaged software applications
with computing hardware, network security and operational support to meet the
needs of middle market companies for business functions such as e-commerce,
sales force automation and customer support, messaging and collaboration and
professional services automation. We implement these applications in our data
centers and enable our clients to access and utilize the applications over the
Internet. We take full responsibility for providing these services to our
clients, freeing them from the need to own and manage related computer systems,
networks and software.
MARKET TRENDS
We believe that there are four key market trends that drive our business
opportunity:
- the increased acceptance of the applications hosting model;
- the rapid growth of e-commerce and Internet-based communications;
- the competitive need of middle market enterprises to automate key business
processes; and
- the availability of Internet-enabled packaged software applications.
THE INCREASED ACCEPTANCE OF THE APPLICATION SERVICE PROVIDER MODEL.
The application service provider model is being increasingly validated by
the emergence of new entrants into this market. The pure play applications
hosting companies today include companies such as Aristasoft, Breakaway
Solutions, Corio, Futurelink, Interliant, Interpath and Telecomputing. KPMG, a
leading systems integrator has announced a partnership with Qwest to provide
applications hosting solutions. USWeb/CKS, another systems integrator, also
provides applications hosting solutions. The leading enterprise application
companies such as Oracle, Siebel and SAP are either in the process of or are
already providing applications hosting solutions. The web hosting companies such
as Concentric, Digex and Verio either by themselves or in partnership with other
players are expected to be players in the ASP market. International Data
Corporation estimates that the market opportunity in the high-end Application
Service Provider market will reach $2 billion by 2003, representing a four-year
compound annual growth rate of 91%.
THE RAPID GROWTH OF E-COMMERCE AND INTERNET-BASED COMMUNICATIONS.
An increasing number of companies use the Internet to enable fast and
efficient communications between various constituents of their enterprises. The
following examples illustrate this trend.
- 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.
International Data Corporation estimates that commerce on the Internet
will be more than $1 trillion by 2003, reflecting a four-year compound
annual growth rate of 85%.
- 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
35
<PAGE>
demand for corporate intranets and extranets will fuel growth rates in
excess of 30% in distributed infrastructure services resulting in a $140
billion market in 2002.
As more companies implement mission-critical business applications on the
Internet, the demand for the outsourced provision of key Internet infrastructure
and services, or web hosting, has significantly increased. The outsourcing of
web sites is occurring because businesses recognize that they do not have an
infrastructure sufficient to ensure reliable and responsive deployment of
mission-critical applications on the Internet. Web site hosting providers
address these concerns by building substantial redundancy and capacious network
bandwidth into their facilities. Moreover, they provide a physically secure data
center environment, which helps to address businesses' security concerns as they
begin to move proprietary business information over the Internet.
THE COMPETITIVE NEED OF MIDDLE MARKET ENTERPRISES TO AUTOMATE KEY BUSINESS
PROCESSES.
Middle market enterprises increasingly face competitive demands to automate
business processes, but they have frequently not been able to afford the
functionality available to their larger competitors. This has been exacerbated
by the shortage of 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 enterprise resource planning software
packages remain too complex and too costly to be effective solutions for middle
market companies. While many enterprise resource planning providers have begun
offering products that are targeted for the middle market, implementation of
these packages generally still requires specialized skill sets and frequently
takes three to twelve months. In addition, the infrastructure required to
support these packages once implemented is also beyond the capabilities of many
middle market businesses. Faced with these costs and time frames, many middle
market companies choose to forgo the capabilities of leading enterprise resource
planning packages in favor of less functional products. We believe that a lower
cost, more easily implemented approach would allow these middle market
businesses to capitalize on the functionality of leading enterprise resource
planning packages and better position these businesses against larger
competitors.
THE AVAILABILITY OF INTERNET-ENABLED PACKAGED SOFTWARE APPLICATIONS.
Until recently, companies wanting to implement Internet applications had to
develop their own software applications or customize existing packages. This
made each implementation unique and costly. It also made implementation time
frames and costs unpredictable. Over the past two years, however, major packaged
application providers, such as Siebel, PeopleSoft, Lawson, Oracle, J.D. Edwards
and others, have released versions of their software which can be accessed and
used over the Internet. Internet-enabled software is becoming an increasingly
common offering of providers of applications for distributed users such as
e-commerce, enterprise resource planning applications, and sales force
automation, where the increasing ubiquity of the Internet makes it a
cost-efficient mechanism for implementing distributed functions.
We believe that the availability of Internet-enabled packaged software makes
it possible, for the first time, to implement these applications on the Internet
in predictable time frames, with predictable costs, and without writing custom
code.
THE USI SOLUTION
We believe that we are well positioned to take advantage of these trends. We
have established our IMAP services as a leading single-source solution for the
Internet-enabled application software needs of middle market enterprises. We
take responsibility for the deployment and maintenance of the IMAP best-of-breed
packaged software applications. This allows our clients to focus on their core
36
<PAGE>
competencies without mediating among disparate vendors. Our 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.
We have teamed with major packaged application software providers to
implement our IMAP solutions. We have built a network of EDCs through which our
clients' business software applications are deployed. The network offers fast,
reliable and secure access to the client application web sites that we manage,
which serve as the "Internet gateways" for enterprises and their employees,
customers and partners to access and use business application software and data.
The servers are generally procured and maintained by us 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 our network is deployed globally, access to client applications can be
equally responsive in North America, Europe and Asia. Moreover, geographically
dispersed backup is designed to ensure high reliability and data integrity. We
provide packaged application software and support along with our 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.
OPERATE A SPECIALIZED GLOBAL NETWORK
We have constructed a highly reliable, fully redundant, global network
specifically designed to support our IMAP solutions. Our network is designed to
provide the fastest possible response time, the highest level of security and
99.9% availability to our clients. We have EDCs in Annapolis, Silicon Valley,
Amsterdam and Tokyo. These EDCs are monitored and managed from our Global
Enterprise Management Center in Annapolis and a remote back-up GEMC in Silicon
Valley. The network is designed around dual primary backbones connecting our
EDCs and GEMCs. Our dedicated network is linked to the Internet in North America
via eight major backbone providers, allowing our clients to bypass congested
public exchange points. In addition, our network is linked with two backbone
providers in each of Europe and Asia, enabling us to provide global connectivity
to our clients. Large storage arrays in Annapolis and Silicon Valley can provide
real-time back-up of North American client sites, enabling us to provide an
unusually high level of data integrity. We use our network operations platform,
USIView, to proactively manage and monitor our network systems,
telecommunications hardware, network connectivity, operating systems and
applications software.
37
<PAGE>
[LOGO]
This specialized network enables us to provide very high levels of
reliability, security and responsiveness to client constituents, whether they
access our applications through the Internet or from behind a client LAN (as
illustrated above).
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. Our
consulting and implementation teams have specific expertise in implementing our
IMAP solutions for e-commerce, sales force automation and customer support,
human resource and financial management, messaging and collaboration and
professional services automation. Each team can integrate a specific application
software package and the required Internet communications services, which
together provide a total solution for a specific business process. These teams
can implement applications and generate value for customers very quickly. For
example, our typical implementation of Siebel technology is designed to be
completed in 45 days. We believe that this provides a competitive advantage over
a more conventional implementation which requires six months to more than a year
for completion. The consulting and implementation teams hand off the implemented
application to our operations group, which runs and maintains the application as
well as provides ongoing support to the client through our client care
organization.
38
<PAGE>
LEVERAGE STRATEGIC RELATIONSHIPS WITH LEADING SOFTWARE APPLICATION PROVIDERS
We have established relationships with vendors in key application areas,
including BroadVision and Microsoft in e-commerce; Ariba in business to business
electronic commerce; Siebel in sales force automation, customer service and
enterprise marketing; PeopleSoft and Lawson in human resources and financials;
Microsoft Exchange in messaging and collaboration; Niku in professional services
automation; and Sagent in decision-making support. We are the exclusive
application service provider of Siebel enterprise relationship management
applications for customers of SiebelNet, Inc. that are headquartered in North
America and are one of two currently certified PeopleSoft Application Service
Providers. 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'
enterprise resource planning, e-commerce and communication needs. In addition,
the agreements provide us with an accelerated path to developing our expert
product teams around the software applications and business processes these
applications support.
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 our clients. We believe that by doing so we will rapidly build our
client base and secure long-term relationships, especially with those clients in
the middle market. We intend to continue investing to maintain a value advantage
over our competitors and to capitalize on our first mover advantages, as
follows:
- DEVELOP NEW BUSINESS. We will continue to develop new business by
soliciting potential clients through joint marketing campaigns with our
hardware, software and integration partners, advertising in industry
specific periodicals and newspapers, sponsoring seminars and trade shows
in selected markets, and conducting targeted mass mailings of marketing
material.
- CROSS-SELL PRODUCTS TO INCREASE PENETRATION OF ACCOUNTS. We are able to
provide a range of packaged software applications and complex web hosting
services to our clients. We actively seek to increase our sales to clients
by cross-selling our products and services. Our aim is to increase our
implementation and provision of our clients' mission-critical business
processes.
- EXPAND OUR PORTFOLIO OF IMAP SOLUTIONS. We have entered into strategic
partnerships with numerous application software vendors. These vendors are
offering or developing additional applications in specific vertical market
segments which we expect to deploy in order to expand our portfolio of
IMAP solutions.
- ENHANCE THE CAPACITY AND FUNCTIONALITY OF OUR GLOBAL NETWORK. We will
continue to deploy enhanced value features into our network. In addition,
as we begin to address clients located in Europe and Asia, we will expand
our capacity in those regions. Today, we provide European and Asian mirror
sites to our clients from co-located Enterprise Data Centers in Amsterdam
and Tokyo.
- EMPHASIZE THE IMAP BRAND. We have focused our sales and marketing efforts
to distinguish IMAP as a branded product offering focused on the middle
market and selected divisions of larger multi-national organizations. Our
direct sales organization allows our sales representatives
39
<PAGE>
to understand each client's specific business needs better and provide the
ongoing support that facilitates effective cross-selling.
IMAP OFFERINGS
Our current IMAP offerings provide integrated solutions to meet the needs of
middle market clients implementing distributed business functions, whether based
on applications we provide or where we are hosting existing applications
provided by the client. These solutions encompass four elements.
- LEADING PACKAGED APPLICATION SOFTWARE. Our application packages address
major business process areas including e-commerce, sales force automation
and customer support, human resource and financial management, messaging
and collaboration and professional services automation. We have chosen to
focus on mission-critical business processes that serve distributed users.
These processes can gain maximum value from Internet implementations and
from our infrastructure.
- USI-MANAGED CLIENT APPLICATION WEB SITES AVAILABLE VIA OUR GLOBAL NETWORK.
USI-managed client application web sites are housed on dedicated
USI-managed servers and available via a reliable, high-performance and
secure global Internet network. Our network architecture is designed to
ensure responsiveness and allows clients to define which groups will have
full or limited access to the web site or the server.
- CONSULTING AND SYSTEMS INTEGRATION SERVICES. IMAP consulting and system
integration services define, develop and offer a service that provides
access to a combination of our network services, application software and
related hardware necessary to provide our service and meet a specific
client's needs. Within the IMAP solutions, we do not develop software nor
do we implement substantial customization of existing packages. Rather,
modular packages applications are configured to meet a client's
requirements.
- INTEGRATED CLIENT SERVICE. Once implemented, IMAP solutions are
efficiently managed in our network of EDCs. We provide client support
twenty-four hours a day, seven days a week, from dedicated teams with
specific knowledge of each client implementation.
In addition to the specific application areas that we support, we allow
clients to host their own software applications in our highly reliable and
secure data center environment. In this context, the IMAP offering consists of
all of the above elements other than the provision of application layer
software. Clients for this complex web site hosting realize all the reliability,
security, and responsiveness benefits of our network; however, we take no
responsibility for the application itself. We believe that many of our complex
web site management clients intend to migrate to a USI-supported application
over time.
Most of our IMAP contracts, including our contracts for complex web site
hosting, provide for a modest initial payment and are generally not less than
three years in length. However, client contracts signed under our agreement with
Siebel may have a term as short as six months and we foresee that some web site
hosting contracts may also have shorter terms, and several of our earliest IMAP
contracts permit early termination without substantial penalty. Our contracts
provide for prospective payment reductions in the event that agreed service
levels, as measured and quantified by system performance benchmarks, are not
met.
40
<PAGE>
USI'S NETWORK
We designed our global network specifically to provide superior performance
for the IMAP offerings. By maintaining architectural and operational control
over our network up to the point at which the client's traffic leaves its ISP
backbone or corporate LAN, our network is designed to:
- 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; and
- provide reliable and customized network security.
NETWORK UPTIME
Our global network is designed to ensure 99.9% uptime by following four
specific principles:
- avoiding incompatibility through standardization;
- utilizing redundant components;
- offering the ability to mirror client servers in separate EDCs; and
- implementing USIView, our global end-to-end network management system.
Our 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 our network as a Cisco Powered
Network, indicating that Cisco has reviewed and approved the network design. Our
network architecture relies on redundancy of network hardware, facilities
infrastructure like power supplies, and telecommunications circuits, which
maximizes the network availability. In addition, we have redundant EDCs, GEMCs
and wide-area networks connecting our EDCs. The wide-area network connection can
be used to dynamically mirror or provide a duplicate site for each client at an
alternative EDC location. This mirroring feature protects the site from downtime
resulting from catastrophic failure at a specific geographic location. For
clients requiring real time disaster recovery, we use storage arrays that enable
real time data mirroring and are designed to maintain the integrity of data to
within minutes.
The GEMC staff manages and monitors the network systems environment,
telecommunications hardware and data content servers in all of our EDCs, both
domestic and international, using USIView, our 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 our 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, we have designed our
"PriorityPeering" network to avoid congestion areas on the Internet and have
specifically designed our primary GEMC to support our integrated network. We
seek to avoid the known Internet congestion points at the Metro Area Exchanges
and at the network access points. In order to bypass the MAEs and network access
points, our network in North America connects directly with eight major Internet
service providers' backbones,
41
<PAGE>
which carry about 85% of all the traffic on the Internet today. Client data is
routed directly over an ISP's network to our network, bypassing congested public
exchange points.
NETWORK SECURITY
Each EDC features multiple levels of security to isolate private information
from public information. Private network infrastructure is physically isolated
with cabling, switches and routers separately maintained from the hardware for
the public network infrastructure. In addition, access to the EDCs and GEMCs is
restricted to authorized personnel by hand scan readers, which also monitor and
record entrances and departures. The public network and the private network have
minimal electronic or logical interconnection and are connected only through a
redundant firewall. The network also includes firewall products that enforce
data security and policy-based routing for clients who prefer secure access to
server resources. We believe that these measures ensure complete separation and
security between its public and private networks.
STRATEGIC SOFTWARE VENDOR RELATIONSHIPS
In developing our IMAP solutions, we have formed relationships with some of
the market-leading software providers whose applications support critical
business processes. These application providers include BroadVision, Siebel,
PeopleSoft, Lawson, Microsoft, Niku and Sagent. We believe that we have proven
to be an attractive partner for these software companies because of our strategy
to deliver integrated solutions to middle market enterprises in a cost-effective
service model. Each of our software agreements is unique, but most allow us to
deploy packaged application software as a service without the need to establish
a separate licensing arrangement for each client. The agreements also generally
include co-marketing, specialized product training and preferred pricing on the
licenses to the software. We plan to enter into additional agreements with other
software vendors over time.
Each of our key application software relationships is described below.
BROADVISION. We have agreed with BroadVision 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 us to offer a robust set of e-commerce
solutions for business-to-business and business-to-consumer commerce.
BroadVision has named us as its first certified e-commerce application service
provider worldwide.
Our agreement with BroadVision allows for attractive discounts on licenses.
Our arrangement with BroadVision also provides for flexible use of licenses
worldwide, sharing of development methodology, technical support, joint sales
activity and co-marketing. We maintain IMAP solutions engineers, trained and
certified on BroadVision applications, in nine major metropolitan areas.
ARIBA. Ariba is a leading provider of intranet- and Internet-based
business-to-business electronic commerce solutions for operating resources. The
company's products efficiently connect requestors to approvers and buyers to
suppliers to deliver an automated solution for improving the acquisition and
management of operating resources, the goods and services required to operate a
company.
Our comprehensive partnership with Ariba includes product development,
application implementation and management services, as well as cooperative sales
and marketing. Under terms of the agreement, USI is a preferred ASP for the
Ariba ORMX solution. Our arrangement with Ariba enables us to not only offer
buyers the Ariba ORMX solution as part of our IMAP portfolio, but it also allows
us the opportunity to provide other IMAP solutions to the suppliers that want to
connect to the Ariba Network. Specifically, as part of the agreement, the Ariba
sales force is incentivized to refer suppliers that transact with buyers through
the Ariba Network platform to USI to leverage our existing sell-side e-commerce
IMAP offerings.
42
<PAGE>
SIEBEL. Siebel is the recognized leader in providing enterprise
relationship management applications, a range of product offerings that includes
sales force automation, customer service/help desk, and enterprise marketing. We
have entered into an agreement with SiebelNet, Inc., a wholly owned subsidiary
of Siebel Systems, Inc., pursuant to which we serve as the exclusive application
service provider of Siebel enterprise relationship management applications for
customers of SiebelNet that are headquartered in North America. Under this
agreement, SiebelNet pays us a monthly fee for services including
ready-to-service hardware, network connectivity and client support.
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, we will implement
the application in our data center, provide on-going management and support, and
may provide our consulting and implementation services. Enterprise relationship
management opportunities identified by our sales force will be handled in the
same manner. In return for the exclusivity of this relationship, we have agreed
not to offer any competing enterprise relationship management applications as
part of our IMAP solutions. The agreement mandates joint marketing programs,
joint oversight of, and agreement on, the program to sell enterprise
relationship management application outsourcing services, and commissioning of
both Siebel's and our sales representatives participating in each sale.
PEOPLESOFT. We have agreed with PeopleSoft to offer PeopleSoft human
resource and core financial applications as IMAP solutions. PeopleSoft is an
established leader in the enterprise resource planning software industry and the
recognized leader in human resource management solutions. We are one of two
currently certified PeopleSoft Application Service Providers.
Our agreement with PeopleSoft provides that opportunities identified by our
sales force be jointly marketed and quoted. Opportunities identified by the
PeopleSoft sales force may be jointly marketed and quoted with us. Customers who
elect outsourcing through us will purchase our IMAP solutions. The agreement
also provides for the sharing of rapid deployment methodologies, complete
software support, the ability to joint market products and services, shared
visibility at industry events, sharing of sales leads and joint training
efforts.
LAWSON. Lawson is an established leader in the enterprise resource planning
software industry and one of the pioneers of fully Internet-enabling its
software products. Lawson is also a recognized leader in selling its enterprise
applications on a worldwide basis. Lawson's product functionality includes human
resources, financials, supply chain, collaborative commerce, enterprise
budgeting and procurement. Lawson has selected USI as a global Application
Service Provider.
Our agreement with Lawson provides that qualified new outsourcing leads
identified by Lawson will be referred to USI for hosting and application
management. Outsourcing leads identified by USI or Lawson will be jointly
marketed and quoted. USI has committed to provide marketing support and
resources for our Lawson offering. The term of the Lawson agreement is one year,
and will renew annually for up to five years unless either party provides notice
of termination prior to the end of any given year.
MICROSOFT. We have agreed with Microsoft to offer Microsoft's Exchange and
Site Server products as IMAP solutions. Microsoft Exchange is the recognized
leader in messaging and collaboration management solutions. Microsoft Site
Server is a leading e-commerce platform.
Our multi-year Exchange agreement with Microsoft grants us the right to
distribute the Exchange software as part of our IMAP solution on a pay-per-user
licensing fee basis. Under our other licensing agreement with Microsoft we
implement, host and manage e-commerce solutions based on Microsoft Site Server.
NIKU. Niku is a leading developer of professional services automation (PSA)
solutions.
43
<PAGE>
Our agreement with Niku allows us to offer, as an IMAP solution, up-front
installation, training and conversion services for Niku's PSA solutions. Under
the Agreement, we pay a discounted fee for each Niku license included in any
IMAP solution.
SAGENT. We have agreed with Sagent to offer Sagent Internet Enterprise
Intelligence applications as an IMAP solution. Sagent is currently fully
prepared to service the emerging Internet Enterprise Intelligence market with
its single, integrated, 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
solutions without the need to establish a separate licensing arrangement for
each client. The agreement also provides for flexible use of the licenses
worldwide, access to rapid deployment methodology, software support, joint
marketing and visibility as a Sagent Premier Partner at industry events, shared
training resources and sharing of sales leads.
SALES AND MARKETING
We offer our products and services through a direct sales organization based
in the U.S. Each sales representative is responsible for a limited number of
client relationships. We believe this approach enables our sales representatives
to understand each client's specific business needs thoroughly and to provide
top quality ongoing support. We currently have 39 sales representatives located
throughout the United States. We intend to expand our sales organization into
all major U.S. markets.
Our sales teams target medium-sized enterprises based in the U.S. with
annual revenues ranging from $50 million to $1 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.
We have developed programs to attract and retain high quality, motivated
sales representatives that have the technical skills and consultative selling
experience necessary to sell our IMAP solutions. In addition, our 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.
We have established a marketing communications organization that is
responsible for the branding and marketing of all our IMAP solutions and for
distinguishing IMAP as a branded product offering. The marketing organization is
responsible for all new service launches to ensure both internal execution and
marketplace acceptance. The marketing organization has developed cooperative
marketing and trade show participation programs in conjunction with our
strategic software and hardware partners.
We have entered into a marketing agreement with U S WEST
Communications, Inc., the incumbent local exchange carrier in fourteen western
states. By the terms of that agreement, U S WEST gains exclusive rights to
market our IMAP products in its fourteen-state region. We make our products
available to U S WEST at a discount and provide technical support during the
sales process. The agreement with respect to any IMAP offering can be canceled
in the event that U S WEST does not achieve an agreed quota of sales for that
offering. Moreover, the exclusive arrangement is not binding on any successor
organization to us. See "Risk Factors--The markets we serve are highly
competitive and many of our competitors have much greater resources."
44
<PAGE>
CLIENT CARE
A central element of the IMAP solution is a high level of responsive
personalized service, referred to as client care. Through our 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 service is available twenty-four hours a day, seven days a
week. Assigned support teams comprise senior client support specialists, network
engineers, and packaged application engineers. The teams have further support
from a group of product-specific application engineers who are trained in the
specific software applications that we offer.
CLIENTS
We target primarily North American-based middle market enterprises and
divisions of larger multinational organizations. We believe that these
organizations will gain the most competitive advantage from IMAP solutions and
that they provide the greatest opportunity for the outsourcing of information
technology operations. Currently, business software application vendors are
providing software predominantly to larger organizations. Historically, attempts
to market to middle market enterprises have generally been unsuccessful due to
the high up-front costs to obtain the required software, the long lead time to
integrate the software into the specific business process and the competition
for and shortage of IT resources in middle market companies.
We currently have clients for both our IMAP offerings and traditional
information technology services. Revenues from IMAP services comprise 54.2% of
total revenue for the nine months ended September 30, 1999. As of September 30,
1999 we had 81 signed contracts with 64 clients for our IMAP services,
representing over $100 million in expected contract revenue (assuming payments
over the full contract terms) and approximately $30 million of 12 month backlog,
which we define as revenue under contract expected to be recognized in the next
12 months. As of September 30, 1999, selected clients of ours include:
Actuate Software
AllBooks4Less.com
Baltimore Sun
Bike.com
Clarus
CornerStone Brands
Dozier Electronics
Franklin Covey
GE Capital Retirement
Health Care Online
Herman Miller
Hershey Foods
HP Shopping Village
(hpshopping.com)
INSLAW
Intraware
Knoll Pharmaceutical
Lattice Partners
Legg Mason
Liberty Financial Companies
liveprint.com
LHS Communications
Loan Market Resources
LocalVoice.com
NetGift Registry
Niku
Perfumania.com
PSDI
rdental.com
Rhythms NetConnections
Sagent
Samsung
Service Hub
Star Telecommunications
Sunburst Hospitality
TaketoAuction
TeleChoice
The Luggage Center
U S WEST
V Technologies
Ventana
WeTheShoppers.com
XL Capital
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
45
<PAGE>
network design. While our competition comes from many industry segments, we
believe no single segment provides the integrated, single-source solution that
we provide.
Our current and potential competitors include companies focused exclusively
on the application hosting business such as Breakaway Solutions, Corio,
Futurelink and Interliant; web hosting companies, such as Concentric, Digex and
Exodus; enterprise applications vendors, such as Oracle, Siebel and SAP;
business Internet Service Providers, such as MCI WorldCom, PSINet and Verio; and
telecommunications companies, such as AT&T, GTE, and Qwest (which has agreed to
acquire our customer and significant stockholder, U S WEST); and systems
integrators, such as Andersen Consulting, EDS, IBM and KPMG. 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.
We compete with national, regional, and local commercial systems integrators
who bundle their services with software and hardware providers and perform a
facilities management outsourcing role for the customer. These competitors
generally have greater name recognition or more extensive experience than we do.
EDS, Andersen Consulting and PricewaterhouseCoopers, 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.
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 to enhance their service offerings. IBM currently provides
applications outsourcing for its Lotus Notes products and other non-IBM software
applications. J.D. Edwards & Company, a developer of enterprise resource
planning software, has announced that it will offer its software in an
outsourced model. Oracle has announced a plan to offer Oracle Business Online, a
hosted enterprise resource planning application software solution. SAP has
formed an outsourcing organization to develop key partnerships with leading
consulting firms with the intent of offering SAP software. We believe that
additional hardware and software providers, potentially including our strategic
partners, may enter the outsourcing market in the future.
All of the major long distance companies, including AT&T, MCI WorldCom,
Qwest Communications and Sprint, offer Internet access services. Qwest has
announced plans to partner with KPMG to deliver hosted enterprise resource
planning solutions over the Internet, and Qwest has agreed to acquire our
customer and substantial stockholder, U S WEST. 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, we expect that we 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.
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.
46
<PAGE>
PROPERTIES
We are headquartered in Annapolis, Maryland, where we currently lease our
principal executive office. Our training and conference facilities are located
in a building we own in Annapolis, Maryland. We believe that the building we
own, due to its age, may contain limited amounts of asbestos containing
materials. We do not believe that limited asbestos presence would subject us to
any material liability.
On April 30, 1999, we purchased land and a building in Annapolis, Maryland
for $11.8 million. The seller financed $7.1 million of the purchase price
through a first mortgage note and will lend us an additional $1.5 million for
construction costs if we meet certain conditions. We are currently renovating
this building which will become our headquarters when completed later this year.
Total cost of these renovations are anticipated to be $12 million.
We lease space in a number of other locations, primarily for EDC and GEMC
installations and to house our consulting and implementation staff. We believe
that our leased facilities are adequate to meet our current needs in the markets
in which we have begun to deploy our services, and that additional facilities
are available to meet our expansion needs in our target markets for the
foreseeable future.
Our leases are for terms varying from 30 to 84 months and generally contain
renewal options of two to three years as well as rent escalation clauses. During
1998 we incurred approximately $720,000 in rent expense.
EMPLOYEES
As of September 30, 1999, we employed approximately 680 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 is 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.
47
<PAGE>
MANAGEMENT
The following sets forth certain information regarding our current directors
and executive officers as of November 30, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ------------------------------------------
<S> <C> <C>
Christopher R. McCleary(1)................ 47 Chief Executive Officer and Chairman of
the Board
Stephen E. McManus........................ 50 President--E-Commerce Business Unit and
Director
Jeffery L. McKnight....................... 56 Executive Vice President of Operations and
Client Services
Andrew A. Stern........................... 42 Executive Vice President and Chief
Operating Officer
Harold C. Teubner, Jr..................... 53 Executive Vice President and Chief
Financial Officer
Gary J. Rogers............................ 49 Senior Vice President, Worldwide Sales
R. Dean Meiszer(3)........................ 43 Director
Benjamin Diesbach(2)...................... 53 Director
David J. Poulin(3)........................ 40 Director
Ray A. Rothrock(1)(3)..................... 44 Director
Frank A. Adams(1)(2)...................... 54 Director
William F. Earthman(1)(2)................. 48 Director
John H. Wyant(1).......................... 53 Director
Joseph R. Zell(1)......................... 40 Director
Michael C. Brooks(1)(2)(3)................ 54 Director
Cathy M. Brienza.......................... 50 Director
</TABLE>
- ------------------------
(1) Member of the executive committee
(2) Member of the compensation committee
(3) Member of the audit committee
CHRISTOPHER R. MCCLEARY is a co-founder of USI and has served as the
Chairman and Chief Executive Officer of USI since January 1998. Prior to
founding USI, he was the Chairman and Chief Executive Officer of DIGEX, Inc.
from January 1996 to December 1997. Prior to serving at DIGEX, Mr. McCleary
served as Vice President and General Manager for Satellite Telephone Service at
American Mobile Satellite Corporation, a satellite communications company, from
October 1990 to January 1996.
STEPHEN E. MCMANUS is a co-founder of USI and has served as a director since
April 1998. He served as President of USI until June 1999, at which time he
became President of our E-Commerce Business Unit. 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 1997 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., or ARINC, the communications
arm of all of the domestic airlines from May 1989 to July 1997. Prior to ARINC,
he held senior operations positions with System One, Inc. from February 1963 to
April 1989.
48
<PAGE>
ANDREW A. STERN has been Executive Vice President and Chief Operating
Officer of USI since June of 1999. He originally joined USI on July 24, 1998 as
Executive Vice President and Chief Financial Officer. 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.
HAROLD C. TEUBNER, JR. has been Executive Vice President and Chief
Financial Officer of USI since October 1999. From July 1998 until joining USI,
Mr. Teubner worked as an independent consultant in the technology industry.
Mr. Teubner served as the Executive Vice President and Chief Operating Officer
at Concept Five Technologies from July 1997 to July 1998. During September 1996,
Mr. Teubner served as COO of Nat Systems International, a French software
company. Prior to joining Concept Five Technologies, Mr. Teubner was President
and CEO of Visix Software, a company that builds high-end, object oriented,
application development tools. Mr. Teubner was with Visix from July 1995 to
June 1996. Mr. Teubner held positions with Sybase Inc. from January 1988 to
April 1995. While at Sybase, Mr. Teubner served as the Senior Vice President of
North American Operations from July 1992 to April 1995.
GARY J. ROGERS joined USI in October 1999 as Vice President, Worldwide
Sales. Prior to joining USI, Mr. Rogers was with CMS/Data, a division of PC Docs
Group International, Inc. from September 1997 to September 1999. While at
CMS/Data, Rogers served in various capacities including: Vice President, Sales
and Marketing and President, Chief Operating Officer. From May 1994 to July
1997, Mr. Rogers was with SQL Financials International, Inc. where he worked as
Vice President of Sales and Regional Sales Manager. Mr. Rogers was an Area Sales
Manager with The ASK Group/ Ingres from August 1990 to April 1994.
R. DEAN MEISZER has been a director of USI since it was founded. Currently,
Mr. Meiszer serves as the President of Lattice Communications, Ltd. Lattice
Communications was formed in October 1997 by the principals and associates of
Crisler Company to own, operate, and manage wireless transmission towers and
related businesses. Meiszer has been President and Managing Director of The
Crisler Company, a Cincinnati-based investment firm, since May 1989. Prior to
Crisler, Mr. Meiszer was Senior Vice President of Society Bank from March 1978
to May 1989.
BENJAMIN DIESBACH was appointed to the board of directors 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 appointed to the board of directors 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 appointed to the board of directors in June 1998 as a
designee of the Venrock Group. He has been a General Partner of Venrock
Associates, the high technology venture capital investment firm of the
Rockefeller Family, since June 1988. Mr. Rothrock serves on the boards of
directors of CheckPoint Software Technology and several private companies
including Qpass, Rights Exchange, Appliant, Inc., Sbyn Technology and Simba
Technology.
FRANK A. ADAMS was appointed to the board of directors in June 1998 as a
designee of the Grotech Group. He is the President and Chief Executive Officer
of Grotech Capital Group, which he co-founded in August 1984. Mr. Adams has
served as President of the Mid-Atlantic Venture Association
49
<PAGE>
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 appointed to the board of directors in June 1998 as
a designee of the Massey Burch Group. He has been a Partner of Massey Burch
Capital Corporation since January 1994. Prior to becoming a Partner at Massey
Burch Capital Corporation, Mr. Earthman served from January 1990 as a Vice
President of Massey Burch Investment Group. Prior to Massey Burch, he worked for
the investment banks J.C. Bradford & Co. from September 1975 to October 1981,
Prudential-Bache Securities from October 1981 to November 1985 and First
Nashville Corp. from December 1985 to December 1989. He currently serves on the
board of directors of Intellivoice Communications, Inc. and Legal Technologies
Network, Inc.
JOHN H. WYANT was appointed to the board of directors in June 1998 as a
designee of the Blue Chip Group. He is the Managing Partner and President of
Blue Chip Venture Company, which he founded in 1990. Mr. Wyant is currently a
director of Regent Communications, Inc., Zaring Homes, Inc., Delicious Brands,
Inc. and Ciao Cucina Corporation. He previously served as a director of DIGEX.
JOSEPH R. ZELL was appointed to the board of directors in July 1998 as a
designee of U S WEST. Since December 1991, he has held several positions with
the !NTERPRISE Networking division of U S WEST Communications, Inc., including
Director of Product Development for !NTERPRISE, Executive Director of
Applications Innovation, President of U S WEST's Wholesale Division and Vice
President of Markets and innovation at !NTERPRISE. He has been President of the
division since March 1997.
MICHAEL C. BROOKS was appointed to the board of directors 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., Media Metrix, Inc., Homestore.Com and various
other private companies.
CATHY M. BRIENZA was appointed to the board of directors in May 1999. Since
July 1997, Ms. Brienza has been a member of Waller-Sutton Media, L.L.C., the
general partner of Waller-Sutton Media Partners, L.P. Prior to joining
Waller-Sutton Media, she was a principal of Sutton Capital Associates, Inc., and
its affiliated companies, which engaged in the ownership and operation of cable
television and cellular telephone systems.
CLASSIFICATION OF THE BOARD OF DIRECTORS
Each director holds office until his or her successor has been elected and
qualified. In April 1999, the board of directors divided itself into three
classes. Messrs. Brooks, Earthman and Zell and Ms. Brienza serve in the class
whose term expires in 2000; Messrs. Adams, McManus, Rothrock and Wyant serve in
the class whose term expires in 2001; and Messrs. Diesbach, Meiszer, Poulin and
McCleary serve in the class whose terms expires in 2002. Upon the expiration of
the term of each class of directors, the stockholders will at their next annual
meeting elect directors to serve in that class for a three-year term.
COMMITTEES OF THE BOARD OF DIRECTORS
In June 1998, the board of directors established a compensation committee,
an audit committee and an executive committee. The compensation committee makes
recommendations concerning salaries and incentive compensation of our employees
and consultants and administers our stock option plan. The audit committee
reviews, acts on and reports to the board of directors with respect to various
auditing and accounting matters, including reviewing our audit policies,
overseeing the engagement of our independent auditors and developing our
financial strategies. The executive committee is
50
<PAGE>
empowered to conduct all activities that may be conducted by the board of
directors, subject only to limitations imposed by applicable Delaware corporate
laws.
COMPENSATION OF DIRECTORS
All non-employee directors are reimbursed for travel and other related
expenses incurred in attending meetings of the board of directors. In addition,
each non-employee director then serving on the board of directors will receive
upon the date of the first board meeting in the second calendar quarter of each
year an option granted pursuant to our option plan to purchase 5,625 shares of
our common stock. The options will vest immediately and will have an exercise
price equal to the fair market value of the common stock on the date of grant.
The shares of common stock purchased pursuant to these options will be subject
to repurchase by us as described in " --Stock Option Plan."
EMPLOYMENT AGREEMENTS
We have entered into the following employment agreements with our executive
officers.
<TABLE>
<CAPTION>
OFFICER TERM SALARY POSITION
- ------- ---------------------- -------- ------------------------------
<S> <C> <C> <C>
Christopher R. McCleary....... January 1998- $250,000 Chairman and Chief Executive
December 2000 Officer
Stephen E. McManus............ April 1998-April 2003 $175,000 President, E-Commerce Business
Unit
Andrew A. Stern............... July 1998-July 2001 $175,000 Executive Vice President and
Chief Operating Officer
Jeffery L. McKnight........... July 1998-July 2001 $175,000 Executive Vice President of
Operations and Client
Services
Harold C. Teubner, Jr......... September 1999- $250,000 Executive Vice President and
September 2002 Chief Financial Officer
Gary J. Rogers................ September 1999- $225,000 Senior Vice President,
September 2002 Worldwide Sales
</TABLE>
Mr. McCleary's agreement also provides for:
- automatic renewal for subsequent one year terms unless either party elects
not to renew prior to 90 days from the end of the then current term of the
agreement;
- a bonus to be determined based on his meeting established management
objectives with a minimum of $250,000 in the second year of the agreement
and $500,000 in the third year of the agreement;
- the right to terminate him for cause upon a vote of two-thirds of the
board of directors preceded by a finding by the compensation committee or
executive committee that he has breached the agreement;
- the payment of his full salary for the term of the agreement if he
terminates the agreement because:
-- we breach the agreement;
-- there is a material adverse change in his job responsibilities, duties,
function or reporting relationships; or
-- he is required to travel more than 50 miles to a relocated office;
- the payment of his full salary for the term of the agreement if he is
terminated without cause; and
51
<PAGE>
- the payment of his bonus after he terminates the agreement for other than
the reasons described above if its amount had already been determined by
the compensation committee.
Mr. McManus, Mr. McKnight and Mr. Stern's agreements all provide for:
- No obligation to pay salary after a termination for cause due to:
-- a breach of the agreement by the officer;
-- engaging in illegal or immoral practices or activities which can
reasonably be expected to be materially detrimental to our reputation;
--being dishonest, disloyal, or fraudulent in performing his duties;
--willful misconduct or dereliction of his duties;
--using, possessing, selling or delivering illegal drugs; or
--in the case of Mr. McManus, substantial failure to perform his duties;
if the action giving rise to the termination is not cured within 60 days and an
arbitrator finds the termination to be valid.
Mr. Stern's agreements provide for:
- the right, which he has exercised, to purchase 937,500 shares of our
common stock;
- a life insurance policy provided by us in an amount equal to twice his
salary less the amount of any group insurance he selects as part of our
standard group insurance plan;
- our right to repurchase the 937,500 shares of stock, for the total tax
liability incurred by Mr. Stern as a result of his purchase, if he is
terminated for cause or if he terminates the agreement on or before May
30, 2000, unless it is a termination for good reason;
- our obligation to register the 937,500 shares of stock for sale under the
Securities Act as soon as practicable in the event the officer's
employment is terminated due to death or disability; and
- the obligation to pay the officer's full salary for the remainder of the
term of the agreement or one year, if longer, and a bonus pro rated for
the remaining term of the agreement if we terminate one of them without
cause.
Mr. McManus' agreement provides for:
- the right, which he has exercised, to purchase 750,000 shares of our
common stock;
- a life insurance policy provided by us in an amount equal to twice his
salary less the amount of any group insurance he selects as part of our
standard group insurance plan;
- our right to repurchase 187,500 shares of stock for $100 if he is
terminated for cause or if he terminates the agreement on or before May
31, 2000; and
- our right to repurchase all or part of 562,500 shares of stock for $100.00
if he is terminated for cause (including substantial failure to perform
his duties) or if he terminates the agreement before April 1, 2003.
Mr. McKnight's agreement also provides for:
- the grant of an option to purchase 562,500 shares of common stock under
our stock option plan; and
- the termination of our right to repurchase his shares under the option
plan 24 hours before any termination of his employment without cause.
52
<PAGE>
If Mr. Rogers is terminated without cause, we must pay him an amount equal
to his annual base salary until the end of the term or for twelve months
whichever is greater, accelerate all unvested stock options and pay any sales
commissions or bonuses owned.
Mr. Rogers' agreement also provides for:
- the grant of an option to purchase 150,000 shares of our common stock
under our stock option plan; and
- the grant of 27,000 shares of common stock, half of which vests
immediately upon the execution of the agreement and the balance vests upon
the first anniversary of Mr. Rogers' employment.
Mr. Teubner's agreement provides for:
- the grant of an option to purchase 450,000 shares of our common stock
under our stock option plan; and
- the termination of our right to repurchase his shares under the option
plan upon termination of his employment without cause.
Some of the agreements provide for the termination of our right to
repurchase shares held by the officers upon a change in control of the company.
All of the agreements provide for review of the salary and bonus terms by our
compensation committee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to June 1998, we had no separate compensation or stock option
committee or other board committee performing equivalent functions, and these
functions were performed by our board of directors. Both Mr. McCleary and Mr.
McManus were members of the board of directors during that period. In June 1998,
we established compensation, audit and executive committees of our board of
directors. The compensation committee is composed of non-employee directors. See
"--Committees of the Board of Directors."
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION. The following table provides summary information
concerning compensation that we paid to or accrued on behalf of our "Named
Executive Officers," which are our Chief Executive Officer and each of the other
executive officers of USI who earned more than $100,000, in salary and bonus,
for all services rendered in all capacities during the fiscal year ended
December 31, 1998. The aggregate amount of perquisites and other personal
benefits, securities or property received by each of the Named Executive
Officers was less than either $50,000 or 10% of the total annual salary and
bonus reported for that Named Executive Officer:
53
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------- SHARES UNDERLYING OPTIONS
NAME AND PRINCIPAL POSITION SALARY BONUS AWARDS
- --------------------------- ------ ----- -------------------------
<S> <C> <C> <C>
Christopher R. McCleary
Chief Executive Officer and Chairman of the
Board............................................ $131,250 $ 0 --
Stephen E. McManus
President--E-Commerce Business Unit and
Director......................................... $131,250 $ 0 --
Jeffery L. McKnight,
Executive Vice President of Operations and Client
Services......................................... $ 75,962 $50,000 562,500
</TABLE>
STOCK OPTIONS. The following table contains information concerning the
stock option grants made to each of the Named Executive Officers during the
fiscal year ended December 31, 1998:
- The options described in the table below are immediately exercisable and
expire on the tenth anniversary of the date of grant. Shares of common
stock purchased pursuant to these options will be subject to our right to
repurchase them at the option exercise price upon the termination of the
holder's employment or business relationship with us. The repurchase right
will lapse with respect to one-third of the shares purchasable upon
exercise of an option on the first anniversary of the date of grant of the
option. The repurchase right with respect to the remainder of the shares
purchasable upon exercise of an option will lapse in equal quarterly
installments over the subsequent eight calendar quarters.
- The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by the rules of the SEC. There can be no assurance that the
actual stock price appreciation over the ten-year option term will be at
the assumed 5% and 10% levels or at any other defined level. Unless the
market price of the common stock appreciates over the option term, no
value will be realized from the option grants. The potential realizable
value is calculated by assuming that the fair market value of the common
stock on the date of grant of the options appreciates at the indicated
rate for the entire term of the option and that the option is exercised at
the exercise price and sold on the last day at the appreciated price.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES
OF STOCK PRICE
NUMBER OF SHARES OF % OF TOTAL APPRECIATION
COMMON STOCK OPTIONS GRANTED EXERCISE FOR OPTION TERM
UNDERLYING OPTIONS TO EMPLOYEES IN PRICE EXPIRATION --------------------
NAME GRANTED 1998 PER SHARE DATE 5% 10%
- ---- ------------------- --------------- --------- ---------- -- ---
<S> <C> <C> <C> <C> <C> <C>
Christopher R. McCleary... 0 -- -- -- -- --
Stephen E. McManus........ 0 -- -- -- -- --
Jeffery L. McKnight....... 562,500 22.3% $1.76 12/20/08 $622,606 $1,577,805
</TABLE>
YEAR-END OPTION VALUES. The following table sets forth information
concerning option holdings through December 31, 1998 by the one Named Executive
Officer who held options at the end of fiscal 1998:
- "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.
54
<PAGE>
- Value is determined by subtracting the exercise price from the fair market
value of the common stock based on an assumed value, as of December 31,
1998, of $14.00 per share (the initial public offering price per share of
our common stock), multiplied by the number of shares underlying the
options.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
OPTIONS AT YEAR END OPTIONS AT YEAR END
------------------- --------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Jeffery L. McKnight........................... 562,500 -- $6,885,000 --
</TABLE>
STOCK OPTION PLAN
Our 1998 Stock Option Plan, approved by the board of directors in July 1998
and amended and restated in February 1999, provides for the issuance of up to
7,023,375 shares of common stock pursuant to the grant of stock options, both
nonqualified stock options and incentive stock options, as defined in our option
plan, to independent directors, employees and consultants. Our compensation
committee has approved, subject to stockholder approval, amendments to our
option plan to increase the number of shares issuable under the option plan by
2,250,000 shares to 9,273,375 shares in the aggregate. As of September 30, 1999,
options to purchase 6,978,033 shares of common stock were outstanding, each with
a weighted average exercise price of $6.36 per share and no options are
available for future grant. Of these, options to purchase 4,878,605 shares of
common stock are intended to qualify as Incentive Stock Options, or ISOs. The
remaining options to purchase 2,099,428 shares of common stock are nonqualified
stock options, or NSOs. The options vest immediately upon the date of grant.
Shares of common stock purchased pursuant to options under our option plan
will be subject to our right to repurchase them at the option exercise price
upon the termination of the holder's employment or business relationship with
us. Other than with respect to the option granted to Mr. McCleary the repurchase
right will lapse with respect to one-third of the shares purchasable upon
exercise of an option on the first anniversary of the date of grant of the
option. The repurchase right with respect to the remainder of the shares
purchasable upon exercise of an option will lapse in equal quarterly
installments over the subsequent eight calendar quarters. Our repurchase right
with respect to shares held by any particular employee will lapse completely if
there is a change in control of USI and the employee's employment is terminated
within 12 months of the change of control. The repurchase right with respect to
the option to purchase 562,500 shares of common stock granted to Mr. McCleary
lapsed with respect to one-quarter of the shares upon consumation of our initial
public offering and will lapse with respect to the remaining shares in full four
years from the date of grant. The lapse of this repurchase right can be
accelerated if USI meets certain performance objectives established by the
compensation committee.
The compensation committee appointed to administer our option plan has
discretion to determine which employees and consultants will be granted stock
options, the number of shares to be optioned, and the terms and conditions of
such options. The full board of directors conducts the administration of the
option plan with respect to options granted to independent directors or to
officers subject to section 16 of the Exchange Act. During the term of our
option plan, each independent director serving on the date of the first board
meeting during the second calendar quarter of each year will automatically be
granted an option to purchase 5,625 shares of common stock on such date. The
exercise price of such shares will be the fair market value on the date of grant
as determined under the terms of our option plan. The compensation committee, or
the board of directors, as applicable, also
55
<PAGE>
has discretion to make adjustments to options in the event of a change in
control or other corporate event including, without limitation, the discretion
to accelerate the vesting of options or waive our repurchase right.
The federal income tax consequences, in general, of the grant and exercise
of an ISO under our option plan are as follows.
- In general, an employee will not recognize taxable income upon the grant
or exercise of an ISO and we will not be entitled to any business expense
deduction with respect to the grant or exercise of an ISO.
- If the employee holds the shares for at least two years after the date of
grant and for at least one year after the date of exercise, the
difference, if any, between the sales price of the shares and the exercise
price of the option will be treated as long-term capital gain or loss upon
subsequent disposition of the shares.
- If the employee disposes of the shares prior to satisfying the holding
period requirements, the employee will recognize ordinary income at the
time of the disposition, generally in an amount equal to the excess of the
fair market value of the shares at the time the option was exercised over
the exercise price of the option. Generally, we will be allowed a business
expense deduction to the extent an employee recognizes ordinary income.
The balance of the gain realized, if any, will be short-term or long-term
capital gain, depending upon whether the shares have been held for at
least twelve months after the date of exercise.
The federal income tax consequences, in general, of the grant and exercise
of an NSO under our option plan are as follows.
- In general, a recipient who receives a NSO will recognize no income at the
time of the grant of the option.
- Upon exercise of an NSO, a recipient will recognize ordinary income in an
amount equal to the excess of the fair market value of the shares on the
date of exercise over the exercise price of the option. Generally, we will
be entitled to a business expense deduction in the amount and at the time
the recipient recognizes ordinary income.
- The basis in shares acquired upon exercise of an NSO will equal the fair
market value of the shares at the time of exercise, and the holding period
of the shares, for capital gain purposes, will begin on the date of
exercise.
401(K) PLAN
In 1998, we adopted a 401(k) plan covering substantially all of our
employees. Under the plan, eligible employees may elect to reduce their current
compensation and have the amount of the reduction contributed to the plan on the
employee's behalf as salary deferral contributions. Beginning as of June 30
1999, we have begun to make matching contributions to the plan on behalf of our
employees in the amounts equal to 50 percent of the first six percent of an
employee's earnings contributed to the plan. Matching contributions are in the
form of our common stock and not in cash. All contributions to the plan by or on
behalf of employees are subject to aggregate annual limits prescribed by the
Internal Revenue Code.
56
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PURCHASES OF SERIES A PREFERRED STOCK
On May 31, 1998, pursuant to an agreement dated May 13, 1998, Blue Chip
Capital Fund II Limited Partnership; Miami Valley Venture Fund L.P.; Grotech
Partners IV L.P.; Grotech Partners V L.P.; Southern Venture Fund SBIC, L.P.;
Southern Venture Fund II, L.P.; Venrock Associates; and Venrock
Associates II, L.P., a group we refer to as the Initial Series A Purchasers,
purchased, in the aggregate, 38,333.33 shares of Series A Preferred Stock for an
aggregate purchase price of $23.0 million.
In connection with the issuance of the shares to the Initial Series A
Purchasers, we issued 1,666.67 shares of Series A Preferred Stock to
Christopher R. McCleary, in exchange for the cancellation of $1.0 million of
debt that we owed to Mr. McCleary.
In an agreement dated June 18, 1998, we issued an additional 5,000 shares
of Series A Preferred Stock to certain of the Initial Series A Purchasers for an
aggregate purchase price of $3.0 million.
In an agreement dated June 18, 1998, we issued 5,833.33 shares of Series A
Preferred Stock to U S WEST for $3.5 million.
In agreements dated June 19, 1998, we issued 3,000 shares of Series A
Preferred Stock to HAGC Partners; Chris Horgan, who later transferred his
interest to his affiliate, Southeastern Technology Fund, L.P.; and a series of
purchasers represented by Account Management Corporation, a group we refer to as
the Account Management Purchasers; for an aggregate purchase price of
$1.8 million. Also on June 19, 1998, 1,166.67 shares of Series A Preferred
Stock were sold to USI Partners, Ltd. for $700,002.
Upon the closing of our initial public offering in April 1999, each holder
of Series A Preferred Stock received on conversion the number of shares of
common stock arrived at by dividing the aggregate purchase price for the
holder's shares of Series A Preferred Stock by the conversion price of $1.77.
BRIDGE FINANCINGS AND PURCHASES OF SERIES B PREFERRED STOCK
In agreements dated September 8, 1998, all of the existing holders of
Series A Preferred Stock, other than Southern Venture Fund SBIC, L.P., HAGC
Partners, Christopher McCleary and two of the Account Management Purchasers,
purchased our convertible promissory notes in the aggregate principal amount of
$9,095,000, together with warrants to purchase 1,461,675 shares of common stock
for $.053 per share. Each note was convertible into preferred stock of USIhaving
an aggregate fair market value equal to the principal amount of the note. The
principal amount of these notes was converted into Series B Convertible
Preferred Stock on December 31, 1998 at a conversion price equal to the $1,050
per share purchase price of the Series B Preferred Stock, and the accrued
interest was paid in cash.
On December 16, 1998, Blue Chip Capital Fund II, L.P. lent us $1.0 million,
which was repaid with interest, in cash, as of December 31, 1998.
In an agreement dated December 16, 1998, Grotech Partners V L.P.; Southern
Venture Fund II, L.P.; Venrock Associates; Venrock Associates II, L.P.; USI
Partners, Ltd.; and Siebel Systems, Inc. purchased our convertible promissory
notes in the aggregate amount of $8.0 million. Each note was convertible into
preferred stock of USI having an aggregate fair market value equal to the
principal amount of the note. The principal amount of these notes was converted
into Series B Preferred Stock on December 31, 1998 at a conversion price equal
to the $1,050 per share purchase price of the Series B Preferred Stock, and the
accrued interest was paid in cash.
57
<PAGE>
In an agreement dated December 29, 1998, U S WEST purchased our convertible
promissory note in the amount of $5.0 million. Each note was convertible into
preferred stock of USI having an aggregate fair market value equal to the
principal amount of the note. The principal amount of this note was converted
into Series B Preferred Stock on December 31, 1998, at a conversion price equal
to the $1,050 per share purchase price of the Series B Preferred Stock, and the
accrued interest was paid in cash.
On December 31, 1998, the principal amount of all of our outstanding
convertible promissory notes, $22,095,000, was converted into 21,042 shares of
Series B Preferred Stock with a purchase price of $1,050 per share. The accrued
interest on these notes was paid in cash. In addition, the warrants we issued in
connection with the issuance of our convertible promissory notes were exchanged
for otherwise identical warrants having an exercise price of $2.29 per share.
In an agreement dated December 31, 1998, we issued 59,278.56 shares of
Series B Preferred Stock for an aggregate purchase price of $62,242,500, of
which $22,095,000 was paid by conversion of the convertible promissory notes
identified above, to the holders of the convertible promissory notes described
above and J. H. Whitney III, L.P.; Whitney Strategic Partners III, L.P.;
Waller-Sutton Media Partners, L.P.; Arbor Venture Partners, L.L.C.; Southeastern
Technology Fund, L.P.; PNC Bank, N.A., Trustee; PNC Bank, N.A., Custodian; AEH
Profit Sharing Trust; Castellini Management Company; and all of the holders of
Series A Preferred Stock except Southern Venture Fund SBIC, L.P.; HAGC Partners;
and two of the Account Management Purchasers. Upon the closing of our initial
public offering in April 1999, each holder of Series B Preferred Stock received
on conversion the number of shares of common stock arrived at by dividing the
aggregate purchase price for the holder's shares of Series B Preferred Stock by
the conversion price of $2.24.
The agreement in which we issued the Series B Preferred Stock includes a
repurchase requirement. In the event that we become an "Affiliate" of
U S WEST, as that term is defined in Section 3(1) of the Communications Act of
1934, and we are also providing services that an Affiliate of U S WEST would be
prohibited from providing, then U S WEST can require us to purchase, and we can
require U S WEST to sell to us, the minimum number of our shares needed to
prevent us from being deemed an Affiliate of U S WEST. The repurchase price, in
either instance, would be the last reported price on the Nasdaq National Market,
or as determined by the board of directors if we are no longer publicly traded.
We are not presently an Affiliate of U S WEST.
AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT
REGISTRATION RIGHTS. According to the terms of the Amended and Restated
Stockholders' Agreement, the holders of the Preferred Stock, together referred
to as the investors, have rights to register shares of our capital stock. At any
time 90 days after the effective date of the first registration statement that
we filed under the Securities Act, holders of at least 33% of the Registrable
Securities, as defined in the Stockholders' Agreement, may require us to effect
registration under the Securities Act of their registrable securities, subject
to the board of directors' right to defer the registration for a period of up to
180 days. The investors also have the right to cause us to register their
securities on Form S-3 when it becomes available to us if they propose to
register securities having a value of at least $10 million. In addition, if we
propose to register securities under the Securities Act, other than
registrations on Form S-4 or Form S-8, then any of the investors has a right,
subject to quantity limitations we determine, or determined by underwriters if
this offering involves an underwriting, to request that we register such
holder's registrable securities. We will bear all registration expenses incurred
in connection with registrations. We have agreed to indemnify the investors
against liabilities related to the accuracy of the registration statement used
in connection with any registration effected pursuant to the foregoing.
58
<PAGE>
GOVERNANCE PROVISIONS. The Stockholders' Agreement gives the Whitney Group
the continuing right to designate one member of our board of directors.
IMAP AGREEMENT WITH U S WEST
USI and U S WEST entered into an agreement on January 15, 1999 in which USI
grants to U S WEST and its affiliates a limited, nontransferable, non-exclusive
license to use the IMAP solution. The agreement has an initial term of three
years. After the end of the initial three year term, the agreement will
automatically be extended on the same terms for an additional 24 months. After
the first extension term, the agreement may be extended by mutual written
agreement. After the initial term, the agreement may be terminated by U S WEST
for convenience if it pays a termination fee ranging from $1,800,000 to
$360,000, depending on how many months are left in the term of the agreement.
U S WEST will pay USI a total of $4,121,250 in thirty-six monthly installments
for use of the IMAP solution for up to 1,000 users. For more than 1,000 users,
U S WEST will pay USI an additional monthly installment amount per user. The
amount payable to USI under the agreement will be reduced if USI does not
provide U S WEST with agreed upon service levels. The agreement contains
standard warranty, limitation of liability and indemnity provisions. On
March 31, 1999, we amended the agreement to allow twenty-five additional users
of U S WEST's affiliate, U S WEST Business and Government Services, to use the
IMAP solution for an additional $3,125 per month. On May 14, 1999, we further
amended the agreement to include architectural changes in the production of the
IMAP solution for an additional fee of $9,750 per month.
MARKETING AGREEMENT WITH U S WEST
USI entered into a marketing agreement on January 30, 1999 with U S WEST
Communications Services, Inc. and U S WEST Enterprise America, Inc. The
agreement establishes a contractual teaming arrangement for the creation and
distribution of network services, IMAP services, system integration services and
comprehensive customer service. The agreement provides U S WEST with the
exclusive rights to market IMAP services in U S WEST's fourteen-state service
region and to some of U S WEST's existing customers and other customers as
mutually agreed to by U S WEST and USI. USI is prohibited from entering into
similar agreements within U S WEST's fourteen-state region with competitors of
U S WEST. USI will make its IMAP services, including consultation and
implementation services, available to U S WEST at discounted prices. USI will
also provide U S WEST with training and technical support during the term of the
agreement. Training and technical support will be provided at no cost for the
first twelve months of the agreement. U S WEST will pay the current rates for
such training and support beginning in the thirteenth month of the agreement's
term. If a U S WEST customer terminates its contract for IMAP services
prematurely, U S WEST will be obligated to make an accelerated payment to USI of
an amount equal to up to 36 months of contract payments under that customer's
contract. U S WEST will provide USI with favorable pricing and terms on
U S WEST's services used to deliver USI's IMAP services. The agreement may be
terminated for cause upon 90 days notice. USI can terminate U S WEST's overall
exclusivity if U S WEST fails to reach performance levels equal to at least 75%
of established sales quotas for the IMAP services. USI can terminate
U S WEST's exclusivity with respect to a particular IMAP product if U S WEST
fails to reach performance levels for that product equal to at least 50% of
established sales quotas so long as USI has performance levels with respect to
that product comparable to the performance required from U S WEST. The
exclusivity provisions will also terminate upon an acquisition or change of
control of USI. Either party may terminate the agreement upon a change in
control of the other. U S WEST has publicly announced its acquisition by Qwest
Communications International, Inc., one of our competitors. This acquisition, if
finally approved, could result in the modification or termination of the
agreement. If the agreement is terminated, we would have to build or replace the
sales distribution channel presently provided by U S WEST in its fourteen state
region.
59
<PAGE>
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. As disclosed above, we repayed this loan
by issuing 1,666.67 shares of Series A Preferred Stock to Mr. McCleary in May
1998.
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.
IMAP AGREEMENT WITH MMP, LLC
USI and MMP, LLC entered into an agreement in March 1999 in which MMP, LLC
became an IMAP customer of USI. The agreement expires in three years unless
terminated earlier in a manner consistent with the agreement or unless extended
by mutual written agreement. MMP, LLC has agreed to pay USI a total of $48,400
in thirty-six equal monthly installments. The agreement contains standard
warranty, limitation of liability and indemnity provisions. Christopher R.
McCleary is a member and officer of MMP, LLC.
IMAP AGREEMENT WITH LATTICE PARTNERS, LTD.
USI and Lattice Partners, Ltd. entered into an agreement on December 14,
1998 in which Lattice Partners, Ltd. became an IMAP customer of USI. The
agreement expires in three years unless terminated earlier in a manner
consistent with the agreement or unless extended by mutual written agreement.
Lattice Partners, Ltd. will pay USI a total of $108,000 in thirty-six equal
monthly installments. The agreement contains standard warranty, limitation of
liability and indemnity provisions. R. Dean Meiszer, a member of our board of
directors, is also a director of Lattice Partners, Ltd.
LOAN FROM USI TO CHRISTOPHER R. MCCLEARY
During the third quarter of 1999, we loaned Christopher R. McCleary
$2.25 million pursuant to a note bearing interest at 5% per annum, payable on or
before July 31, 2000 and secured by shares of Mr. McCleary's USI common stock.
The purpose of the loan was to finance Mr. McCleary's exercise of his option to
purchase 562,500 shares of our common stock. Subject to the approval of our
board of directors, during the fourth quarter of 1999, we anticipate loaning
Christopher R. McCleary approximately $2 million pursuant to a note bearing
interest at 7% per annum, payable within 90 days of demand and secured by shares
of Mr. McCleary's USI common stock. The purpose of the loan is to fund Mr.
McCleary's tax liability resulting from the exercise of his option described
above.
60
<PAGE>
PRINCIPAL STOCKHOLDERS
The table below sets forth, as of November 30, 1999, information with
respect to the beneficial ownership of our common stock by (1) each person who
we know to be the beneficial owner of more than 5% of our outstanding common
stock; (2) each of the directors and Named Executive Officers individually; and
(3) all directors and executive officers as a group. Except as otherwise
indicated, each of the stockholders has sole voting and investment power with
respect to the shares beneficially owned. The address of each executive officer
and director is c/o USINTERNETWORKING, INC., One USI Plaza, Annapolis, MD
21401-7478.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF
NAMED EXECUTIVE OFFICERS AND DIRECTORS BENEFICIALLY OWNED(1)(2) OWNERSHIP(1)(2)
- -------------------------------------- ------------------------ ---------------
<S> <C> <C>
EXECUTIVE OFFICERS
Christopher R. McCleary(3)................................ 2,508,927 4.11%
Andrew A. Stern(4)........................................ 939,000 1.54
Stephen E. McManus........................................ 750,000 1.23
Jeffery L. McKnight(5).................................... 562,500 *
DIRECTORS
R. Dean Meiszer(6)........................................ 712,096 1.17
Ray A. Rothrock(7)........................................ 4,016,961 6.56
Frank A. Adams(8)......................................... 12,529,102 20.31
William F. Earthman(9).................................... 2,124,639 3.48
John H. Wyant(10)......................................... 5,725,528 9.33
Benjamin Diesbach(11)..................................... 11,250 *
David J. Poulin(12)....................................... 11,250 *
Michael C. Brooks(13)..................................... 8,934,196 14.64
Joseph Zell(14)........................................... 0 *
Cathy M. Brienza(15)...................................... 2,237,764 3.67
All Executive Officers and Directors as a group (16 41,690,213 68.00
persons)................................................
BENEFICIAL OWNERS OF 5% OR MORE OF THE
OUTSTANDING COMMON STOCK OF USI
Blue Chip Group(16)....................................... 5,714,278 9.31
c/o Blue Chip Venture Company, Ltd.
2000 PNC Center
201 East Fifth Street
Cincinnati, Ohio 45202
Grotech Capital Group(17)................................. 12,517,852 20.30
9690 Deereco Road, Suite 800
Timonium, Maryland 21093
Venrock Group(18)......................................... 4,005,711 6.54
c/o Venrock Associates
Room 5506
30 Rockefeller Plaza
New York, New York 10112
Whitney Group(19)......................................... 8,928,571 14.65
c/o J.H. Whitney & Co.
177 Broad Street
Stamford, CT 06901
U S WEST Communications, Inc.(20)......................... 4,788,918 7.83
1801 California Street
Denver, Colorado 80202
</TABLE>
61
<PAGE>
- ------------------------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Except where community property laws
apply or as indicated in the footnotes of this table, to our knowledge, each
stockholder identified in the table possesses sole voting and investment
power with respect to all shares of common stock shown as beneficially owned
by the stockholder. The number of shares beneficially owned by a person
includes shares of common stock subject to options and warrants held by that
person that are currently exercisable within 60 days of November 30, 1999.
Shares issuable pursuant to options and warrants are deemed outstanding for
computing the percentage ownership of the person holding the options and
warrants but are not deemed outstanding for the purposes of computing the
percentage ownership of any other person.
(2) For purposes of this table, the number of shares of common stock outstanding
as of November 30, 1999 is deemed to be 61,033,471. 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 or
warrants exercisable within 60 days of November 30, 1999 are also assumed to
be outstanding.
(3) Includes 446,427 shares of common stock held by The Christopher R. McCleary
Childrens' Trust I of which Christopher McCleary is grantor.
(4) Includes 1,500 shares held by an irrevocable trust for the benefit of
Mr. Stern's children. Mr. Stern's spouse is the trustee of the trust.
(5) Includes options to purchase 562,500 shares of common stock exercisable
within 60 days of November 30, 1999.
(6) Includes 678,346 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
11,250 shares of common stock and warrants to purchase 22,250 shares of
common stock each exercisable within 60 days of November 30, 1999.
(7) Includes 1,648,437 shares of common stock owned by Venrock Associates and
2,159,596 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 5,625 shares of common stock and warrants to purchase 197,677
shares of common stock each exercisable within 60 days of November 30, 1999.
(8) Includes 4,151,785 shares of common stock owned by Grotech Partners IV, L.P.
and 7,723,212 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 11,250 shares of common
stock and warrants to purchase 642,855 shares of common stock each
exercisable within 60 days of November 30, 1999.
(9) Includes 1,124,998 shares of common stock owned by Southern Venture Fund
SBIC, L.P. and 964,284 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 11,250 shares of common stock and warrants to
purchase 24,106 shares of common stock each exercisable within 60 days of
November 30, 1999. Southern Venture Fund SBIC, L.P. and Southern Venture
Fund II, L.P. are part of an affiliated group of investment partnerships and
are collectively referred to as the Massey Burch Group.
(10) Includes 4,583,931 shares of common stock owned by Blue Chip Capital Fund
II Limited Partnership and 808,921 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
62
<PAGE>
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 11,250 shares of common stock or warrants to
purchase 321,426 shares of common stock each exercisable within 60 days of
November 30, 1999.
(11) Includes options to purchase 11,250 shares of common stock exercisable
within 60 days of November 30, 1999.
(12) Includes options to purchase 11,250 shares of common stock exercisable
within 60 days of November 30, 1999.
(13) Includes 8,718,448 shares of common stock owned by J.H. Whitney III, L.P.
and 210,084 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. Also includes
options to purchase 5,625 shares of common stock exercisable within 60 days
of November 30, 1999.
(14) Mr. Zell transferred options to purchase 11,250 shares of common stock
which he received under our option plan to U S WEST. U S WEST policy
prevents Mr. Zell from exercising these options for his own benefit.
(15) Includes 2,232,139 shares of common stock owned by Waller-Sutton Media
Partners, L.P. Ms. Brienza is a member of Waller-Sutton Media, L.L.C. the
general partner of Waller-Sutton Media Partners, L.P. Ms. Brienza disclaims
beneficial ownership of the shares held by Waller-Sutton Media Partners,
L.P. Also includes options to purchase 5,625 shares of common stock
exercisable within 60 days of November 30, 1999.
(16) Includes 4,583,931 shares of common stock owned by Blue Chip Capital Fund
II Limited Partnership and 808,921 shares of common stock owned by Miami
Valley Venture Fund, L.P. Blue Chip Capital Fund II Limited Partnership and
Miami Valley Venture Fund, L.P. are part of an affiliated group of
investment partnerships commonly controlled by Blue Chip Venture Company and
are collectively referred to as the Blue Chip Group. Also includes warrants
to purchase 321,426 shares of common stock exercisable within 60 days of
November 30, 1999.
(17) Includes 4,151,785 shares of common stock owned by Grotech Partners IV,
L.P. and 7,723,212 shares of Common Stock owned by Grotech Partners V, L.P.,
Grotech Partners IV, L.P. and Grotech Partners V, L.P. are part of an
affiliated group of investment partnerships commonly controlled by Grotech
Capital Group and are collectively referred to as the Grotech Capital Group.
Also includes warrants to purchase 642,855 shares of common stock
exercisable within 60 days of November 30, 1999.
(18) Includes 1,648,437 shares of common stock owned by Venrock Associates and
2,159,596 shares of common stock owned by Venrock Associates II, L.P.,
Venrock Associates and Venrock Associates II, L.P. are affiliated entities
collectively referred to as the Venrock Group. Also includes warrants to
purchase 197,677 shares of common stock within 60 days of November 30, 1999.
(19) Includes 8,718,488 shares of common stock owned by J.H. Whitney III, L.P.
and 210,084 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.
(20) Includes warrants to purchase 152,677 shares of common stock and options to
purchase 5,625 shares of common stock exercisable within 60 days of November
30, 1999.
63
<PAGE>
DESCRIPTION OF CERTAIN CREDIT FACILITIES
As of September 30, 1999, USI has obtained numerous secured financing
commitments for capital leases and real estate and equipment loans to finance
real estate and various types of capital equipment, including computer hardware,
software, furniture and fixtures and leasehold improvements. These secured
financing arrangements are collectively called the Credit Facilities. The Credit
Facilities allow us to finance an aggregate amount of up to $73.3 million, of
which an aggregate amount of $56.5 million had been drawn at September 30, 1999.
A description follows of the Credit Facilities with financing commitments of
$10.0 million or more.
VENTURE LENDING & LEASING TECHNOLOGIES INTERNATIONAL, INC. USI has a
commitment from Venture Lending & Leasing providing for a line of credit to
enable USI to finance up to $10.0 million of various types of equipment as
described above. As of September 30, 1999, $9.6 million of this commitment has
been funded. This facility is not available for further funding.
FINOVA CAPITAL CORPORATION. USI has a commitment from Finova providing for
a line of credit to enable USI to lease up to $11.7 million of various types of
equipment. As of September 30, 1999, all of this commitment has been funded.
Each schedule of this facility has a term of 36 months.
CISCO SYSTEMS CAPITAL CORPORATION. USI has a commitment from Cisco Systems
Capital Corporation, a wholly-owned subsidiary of one of USI's vendors,
providing for a line of credit to enable USIto lease up to $10.0 million of
Cisco-manufactured equipment. As of September 30, 1999, $3.4 million of this
commitment has been funded. This facility is available for funding until June
30, 2000, with each funding schedule having a term of 36 months.
64
<PAGE>
DESCRIPTION OF THE NOTES
The Notes were issued under an Indenture, dated as of October 29, 1999,
between USI, as issuer, and The Bank of New York, as Trustee. The following
description is a summary of the material provisions of the Indenture. It does
not restate this agreement in its entirety. We urge you to read the Indenture
because it, and not this description, defines your rights as a holder of the
Notes. A copy of the form of Indenture and the form of certificate evidencing
the Notes is available to you upon request.
You can find the definitions of the capitalized terms used in this
description under the subheading "Definitions." In this section of the
Prospectus, entitled "Description of the Notes," when we refer to "USI," "we,"
"our," or "us," we are referring to USINTERNETWORKING, INC. and not any of its
subsidiaries.
GENERAL
The Notes are general unsecured obligations of USI, were offered in the
principal amount of $125,000,000 and will mature on November 1, 2004. The Notes
are contractually subordinated in right of payment to all existing and future
Senior Indebtedness. As of September 30, 1999, we had approximately $34.6
million of Senior Indebtedness outstanding. In addition, the Notes are
effectively subordinated to all obligations, indebtedness and other liabilities
(including trade payables) of any of our Subsidiaries. As of September 30, 1999,
our Subsidiaries had no indebtedness outstanding. Our rights to receive assets
of our Subsidiaries upon their liquidation or reorganization (and the consequent
right of the holders of the Notes to participate in those assets) are
effectively subordinated to the claims of that Subsidiary's creditors (including
trade creditors), in which case our claims are still subordinate to any security
interests in the assets of the Subsidiary and any indebtedness of the Subsidiary
senior to that held by us. In addition, our cash flow and the consequent ability
to service our debt, including the Notes, may depend upon the results of
operations of our Subsidiaries and upon the ability of our Subsidiaries to
provide cash (whether in the form of dividends, loans, or otherwise) to pay
amounts due in respect of our obligations, including the Notes. The Indenture
does not restrict the incurrence of indebtedness (including Senior Indebtedness)
by us or our Subsidiaries. In addition, the Notes are not protected by financial
covenants that limit our business activities.
The Notes bear interest from October 29, 1999 at the rate per annum of 7%.
Interest is payable semi-annually on May 1 and November 1 of each year,
commencing May 1, 2000, to holders of record at the close of business on April
15 or October 15 preceding each such interest payment date. Interest is
calculated on the basis of a 360-day year consisting of twelve 30-day months.
Principal of and interest on the Notes is payable at the office of the Paying
Agent. The Trustee has initially acted as the Paying Agent.
CONVERSION RIGHTS
A holder may, at any time prior to the close of business on November 1,
2004, convert the principal amount of a Note (or any portion thereof equal to
$1,000 or any integral multiple thereof) into shares of our common stock at the
conversion price of $24.85 per share, subject to adjustment as described below
(the "Conversion Price"); except that if a Note is called for redemption, the
conversion right will terminate at the close of business on the Business Day
immediately preceding the redemption date for the Note (unless we default in
making the redemption payment when due, in which case the conversion right shall
terminate at the close of business on the date the default is cured and the Note
is redeemed). A Note for which a holder has delivered a notice exercising the
option to require us to purchase the Note may be converted only if the holder's
notice is withdrawn by a written notice of withdrawal delivered by the holder to
a Paying Agent prior to the close of business on the second Business Day prior
to the Change in Control Payment Date in accordance with the Indenture.
65
<PAGE>
No payment or adjustment will be made for dividends or distributions with
respect to shares of common stock issued upon conversion of a Note. Except as
otherwise provided in the Indenture, interest accrued shall not be paid on Notes
converted. If any holder surrenders a Note for conversion between the record
date for the payment of an installment of interest and the related interest
payment date, then notwithstanding the conversion, the interest payable on the
interest payment date will be paid to the person in whose name the Note was
registered at the close of business on the record date. However, in this event,
unless the Note has been called for redemption, the Note, when surrendered for
conversion, must be accompanied by delivery by the holder of payment in an
amount equal to the interest payable on the interest payment date on the
principal amount of the converted Note. No fractional shares will be issued upon
conversion, but a cash payment will be made for any fractional interest based
upon the closing price (as defined in the Indenture) of the common stock on the
trading day immediately prior to the date of conversion.
The Conversion Price is subject to adjustment upon the occurrence of certain
events, including:
(1) the issuance of shares of common stock as a dividend or distribution on
our common stock;
(2) the subdivision or combination of our outstanding common stock;
(3) the issuance to all or substantially all holders of common stock of
rights or warrants entitling them to subscribe for or purchase common
stock (or securities convertible into common stock) at a price per share
(or having a conversion price per share) less than the current market
price per share (as defined in the Indenture);
(4) the distribution to all or substantially all holders of common stock of
shares of capital stock of USI (other than common stock), evidences of
indebtedness or other non-cash assets (including securities of any person
other than USI but excluding (a) dividends on distributions paid
exclusively in cash, (b) dividends or distributions referred to in
clauses (1) and (2) above and (c) distributions in connection with a
reclassification, consolidation or sale referred to in the next
succeeding paragraph);
(5) the distribution to all or substantially all holders of common stock of
rights or warrants to subscribe for USI's securities (other than those
rights and warrants referred to in (3) above and other than the
distribution of rights to all holders of common stock pursuant to the
adoption of a stockholders rights plan or the detachment of such rights
under the terms of such plan);
(6) the distribution to all or substantially all holders of common stock of
cash in an aggregate amount that (together with (A) any cash and the fair
market value of any other consideration payable in respect of any tender
offer by USI or any of our Subsidiaries for common stock consummated
within the preceding 12 months not triggering a Conversion Price
adjustment and (B) all other cash distribution to all or substantially
all holders of common stock made within the preceding 12 months not
triggering a Conversion Price adjustment) exceeds an amount equal to
10.0% of our market capitalization (determined as provided in the
Indenture) on the Business Day immediately preceding the day on which we
declare the distribution; and
(7) the purchase of common stock pursuant to a tender offer made by USI or
any of its Subsidiaries to the extent that the same involves aggregate
consideration that (together with (A) any cash and the fair market value
of any other consideration payable in respect of any other tender offer
by USI or any of our Subsidiaries for common stock consummated within the
preceding 12 months not triggering a Conversion Price adjustment and (B)
all cash distributions to all or substantially all holders of common
stock made within the preceding 12 months not triggering a Conversion
Price adjustment) exceeds an amount equal to 10.0% of
66
<PAGE>
USI's market capitalization (determined as provided in the Indenture) on
the expiration date of such tender offer.
Notwithstanding the foregoing, no adjustment need be made in the Conversion
Price for a transaction of the nature described above in this paragraph if all
holders of Notes are entitled to participate in the transaction on a basis and
with notice that the Board of Directors determines to be fair and appropriate in
light of the basis and notice on which holders of common stock participate in
the transaction; no adjustment to the Conversion Price need be made or any
issuance of common stock pursuant to any of our plans for reinvestment of
dividends or interest or for a change in the par value of the common stock; and,
to the extent that the Notes become convertible into the right to receive cash,
no adjustment to the Conversion Price need be made thereafter as to the cash,
and interest will not accrue on the cash. We, from time to time, may reduce the
Conversion Price by an amount for any period of time if the period is at least
20 days or such longer period as may be required by law and if the reduction is
irrevocable during the period; PROVIDED, HOWEVER, that in no event may we reduce
the Conversion Price to be less than the par value of a share of our common
stock. No adjustment of the Conversion Price will be required to be made until
the cumulative adjustments require an increase or decrease of at least 1% in the
Conversion Price as last adjusted.
Subject to any applicable right of the holders upon a Change in Control, if
USI reclassifies or changes its common stock issuable upon conversion of the
Notes (other than a change in par value, or as a result of a subdivision or
combination, or any other change for which a Conversion Price adjustment is
provided in the Indenture) or mergers into or transfers or leases all or
substantially all of its assets to any person, or is a party to a merger that
reclassifies or changes its outstanding common stock, the Notes will become
convertible into the kind and amount of securities and property (including cash)
which the holders of the Notes would have owned immediately after the
transaction if the holders had converted the Notes immediately before the
effective date of the transaction.
Adjustments to the Conversion Price to reflect our issuance of other rights,
warrants, evidences of indebtedness, securities or other property (including
cash) to holders of the common stock may result in constructive distributions
taxable as dividends to holders of the Notes.
OPTIONAL REDEMPTION
The Notes may not be redeemed at the option of the Company prior to November
5, 2002. On that date and thereafter, the Notes may be redeemed at our option,
in whole or, in part, upon not less than 30 nor more than 60 days' notice by
mail.
The redemption prices (expressed as a percentage of principal amount) are as
follows for Notes redeemed during the periods set forth below:
<TABLE>
<CAPTION>
PERIOD PERCENTAGE
- ------ ----------
<S> <C>
November 5, 2002 through October 31, 2003................... 101.75%
November 1, 2003 and thereafter............................. 100.00%
</TABLE>
in each case together with accrued interest up to but not including the
redemption date; provided that if the redemption date falls after an interest
payment record date and on or before an interest payment date, then the interest
payment shall be payable to holders of record on the relevant record date.
If less than all of the outstanding Notes are to be redeemed, the Trustee
shall select the Notes to be redeemed in principal amounts of $1,000 or
multiples thereof by lot, PRO RATA or by another method the Trustee considers
fair and appropriate. If a portion of a holder's Notes is selected for partial
redemption and that holder converts a portion of those Notes, the converted
portion shall be deemed to be of the portion selected for redemption.
67
<PAGE>
All Notes which are redeemed or otherwise acquired by us or any of our
Subsidiaries prior to maturity will be immediately canceled and may not be held,
reissued or resold.
PURCHASE OF NOTES AT THE OPTION OF HOLDERS UPON A CHANGE IN CONTROL
In the event of a Change in Control each holder has the option, subject to
the terms and conditions of the Indenture, to require us to purchase all or any
part (provided that the principal amount must be $1,000 or an integral multiple
thereof) of the holder's Notes for a purchase price equal to 100% of the
principal amount thereof, plus accrued interest up to but not including the
Change in Control Payment Date, as described below. This payment is referred to
as the Change in Control Payment.
Within 30 days following any Change in Control, we will mail a notice to
each holder, stating:
(1) that the Change in Control Offer is being made pursuant to the covenant
entitled "Change in Control" in the Indenture and that all the Notes
tendered will be accepted for payment;
(2) the purchase price and the purchase date, which shall be no earlier than
30 days nor later than 40 days from the date such notice is mailed. This
date is referred to as the Change in Control Payment Date;
(3) that interest will continue to accrue on any convertible notes not
tendered, as provided in the convertible notes;
(4) that, unless USI defaults in the payment of the Change in Control
Payment, with respect to all the Notes accepted for payment pursuant to
the Change in Control Offer, interest will cease to accrue after the
Change in Control Payment Date;
(5) that holders electing to have any of the Notes purchased pursuant to a
Change in Control Offer will be required to surrender the Notes, with the
form entitled Option of Holder to Elect Purchase on the reverse of the
Notes completed, to the Paying Agent at the address specified in the
notice prior to the close of business on the third Business Day preceding
the Change in Control Payment Date;
(6) that holders will be entitled to withdraw their election if the Paying
Agent receives, not later than the close of business on the second
Business Day preceding the Change in Control Payment Date, a telegram,
facsimile transmission or letter setting forth the name of the holder,
the principal amount of the Notes delivered for purchase, and a statement
that such holder is withdrawing his election to have the Notes purchased;
and
(7) that holders whose Notes are being purchased only in part will be issued
new Notes equal in principal amount to the unpurchased portion of the
Notes surrendered, which unpurchased portion must be equal to $1,000 in
principal amount.
A Change in Control shall be deemed to have occurred if any of the following
occurs after the Issue Date of the Notes:
(1) the consolidation with or merger by USI into any other Person, or any
other Person merges into USI, unless the stockholders of USI immediately
before such transaction own, directly or indirectly immediately following
such transaction, at least a majority of the combined voting power of our
outstanding voting securities entitled to vote generally in the election
of directors of USI or the Person resulting from such transaction;
(2) the sale, lease or transfer of all or substantially all of our assets to
any "person" or "group", within the meaning of Sections 13(d)(3) and
14(d)(2) of the Exchange Act or any successor provision to either of the
foregoing, including any group acting for the purpose of acquiring,
68
<PAGE>
holding or disposing of securities within the meaning of Rule 13d-5(b)(1)
under the Exchange Act;
(3) the approval by the requisite stockholders of USI of a plan of
liquidation or dissolution of USI;
(4) any "person" or "group," within the meaning of Sections 13(d) and
14(d)(2) of the Exchange Act or any successor provision to either of the
foregoing, including any group acting for the purpose of acquiring,
holding or disposing of securities within the meaning of Rule 13d-5(b)(1)
under the Exchange Act, becomes the "beneficial owner," as defined in
Rule 13d-3 under the Exchange Act, of more than 50% of the total voting
power of all classes of our voting stock and/or warrants or options to
acquire such voting stock, calculated on a fully diluted basis, unless,
as a result of such transaction, the ultimate direct or indirect
ownership USI is substantially the same immediately after such
transaction as it was immediately prior to such transaction; or
(5) during any period of two consecutive years, individuals who at the
beginning of such period constituted our Board of Directors, together
with any new directors whose election or appointment by such board or
whose nomination for election by our stockholders was approved by a vote
of a majority of the directors then still in office who were either
directors at the beginning of such period or whose election or nomination
for election was previously so approved, cease for any reason to
constitute a majority of our Board of Directors then in office.
We will comply with the requirements of Rule 13e-4 and Rule 14e-1, under the
Exchange Act, and with any other securities laws and regulations thereunder to
the extent these laws and regulations are applicable in connection with any
offer by USI to purchase Notes at the option of the holders upon a Change in
Control.
The Change in Control purchase feature of the Notes may in some
circumstances make more difficult or discourage a takeover of USI and the
removal of incumbent management. We are not aware of any specific effort to
accumulate shares of common stock or to obtain control of USI by means of a
merger, tender offer, solicitation or otherwise, nor is the Change in Control
purchase feature part of a plan by management to adopt a series of anti-takeover
provisions. Instead, the Change in Control purchase feature is a result of
negotiations between USI and the initial purchasers.
Subject to the limitation on mergers and consolidations discussed below, we
could, in the future, enter into transactions, including recapitalizations of
USI, that would not constitute a Change in Control under the Indenture, but that
would increase the amount of indebtedness (including Senior Indebtedness)
outstanding or otherwise adversely affect the holders of the Notes. There will
be no restrictions in the Indenture on the creation of additional indebtedness
(including Senior Indebtedness) by USI or its Subsidiaries and the incurrence of
significant amounts of additional indebtedness could have an adverse effect on
our ability to service our indebtedness, including the Notes.
If a Change in Control were to occur, there can be no assurance that we
would have sufficient funds to pay the Change in Control Payment for the Notes
tendered by the holders thereof. In addition, other indebtedness which we may
incur in the future may have similar change in control provisions permitting the
holders thereof to accelerate or require us to repurchase such indebtedness upon
the occurrence of events similar to a Change in Control. Our failure to
repurchase the Notes when required following a Change in Control will result in
an Event of Default under the Indenture whether or not such repurchase is
permitted by the subordination provisions thereof.
Other than granting holders the option to require USI to purchase all or
part of their Notes upon the occurrence of the Change in Control as described
above, the Indenture will not contain any
69
<PAGE>
covenants or other provisions designed to afford holders protection in the event
of takeovers, recapitalizations, highly leveraged transactions or similar
restructurings involving USI.
In the event that Certificated Notes are issued under the limited
circumstances described herein, holders electing to exercise the option to have
their Notes repurchased following a Change in Control must surrender the
Certificated Notes, together with such additional documents as are required by
the Indenture, at the office of a Paying Agent. Where not all of the Notes
represented by a Certificated Notes are submitted for purchase, a new
Certificated Note in respect of the principal amount of the Notes that have not
been so submitted for purchase will be issued to the holder.
SUBORDINATION OF NOTES
To the extent set forth in the Indenture, the Notes are subordinated in
right of payment to all of our existing and future Senior Indebtedness. Upon any
payment or distribution of our assets in connection with any dissolution,
winding-up, liquidation or reorganization of USI (whether in insolvency or
bankruptcy proceedings or otherwise), all Senior Indebtedness must be paid in
full before any payment is made in respect of the Notes. In the event of a
default in payment (whether at maturity or at a date fixed for prepayment or by
acceleration or otherwise) of principal of or premium, if any, or interest on
Senior Indebtedness, no payment may be made by us in respect of the Notes until
payment in full of the Senior Indebtedness then due or the cure, waiver or
cessation of the default. Upon an event of default with respect to any Senior
Indebtedness (other than a default in the payment of principal of, or premium,
if any or interest on Senior Indebtedness) permitting a holder thereof to
accelerate its maturity, and upon written notice, referred to as a Default
Notice, of such default to the Trustee and USI by any holder of such Senior
Indebtedness or its representative, then, unless and until such default has been
cured, waived or has ceased to exist, no payment may be made by USI in respect
of the Notes; except that nothing in the foregoing provisions of this sentence
will prevent the making of any payment (which is not otherwise prohibited by the
provisions described in the immediately preceding sentence) in respect of the
Notes for a period of more than 180 days after the date such Default Notice is
given unless the maturity of the Senior Indebtedness has been accelerated, in
which case no payment on the Notes may be made until the acceleration has been
waived, rescinded or annulled or the Senior Indebtedness has been paid in full.
Notwithstanding the provisions described in the preceding sentence, not more
than one Default Notice shall be given with respect to the same issue of Senior
Indebtedness within a period of 360 consecutive days, and no event of default
which existed on the date of any Default Notice and was known to the holders of
any issue of Senior Indebtedness shall be made the basis for the giving of a
subsequent Default Notice by the holders of the issue of Senior Indebtedness.
In the event that, notwithstanding the provisions set forth in the
immediately preceding paragraph, the Trustee, any Paying Agent or any holder of
the Notes receives any payment or distribution of assets of USI of any kind in
contravention of any of the terms of the Indenture, whether in cash, property or
securities, in respect of the Notes before all Senior Indebtedness is paid in
full, then such payment or distribution will be held by the recipient in trust
for the benefit of holders of Senior Indebtedness or their representatives to
the extent necessary to make payment in full of all Senior Indebtedness
remaining unpaid, after giving effect to any concurrent payment or distribution
to or for the holders of Senior Indebtedness.
As a result of these subordination provisions, in the event of our
insolvency, holders of the Notes may recover ratably less, than our other
creditors. Such subordination will not prevent the occurrence of any Event of
Default under the Indenture.
The Indenture does not limit the amount of indebtedness, including Senior
Indebtedness, that USI, or any Subsidiary, can create, incur, assume or
guarantee.
70
<PAGE>
DEFINITIONS
"BUSINESS DAY" means each day which is not a Legal Holiday.
"CAPITAL LEASE OBLIGATIONS" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the stated maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"CAPITAL STOCK" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or interests
in (however designated) equity of such Person, but excluding any debt securities
convertible into such equity.
"CURRENCY AGREEMENT" means in respect of a Person, any foreign exchange
contract, currency swap agreement or other similar agreement designed to protect
such Person against fluctuations in currency values.
"EVENT OF DEFAULT" means an event of default under the Indenture.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth in:
(1) the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants;
(2) statements and pronouncements of the Financial Accounting Standards
Board;
(3) such other statements by such other entity as approved by a significant
segment of the accounting profession; and
(4) the rules and regulations of the Commission governing the inclusion of
financial statements (including pro forma financial statements) in
registration statements filed under the Securities Act of 1933 and
periodic reports required to be filed pursuant to Section 13 of the
Exchange Act, including opinions and pronouncements in staff accounting
bulletins and similar written statements from the accounting staff of the
Commission.
"INDEBTEDNESS" means, with respect to any person, without duplication:
(1) all liabilities of such person for borrowed money or for the deferred
purchase price of property or services, excluding any trade accounts
payable and other current liabilities incurred in the ordinary course of
business;
(2) all obligations of such person evidenced by bonds, notes, debentures, or
other similar instruments;
(3) all Capital Lease Obligations of such person;
(4) all guarantees of Indebtedness referred to in this definition by such
person;
(5) all obligations of such person under or in respect of Currency
Agreements and Interest Rate Agreements of such person; and
(6) any amendment, supplement, modification, deferral, renewal, extension or
refunding of any liability of the types referred to in clauses (1)
through (5) above.
"INTEREST RATE AGREEMENT" means in respect of a Person any interest rate
swap agreement, interest rate cap agreement or other financial agreement or
arrangement designed to protect such Person against fluctuations in interest
rates.
71
<PAGE>
"ISSUE DATE" means the date on which the Notes are originally issued.
"LEGAL HOLIDAY" means a Saturday, a Sunday or a day on which banking
institutions in the State of New York are authorized or required by law to
close. If a payment date is a Legal Holiday, payment shall be made on the next
succeeding day that is not a Legal Holiday, and no interest shall accrue for the
intervening period. If a regular record date is a Legal Holiday, the record
shall not be affected.
"PERSON" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"SENIOR INDEBTEDNESS" means the principal of, premium, if any, interest and
other amounts payable on or in respect of any Indebtedness of USI, whether
outstanding on the date of the Indenture or thereafter created, incurred or
assumed, unless, in the case of any particular Indebtedness, the instrument
creating or evidencing the same or pursuant to which the same is outstanding
expressly provides that such Indebtedness shall not be senior in right of
payment to, or shall be junior in right of payment to, or shall be PARI PASSU,
in right of payment with, the Notes. Notwithstanding the foregoing, "Senior
Indebtedness" shall not include:
(1) Indebtedness evidenced by the Notes;
(2) Indebtedness which, when incurred and without respect to any election
under Section 1111 (b) of Title 11, United States Code (or any successor
provision thereto), is without recourse to USI;
(3) trade accounts payable or other current liabilities incurred in the
ordinary course of business;
(4) Indebtedness of or amounts owed by USI for compensation to employees or
for services rendered to USI;
(5) any liability for federal, state, local or other taxes owed or owing by
USI;
(6) Indebtedness of USI to a Subsidiary of USI; and
(7) amounts owing under leases (other than Capital Lease Obligations).
"SIGNIFICANT SUBSIDIARY" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of USI within the meaning of Rule 1-02 under Regulation
S-X promulgated by the SEC.
"SUBSIDIARY" means, in respect of any Person, any corporation, association,
partnership or other business entity of which more than 50% of the total voting
power of shares of Capital Stock or other interests (including partnership
interests) entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers, general partners or trustees
thereof is at the time owned or controlled, directly or indirectly, by:
(1) such Person;
(2) such Person and one or more Subsidiaries of such Person; or
(3) one or more Subsidiaries of such Person.
"VOTING STOCK" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
EVENTS OF DEFAULT; NOTICE WAIVER
If an Event of Default (other than an Event of Default resulting from
bankruptcy, insolvency or reorganization with respect to USI or any Significant
Subsidiary) occurs and is continuing, the Trustees
72
<PAGE>
may, by notice to USI, declare all unpaid principal of and accrued interest to
the date of acceleration on the Notes then outstanding to be due and payable
immediately. Also, in such event, the holders of at least 25% in principal
amount at the Notes then outstanding may, by notice to USI and the Trustee,
declare all unpaid principal of and accrued interest to the date of acceleration
on the Notes then outstanding to be due and payable immediately. If an Event of
Default resulting from events of bankruptcy, insolvency or reorganization with
respect to USI or any Significant Subsidiary shall occur, all unpaid principal
of and accrued interest on the Notes then outstanding shall become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any holder.
The Indenture provides that the holders of a majority in principal amount of
the outstanding Notes may on behalf of all holders waive any existing default or
Event of Default and its consequences except a default or Event of Default in
the payment of principal or accrued interest on the Notes or any default in
respect of any provision of the Indenture that cannot be modified or amended
without the consent of the holder of each Note affected.
The following are Events of Default under the Indenture:
(1) failure of USI to pay any interest on the Notes for 30 days after the
same is due or failure of USI to pay any principal of or premium, if any,
on the Notes when due (whether at maturity, upon redemption, on a Change
in Control Payment Date or otherwise);
(2) failure of USI to comply with any of its other agreements contained in
the Notes or the Indenture for 60 days after receipt of notice of such
failure from the Trustee or the holders of not less than 25% in aggregate
principal amount of the Notes then outstanding;
(3) default under any bond, debenture, note or other evidence of
indebtedness for money borrowed of USI or any Significant Subsidiary
having an aggregate outstanding principal amount in excess of $15
million, which default shall have resulted in such indebtedness being
accelerated, without such indebtedness being discharged, or such
acceleration having been rescinded or annulled, within ten days from the
date of such acceleration; and
(4) certain events of bankruptcy, insolvency or reorganization with respect
to the Company or any Significant Subsidiary.
The Trustee shall, within 90 days after the occurrence of any default known
to it, give to the holders notice of such default, PROVIDED that, except in the
case of default in the payment of principal of or interest on any of the Notes,
the Trustee may withhold such notice if it in good faith determines that the
withholding of such notice is in the interests of the holders.
No holder may pursue any remedy under the Indenture or the Notes against USI
(except actions for payment of overdue principal or interest or for the
conversion of the Notes), unless:
(1) the holder gives to the Trustee written notice of a continuing Event of
Default;
(2) the holders of at least 25% in principal amount of the outstanding Notes
make a written request to the Trustee to pursue the remedy;
(3) such holder or holders offer satisfactory indemnity to the Trustee
against any loss or expense;
(4) the Trustee does not comply with the request within the 60 days after
receipt of the request and the offer of indemnity; and
(5) the Trustee shall not have received during such 60-day period a contrary
direction from the holders of at least a majority in principal amount of
the outstanding Notes.
We must deliver an Officer's Certificate to the Trustee within 90 days after
the end of each fiscal year of USI as to the signer's knowledge of our
compliance with all conditions and covenants on our
73
<PAGE>
part contained in the Indenture, and stating whether or not the signers know of
any default or Event of Default. If any such signer knows of such a default or
Event of Default, the Officer's Certificate shall describe the default or Event
of Default and the efforts to remedy the same.
AMENDMENT
USI and the Trustee may amend or supplement the Indenture or the Notes with
the written consent of the holders of at least a majority in principal amount of
the outstanding Notes. The holders of a majority in principal amount of the
Notes outstanding may waive compliance in a particular instance by USI with any
provision of the Indenture or the Notes without notice to any holder. However,
without the consent of the holder of each Note affected thereby, an amendment,
supplement or waiver may not:
(1) reduce the percentage of the principal amount of outstanding Notes whose
holders must consent to an amendment, supplement or waiver;
(2) reduce the rate of or change the fixed maturity of any Note;
(3) alter the conversion provisions with respect to any Note in a manner
adverse to the holder thereof;
(4) waive a default in the payment (whether at maturity, upon redemption, on
an interest payment date, on a Change in Control Payment Date or
otherwise) of the principal of or premium or interest on any Note;
(5) reduce the percentage of Notes necessary to waive defaults or Events of
Default;
(6) modify any of the subordination provisions in the Indenture in a manner
adverse to the holders of the Notes; or
(7) make any Note payable in money other then that stated in the Note.
USI and the Trustee may amend or supplement the Indenture or the Notes
without notice to or consent of any holder in some events, such as to comply
with the conversion, adjustment, liquidation and merger provisions described in
the Indenture, to cure any ambiguity, defect or inconsistency or to make any
other change that does not adversely affect the rights of the holders, to comply
with the provisions of the Trust Indenture Act or to appoint a successor
Trustee.
No amendment may be made that adversely affects the rights under the
provisions described under "--Subordination of Notes" above of a holder of an
issue of Senior Indebtedness unless the holders of that issue, pursuant to its
terms, consents to such amendment.
REGISTRATION RIGHTS
The following summary of the registration rights provided in the
registration rights agreement and the Notes is not complete. You should refer to
the registration rights agreement and the Notes for a full description of the
registration rights that apply to the Notes.
USI has agreed, pursuant to a Registration Rights Agreement to be dated the
Issue Date between USI and the initial purchasers, to file a Shelf Registration
Statement under the Securities Act within 60 days after the latest date of
original issuance of the Notes, referred to as the Filing Date, to register
resales of the Notes and the shares of common stock into which the Notes are
convertible, referred to as Registrable Securities. USI has complied with this
provision of the Registration Rights Agreement by filing the Registration
Statement of which this Prospectus is a part. USI will use reasonable efforts to
have such Shelf Registration Statement declared effective as soon as practicable
after it is filed and, in
74
<PAGE>
any event, within 150 days after the latest date of original issuance of the
Notes, and to keep it effective until the earliest of:
(1) two years after the Filing Date;
(2) the date when all Registrable Securities shall have been registered
under the Securities Act and disposed of; or
(3) the date on which all Registrable Securities are eligible to be sold to
the public pursuant to Rule 144(k) under the effectiveness period.
A holder of Registrable Securities that sells Registrable Securities
pursuant to the Shelf Registration Statement generally will be required to
provide information about itself and the specifics of the sale, be named as a
selling security holder in the related prospectus and deliver a prospectus to
purchasers, be subject to relevant civil liability provisions under the
Securities Act in connection with such sales and be bound by the provisions of
the Registration Rights Agreements which are applicable to such holder
(including certain indemnification obligations).
If:
(1) on or prior to the 60th day after the first date of original issuance of
the Notes, the Shelf Registration Statement has not been filed with the
Commission;
(2) on or prior to the 150th day after the latest date of original issuance
of the Notes, the Shelf Registration Statement has not been declared
effective by the Commission;
(3) USI fails to supplement the Shelf Registration Statement in a timely
manner in order to name additional selling security holders; or
(4) after the Shelf Registration Statement has been declared effective, such
Shelf Registration Statement ceases to be effective or usable (subject to
certain exceptions) in connection with resales of Notes and the common
stock issuable upon the conversion of the Notes in accordance with and
during the periods specified in the Registration Rights Agreement (each
such event referred to in clauses (1) through (4), a "Registration
Default"),
additional interest will accrue on the Notes over and above the rate set forth
in the title of the Notes, from and including the date on which any such
Registration Default shall occur to but excluding the date on which all
Registration Defaults have been cured, at the rate of 0.5% per annum. We will
have no other liabilities for monetary damages with respect to our registration
obligations. With respect to each holder, our obligations to pay additional
interest remain in effect only so long as the Notes and the common stock
issuable upon the conversion of the Notes held by the holder are "Registrable
Securities" within the meaning of the Registrable Rights Agreement.
We will pay all expenses of the Shelf Registration Statement, provide each
holder that is selling Registrable Securities pursuant to the Shelf Registration
Statement copies of the related prospectus and take other actions as are
required to permit, subject to the foregoing, unrestricted resales of the
Registrable Securities.
SATISFACTION AND DISCHARGE
If all of the Notes have been delivered to the Trustee for cancellation
(subject to certain limited exceptions) or if all of the Notes not theretofore
delivered to the Trustee for cancellation have become due and payable or will
become due and payable within one year at their stated maturity or upon
redemption, then USI may terminate all of its obligations under the Indenture,
other than its obligations (including its obligation to deliver shares of common
stock upon conversion of the Notes and its obligation to purchase Notes
following a Change in Control), at any time, by depositing with
75
<PAGE>
the Trustee or a Paying Agent other than USI, money sufficient to pay the
principal of and interest on the Notes then outstanding to maturity or
redemption, as the case may be.
MERGERS AND CONSOLIDATIONS
Subject to the right of the holders to require USI to purchase the Notes in
the event of a Change in Control, USI may consolidate or merge with or into any
other corporation, and USI may sell, lease, convey, assign, or otherwise
transfer all or substantially all its property and assets to any other
corporation; PROVIDED:
(1) either USI is the resulting or surviving corporation, or the successor
corporation is organized and existing under the laws or the Unites States
of America, any state thereof or the District of Columbia which expressly
assumes, by supplemental indenture executed and delivered to the Trustee,
payment of the principal of and interest on the Notes and performance and
observance of every covenant of USI in the Indenture and the Notes
(including, without limitation, the agreement to deliver shares of common
stock upon conversion of Notes);
(2) immediately after giving effect to such transaction, no default or Event
of Default shall have occurred and be continuing; and
(3) other conditions are met.
Thereafter, in any transaction (other than a lease) in which USI is not the
surviving or resulting corporation, USI shall be released from all of its
obligations under the Indenture and the Notes.
CONCERNING THE TRUSTEE
The Bank of New York serves as the Trustee under the Indenture. The Trustee
will be permitted to deal with USI and any affiliate of USI with the same rights
as if it were not Trustee; PROVIDED, HOWEVER, that under the Trust Indenture
Act, if the Trustee acquires any conflicting interest (as defined in the Trust
Indenture Act) and there exists a default with respect to the Notes, it must
eliminate such conflicts or resign.
The holders of a majority in principal amount of all outstanding Notes will
have the right to direct the time, method and place of conducting any proceeding
for exercising any remedy or power available to the Trustee, PROVIDED that such
direction does not conflict with any law or the Indenture, is not unduly
prejudicial to the rights of another holder or the Trustee and does not involve
the Trustee in personal liability.
BOOK-ENTRY; DELIVERY AND FORM
We issued the Notes in the form of one or more global notes (the "Global
Note"). The Global Note was deposited with the Trustee as custodian for DTC and
registered in the name of a nominee of DTC. The Global Note (and any shares of
common stock issuable upon conversion) is subject to certain restrictions on
transfer set forth therein and will bear the legend regarding these restrictions
set forth under "Transfer Restrictions." Except as set forth below, the Global
Note may be transferred, in whole and not in part, only to DTC or another
nominee of DTC. You may hold your beneficial interests in the Global Note
directly through DTC if you have an account with DTC or indirectly through
organizations which have accounts with DTC. Notes in definitive certificated
form (the "Certificated Notes") will be issued only in certain limited
circumstances described below.
DTC has advised us as follows: DTC is a limited-purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the New York
Uniform Commercial Code, and "a clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities of
76
<PAGE>
institutions that have accounts with DTC ("participants") and to facilitate the
clearance and settlement of securities transactions among its participants in
such securities through electronic book-entry changes in accounts of the
participants, thereby eliminating the need for physical movement of securities
certificates. DTC's participants include securities brokers and dealers (which
may include the initial purchasers), banks, trust companies, clearing
corporations and certain other organizations. Access to DTC's book-entry system
is also available to others such as banks, brokers, dealers and trust companies
(collectively, the "indirect participants") that clear through or maintain a
custodial relationship with a participant, whether directly or indirectly.
We expect that pursuant to procedures established by DTC, upon the deposit
of the Global Note with DTC, DTC credited, on its book-entry registration and
transfer system, the principal amount of Notes represented by such Global Note
to the accounts of participants. The accounts to be credited were designated by
the initial purchasers. Ownership of beneficial interests in the Global Note has
been limited to participants or persons that may hold interests through
participants. Ownership of beneficial interests in the Global Note is shown on,
and the transfer of those ownership interests will be effected only through,
records maintained by DTC (with respect to participants' interests), the
participants and the indirect participants (with respect to the owners of
beneficial interests in the Global Note other than participants). The laws of
some jurisdictions may require that certain purchasers of securities take
physical delivery of such securities in definitive form. These limits and laws
may impair the ability to transfer or pledge beneficial interests in the Global
Note.
Beneficial owners of interests in Global Notes who desire to convert their
interests into common stock should contact their brokers or other participants
or indirect participants through whom they hold such beneficial interests to
obtain information on procedures, including proper forms and cut-off times, for
submitting requests for conversion.
So long as DTC, or its nominee, is the registered owner or holder of a
Global Note, DTC or its nominee, as the case may be, will be considered the sole
owner or holder of the Notes represented by the Global Note for all purposes
under the Indenture and the Notes. In addition, no beneficial owner of an
interest in a Global Note will be able to transfer that interest except in
accordance with the applicable procedures of DTC (in addition to those under the
Indenture referred to in this Prospectus; see "Transfer Restrictions"). Except
as set forth below, as an owner of a beneficial interest in the Global Note, you
will not be entitled to have the Notes represented by the Global Note registered
in your name, will not receive or be entitled to receive physical delivery of
certificated Notes and will not be considered to be the owner or holder of any
Notes under the Global Note. We understand that under existing industry
practice, in the event an owner of a beneficial interest in the Global Note
desires to take any action that DTC, as the holder of the Global Note, is
entitled to take, DTC would authorize the participants to take such action, and
the participants would authorize beneficial owners owning through such
participants to take such action or would otherwise act upon the instructions of
beneficial owners owning through them.
We have and will continue to make payments of principal of, premium, if any,
and interest on the Notes represented by the Global Note registered in the name
of and held by DTC or its nominee to DTC or its nominee, as the case may be, as
the registered owner and holder of the Global Note. Neither we, the Trustee nor
any Paying Agent have or will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the Global Note or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
We expect that DTC or its nominee, upon receipt of any payment of principal
of, premium, if any, or interest on the Global Note, will credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of the Global Note as shown on the records of
DTC or its nominee. We also expect that payments by participants or indirect
77
<PAGE>
participants to owners of beneficial interests in the Global Note held through
such participants or indirect participants will be governed by standing
instructions and customary practices and will be the responsibility of such
participants or indirect participants. We do not have any responsibility or
liability for any aspect of the records relating to, or payments made on account
of, beneficial ownership interests in the Global Note for any Note or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests or for any other aspect of the relationship between DTC and
its participants or indirect participants or the relationship between such
participants or indirect participants and the owners of beneficial interests in
the Global Note owning through such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds.
DTC has advised us that it will take any action permitted to be taken by a
holder of Notes (including the presentation of Notes for conversion as described
above) only at the direction of one or more participants to whose account the
DTC interests in the Global Note is credited and only in respect of such portion
of the aggregate principal amount of Notes as to which such participant or
participants has or have given such direction. However, if there is an Event of
Default under the Notes, DTC will exchange the Global Note for Certificated
Notes which it will distribute to its participants and which will be legended as
set forth under the heading "Transfer Restrictions."
Although DTC is expected to follow the foregoing procedures in order to
facilitate transfers of interests in the Global Note among participants of DTC,
they are under no obligation to perform or continue to perform such procedures,
and such procedures may be discontinued at any time. Neither we nor the Trustee
will have any responsibility or liability for the performance by DTC or the
participants or indirect participants of their respective obligations under the
rules and procedures governing their respective operations.
78
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock is only a summary and is
qualified in its entirety by reference to the actual terms and provisions of the
capital stock contained in our Second Amended and Restated Certificate of
Incorporation, which became effective on April 14, 1999 and our bylaws, which
were amended at the same time.
Our certificate of incorporation authorizes 75,000,000 shares of common
stock, par value $.001 per share and 1,000,000 shares of preferred stock, par
value $.001 per share, the rights and preferences of which may be designated by
the board of directors. As of September 30, 1999, there were 60,813,704 shares
of common stock issued and outstanding and no shares of preferred stock issued
and outstanding. As of September 30, 1999, there were 184 holders of record of
our common stock.
COMMON STOCK
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive ratably
such dividends, if any, as may be declared by the board of directors out of
funds legally available therefor, subject to any preferential dividend rights of
outstanding preferred stock. Upon the liquidation, dissolution or winding up of
USI, the holders of common stock are entitled to receive ratably the net assets
of USI available after the payment of all debts and other liabilities and
subject to the prior rights of any outstanding preferred stock. Holders of the
common stock have no preemptive, subscription, redemption or conversion rights.
The outstanding shares of common stock are, and the shares that we offer in this
offering will be, when issued and paid for, validly issued, fully paid and
nonassessable. The rights, preferences and privileges of holders of common stock
are subject to, and may be adversely affected by, the rights of the holders of
shares of any series of preferred stock which we may designate and issue in the
future. Upon the closing of this offering, there will be no shares of preferred
stock outstanding.
PREFERRED STOCK
The board of directors is authorized, subject to certain limitations
prescribed by law, without further stockholder approval, to issue from time to
time up to an aggregate of 1,000,000 shares of preferred stock in one or more
series and to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions of the shares of each such series
thereof, including the dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption, including sinking fund provisions,
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of such series. The issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change of control of USI. We have no present plans to issue any shares of
preferred stock.
WARRANTS
At September 30, 1999, there were warrants outstanding to purchase a total
of 1,736,675 shares of common stock. Warrants to purchase 1,429,533 shares at
$2.29 per share will expire in September 2008, warrants to purchase 168,750
shares at $10.67 per share will expire in September and October 2008 and
warrants to purchase 138,392 shares at $2.24 per share will expire in December
2003 and June 2004.
REGISTRATION RIGHTS
The holders of 46,349,289 shares of common stock and 1,429,533 shares of
common stock issuable upon the exercise of warrants to purchase common stock are
entitled to rights with respect to registration of such shares under the
Securities Act described at "Certain Relationship and Related
79
<PAGE>
Transactions--Amended and Restated Stockholder Agreement." The holders of
warrants to purchase 195,536 shares of common stock are entitled to rights with
respect to registration of such shares under the Securities Act. Under these
registration rights, in the event we elect to register any of our shares of
common stock for purposes of effecting any public offering, the holders of the
warrants or the shares issued upon exercise of the warrants are entitled to
include their shares of common stock in the registration, subject however to the
right of USI or the underwriters of the proposed offering, if any, to reduce the
number of shares proposed to be registered in view of market conditions. All
expenses in connection with any registration other than underwriting discounts
and commissions will be borne by USI.
We have agreed to register up to 2,015,625 shares held by officers of USI in
the event an officer's employment is terminated due to death or disability.
CERTAIN ANTI-TAKEOVER, LIMITED LIABILITY AND INDEMNIFICATION PROVISIONS
As noted above, our board of directors, without stockholder approval, has
the authority under our certificate of incorporation to issue preferred stock
with rights superior to the rights of the holders of common stock. As a result,
preferred stock could be issued quickly and easily, could adversely affect the
rights of holders of common stock and could be issued with terms calculated to
delay or prevent a change of control of USI or make removal of management more
difficult.
ELECTION AND REMOVAL OF DIRECTORS. The certificate and bylaws provides 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 provide that the stockholders may not call
a special meeting of the stockholders of USI. Rather, only the board of
directors, the chairman of the board or the president will be able to call
special meetings of stockholders.
REQUIREMENTS FOR ADVANCE NOTIFICATION OF STOCKHOLDER NOMINATIONS AND
PROPOSALS. Our bylaws establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the board of
directors or one of its committees.
DELAWARE ANTI-TAKEOVER LAW. We are a Delaware corporation subject to
Section 203 of the Delaware General Corporation Law. Under Section 203, certain
"business combinations" between a Delaware corporation whose stock generally is
publicly traded or held of record by more than 2,000 stockholders and an
"interested stockholder" are prohibited for a three-year period following the
date that such stockholder became an interested stockholder, unless:
- The corporation has elected in its certificate of incorporation not to be
governed by Section 203. We have not made such an election,
- The business combination or the transaction which resulted in the
stockholder becoming an interested stockholder was approved by the board
of directors of the corporation before such stockholder became an
interested stockholder,
- Upon consummation of the transaction that made such stockholder an
interested stockholder, the interested stockholder owned at least 85% of
the voting stock of the corporation outstanding at the commencement of the
transaction excluding voting stock owned by directors who are also
80
<PAGE>
officers or held in employee benefit plans in which the employees do not
have a confidential right to tender stock held by the plan in a tender or
exchange offer, or
- The business combination is approved by the board of directors of the
corporation and authorized at a meeting by two-thirds of the voting stock
which the interested stockholder did not own.
The three-year prohibition also does not apply to some business combinations
proposed by an interested stockholder following the announcement or notification
of an extraordinary transaction involving the corporation and a person who had
not been an interested stockholder during the previous three years or who became
an interested stockholder with the approval of a majority of the corporation's
directors. The term "business combination" is defined generally to include
mergers or consolidations between a Delaware corporation and an interested
stockholder, transactions with an interested stockholder involving the assets or
stock of the corporation or its majority-owned subsidiaries, and transactions
which increase an interested stockholder's percentage ownership of stock. The
term "interested stockholder" is defined generally as those stockholders who
become beneficial owners of 15% or more of a Delaware corporation's voting
stock, together with the affiliates or associates of that stockholder.
LIMITATION OF OFFICER AND DIRECTOR LIABILITY AND INDEMNIFICATION
ARRANGEMENTS. Our certificate limits the liability of our directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
will not be personally liable for monetary damages for breach of their fiduciary
duties as directors, except liability for:
- any breach of their duty of loyalty to the corporation or its
stockholders,
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
- unlawful payments of dividends or unlawful stock repurchases or
redemptions, or
- any transaction from which the director derived an improper personal
benefit.
This charter provision has no effect on any non-monetary remedies that may
be available to us or our stockholders, nor does it relieve us or our officers
or directors from compliance with federal or state securities laws. The
certificate also generally provides that we shall indemnify, to the fullest
extent permitted by law, any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit,
investigation, administrative hearing or any other proceeding by reason of the
fact that he is or was a director or officer of ours, or is or was serving at
our request as a director, officer, employee or agent of another entity, against
expenses incurred by him in connection with such proceeding. An officer or
director shall not be entitled to indemnification by us if:
- The officer or director did not act in good faith and in a manner
reasonably believed to be in, or not opposed to, our best interests, or
- With respect to any criminal action or proceeding, the officer or director
had reasonable cause to believe his conduct was unlawful.
These charter and bylaw provisions and provisions of Delaware law may have
the effect of delaying, deterring or preventing a change of control of USI.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company is the transfer agent and registrar
for the common stock.
81
<PAGE>
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of certain United States federal
income tax considerations that may be relevant to the purchase, ownership and
disposition of the Notes by U.S. holders, as defined below, and the ownership
and disposition of our common stock received upon conversion of the Notes by
U.S. holders. This discussion does not purport to be a full description of all
United States federal income tax considerations that may be relevant to the
purchase, holding and disposition of the Notes or our common stock and does not
address any other taxes that might be applicable to a holder of the Notes or our
common stock, such as tax consequences arising under the tax laws of any state,
locality or foreign jurisdiction. We cannot assure you that the United States
Internal Revenue Service will take a similar view of these consequences.
Further, this discussion does not address all aspects of taxation that may be
relevant to particular holders of Notes or common stock in light of their
personal circumstances and does not deal with persons that are subject to
special tax rules, such as dealers in securities, financial institutions,
insurance companies, tax-exempt entities, persons holding the Notes as part of a
hedging or conversion transaction, a straddle or constructive sale, persons
whose functional currency is not the United States dollar and persons who are
not U.S. holders. The discussion below assumes that the Notes and the common
stock into which such Notes are convertible are held as capital assets within
the meaning of section 1221 of the Internal Revenue Code.
The discussion of the United States federal income tax considerations below
is based on currently existing provisions of the Internal Revenue Code, the
applicable Treasury regulations promulgated and proposed under the Internal
Revenue Code, judicial decisions and administrative interpretations, all of
which are subject to change, possibly on a retroactive basis. Because individual
circumstances may differ, you are strongly urged to consult your tax advisor
with respect to your particular tax situation and the particular tax effects of
any state, local, non-United States or other tax laws and possible changes in
the tax laws.
As used herein, a U.S. holder means a beneficial owner of a Note or common
stock who is, for United States federal income tax purposes:
- a citizen or resident of the United States;
- a corporation or partnership created or organized in or under the laws of
the United States or of any state thereof or in the District of Columbia,
unless in the case of a partnership Treasury regulations enacted in the
future provide otherwise;
- an estate the income of which is subject to United States federal income
taxation regardless of its source; or
- a trust if either (a) a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more
United States persons have the authority to control all substantial
decisions of the trust or (b) the trust has a valid election in effect
under applicable Treasury regulations to be treated as a United States
person.
STATED INTEREST. Interest on a Note will be includable in the income of a
U.S. holder as ordinary income at the time interest is received or accrued, in
accordance with a holder's method of accounting for United States federal income
tax purposes.
REGISTRATION RIGHTS. The registration of the Notes pursuant to our
obligation as described under "Description of the Notes--Registration Rights"
will not constitute a taxable event for United States federal income tax
purposes, will not affect a U.S. holder's tax basis in the Notes, and a U.S.
holder's holding period for the registered Notes will include the holding period
such U.S. holder had in the Notes before such Notes were registered.
82
<PAGE>
MANDATORY PURCHASE AND OPTIONAL REDEMPTION. In the event of a Change in
Control, the holders of the Notes will have the right to require us to purchase
their Notes at a price equal to 100% of the aggregate principal amount, plus
accrued interest. Under Treasury regulations issued under provisions of the
Internal Revenue Code relating to original issue discount, computation of yield
and maturity of the Notes is not affected by this purchase right and obligation
if, based on all the facts and circumstances as of the issue date, payments on
the Notes are significantly more likely than not to occur in accordance with the
stated payment schedule on the Notes (which does not reflect a Change in
Control). We believe, based on all the facts and circumstances as of the issue
date, it was significantly more likely than not that the Notes would be paid
according to their stated schedule. Therefore, we have not and will not take the
purchase right and obligation into account in determining the yield and maturity
of the Notes.
We may redeem the Notes, in whole or in part, at any time on or after
November 5, 2002, at prices specified under the heading "Description of the
Notes--Optional Redemption." The Treasury regulations that relate to original
issue discount contain rules for determining the yield and maturity of any
instrument that may be redeemed prior to its stated maturity date at the option
of the issuer. Under these regulations, solely for purposes of the accrual of
original issue discount, it is assumed that the issuer will exercise any option
to redeem a debt instrument if the exercise will lower the yield-to-maturity of
the debt instrument. We believe that we will not be presumed to redeem the Notes
prior to their stated maturity under the foregoing rules because the exercise of
the option would not lower the yield-to-maturity of the Notes.
SALE, EXCHANGE OR REDEMPTION OF NOTES. A U.S. holder of a Note will
recognize gain or loss upon the sale, exchange, redemption or other taxable
disposition of a Note in an amount equal to the difference between (i) the
amount of cash plus the fair market value of any property received, other than
an amount received in respect of accrued interest, which will be taxable as
interest if not previously included in income which is taxable as ordinary
income and (ii) the U.S. holder's adjusted tax basis in the Note. A U.S.
holder's adjusted tax basis in a Note generally will equal the cost of the Note
to the holder. Generally, gain or loss recognized on the disposition of a Note
will be capital gain or loss and will be long-term capital gain or loss if the
U.S. holder's holding period in the Note is more than one year at the time of
the disposition.
MARKET DISCOUNT. The tax treatment of a U.S. holder with respect to the
Notes may be altered if the holder acquires the Notes at a "market discount."
Market discount on a Note will generally equal the amount, if any, by which the
principal amount of the Note exceeds the holder's initial tax basis in the Note
(generally the Note's acquisition price). Subject to a de minimis exception, a
U.S. holder of a Note acquired at a market discount is generally required to
treat as ordinary income any gain recognized on the disposition of the Note to
the extent of the "accrued market discount" at the time of disposition, unless
the holder elects to include accrued market discount in income currently. Market
discount on a Note will be treated as accruing on a straight-line basis over the
term of such Note, or at the election of the holder, under a constant-yield
method. A U.S. holder of a Note acquired at a market discount who does not elect
to include accrued market discount in income currently may be required to defer
the deduction of the portion of the interest on any indebtedness incurred or
maintained to purchase or carry the Note until the Note is disposed of in a
taxable transaction. If a Note with accrued market discount is converted into
our common stock, the amount of such accrued market discount at the time of
conversion generally will be taxable to the U.S. holder as ordinary income upon
disposition of our common stock.
AMORTIZABLE BOND PREMIUM. A U.S. holder that purchases a Note at a premium
over its stated principal amount generally may elect to amortize such premium as
amortizable bond premium from the purchase date to the Note's maturity date
(taking into account earlier call dates, as appropriate) under a yield to
maturity formula if an election by the taxpayer under section 171 of the Code is
in effect or is made. The amortizable bond premium will not include any premium
attributable to the Note's
83
<PAGE>
conversion feature. The premium attributable to the conversion feature is the
excess, if any, of the Note's purchase price over what the Note's fair market
value would be if there were no conversion feature. In addition, under Treasury
Regulations, the amount of amortizable bond premium that a U.S. holder may
deduct in any accrual period is limited to the amount by which the holder's
total interest inclusions on the Note in prior accrual periods exceeds the total
amount treated by the holder as a bond premium deduction in prior accrual
periods. If any of the excess bond premium is not deductible under section 171,
that amount is carried forward to the next accrual period and is treated as bond
premium allocable to that period.
An election under section 171 of the Code is available only if the Notes are
held as capital assets. Such election is revocable only with the consent of the
Internal Revenue Service and applies to all debt obligations owned or
subsequently acquired by the taxpayer. In general, a U.S. holder's tax basis in
a Note will be reduced by the amount of any bond premium that is amortized or
used to offset interest income. Such amortization will cease upon conversion of
the Note into our common stock.
CONVERSION. A U.S. holder of a Note will not recognize gain or loss on the
conversion of a Note solely into our common stock except with respect to cash in
lieu of fractional shares and except to the extent that the common stock issued
upon conversion is treated as attributable to accrued interest on the Note. The
holding period of the common stock received upon conversion will include the
period during which the Note was held, and the holder's aggregate tax basis in
the common stock received upon conversion of the Note will be equal to the
holder's aggregate tax basis in the Note at the time of conversion, less any
portion allocable to any fractional share. However, a holder's tax basis in
shares of common stock considered attributable to accrued interest generally
will equal the amount of such accrued interest included in income and the
holding period will begin on the day following the date of conversion. A U.S.
holder of a Note will recognize gain or loss for federal income tax purposes
upon the receipt of cash in lieu of a fractional share of our common stock in an
amount equal to the difference between the amount of cash received and the
holder's tax basis in such fractional share. This gain or loss should be capital
gain or loss and should be taxable as described under "Sale, Exchange or
Redemption of the Notes." The fair market value of shares of common stock
received, which is attributable to accrued interest, will be taxable as ordinary
interest income.
CONSTRUCTIVE DISTRIBUTIONS. The conversion price of the Notes is subject to
adjustment under specified circumstances. Under section 305 of the Internal
Revenue Code and applicable Treasury regulations, adjustments or the failure to
make adjustments to the conversion price of the Notes may result in a taxable
constructive distribution to U.S. holders of Notes, resulting in ordinary income
(subject to a possible dividends received deduction in the case of corporate
shareholders) to the extent of our earnings and profits, as determined in
accordance with United States federal income tax principles, if, and to the
extent that, these adjustments in the conversion price increase the
proportionate interest of a U.S. holder of a Note in our fully diluted common
stock, whether or not the holder ever converts the Notes into our common stock.
ADDITIONAL INTEREST. We intend to take the position that payments of
additional interest as described under the heading "Description of the
Notes--Registration Rights" if paid as required therein, should be taxable to
U.S. holders as ordinary income when received or accrued in accordance with the
U.S. holder's method of accounting for United States federal income tax
purposes. The Internal Revenue Service may take a different position, however,
which could affect the timing of a U.S. holder's income with respect to
additional interest.
DISTRIBUTIONS ON COMMON STOCK. A distribution by our company with respect to
our common stock will be treated for United States federal income tax purposes
as ordinary dividend income to the extent that such distributions do not exceed
our earnings and profits as determined under United States federal income tax
principles. To the extent a distribution exceeds our earnings and profits, it
will be
84
<PAGE>
treated first as a tax-free return of the U.S. holder's tax basis in the common
stock to the extent of the holder's tax basis, and then will generally be
treated as gain from the sale of a capital asset.
DISPOSITION OF COMMON STOCK. A U.S. holder of our common stock will
recognize capital gain or loss upon the sale or other taxable disposition of our
common stock in an amount equal to the difference between the amount of cash
plus the fair market value of any property received and the U.S. holder's tax
basis in the common stock. The taxation of such capital gains will be as
described above under "Sale, Exchange or Redemption of Notes."
UNITED STATES INFORMATION REPORTING AND BACKUP WITHHOLDING. Under current
United States federal income tax law, "reportable" payments, including payments
on interest and dividends and under specified circumstances principal payments
on the Notes made to, specified U.S. holders may be subject to backup
withholding tax at the rate of 31%, if these persons fail to supply correct
taxpayer identification numbers and other required information in the specified
manner.
Any amounts withheld under the backup withholding rules from payment to a
holder of Notes or common stock will be refunded or credited against the
holder's United States federal income tax liability provided that the required
information is furnished to the United States Internal Revenue Service.
We will report to holders of Notes and common stock and to the Internal
Revenue Service the amount of any reportable payments for each calendar year and
the amount of any tax withheld with respect to reportable payments.
85
<PAGE>
SELLING SECURITY HOLDERS
The Notes were originally issued by us and sold by the initial purchasers in
a transaction exempt from the registration requirements of the Securities Act to
persons reasonably believed by the initial purchasers to be qualified
institutional buyers or other institutional accredited investors. Credit Suisse
First Boston Corporation, Morgan Stanley & Co. Incorporated, Bear, Stearns & Co.
Inc., Legg Mason Wood Walker, Incorporated, Wasserstein Perella Securities,
Inc., C.E. Unterberg, Towbin and The Robinson-Humphrey Company, LLC acted as the
initial purchasers in this transaction. Selling security holders, including
their transferees, pledgees or donees or their successors, may from time to time
offer and sell pursuant to this Prospectus any or all of the Notes and common
stock into which the Notes are convertible.
The following table sets forth information, as of December 15, 1999, with
respect to the selling security holders and the principal amounts of Notes
benefically owned by each selling holder that may be offered under this
Prospectus. The information is based on information provided by or on behalf of
the selling holders. The selling security holders may offer all, some or none of
the Notes or common stock into which the Notes are convertible. Accordingly, no
estimate can be given as to the amount of the Notes or common stock that will be
held by the selling security holders upon termination of any sales. In addition,
the selling security holders identified below may have sold, transferred or
otherwise disposed of all or a portion of their Notes since the date on which
they provided the information regarding their Notes in transactions exempt from
the registration requirements of the Securities Act.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF NUMBER OF
NOTES CONVERSION SHARES
BENEFICIALLY OWNED THAT PERCENTAGE OF THAT MAY BE
SELLING SECURITYHOLDER MAY BE SOLD NOTES OUTSTANDING SOLD(1)(2)
- ---------------------- ----------------------- ----------------- -----------------
<S> <C> <C> <C>
AAM/Zazone Institutional Income Fund,
L.P...................................... $ 1,150,000 *% 46,277
AIG/National Union Fire Insurance.......... 500,000 * 20,120
Aftra Health Fund.......................... 300,000 * 12,072
Aristeia International, Ltd................ 1,397,000 1.1 56,217
Aristeia Trading, LLC...................... 603,000 * 24,265
Associated Electric & Gas Insurance
Services Limited......................... 200,000 * 8,048
BNP Arbitrage SNC.......................... 6,250,000 5 251,509
BS Debt Income Fund-Class A................ 5,000 * 201
BankAmerica Pension Plan................... 1,000,000 * 40,241
Black Diamond Offshore, Ltd................ 381,000 * 15,331
Boilermaker-Blacksmith Pension Trust....... 1,150,000 * 46,277
Brown & Williamson Tobacco Master
Retirement Trust......................... 100,000 * 4,024
CALAMOS Convertible Fund-CALAMOS Investment
Trust.................................... 1,350,000 1.1 54,325
CALAMOS Convertible Portfolio-CALAMOS
Advisors Trust........................... 15,000 * 603
CALAMOS Global Growth and Income Fund-
CALAMOS Investment Trust................. 90,000 * 3,621
CALAMOS Growth and Income Fund-CALAMOS
Investment Trust......................... 620,000 * 24,949
Champion International Corporation Master
Retirement Trust......................... 995,000 * 40,040
City of Knoxville Pension System........... 370,000 * 14,889
Convexity Partners, L.P.................... 750,000 * 30,181
Credit Suisse First Boston Corporation..... 27,000,000 21.6 1,086,519
Delaware PERS.............................. 950,000 * 38,229
Delta Airlines Master Trust................ 2,200,000 1.8 88,531
Deutsche Bank Securities Inc............... 4,925,000 3.9 198,891
Dorinco Reinsurance Company................ 500,000 * 20,120
Double Black Diamond Offshore LDC.......... 1,029,000 * 41,408
The Dow Chemical Company Employees'
Retirement Plan.......................... 2,275,000 1.8 91,549
</TABLE>
86
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF NUMBER OF
NOTES CONVERSION SHARES
BENEFICIALLY OWNED THAT PERCENTAGE OF THAT MAY BE
SELLING SECURITYHOLDER MAY BE SOLD NOTES OUTSTANDING SOLD(1)(2)
- ---------------------- ----------------------- ----------------- -----------------
<S> <C> <C> <C>
ELF Aquitaine.............................. $ 50,000 *% 2,012
Elliott Associates, L.P.................... 745,000 * 29,979
Family Service Life Insurance Co........... 300,000 * 12,072
The Fondren Foundation..................... 70,000 * 2,816
Greek Catholic Union....................... 15,000 * 603
Guardian Life Insurance Co................. 4,500,000 3.6 181,086
Guardian Pension Trust..................... 200,000 * 8,048
Highbridge Capital Corporation............. 4,000,000 3.2 160,965
ICI American Holdings Trust................ 450,000 * 18,108
Island Holdings............................ 10,000 * 402
Jackson Investment Fund Ltd. C/o Leeds
Management Services (Cayman) Ltd......... 130,000 * 5,231
JMG Convertible Investments, L.P........... 250,000 * 10,060
JMG Triton Offshore Fund, Ltd.............. 7,750,000 6.2 311,871
Kettering Medical Center Funded
Depreciation Account..................... 70,000 * 2,816
Nelson Partners Ltd. C/o Leeds Management
Services (Cayman) Ltd.................... 455,000 * 18,309
Knoxville Utilities Board Retirement
System................................... 225,000 * 9,054
LLT Limited................................ 150,000 * 6,036
The Liverpool Limited Partnership.......... 255,000 * 10,216
Lord Abbot & Co. Oxford Fund............... 650,000 * 26,156
Mainstay Convertible Fund.................. 2,425,000 1.9 97,585
Mainstay Strategic Value Fund.............. 100,000 * 4,024
Mainstay VP Convertible Portfolio.......... 700,000 * 28,169
McMahan Securities Company, L.P............ 250,000 * 10,060
Merrill Lynch Pierce Fenner and Smith
Inc...................................... 3,250,000 2.6 130,784
Nalco Chemical Retirement.................. 210,000 * 8,450
New York Life Insurance and Annuity
Corporation (NYLIAC)..................... 750,000 * 30,181
New York Life Insurance Company (NYLIC).... 6,750,000 5.4 271,629
New York Life Separate Account #7.......... 700,000 * 28,169
Olympus Securities, Ltd. C/o Leeds
Management Services Ltd.................. 740,000 * 29,778
Peoples Benefit Life Insurance Company
Teamsters................................ 1,500,000 1.2 60,362
Port Authority of Allegheny County
Retirement and Disability Allowance...... 1,200,000 * 48,289
SPT........................................ 960,000 * 38,631
San Diego County Employees Retirement
Association.............................. 1,650,000 1.3 66,398
SoundShore Holdings Ltd.................... 5,499,000 4.4 221,287
SoundShore Opportunity Holding Fund Ltd.... 2,834,000 2.2 114,044
SoundShore Strategic Holding Fund Ltd...... 1,037,000 * 41,730
Southern Farm Bureau Life Insurance -
FRIC..................................... 575,000 * 23,138
Southern Farm Bureau Life Insurance
Company.................................. 475,000 * 19,114
Southport Management Partners, L.P......... 450,000 * 18,108
Southport Partners International, Ltd...... 900,000 * 36,217
Starvest Combined Portfolio................ 725,000 * 29,175
State of Oregon Equity..................... 4,600,000 3.7 185,110
Unifi, Inc. Profit Sharing Plan and
Trust.................................... 110,000 * 4,426
United Food and Commercial Workers Local
1262..................................... 470,000 * 18,913
Van Waters & Rogers, Inc. Retirement Plan
(f.k.a. Univar Corporation).............. 330,000 * 13,279
</TABLE>
87
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF NUMBER OF
NOTES CONVERSION SHARES
BENEFICIALLY OWNED THAT PERCENTAGE OF THAT MAY BE
SELLING SECURITYHOLDER MAY BE SOLD NOTES OUTSTANDING SOLD(1)(2)
- ---------------------- ----------------------- ----------------- -----------------
<S> <C> <C> <C>
Westgate International, L.P................ $ 1,000,000 *% 40,241
Worldwide Transactions Ltd................. 90,000 * 3,621
Zeneca Holdings Trust...................... 435,000 * 17,505
------------ ---- ---------
Total............................ $117,095,000 93.7% 4,712,694
============ ==== =========
</TABLE>
- ------------------------
* Less than 1%
(1) Consists of shares of common stock issuable upon conversion of the Notes.
(2) Assumes a conversion price of $24.85 and a cash payment in lieu of any
fractional share interest. The conversion price is subject to adjustment as
described under "Description of Notes--Conversion."
The following table sets forth information, as of December 15, 1999, with
respect to the seven selling stockholders and the number of shares of common
stock beneficially owned by each selling stockholder that may be offered under
this Prospectus. The selling stockholders acquired these shares in private
placement transactions and have rights to include resales of their shares in
this Prospectus.
<TABLE>
<CAPTION>
NUMBER OF
SHARES THAT MAY
SELLING STOCKHOLDER BE SOLD
- ------------------- ---------------
<S> <C>
Luis Sebastian Alegrett..................................... 29,072
Carlos E. Bravo............................................. 3,592
Matthew D. Kanter........................................... 11,906
Michael Q. Mai.............................................. 17,727
Vicente Perez de Tudela..................................... 6,382
S. David Walden............................................. 11,880
Southeastern Technology Fund L.P............................ 32,142
-------
Total................................................... 112,701
</TABLE>
None of the selling holders nor any of their affiliates, officers, directors
or principal equity holders has held any position or office or has had any
material relationship with USI within the past three years other than Mathew D.
Kanter, who is President of USI, New York, S. David Walden, who is Vice
President of Product Marketing of USI, New York and Luis Sebastian Alegrett,
Carlos E. Bravo, Michael Q. Mai and Vicente Perez de Tudela, who are all
consultants of USI.
Information concerning the selling holders may change from time to time and
any changed information will be set forth in supplements to this prospectus if
and when necessary. In addition, the conversion rate and therefore, the number
of shares of common stock issuable upon conversion of the Notes, is subject to
adjustment under certain circumstances. Accordingly, the aggregate principal
amount of Notes and the number of shares of common stock into which the notes
are convertible may increase or decrease.
88
<PAGE>
PLAN OF DISTRIBUTION
The selling holders and their successors, including their transferees,
pledgees or donees or their successors, may sell the Notes and the common stock
into which the Notes are convertible directly to purchasers or through
underwriters, broker-dealers or agents, who may receive compensation in the form
of discounts, concessions or commissions from the selling holders or the
purchasers. These discounts, concessions or commissions as to any particular
underwriter, broker-dealer or agent may be in excess of those customary in the
types of transactions involved.
The Notes and the common stock into which the Notes are convertible may be
sold in one or more transactions at fixed prices, at prevailing market prices at
the time of sale, at prices related to the prevailing market prices, at varying
prices determined at the time of sale, or at negotiated prices. These sales may
be effected in transactions, which may involve crosses or block transactions:
- on any national securities exchange or U.S. inter-dealer system of a
registered national securities association on which the Notes or the
common stock may be listed or quoted at the time of sale;
- in the over-the-counter market;
- in transactions otherwise than on these exchanges or systems or in the
over-the-counter market;
- through the writing of options, whether the options are listed on an
options exchange or otherwise; or
- through the settlement of short sales.
In connection with the sale of the Notes and the common stock into which the
Notes are convertible or otherwise, the selling holders may enter into hedging
transactions with broker-dealers or other financial institutions, which may in
turn engage in short sales of the Notes or the common stock into which the Notes
are convertible in the course of hedging the positions they assume. The selling
holders may also sell the Notes or the common stock into which the Notes are
convertible short and deliver these securities to close out their short
positions, or loan or pledge the Notes or the common stock into which the Notes
are convertible to broker-dealers that in turn may sell these securities.
The aggregate proceeds to the selling holders from the sale of the Notes or
common stock into which the Notes are convertible offered by them will be the
purchase price of the Notes or common stock less discounts and commissions, if
any. Each of the selling holders reserves the right to accept and, together with
their agents from time to time, to reject, in whole or in part, any proposed
purchase of Notes or common stock to be made directly or through agents. We will
not receive any of the proceeds from this offering.
Our outstanding common stock is listed for trading on the Nasdaq National
Market. We do not intend to list the Notes for trading on any national
securities exchange or on the Nasdaq National Market and can give no assurance
about the development of any trading market for the Notes.
In order to comply with the securities laws of some states, if applicable,
the Notes and common stock into which the Notes are convertible may be sold in
these jurisdictions only through registered or licensed brokers or dealers. In
addition, in some states the Notes and common stock into which the Notes are
convertible may not be sold unless they have been registered or qualified for
sale or an exemption from registration or qualification requirements is
available and is complied with.
The selling holders and any underwriters, broker-dealers or agents that
participate in the sale of the Notes and common stock into which the Notes are
convertible may be "underwriters" within the meaning of Section 2(11) of the
Securities Act. Any discounts, commissions, concessions or profit they earn on
any resale of the shares may be underwriting discounts and commissions under the
Securities Act. Selling holders who are "underwriters" within the meaning of
Section 2(11) of the Securities Act will be subject to the prospectus delivery
requirements of the Securities Act. The selling holders have
89
<PAGE>
acknowledged that they understand their obligations to comply with the
provisions of the Exchange Act and the rules thereunder relating to stock
manipulation, particularly Regulation M.
In addition, any securities covered by this prospectus that qualify for sale
pursuant to Rule 144 or Rule 144A of the Securities Act may be sold under Rule
144 or Rule 144A rather than pursuant to this prospectus. A selling holder may
not sell any Notes or common stock described in this prospectus and may not
transfer, devise or gift these securities by other means not described in this
prospectus.
To the extent required, the specific Notes or common stock to be sold, the
names of the selling holders, the respective purchase prices and public offering
prices, the names of any agent, dealer or underwriter, and any applicable
commissions or discounts with respect to a particular offer will be set forth in
an accompanying prospectus supplement or, if appropriate, a post- effective
amendment to the registration statement of which this prospectus is a part.
The Registration Statement of which this Prospectus is a part is being filed
pursuant to a registration rights agreement that we entered into for the benefit
of holders of the Notes to register their Notes and common stock under
applicable federal and state securities laws under specific circumstances and at
specific times. The registration rights agreement provides for
cross-indemnification of the selling holders and us and their and our respective
directors, officers and controlling persons against specific liabilities in
connection with the offer and sale of the Notes and the common stock, including
liabilities under the Securities Act.
The seven selling stockholders acquired their shares of common stock in
private placement transactions. As part of these transactions, we entered into
agreements that granted the selling stockholders rights to include resales of
their shares in this Prospectus. These agreements provide for
cross-indemnification provisions similar to those in the registration rights
agreement discussed above. The selling stockholders may distribute their shares
in the same manner as the shares of common stock underlying the Notes may be
distributed.
We will pay substantially all of the expenses incurred by the selling
holders incident to the offering and sale of the Notes and the common stock.
90
<PAGE>
LEGAL MATTERS
Certain legal matters in connection with the offering and sale of the Notes
will be passed upon for USI by Latham & Watkins, Washington, D.C. Partners of
Latham & Watkins own in total shares of our common stock representing less than
1% of the total number of shares of common stock outstanding.
EXPERTS
Ernst & Young LLP, independent auditors, has audited our consolidated
financial statements at December 31, 1998, and for the period January 14, 1998
(date of inception) through December 31, 1998, as set forth in their report.
We've included our consolidated financial statements in the prospectus and
elsewhere in the registration statement in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.
Ernst & Young LLP has also audited I.I.T. Holding, Inc. and subsididaries'
consolidated financial statements at December 31, 1996 and 1997, and September
7, 1998, and for each of the two years in the year ended December 31, 1997, and
for the period from January 1, 1998 through September 7, 1998, as set forth in
their report, as to the years 1996 and 1997, their report is based in part on
the report of Bassan & Associates S.C., independent auditors. We've included
IIT's consolidated financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on their
authority as experts in accounting and auditing.
The financial statements of ACR as of September 30, 1998, December 31, 1997
and 1996 and for the nine months ended September 30, 1998 and for each of the
two years ended December 31, 1997 included in this Prospectus, have been audited
by Mahoney Cohen & Company, CPA, P.C., independent auditors, as stated in their
report appearing herein.
AVAILABLE INFORMATION
We are currently subject to the periodic reporting and other requirements of
the Securities Exchange Act of 1934. You may read and copy any document we file
at the Commission's public reference rooms located at 450 5th Street, N.W.,
Washington, D.C. 20549, at Seven World Trade Center, 13th Floor, New York, New
York 10048 and at Northwest Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Please call the Commission at 1-800-SEC-0330 for
further information on the public reference rooms. Our Commission filings are
also available to the public from commercial document retrieval services and at
the web site maintained by the Commission at: http://www.sec.gov. Our common
stock trades on Nasdaq.
We have agreed that, whether or not we are required to do so by the rules
and regulations of the Commission, for so long as any of the Notes remain
outstanding, we will furnish to the holders of the Notes and file with the
Commission (unless the Commission will not accept such a filing) (1) all
quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if we were
required to file such forms, including a "Management's Discussion and Analysis
of Results of Operations and Financial Condition" and, with respect to the
annual information only, a report thereon by our certified independent public
accountants and (2) all reports that would be required to be filed with the
Securities and Exchange Commission on Form 8-K if we were required to file such
reports. In addition, for so long as any of the Notes remain outstanding, we
have agreed to make available to any securities analyst, prospective purchaser
or beneficial owner of any of those securities in connection with any sale
thereof the information required by Rule 144A(d)(4) under the Securities Act.
You may request a copy of any of this information, at no cost, by writing or
telephoning us at the following address or phone number:
USINTERNETWORKING, INC.
One USI Plaza
Annapolis, Maryland 21401-7478
(410) 897-4400
91
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF USINTERNETWORKING, INC.
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of December 31, 1998 and as
of September 30, 1999 (unaudited)......................... F-3
Consolidated Statements of Operations for the period January
14, 1998 (date of inception) through December 31, 1998 and
for the period January 14, 1998 (date of inception)
through September 30, 1998 (unaudited) and the nine months
ended September 30, 1999 (unaudited)...................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the period January 14, 1998 (date of inception)
through December 31, 1998 and for the nine months ended
September 30, 1999 (unaudited)............................ F-5
Consolidated Statements of Cash Flows for the period January
14, 1998 (date of inception) through December 31, 1998 and
for the period January 14, 1998 (date of inception)
through September 30, 1998 (unaudited) and the nine months
ended September 30, 1999 (unaudited)...................... F-7
Notes to Consolidated Financial Statements.................. F-8
CONSOLIDATED FINANCIAL STATEMENTS OF I.I.T. HOLDING, INC.
AND SUBSIDIARIES
Report of Independent Auditors.............................. F-27
Report of Independent Auditors.............................. F-28
Consolidated Balance Sheets as of December 31, 1997 and 1996
and as of September 7, 1998............................... F-29
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1996 and for the period from January
1, 1998 through September 7, 1998......................... F-30
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997 and 1996 and for the period
from January 1, 1998 through September 7, 1998............ F-31
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1996 and for the period from January
1, 1998 through September 7, 1998......................... F-32
Notes to Consolidated Financial Statements.................. F-33
FINANCIAL STATEMENTS OF ADVANCED COMMUNICATION RESOURCES,
INC.
Independent Auditor's Report................................ F-39
Balance Sheets as of December 31, 1997 and 1996 and
September 30, 1998........................................ F-40
Statements of Operations for the years ended December 31,
1997 and 1996 and for the nine months ended September 30,
1998...................................................... F-41
Statements of Stockholders' Equity for the years ended
December 31, 1997 and 1996 and for the nine months ended
September 30, 1998........................................ F-42
Statements of Cash Flows for the years ended December 31,
1997 and 1996 and for the nine months ended September 30,
1998...................................................... F-43
Notes to Financial Statements............................... F-44
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR
THE TWELVE MONTHS ENDED DECEMBER 31, 1998................. P-1
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
USINTERNETWORKING, INC.
We have audited the accompanying consolidated balance sheet of
USINTERNETWORKING, INC. ("the Company") as of December 31, 1998, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the period from January 14, 1998 (date of inception) through December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
USINTERNETWORKING, INC. as of December 31, 1998, and the consolidated results of
its operations and its cash flows for the period from January 14, 1998 (date of
inception) through December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Baltimore, Maryland
May 13, 1999,
except for Note 21 and paragraph 3 of Note 22, as to which the date is
December 3, 1999
F-2
<PAGE>
USINTERNETWORKING, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 43,802,465 $ 28,577,208
Restricted cash........................................... 581,712 506,712
Available-for-sale securities............................. -- 40,424,676
Accounts receivable, less allowance of $142,000 and
$341,012 in 1998 and 1999, respectively................. 2,882,119 9,875,202
Prepaid expenses and other current assets................. 2,436,247 4,993,163
------------ ------------
Total current assets........................................ 49,702,543 84,376,961
Deferred IMAP costs......................................... -- 5,370,347
Software licenses, net of accumulated amortization of
$2,525,573 in 1999........................................ 9,596,760 11,035,810
Property and equipment, net of accumulated depreciation of
$1,567,885 and $9,710,162 in 1998 and 1999,
respectively.............................................. 21,640,145 81,672,820
Goodwill, net of accumulated amortization of $1,611,763 and
$5,694,763 in 1998 and 1999, respectively................. 25,137,296 22,133,603
Other assets................................................ 439,734 482,113
------------ ------------
Total assets................................................ $106,516,478 $205,071,654
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 6,571,767 $ 12,094,324
Accrued compensation...................................... 4,870,690 7,074,536
Other accrued expenses.................................... 1,569,570 1,065,275
Deferred revenue.......................................... 51,247 3,601,823
Due to former shareholders of acquired businesses......... 10,826,735 --
Current portion of capital lease obligations.............. 1,503,947 3,749,318
Current portion of long-term debt......................... 1,757,588 10,055,592
------------ ------------
Total current liabilities................................... 27,151,544 37,640,868
Short-term obligations expected to be refinanced............ 5,282,450 --
Capital lease obligations, less current portion............. 3,427,254 8,086,680
Long-term debt, less current portion........................ 5,231,794 26,485,049
Dividends payable........................................... 1,503,004 --
------------ ------------
Total liabilities........................................... 42,596,046 72,212,597
Series B Convertible Redeemable Preferred Stock, $.01 par
value, 115,000 shares authorized, 59,279 shares issued and
outstanding in 1998, none in 1999......................... 62,242,500 --
Common stock subject to repurchase, 2,015,625 shares issued
and outstanding in 1998, none in 1999..................... 4,145,000 --
Commitments and contingent liabilities...................... -- --
Stockholders' equity (deficit):
Series A Convertible Preferred Stock, $.01 par value,
110,000 shares authorized, 55,000 shares issued and
outstanding in 1998, none in 1999....................... 550 --
Common stock, $.001 par value, 75,000,000 shares
authorized, 937,500 shares issued and outstanding in
1998, 60,813,704 shares outstanding in 1999............. 938 60,814
Additional paid-in capital................................ 29,984,756 236,631,079
Note receivable from officer for purchase of common
stock................................................... -- (2,250,000)
Unearned compensation..................................... -- (361,822)
Accumulated deficit....................................... (32,453,312) (101,505,381)
Accumulated other comprehensive income.................... -- 284,367
------------ ------------
Total stockholders' equity (deficit)...................... (2,467,068) 132,859,057
------------ ------------
Total liabilities and stockholders' equity (deficit)........ $106,516,478 $205,071,654
============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
USINTERNETWORKING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD FROM FOR THE PERIOD FROM
JANUARY 14, 1998 JANUARY 14, 1998
(DATE OF INCEPTION) (DATE OF INCEPTION)
THROUGH THROUGH NINE MONTHS ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
------------------- ------------------- ------------------
(UNAUDITED)
<S> <C> <C> <C>
Revenue.................................... $ 4,122,449 $ 515,488 $ 20,851,714
Costs and expenses:
Direct cost of services.................. 3,425,111 342,917 13,897,698
Network and infrastructure costs......... 2,185,893 -- 11,360,299
General and administrative............... 19,426,575 10,407,416 15,841,863
Sales and marketing...................... 5,123,334 1,802,383 24,552,985
Product research and development......... 690,388 259,181 2,005,107
Non-cash stock compensation expense...... 231,135 90,455 6,805,486
Depreciation and amortization............ 3,179,648 269,134 14,793,756
------------ ------------ ------------
Total costs and expenses................... 34,262,084 13,171,486 89,257,194
------------ ------------ ------------
Operating loss............................. (30,139,635) (12,655,998) (68,405,480)
Other income (expense):
Interest income.......................... 367,411 307,335 2,146,810
Interest expense......................... (2,681,088) (74,551) (2,793,399)
------------ ------------ ------------
(2,313,677) 232,784 (646,589)
------------ ------------ ------------
Net loss................................... (32,453,312) (12,423,214) (69,052,069)
Dividends accrued on Series A and Series B
Convertible Preferred Stock.............. (1,503,004) (843,004) (2,328,150)
Accretion of common stock subject to
repurchase to fair value................. (3,903,865) (1,475,000) (23,938,069)
Accretion of Series B Convertible
Redeemable
Preferred Stock to fair value............ (236,991) -- (99,252)
------------ ------------ ------------
Net loss attributable to common
stockholders............................. $(38,097,172) $(14,741,218) $(95,417,540)
============ ============ ============
Basic and diluted loss per common share
attributable to common stockholders...... $ (40.64) $ (15.72) $ (2.49)
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
USINTERNETWORKING, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL NOTE
--------------------- ---------------------- PAID-IN RECEIVABLE UNEARNED
SHARES PAR VALUE SHARES PAR VALUE CAPITAL FROM OFFICER COMPENSATION
--------- --------- ---------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 14, 1998........ -- $ -- -- $ -- $ -- $ -- $ --
Issuance of common stock to
founder upon inception......... -- -- 937,500 938 4,062 -- --
Issuance of Series A Convertible
Preferred Stock on May 28, 1998
for cash....................... 38,333 383 -- -- 22,999,617 -- --
Issuance of Series A Convertible
Preferred Stock on May 28, 1998
in exchange for $1,000,000
note........................... 1,667 17 -- -- 999,983 -- --
Issuance of Series A Convertible
Preferred Stock on June 22,
1998 for cash.................. 6,167 62 -- -- 3,699,938 -- --
Issuance of Series A Convertible
Preferred Stock on July 2, 1998
for cash....................... 5,833 58 -- -- 3,499,942 -- --
Issuance of Series A Convertible
Preferred Stock on July 30,
1998 for cash.................. 3,000 30 -- -- 1,799,970 -- --
Transaction costs associated with
the issuance of Series A
Convertible Preferred Stock.... -- -- -- -- (205,225) -- --
Issuance of warrants to purchase
75,000 shares of common stock
associated with the acquisition
of IIT on September 8, 1998.... -- -- -- -- 40,000 -- --
Issuance of warrants to purchase
1,461,675 shares of common
stock in connection with
$9,095,000 of debt on September
7, 1998........................ -- -- -- -- 1,948,930 -- --
Issuance of warrants to purchase
111,606 shares of common stock
in connection with a $5,000,000
financing commitment on
September 22, 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 warrants to purchase
93,750 shares of common stock
associated with the acquisition
of ACR on October 2, 1998...... -- -- -- -- 50,000 -- --
Issuance of warrants to purchase
26,786 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) -- --
Accretion of common stock subject
to repurchase to fair value.... -- -- -- -- (3,903,865) -- --
Accretion of Series B Convertible
Redeemable Preferred Stock to
fair value..................... -- -- -- -- (236,991) -- --
Net loss for the period January
14, 1998 through December 31,
1998........................... -- -- -- -- -- --
------- ----- ---------- ------- ------------ ----------- ---------
Balance at December 31, 1998....... 55,000 550 937,500 938 29,984,756 -- --
------- ----- ---------- ------- ------------ ----------- ---------
<CAPTION>
ACCUMULATED TOTAL
OTHER STOCKHOLDERS'
ACCUMULATED COMPREHENSIVE EQUITY
DEFICIT INCOME (DEFICIT)
------------- ------------- -------------
<S> <C> <C> <C>
Balance at January 14, 1998........ $ -- $ -- $ --
Issuance of common stock to
founder upon inception......... -- -- 5,000
Issuance of Series A Convertible
Preferred Stock on May 28, 1998
for cash....................... -- -- 23,000,000
Issuance of Series A Convertible
Preferred Stock on May 28, 1998
in exchange for $1,000,000
note........................... -- -- 1,000,000
Issuance of Series A Convertible
Preferred Stock on June 22,
1998 for cash.................. -- -- 3,700,000
Issuance of Series A Convertible
Preferred Stock on July 2, 1998
for cash....................... -- -- 3,500,000
Issuance of Series A Convertible
Preferred Stock on July 30,
1998 for cash.................. -- -- 1,800,000
Transaction costs associated with
the issuance of Series A
Convertible Preferred Stock.... -- -- (205,225)
Issuance of warrants to purchase
75,000 shares of common stock
associated with the acquisition
of IIT on September 8, 1998.... -- -- 40,000
Issuance of warrants to purchase
1,461,675 shares of common
stock in connection with
$9,095,000 of debt on September
7, 1998........................ -- -- 1,948,930
Issuance of warrants to purchase
111,606 shares of common stock
in connection with a $5,000,000
financing commitment on
September 22, 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 warrants to purchase
93,750 shares of common stock
associated with the acquisition
of ACR on October 2, 1998...... -- -- 50,000
Issuance of warrants to purchase
26,786 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)
Accretion of common stock subject
to repurchase to fair value.... -- -- (3,903,865)
Accretion of Series B Convertible
Redeemable Preferred Stock to
fair value..................... -- -- (236,991)
Net loss for the period January
14, 1998 through December 31,
1998........................... (32,453,312) -- (32,453,312)
------------- --------- ------------
Balance at December 31, 1998....... (32,453,312) -- (2,467,068)
------------- --------- ------------
</TABLE>
F-5
<PAGE>
USINTERNETWORKING, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL NOTE
--------------------- ---------------------- PAID-IN RECEIVABLE UNEARNED
SHARES PAR VALUE SHARES PAR VALUE CAPITAL FROM OFFICER COMPENSATION
--------- --------- ---------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dividends accrued on Series A and
Series B Convertible Preferred
Stock.......................... -- -- -- -- (2,328,150) -- --
Accretion of common stock subject
to repurchase to fair value.... -- -- -- -- (23,938,069) -- --
Accretion of Series B Convertible
Redeemable Preferred Stock to
fair value..................... -- -- -- -- (99,252) -- --
Conversion of Series A
Convertible Preferred Stock to
common stock................... (55,000) (550) 18,562,491 18,562 (18,012) -- --
Conversion of Series B
Convertible Redeemable
Preferred Stock to common
stock.......................... -- -- 27,786,798 27,787 62,214,713 -- --
Reclassification of common stock
subject to repurchase to common
stock.......................... -- -- 2,015,625 2,016 28,714,237 -- (633,184)
Issuance of common stock upon
initial public offering........ -- -- 10,350,000 10,350 144,889,650 -- --
Initial public offering issuance
costs.......................... -- -- -- -- (12,190,627) -- --
Issuance of common stock upon
exercise of stock options...... -- -- 315,506 315 554,842 -- --
Issuance of common stock upon
exercise of stock options in
exchange for note.............. -- -- 562,500 563 2,249,437 (2,250,000) --
Issuance of common stock upon
exercise of warrants........... -- -- 487,298 487 1,092,773 -- --
Contribution of common stock to
employee benefit plan.......... -- -- 25,674 26 378,636 -- --
Repurchase of common stock....... -- -- (229,688) (230) (1,029,317) -- --
Amortization of unearned
compensation................... -- -- -- -- 135,681 -- 271,362
Stock compensation expense for
issuance of common stock
options at below fair market
value.......................... -- -- -- -- 6,019,781 -- --
Comprehensive income:............ -- -- -- -- -- -- --
Net loss for the period January
1, 1999 through September 30,
1999........................... -- -- -- -- -- -- --
Other comprehensive
income--unrealized gain on
marketable securities........ -- -- -- -- -- -- --
Total comprehensive income
(loss)....................... -- -- -- -- -- -- --
------- ----- ---------- ------- ------------ ----------- ---------
Balance at September 30, 1999
(unaudited)........................ -- -- 60,813,704 $60,814 $236,631,079 $(2,250,000) $(361,822)
======= ===== ========== ======= ============ =========== =========
<CAPTION>
ACCUMULATED TOTAL
OTHER STOCKHOLDERS'
ACCUMULATED COMPREHENSIVE EQUITY
DEFICIT INCOME (DEFICIT)
------------- ------------- -------------
<S> <C> <C> <C>
Dividends accrued on Series A and
Series B Convertible Preferred
Stock.......................... -- -- (2,328,150)
Accretion of common stock subject
to repurchase to fair value.... -- -- (23,938,069)
Accretion of Series B Convertible
Redeemable Preferred Stock to
fair value..................... -- -- (99,252)
Conversion of Series A
Convertible Preferred Stock to
common stock................... -- -- --
Conversion of Series B
Convertible Redeemable
Preferred Stock to common
stock.......................... -- -- 62,242,500
Reclassification of common stock
subject to repurchase to common
stock.......................... -- 28,083,069
Issuance of common stock upon
initial public offering........ -- -- 144,900,000
Initial public offering issuance
costs.......................... -- -- (12,190,627)
Issuance of common stock upon
exercise of stock options...... -- -- 555,157
Issuance of common stock upon
exercise of stock options in
exchange for note.............. -- -- --
Issuance of common stock upon
exercise of warrants........... -- -- 1,093,260
Contribution of common stock to
employee benefit plan.......... -- -- 378,662
Repurchase of common stock....... -- -- (1,029,547)
Amortization of unearned
compensation................... -- -- 407,043
Stock compensation expense for
issuance of common stock
options at below fair market
value.......................... -- -- 6,019,781
Comprehensive income:............ -- --
Net loss for the period January
1, 1999 through September 30,
1999........................... (69,052,069) -- (69,052,069)
Other comprehensive
income--unrealized gain on
marketable securities........ -- 284,367 284,367
------------
Total comprehensive income
(loss)....................... -- -- (68,767,702)
------------- --------- ------------
Balance at September 30, 1999
(unaudited)........................ $(101,505,381) $ 284,367 $132,859,057
============= ========= ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
USINTERNETWORKING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD FROM FOR THE PERIOD FROM
JANUARY 14, 1998 JANUARY 14, 1998
(DATE OF INCEPTION) (DATE OF INCEPTION)
THROUGH THROUGH NINE MONTHS ENDED
DECEMBER 31, 1998 SEPETEMBER 30, 1998 SEPTEMBER 30, 1999
------------------- ------------------- ------------------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................................. $(32,453,312) $(12,423,214) $(69,052,069)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation..................................... 1,567,885 269,134 10,710,756
Amortization..................................... 1,611,763 -- 4,083,000
Amortization of unearned compensation related to
the issuance of common stock................... 231,135 90,455 407,043
Non-cash stock compensation expense.............. -- -- 6,398,443
Non-cash interest expense........................ 2,011,904 -- 188,921
Changes in operating assets and liabilities:
Accounts receivable............................ 43,293 (1,309,469) (6,993,083)
Prepaid expenses and other current assets...... (2,470,745) (834,533) (2,556,916)
Deferred IMAP costs............................ -- -- (5,370,347)
Accounts payable............................... 4,333,579 2,659,047 522,557
Accrued compensation........................... 4,287,023 457,203 2,203,846
Accrued expenses and other current
liabilities.................................. 234,800 3,297,804 3,046,281
------------ ------------ ------------
Net cash used in operating activities................ (20,602,675) (7,793,573) (56,411,568)
INVESTING ACTIVITIES
Purchases of property and equipment.................. (20,127,849) (16,219,463) (58,867,670)
Change in restricted cash............................ (581,712) (581,712) 75,000
Purchases of available-for-sale securities........... -- -- (40,140,309)
Acquisitions, net of cash acquired................... (16,899,991) (14,193,796) (1,079,307)
Change in other assets............................... (59,080) (262,616) (42,379)
------------ ------------ ------------
Net cash used in investing activities................ (37,668,632) (31,257,587) (100,054,665)
FINANCING ACTIVITIES
Proceeds from issuance of Series A Convertible
Preferred Stock.................................... 31,794,775 31,905,907 --
Proceeds from loan from officer, subsequently
converted into Series A Convertible Preferred
Stock.............................................. 1,000,000 1,000,000 --
Proceeds (expenses) from issuance of Series B
Convertible Redeemable Preferred Stock............. 39,910,509 -- (99,252)
Proceeds from issuance of common stock and common
stock subject to repurchase........................ 15,000 15,000 --
Proceeds from issuance of common stock upon initial
public offering, net of issuance costs............. -- -- 132,709,373
Proceeds from exercise of stock options and
warrants........................................... -- -- 628,870
Proceeds from issuance of long-term debt............. 9,486,969 17,385,179 27,124,538
Proceeds from issuance of notes, subsequently
converted into Series B Convertible Redeemable
Preferred Stock.................................... 22,095,000 -- --
Dividends paid to preferred stockholders............. -- -- (3,831,154)
Payment to former shareholders of acquired
businesses......................................... -- -- (10,826,735)
Payments on long-term debt........................... (1,804,876) (16,190) (3,054,650)
Payments on capital lease obligations................ (423,605) (8,301) (1,410,014)
------------ ------------ ------------
Net cash provided by financing activities............ 102,073,772 50,281,595 141,240,976
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents........................................ 43,802,465 11,230,435 (15,255,257)
Cash and cash equivalents at beginning of period..... -- -- 43,802,465
------------ ------------ ------------
Cash and cash equivalents at end of period........... $ 43,802,465 $ 11,230,435 $ 28,577,208
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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)" The Company's IMAP services
integrate Internet communications, data center management and packaged software
applications implementation and support to meet the technology needs of business
in a number of business process areas including sales force automation, customer
support, e-commerce, and human resource and financial systems. The Company also
makes its infrastructure available to clients who want to run their own
applications in a highly reliable and secure Internet environment and provides
information technology consulting services.
UNAUDITED INTERIM FINANCIAL INFORMATION
The unaudited interim financial information as of and for the nine months
ended September 30, 1999, has been prepared in accordance with generally
accepted accounting principles for interim financial information and with
instructions to Article 10 of Regulation S-X. In the opinion of management, such
information contains all adjustments, consisting only of normal recurring
adjustments, considered necessary for a fair presentation of such periods. The
operating results for any interim period are not necessarily indicative of
results for any future periods.
All financial information contained in these notes related to periods
subsequent to December 31, 1998 is unaudited.
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 sheets.
F-8
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS
Available-for-sale securities are carried at fair value with the unrealized
gains and losses, net of tax, reported as other comprehensive income. Realized
gains and losses and declines in value judged to be other than temporary on
available-for-sale securities are included in investment income. The cost of
securities sold is based on the specific identification method. Interest and
dividends on securities classified as available-for-sale are included in
investment income.
At September 30, 1999, available-for-sale securities consisted principally
of corporate and government agency obligations. These investments are classified
as current as all maturities are less than one year.
SOFTWARE LICENSES
The Company capitalizes the costs associated with the purchase of licenses
for major business process application software used in providing IMAP services.
During 1998, the Company was obligated to purchase and purchased $9.6 million of
perpetual licenses from 4 software application vendors. The agreements to
purchase these licenses specify the maximum number of users permitted to utilize
the license in connection with the Company's service, and whether the licenses
may be later transferred to subsequent users by the Company. All amounts paid to
the vendors are non-refundable, regardless of the actual number of users
assigned a license in connection with IMAP services.
Transferrable licenses will be amortized over their estimated useful life of
three years. Non-transferrable licenses will be amortized over the lesser of the
minimum contract period for IMAP clients subject to these licenses, or three
years. Amortization commenced in January 1999, the date that transferrable and
non-transferrable licenses were first available to generate revenue, and the
average amortization period is expected to be three years.
The Company also purchases maintenance services from its software vendors
under agreements that require annual payments for software maintenance,
including technical support and software upgrades. These payments are included
in prepaid expenses and amortized ratably over the annual service period.
PROPERTY AND EQUIPMENT AND ACCOUNTING CHANGE
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is computed for owned assets using the straight-line method over
estimated useful lives of the assets. Assets under capital leases are amortized
using the straight-line method over the lesser of the lease term or the
estimated useful life of the assets.
Estimated useful lives for all depreciable assets other than a building and
leasehold improvements range from three to seven years. Computer hardware, and
software purchased for internal use, is depreciated over three to five years.
The building is depreciated over 25 years and leasehold improvements are
depreciated over the term of the related lease.
On July 1, 1999, the Company changed its estimate of the useful life of its
computer equipment from three to five years. The change in estimate will be
accounted for prospectively, with depreciation expense for periods subsequent to
June 30, 1999 calculated so as to depreciate the remaining book value of the
equipment at June 30, 1999 equally over the revised estimated useful life.
F-9
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The effect of this change was to decrease depreciation expense and net loss
by $1,316,000 for the nine months ended September 30, 1999. Basic and diluted
loss per share for the nine months ended September 30, 1999 was lower by $0.03
per share as a result of the change.
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
The Company generates revenue from IMAP services and information technology
services. Revenues from professional IT services are recognized as services are
provided.
IMAP revenues consist of monthly recurring fees for services, which
generally include internet access to the Company's network of Enterprise Data
Centers hosting application software, and the implementation and management of
that software. Payment for services is generally received monthly over a two to
five year contract term, and revenues are recognized ratably as earned over the
contract term. Payments received in advance of revenue recognition, even if
non-refundable, are recorded as deferred revenue. Some contracts permit
termination without cause by the clients. Contracts permitting termination
without cause may provide for termination payments to the Company that will be
recognized as revenue when collectibility is assured.
DEFERRED IMAP COSTS
Direct costs related to the implementation of software under IMAP contracts
are deferred and expensed ratably over the term of the related contract.
GOODWILL AMORTIZATION
The Company amortizes goodwill arising from certain purchase business
combinations on a straight-line basis over its estimated useful life of 5 years.
ADVERTISING COSTS
The Company expenses advertising as incurred. Advertising expense totaled
approximately $700,000 in 1998.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, consisting principally of property and equipment and
goodwill, are evaluated for possible impairment through a review of undiscounted
expected future cash flows. If the sum of the undiscounted expected future cash
flows is less than the carrying amount of the asset, an impairment loss is
recognized.
F-10
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK OPTIONS
The Company records compensation expense for all stock-based compensation
plans using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees ("APB No. 25"). Under
APB No. 25, if the exercise price of the Company's employee stock options equals
or exceeds the estimated fair value of the underlying stock on the date of
grant, no compensation expense is generally recognized.
Financial Accounting Standards Board Statement No. 123, Accounting for
Stock-Based Compensation ("Statement No. 123") encourages companies to recognize
expense for stock-based awards based on their estimated value on the date of
grant. Statement No. 123 requires the disclosure of pro forma net income or loss
in the notes to the financial statements if the fair value method is not
elected. The Company accounts for its stock-based compensation using the
intrinsic value method, and has determined that the use of the fair value method
to record compensation expense would have no effect on the reported net loss in
1998.
STOCK SPLIT
In February 1999, the Company's Board of Directors approved an 8 for 1
reverse stock split of common stock, options and warrants which became effective
on April 8, 1999. Accordingly, all share and per share data including stock
option, warrant and loss per share information have been restated in the
consolidated financial statements to retroactively reflect the stock split. (See
also Note 22.)
ACCOUNTING PRONOUNCEMENTS ADOPTED IN 1999
In March 1998, the AICPA issued Statement of Position 98-1, ACCOUNTING FOR
THE COSTS OF COMPUTER SOFTWARE DEVELOPED FOR OR OBTAINED FOR INTERNAL USE (SOP
98-1). SOP 98-1 requires the capitalization of costs to purchase or develop
internal-use software, including external direct costs of materials and
services, and payroll and payroll related costs for employees who are directly
associated with and devote time to an internal use software development project.
Allocations of overhead and capitalized costs are not permitted. Computer
software costs related to research and development are expensed as incurred, as
are training and maintenance costs. SOP 98-1 was adopted in 1999, and
application is prospective. In 1998, the Company expensed approximately $1
million of costs related to the implementation of internal use software. The
Company capitalized approximately $1.5 million of costs in implementing internal
use software for the nine months ended September 30, 1999.
In April 1998, the AICPA issued Statement of Position 98-5, REPORTING THE
COSTS OF START-UP ACTIVITIES (SOP 98-5). SOP 98-5 requires that start-up costs
and organization costs be expensed as incurred. Start-up activities include
one-time activities related to opening a new facility, including a new product
or service, conducting business in a new territory, conducting business with a
new class of customer, initiating a new process in an existing facility, or
commencing some new operation. SOP 98-5 was adopted in 1999. All start-up and
organizational costs of the Company have been expensed; therefore, adoption of
this new standard had no effect on the consolidated financial statements.
2. ACQUISITIONS
On September 8, 1998, the Company acquired all of the outstanding common
stock of I.I.T. Holding, Inc. (IIT), a provider of Internet and intranet
consulting, integration and support services
F-11
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
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 75,000 shares of common stock for $10.67 per share valued
at $40,000. Direct acquisition costs of $394,968 were also incurred. The
acquisition was accounted for using the purchase method of accounting, and the
results of operations of IIT are included in the accompanying consolidated
statements of operations commencing September 8, 1998. At the acquisition date,
$14,131,788 of goodwill was recorded.
Additional contingent consideration was payable to the former shareholders
of IIT to the extent that defined amounts of revenue, earnings before interest,
income taxes, depreciation and amortization (EBITDA), and employee retention
percentages (as related to the operations of IIT) in 1998 were exceeded. The
maximum amount of contingent consideration payable to the sellers was
$3,799,999. At December 31, 1998, the Company determined that the amount of
additional consideration due to the sellers was $2,326,735, and therefore
recorded that amount as additional goodwill. The contingent consideration was
paid in May 1999.
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
93,750 shares of common stock for $10.67 per share valued at $50,000. Direct
acquisition costs of $338,916 were also incurred. The acquisition was accounted
for using the purchase method of accounting, and the results of operations of
ACR are included in the accompanying consolidated statements of operations
commencing October 2, 1998. At the acquisition date, $5,290,535 of goodwill was
recorded.
Additional contingent consideration was 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 were
exceeded. The maximum amount of contingent consideration payable to the sellers
was $5,000,000. At December 31, 1998, the Company determined that the amount of
additional consideration due to the sellers was $5,000,000, and therefore
recorded that amount as additional goodwill. The contingent consideration was
paid in January 1999.
The following summarizes unaudited pro forma consolidated results of
operations for 1998 assuming the IIT and ACR acquisitions had occurred at the
beginning of 1998. The results are not necessarily indicative of what would have
occurred had these transactions been consummated as of the beginning of 1998, or
of future operations of the Company (in thousands):
<TABLE>
<CAPTION>
PRO FORMA
-----------
(UNAUDITED)
<S> <C>
Revenue..................................................... $ 13,938
Net loss.................................................... $(36,140)
Basic and diluted loss per common share..................... $ (38.55)
</TABLE>
F-12
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss per
common share:
<TABLE>
<CAPTION>
FOR THE PERIOD FROM FOR THE PERIOD FROM
JANUARY 14, 1998 JANUARY 14, 1998
(DATE OF INCEPTION) (DATE OF INCEPTION)
THROUGH THROUGH NINE MONTHS ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
------------------- ------------------- ------------------
(UNAUDITED)
<S> <C> <C> <C>
Numerator:
Net loss............................... $(32,453,312) $(12,423,214) $(69,052,069)
Dividends on Series A Convertible
Preferred Stock...................... (1,503,004) (843,004) (2,328,150)
Accretion of common stock subject to
repurchase to fair value............. (3,903,865) (1,475,000) (23,938,069)
Accretion of Series B Convertible
Redeemable Preferred Stock to fair
value................................ (236,991) -- (99,252)
------------ ------------ ------------
$(38,097,172) $(14,741,218) $(95,417,540)
============ ============ ============
Denominator:
Weighted-average number of shares of
common stock outstanding and not
subject to repurchase during the
period............................... 937,500 937,500 38,362,926
------------ ------------ ------------
Basic and diluted loss per common
share.................................. $ (40.64) $ (15.72) $ (2.49)
============ ============ ============
</TABLE>
Basic loss per share is based upon the average number of shares of common
stock outstanding during the periods. The 1998 computations exclude 2,015,625
shares of common stock subject to repurchase.
Diluted loss per common share is equal to basic loss per common share
because if potentially dilutive securities were included in the computation, the
result would be anti-dilutive. These potentially dilutive securities consist of
common stock subject to repurchase, convertible preferred stocks, stock options
and warrants in the 1998 periods, and stock options and warrants in the 1999
periods.
4. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The Company acquired equipment totaling $5,188,489 and $1,281,703 under
leases classified as capital leases for the period from January 14, 1998 (date
of inception) through December 31, 1998 and for the nine months ended September
30, 1999, respectively. The Company also acquired $7,500,000 of equipment in
1998 that was included in accounts payable and short-term obligations expected
to be refinanced at December 31, 1998.
Interest paid was approximately $368,000 and $3,085,000 for the period from
January 14, 1998 (date of inception) through December 31, 1998 and for the nine
months ended September 30, 1999, respectively.
In December 1998, $22,095,000 of notes payable and a $1,000,000 loan from an
officer of the Company were converted into Series B Convertible Redeemable
Preferred Stock.
F-13
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (CONTINUED)
The Company purchased all of the capital stock of IIT and ACR for
approximately $27.8 million. In conjunction with these acquisitions, assets with
a fair market value of approximately $30.8 million were acquired and liabilities
of approximately $3.0 million were assumed.
In July 1998, the Company sold 937,500 shares of common stock to an
executive officer for $5,000. The common stock at the date of issuance had an
appraised estimated fair value of $1.07 per share, or $1,000,000. The difference
between the estimated fair value of the common stock of $1,000,000 and the
amount paid of $5,000 ($995,000) was recorded as unearned compensation and is
being amortized over the 22 month period in which it is earned. Other non-cash
compensation of $5,000 related to common stock issuances was also recorded in
1998.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
-------------- --------------
(UNAUDITED)
<S> <C> <C>
Building and land........................... $ 959,124 $14,458,390
Furniture and fixtures...................... 779,332 2,336,762
Equipment and automobiles................... 2,151,877 3,241,954
Computers and software...................... 16,018,565 63,343,718
Leasehold improvements...................... 3,299,132 8,002,158
----------- -----------
23,208,030 91,382,982
Accumulated depreciation.................... (1,567,885) (9,710,162)
----------- -----------
Total....................................... $21,640,145 $81,672,820
=========== ===========
</TABLE>
Substantially all property and equipment is collateralized under financing
arrangements.
6. CAPITAL LEASE OBLIGATIONS
The Company has entered into capital lease agreements to acquire certain
equipment. Property and equipment includes the following amounts for leases that
have been capitalized.
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
Computers and software............................. $5,188,489 $13,618,834
Accumulated amortization........................... (349,716) (2,102,220)
---------- -----------
Total.............................................. $4,838,773 $11,516,614
</TABLE>
Amortization of leased property is included in depreciation and amortization
expense.
F-14
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. CAPITAL LEASE OBLIGATIONS (CONTINUED)
Future minimum payments under capital lease obligations consist of the
following at September 30, 1999 (unaudited):
<TABLE>
<S> <C>
October 1, 1999 through December 31, 1999................... $ 1,795,672
2000........................................................ 5,265,287
2001........................................................ 4,895,478
2002........................................................ 2,231,941
2003........................................................ 91,098
Thereafter.................................................. 14,663
-----------
Total minimum lease payments................................ 14,294,139
Amounts representing interest............................... (2,458,141)
-----------
Present value of capital lease obligations.................. 11,835,998
Current portion............................................. (3,749,318)
-----------
Capital lease obligations, non-current $ 8,086,680
===========
</TABLE>
7. DUE TO FORMER SHAREHOLDERS OF ACQUIRED BUSINESSES
In connection with the acquisition of ACR in October 1998, the Company
issued to the sellers a $3,500,000 note bearing interest at 8.25% per annum. The
note, including accrued interest, was due and was paid in January 1999.
As more fully disclosed in Note 2, the Company paid additional consideration
related to the acquisitions of ACR and IIT in the aggregate amount of
$7,326,735. The additional consideration was paid in April 1999.
F-15
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
Note payable to a bank due June 30, 2001 and bearing
interest at 9.0% per annum. The note is payable in monthly
installments of principal and interest of $6,644 with all
unpaid principal and interest due at maturity. The note is
secured by a mortgage on the real property purchased with
the proceeds and with a $79,929 letter of credit pledged
as additional security.................................... $ 639,517 $ 623,352
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....................................... 217,689 212,306
Notes payable due on August 1, 2001 and bearing interest at
13.0% per annum. The notes are payable in monthly
installments of principal and interest of $77,429 and are
collateralized by certain furniture, fixtures, equipment
and software.............................................. 2,081,563 1,567,264
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.............................................. 134,519 102,427
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....... 4,501,175 3,606,628
Notes payable due on February 1, 2002 and bearing interest
at 15.0% per annum. The note is payable in monthly
installments of principal and interest ranging from
$35,730 to $40,348 and is collateralized by certain
furniture, fixtures, equipment and software............... -- 1,840,915
Note payable due on October 1, 2002 and bearing interest at
13.6% per annum. The note is payable in monthly
installments of principal and interest of $58,522 and is
collateralized by certain furniture, fixtures and
equipment................................................. -- 1,850,736
Note payable due on April 1, 2002 and bearing interest at
17.1% per annum. The note is payable in monthly
installments of principal and interest of $78,650 and is
collateralized by certain furniture, fixtures, equipment
and software.............................................. -- 2,127,287
</TABLE>
F-16
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
Note payable due on January 1, 2002 and bearing interest at
11.9% per annum. The note is payable in monthly
installments of principal and interest of $209,028 and is
collateralized by certain software licenses............... $ -- $ 1,911,653
Notes payable due on July 1, 2003 and bearing interest at
14.1% per annum. The notes are payable in monthly
installments of principal and interest of $94,894 and are
collateralized by certain equipment and software.......... -- 2,743,634
Notes payable due on June 1, 2002 and bearing interest at
14% per annum. The note is payable in monthly installments
of principal and interest of $396,694 and is
collateralized by certain equipment and software.......... -- 10,680,130
Note payable due on September 1, 2002 and bearing interest
at 13.4% per annum. The note is payable in monthly
installments of principal and interest of $68,614 and is
collateralized by certain furniture, fixtures, equipment
and software.............................................. -- 2,022,312
Note payable due on May 1, 2006 and bearing interest at 7.5%
per annum. The note is payable in monthly installments of
principal and interest of $44,063 with all unpaid
principal and interest due at maturity. The note is
secured by a mortgage on the real property purchased with
the proceeds.............................................. -- 7,028,874
Note payable due on March 1, 2001 and bearing interest at
6.6% per annum. The note is payable in monthly
installments of principal and interest ranging from
$19,908 to $28,237 and is collateralized by the general
assets of the Company..................................... -- 633,688
Notes payable due between February 28, 2003 and March 11,
2004 and bearing interest at rates ranging from 8.25% 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 93,225
---------- -----------
Total....................................................... 7,682,093 37,044,431
Less: current portion....................................... 1,757,588 10,055,592
Less: discounts............................................. 692,711 503,790
---------- -----------
$5,231,794 $26,485,049
========== ===========
</TABLE>
F-17
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LONG-TERM DEBT (CONTINUED)
Aggregate maturities of long-term debt at September 30, 1999 are as follows
(unaudited):
<TABLE>
<S> <C>
October 1, 1999 through December 31, 1999................... $ 2,319,476
2000........................................................ 11,294,001
2001........................................................ 11,892,297
2002........................................................ 4,439,325
2003........................................................ 390,045
2004 and thereafter......................................... 6,709,287
-----------
Total....................................................... $37,044,431
===========
</TABLE>
At December 31, 1998 and September 30, 1999, the fair value of long-term
debt approximates its carrying value.
9. SHORT-TERM OBLIGATIONS EXPECTED TO BE REFINANCED
At December 31, 1998, the Company had outstanding current liabilities for
the purchase of fixed assets of $7,500,000, for which the Company had
outstanding commitments to finance on a long-term basis. The Company executed
the financings in early 1999, and therefore classified at December 31, 1998
$5,282,450, or the portion of the $7,500,000 financing that is due after 1999,
as long-term. The remaining $2,217,550, which is due in 1999, is included in
accounts payable at December 31, 1998. These obligations bear interest at rates
from 9% to 17% per annum, and will mature in varying installments through
January 2002. The balance sheet at September 30, 1999 includes these amounts in
long-term debt.
10. INITIAL PUBLIC OFFERING
In April 1999 the Company completed an initial public offering of 10,350,000
shares of common stock which resulted in net proceeds of approximately
$132,810,000, after deducting underwriting discounts, commissions and offering
expenses. Upon the closing of the offering, the Series A Preferred Stock and
Series B Preferred Stock automatically converted into 46,349,289 shares of
common stock, and the common stock subject to repurchase no longer became
mandatorily redeemable by the Company upon the occurrence of certain events.
(See Notes 11 and 12.)
11. PREFERRED STOCK
The Company has authorized the issuance of up to 225,000 shares of preferred
stock, par value $.01 per share, of which 110,000 has been designated Series A
Convertible Preferred Stock ("Series A") and 115,000 has been designated Series
B Convertible Redeemable Preferred Stock ("Series B"). During 1998, the Company
issued 55,000 shares of Series A for a total aggregate purchase price of $33
million, and 59,279 shares of Series B for a total aggregate purchase price of
$62.2 million, including $22.1 million of Series B issued upon conversion of
notes payable. Upon the conversion of notes payable with a face value of
$9,095,000 into Series B, unamortized debt discount of approximately $1,350,000
was recorded as additional interest expense.
F-18
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. PREFERRED STOCK (CONTINUED)
SERIES A:
CONVERSION
The Series A outstanding at December 31, 1998 automatically converted into
shares of common stock upon the closing of the initial public offering in April
1999. Each share of Series A was converted into 337.5 shares of common stock.
DIVIDENDS
The holders of the Series A were entitled to receive cumulative quarterly
dividends at the annual rate of $48 per share. All accrued dividends were paid
at the closing of the initial public offering in April 1999.
VOTING RIGHTS
Each share of Series A had substantially the same voting rights as the
number of shares of common stock into which it was converted. In addition,
certain corporate actions required the consent of two-thirds of the outstanding
shares of Series A.
SERIES B:
CONVERSION
The Series B outstanding at December 31, 1998 automatically converted into
shares of common stock upon the closing the initial public offering in April
1999. Each share of Series B was converted into 468.75 shares of common stock.
DIVIDENDS
The holders of the Series B were entitled to receive cumulative quarterly
dividends at the annual rate of $84 per share. All accrued dividends were paid
at the closing of the initial public offering in April 1999.
VOTING RIGHTS
Each share of Series B had substantially the same voting rights as the
number of shares of common stock into which it was converted.
12. COMMON STOCK SUBJECT TO REPURCHASE
The Company sold 2,015,625 shares of common stock to three officers that at
December 31, 1998 required the Company to repurchase the common stock at fair
value in the event of disability or death. The Company also has the option to
repurchase 1,078,125 shares of common stock sold to two officers for an
aggregate purchase price of $200, if the officers owning the shares are
terminated for cause, and has the option to repurchase 937,500 shares of common
stock sold to another officer for approximately $350,000, if that officer is
terminated for cause. All of the shares of common stock subject to repurchase
may be repurchased by the Company for an aggregate purchase price of
approximately $350,000 if the officers owning the shares terminate their
employment prior to May 2000. These agreements were amended on February 25, 1999
to void the repurchase obligation upon death or disability upon the closing of
an initial public offering of the common stock.
F-19
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. COMMON STOCK SUBJECT TO REPURCHASE (CONTINUED)
The Company initially recorded the common stock subject to repurchase at an
amount equal to the consideration received of $1,010,000 (purchase price of
$1,057,500, less $47,500 represented by notes receivable). The common stock
subject to repurchase has been accreted to its estimated fair value during all
periods the common stock was subject to repurchase through charges to additional
paid-in capital. The estimated value per share of $2.08 at December 31, 1998 was
determined through an independent appraisal of the Company's common stock.
Additional accretion in 1999 prior to the April initial public offering was
recorded based on valuations consistent with the expected initial public
offering price. As a result of the initial public offering in April 1999, these
shares are no longer subject to mandatory repurchase by the Company, and their
accreted value of $28,083,069 has been reclassified to stockholders' equity.
13. STOCK WARRANTS
In 1998, in connection with the issuance of debt or capital leases, the
Company issued warrants to purchase 1,600,067 shares of common stock and
warrants to purchase 971 shares of Series B. The warrants to purchase Series B
converted into warrants to purchase 455,156 shares of common stock in April 1999
upon the closing of the initial public offering. The warrants expire from 2003
through 2008, and are exerciseable for $2.24 or $2.29 per share.
Upon issuance, the Company estimated the fair value of the warrants using a
Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rate of 5.50%, dividend yield of 0%; volatility
factor of the expected market price of the Company's common stock of 40%; and a
weighted-average expected life of the warrant of 10 years. The range of values
assigned to the warrants was $.53 to $1.39 per share, and the total value
assigned was $2,740,329. This amount was recorded as additional paid-in capital,
and a corresponding debt discount was recorded that is being recognized as
additional interest expense over the term of the related debt or capital lease.
Also, as discussed in Note 2, the Company issued warrants to purchase
168,750 shares of common stock in connection with the acquisition of IIT and
ACR. These warrants expire in 2008 and are exerciseable for $10.67 per share.
The Company estimated the value of these warrants considering the various terms,
including the exercise price of the warrants, the estimated fair value of the
Company's common stock, and the length of time the warrants are exercisable. The
aggregate value assigned to these warrants was $90,000.
During 1999, warrants to purchase 487,298 shares of common stock were
exercised for proceeds of $1,093,260. A summary of warrants outstanding at
September 30, 1999 is as follows (unaudited):
<TABLE>
<CAPTION>
NUMBER OF SHARES EXERCISE PRICE EXPIRATION DATE
- ---------------- -------------- ---------------
COMMON STOCK:
<S> <C> <C>
26,786 $ 2.24 December 2003
111,607 $ 2.24 June 2004
1,429,533 $ 2.29 September 2008
75,000 $10.67 September 2008
93,750 $10.67 October 2008
</TABLE>
14. SHARES RESERVED FOR FUTURE ISSUANCE
As of December 31, 1998, the Company had reserved 18,562,491 shares and
27,786,798 shares of common stock for issuance upon the conversion of the Series
A and Series B, respectively. These
F-20
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SHARES RESERVED FOR FUTURE ISSUANCE (CONTINUED)
shares were issued in April 1999 upon conversion. In addition, the Company at
December 31, 1998 had reserved 7,023,375 shares of common stock for future
issuance upon the exercise of stock options eligible for granting under the 1998
Stock Option Plan (see Note 15), and 2,223,972 shares of common stock
attributable to outstanding warrants issued in 1998.
15. 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, as amended, provides for the
granting of either qualified or non-qualified options to purchase an aggregate
of up to 7,023,375 shares of common stock to eligible employees, officers,
directors and consultants of the Company.
A summary of the Company's stock option activity follows:
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
JANUARY 1, 1998
(DATE OF INCEPTION)
THROUGH NINE MONTHS ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
-------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Outstanding at beginning of year..................... -- $ -- 2,523,375 $1.76
Granted.............................................. 2,563,688 1.76 5,801,850 7.12
Exercised............................................ -- (877,850) 3.20
Forfeited............................................ (40,313) 1.76 (469,343) 3.21
Outstanding at end of year........................... 2,523,375 1.76 6,978,033 6.36
Exercisable at end of year........................... 2,523,375 6,978,033
</TABLE>
The exercise price for all options outstanding as of December 31, 1998 is
$1.76. 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 outstanding options is 9.7 years.
For the year ended December 31, 1998, pro forma net loss and loss per share
information required by Statement No. 123 was determined using the minimum value
method. The minimum value method calculates the fair value of options as the
excess of the estimated fair value of the underlying stock at the date of grant
over the present value of both the exercise price and the expected dividend
payments, each discounted at the risk-free rate, over the expected life of the
option. In determining the estimated fair value of granted stock options under
the minimum value method, the risk-free interest rate was assumed to be 5.50%,
the dividend yield was estimated to be 0% and the expected life of granted
options was assumed to be four years.
F-21
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. STOCK COMPENSATION PLAN (CONTINUED)
Because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the minimum value method and
other methods prescribed by Statement No. 123 do not necessarily provide a
single measure of the fair value of its employee stock options.
The grant-date fair value of all options granted during 1998 using the
minimum value method was less than $.01, thus no pro forma information has been
presented. The exercise price at the grant-date of all options granted through
December 31, 1998 was greater than the market value of the underlying common
stock on the grant date, as determined by independent appraisal. As a result,
the Company has not recognized compensation expense related to these options.
Certain options granted in 1999 are exercisable at prices less than the fair
market value of the Company's common stock at the date of grant. The Company
will record stock compensation expense of approximately $40.0 million as a
result of these 1999 option grants that will be recognized ratably over the
four-year period that the employees earn the right to retain the shares obtained
upon exercise of the stock options without regard to continued employment.
16. INCOME TAXES
At December 31, 1998, the Company has a U.S. federal net operating loss
carryforward of $20 million. This carryforward expires in 2013. The amount
available to be used in any given year will be limited by operation of certain
provisions of the Internal Revenue Code. The Company also has state net
operating loss carryforwards available, the utilization of which will be
similarly limited. The Company has established a valuation allowance with
respect to these federal and state carryforwards.
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 7,855,560
Start-up and organizational costs capitalized for tax
purposes................................................ 3,632,867
Other..................................................... 192,230
Total deferred tax assets................................... 11,680,657
------------
Deferred tax liabilities:
Tax over book depreciation................................ 314,930
Other..................................................... 467,169
------------
Total deferred tax liability................................ 782,099
------------
Net future income tax benefit............................... 10,898,558
Valuation allowance for net deferred tax assets............. (10,898,558)
------------
Net deferred tax assets..................................... $ --
============
</TABLE>
F-22
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. 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.......................... $(11,358,659)
State income taxes, net of federal benefit.................. (984,188)
Non-deductible goodwill..................................... 559,839
Non-deductible interest expense............................. 704,166
Non-deductible transactions costs........................... 154,777
Other....................................................... 25,507
Valuation allowance......................................... 10,898,558
------------
Total....................................................... $ --
============
</TABLE>
The Company expects that its effective income tax rate in 1999 will be zero.
17. OPERATING LEASES
The Company conducts primarily all of its operations from leased facilities
under operating leases that have terms of up to five years and generally contain
renewal options of two to three years and rent escalation clauses. Future
minimum payments under noncancelable operating leases with initial terms of one
year or more consist of the following at December 31, 1998:
<TABLE>
<S> <C>
1999........................................................ $1,441,681
2000........................................................ 1,402,328
2001........................................................ 954,563
2002........................................................ 684,799
2003........................................................ 158,549
----------
$4,641,920
==========
</TABLE>
The Company incurred rent expense of $718,416 during the period from January
14, 1998 (date of inception) through December 31, 1998.
18. EMPLOYEE BENEFIT PLAN
The Company established a defined contribution benefit plan effective July
1, 1998. The plan covers substantially all employees who have 30 days of service
with the Company. Participants may contribute from 1% to 15% of their annual
compensation to the plan. In addition, the Company may make discretionary
matching and profit-sharing contributions to the plan. No contributions were
made by the Company in 1998.
19. RELATED PARTY TRANSACTIONS
During 1998, the Company received a non-interest bearing loan from an
officer in the amount of $1,000,000. The loan was subsequently converted into
1,667 shares of Series A Convertible Preferred Stock.
In January 1999, the Company entered into an agreement with U S WEST, a
common stockholder, which provides U S WEST with the exclusive rights to market
iMAP services in their fourteen-state service region. The Company will make its
iMAP services available to U S WEST at discounted prices
F-23
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. RELATED PARTY TRANSACTIONS (CONTINUED)
which U S WEST can in turn sell to the end user. Under this agreement revenue
will be recognized as the iMAP services are provided, the Company will invoice U
S WEST for their services, in accordance with the terms of this agreement. In
addition, under the terms of the agreement, the Company provides U S WEST with
training and technical support. For the first year of the agreement, these
training and technical support services will be provided at no cost to U S WEST;
beginning in the thirteenth month the Company will invoice U S WEST for these
services at prevailing rates. The Company will expense the cost of these
services as incurred.
In September 1999, the Company loaned $2,250,000 to an officer to purchase
562,500 shares of common stock. The loan is evidenced by a full recourse note
that bears interest at 5% per annum, is payable on or before July 31, 2000. The
Company has classified the note as a reduction of stockholders' equity at
September 30, 1999.
20. BUSINESS AND GEOGRAPHIC SEGMENT INFORMATION
During 1998 and through June 1999, the Company was organized into two
business units -- IMAP and Professional IT Services. In the third quarter of
1999, the Company changed the manner in which it manages its operations and
reports the activities of those operations. The Company is now organized into
seven business units that offer unique software solutions. These operating
segments have been aggregated for reporting purposes into two segments, as
follows:
- ENTERPRISE WIDE SOLUTIONS -- provides enterprise relationship management,
financial management, human resource, and professional services automation
software product offerings; and
- E-COMMERCE AND WEB BASED SOLUTIONS -- provides electronic commerce,
enhanced messaging and decision support product offerings.
Management believes that the aggregation of the operating segments helps
users of the financial statements better understand performance. The combined
operating segments have similar economic characteristics and products and meet
other criteria for aggregation. Both business units utilize an Internet-based
network, which enables clients to use leading business software applications
without the burden of owning, or managing the underlying technology. These
services are delivered to customers through a network of Enterprise Data Centers
located in Maryland, California, Amsterdam and Tokyo.
The Company evaluates the performance of its new operating segments based on
contriubtion margin, or revenues less variable direct costs. This contribution
margin excludes an allocation of network and infrastructure costs, selling,
general and administrative costs, non-cash stock compensation expense, and
depreciation and amortization.
The Company does not prepare information regarding segment assets. The
accounting policies used by the reportable segments are the same as those used
by the Company as described in Note 1 to the consolidated financial statements.
F-24
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. BUSINESS AND GEOGRAPHIC SEGMENT INFORMATION (CONTINUED)
The following table sets forth information on the Company's reportable
segments. The 1998 data has been restated to conform to the new segment
classifications.
<TABLE>
<CAPTION>
FOR THE PERIOD FROM FOR THE PERIOD FROM
JANUARY 14, 1998 JANUARY 14, 1998
(DATE OF INCEPTION) (DATE OF INCEPTION)
THROUGH THROUGH NINE MONTHS ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
------------------- ------------------- ------------------
(UNAUDITED)
<S> <C> <C> <C>
Revenue:
Enterprise Wide Solutions................ $2,138,290 $515,488 $10,774,249
E-Commerce and Web Based Solutions....... 1,984,159 -- 10,077,465
---------- -------- -----------
Consolidated............................. $4,122,449 $515,488 $20,851,714
========== ======== ===========
Segment operating profit:
Enterprise Wide Solutions................ $ (20,876) $172,571 $ 5,610,255
E-Commerce and Web Based Solutions....... 718,214 -- 1,343,761
---------- -------- -----------
Consolidated............................. $ 697,338 $172,571 $ 6,954,016
========== ======== ===========
</TABLE>
A reconciliation of segment operating loss to net loss during the periods
presented is as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD FROM FOR THE PERIOD FROM
JANUARY 14, 1998 JANUARY 14, 1998
(DATE OF INCEPTION) (DATE OF INCEPTION)
THROUGH THROUGH NINE MONTHS ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
------------------- ------------------- ------------------
<S> <C> <C> <C>
Segment operating profit for all
segments................................. $ 697,338 $ 172,571 $ 6,954,016
Network and infrastructure costs........... (2,185,893) -- (11,360,299)
General and administrative................. (19,426,575) (10,407,416) (15,841,863)
Sales and marketing........................ (5,123,334) (1,802,383) (24,552,985)
Product research and development........... (690,388) (259,181) (2,005,107)
Non-cash stock compensation expense........ (231,135) (90,455) (6,805,486)
Depreciation and amortization.............. (3,179,648) (269,134) (14,793,756)
Interest income............................ 367,411 307,335 2,146,810
Interest expense........................... (2,681,088) (74,551) (2,793,399)
------------ ------------ ------------
Net loss................................... $(32,453,312) $(12,423,214) $(69,052,069)
============ ============ ============
</TABLE>
Revenues from one customer of the Company's Enterprise Wide Solutions
segment accounted for approximately 16% of the Company's consolidated revenue
for the nine months ended September 30, 1999.
21. COMMITMENTS
As of March 1999, the Company had entered into forward looking commitments
to purchase software and advertising totaling $22.5 million. The agreement
provided for eight minimum payments of $2.5 million to be paid over eight fiscal
quarters commencing on March 31, 1999, for the purchase of software licenses.
Additionally, the agreement provided for eight quarterly minimum payments of
$312,500 commencing in March 1999 for co-marketed print advertising campaigns.
These commitments
F-25
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. COMMITMENTS (CONTINUED)
when paid were recorded by the Company in accordance with its software licenses
and advertising cost policies as more fully described in Note 1.
In June 1999, the Company renegotiated this agreement to terminate upon
payment of the June 1999 quarterly payments.
22. SUBSEQUENT EVENTS
On October 8, 1999, the Company purchased the assets of Conklin & Conklin,
Inc. ("Conklin"), a comprehensive provider of Lawson financial and human
resources system implementation services and a certified reseller of Lawson
software licenses. The purchase price consisted of cash of $8.0 million, assumed
liabilities of $0.6 million, and a $2.0 million secured note. The secured note
is due on October 8, 2001, and bears interest at 10% payable monthly. In
addition, Conklin's stockholders will be entitled to contingent payments of up
to $4.0 million, payable in up to 500,000 shares of common stock with any
remainder due in cash. Of the contingent consideration, $3.0 million will be
payable based on the achievement of specified financial milestones over a 26
month period, and any such payment will result in the recording of additional
goodwill. The remaining $1.0 million is payable only if the principal
stockholders are employed by the Company on December 8, 2001, and will be
recorded as compensation expense if paid. Goodwill of approximately $9.5 million
was recorded at the acquisition date, and is being amortized over its estimated
useful life of 5 years.
In October and November 1999, the Company issued $125,000,000 of convertible
subordinated notes, due November 1, 2004. The net proceeds from the issuance
were approximately $120,l00,000. The notes pay interest semi-annually on May 1
and November 1 at 7% per annum, and are convertible into common stock at a price
of $24.85 per common share.
In November 1999, the Board of Directors approved a 3 for 2 stock split of
common stock, options and warrants for holders of record on December 3, 1999.
Accordingly, all share and per share data including stock option, warrant and
loss per share information have been restated in the consolidated financial
statements to retroactively reflect the stock split.
F-26
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
I.I.T. Holding, Inc.
We have audited the accompanying consolidated balance sheets of I.I.T.
Holding, Inc. and subsidiaries as of December 31, 1996 and 1997, and
September 7, 1998, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for the years ended December 31,
1996 and 1997, and for the period from January 1, 1998 through September 7,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the 1996 and 1997 financial
statements of International Information Technology IIT, C.A., a wholly-owned
subsidiary, which statements reflect total assets of $68,247 and $76,361 as of
December 31, 1996 and 1997, respectively, and total revenues of $3,336 and
$147,797 for the period from March 6, 1996 (inception) through December 31, 1996
and for the year ended December 31, 1997, respectively. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to data included for International Information
Technology IIT, C.A., is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of I.I.T. Holding, Inc.
and subsidiaries as of December 31, 1996 and 1997, and September 7, 1998 and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1996 and 1997, and for the period from January 1, 1998
through September 7, 1998, in conformity with generally accepted accounting
principles.
Baltimore, Maryland /s/ Ernst & Young LLP
March 23, 1999
F-27
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
U.S. INTERNETWORKING, INC.
We have audited the accompanying balance sheets of International Information
Technology IIT, C.A., at December 31, 1997 and for the period from March 5, 1996
(date of inception) through December 31, 1996, and the related statements of
operations, changes in stockholders' equity and cash flows for the years then
ended (not presented separately herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with U.S. generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of International Information
Technology IIT, C.A. at December 31, 1997 and for the period from March 5, 1996
(date of inception) through December 31, 1996, and the results of its operations
and its cash flows for the years then ended in conformity with U.S. generally
accepted accounting principles.
At December 31, 1997 and 1996, the accompanying financial statements have
been prepared assuming that the Company will continue its ongoing operations,
despite of the negative stockholder's equity, which shows uncertainty about the
Company's ability to continue in operation. These financial statements do not
include any adjustments that could result as a consequence of this uncertainty.
BASSAN & ASOCIADOS S.C.
Ana Escudero de D'Aguiar
Certified Public Accountant
CPA D.F. Venezuela No. 7558
August 20, 1998
F-28
<PAGE>
I.I.T. HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1996 1997 SEPTEMBER 7, 1998
-------- ---------- -----------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 69,563 $ 14,443 $ 331,013
Accounts receivable --trade, less allowance of
$50,000 in 1998.................................... 225,500 634,215 1,299,469
Other current assets................................. 2,451 13,902 68,799
-------- ---------- ----------
Total current assets................................... 297,514 662,560 1,699,281
Equipment and vehicles:
Computer equipment................................... 30,407 116,850 161,449
Vehicles............................................. 45,119 45,119 --
-------- ---------- ----------
75,526 161,969 161,449
Less: accumulated depreciation....................... (25,831) (56,084) (55,700)
-------- ---------- ----------
49,695 105,885 105,749
Other assets........................................... 654 618 --
-------- ---------- ----------
Total assets........................................... $347,863 $ 769,063 $1,805,030
======== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank overdraft....................................... $ -- $ 157,056 $ --
Accounts payable..................................... 13,899 7,162 53,787
Accrued expenses..................................... 60,000 366,685 1,974,395
Current portion of note payable...................... 4,443 10,036 --
Current portion of capital lease obligations......... -- 18,230 9,803
Unsecured demand note payable to stockholder, non-
interest bearing................................... 99,951 62,160 8,500
Client advances...................................... 55,824 -- --
Current deferred income taxes........................ 49,270 -- --
-------- ---------- ----------
Total current liabilities.............................. 283,387 621,329 2,046,485
Note payable........................................... 10,676 -- --
Capital lease obligations, net of current portion...... -- 15,953 8,596
Deferred income taxes.................................. 9,103 -- --
Commitments and contingent liabilities................. -- -- --
Stockholders' equity (deficit):
Common stock......................................... 2,724 3,197 475
Additional paid-in capital........................... -- 1,001,843 1,004,565
Accumulated other comprehensive income (loss)........ 835 (20,918) 21,365
Retained earnings (deficit).......................... 41,138 (852,341) (1,276,456)
-------- ---------- ----------
44,697 131,781 (250,051)
-------- ---------- ----------
Total liabilities and stockholders' equity............. $347,863 $ 769,063 $1,805,030
======== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
F-29
<PAGE>
\
I.I.T. HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR ENDED DECEMBER 31 JANUARY 1, 1998
------------------------ THROUGH
1996 1997 SEPTEMBER 7, 1998
-------- ---------- -----------------
<S> <C> <C> <C>
Consulting revenue................................... $747,023 $2,812,011 $4,405,560
Cost of revenue...................................... 519,261 1,881,031 2,976,499
-------- ---------- ----------
Gross profit......................................... 227,762 930,980 1,429,061
Operating expenses:
General and administrative......................... 131,037 778,342 1,803,611
Sales and marketing................................ 73,305 62,943 4,632
Stock compensation expense......................... -- 1,002,316 --
Depreciation....................................... 13,556 30,253 27,580
-------- ---------- ----------
217,898 1,873,854 1,835,823
-------- ---------- ----------
Income (loss) from operations........................ 9,864 (942,874) (406,762)
Interest expense..................................... (2,917) (8,977) (17,353)
-------- ---------- ----------
Income (loss) before provision for income taxes...... 6,947 (951,851) (424,115)
Provision (benefit) for income taxes................. 14,832 (58,372) --
-------- ---------- ----------
Net income (loss).................................... $ (7,885) $ (893,479) $ (424,115)
======== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
F-30
<PAGE>
I.I.T. HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER RETAINED
COMMON PAID-IN COMPREHENSIVE EARNINGS
STOCK CAPITAL INCOME (DEFICIT) TOTAL
-------- ---------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1996........ $1,000 $ -- $ -- $ 49,023 $ 50,023
Issuance of common stock......... 1,724 -- -- -- 1,724
Comprehensive income:
Net loss....................... -- -- -- (7,885) (7,885)
Other comprehensive income--
translation adjustment....... -- -- 835 -- 835
----------
Total comprehensive income
(loss)......................... -- -- -- -- (7,050)
------ ---------- -------- ----------- ----------
Balances at December 31, 1996...... 2,724 -- 835 41,138 44,697
Stock grant to employees for no
consideration.................. 473 1,001,843 -- -- 1,002,316
Comprehensive income:
Net loss....................... -- -- -- (893,479) (893,479)
Other comprehensive income--
translation adjustment....... -- -- (21,753) -- (21,753)
----------
Total comprehensive income
(loss)......................... -- -- -- -- (915,232)
------ ---------- -------- ----------- ----------
Balances at December 31, 1997...... 3,197 1,001,843 (20,918) (852,341) 131,781
Corporate reorganization......... (2,722) 2,722 -- -- --
Comprehensive income:
Net loss....................... -- -- -- (424,115) (424,115)
Other comprehensive income--
translation adjustment....... -- -- 42,283 -- 42,283
Total comprehensive income
(loss)......................... -- -- -- -- (381,832)
------ ---------- -------- ----------- ----------
Balances at September 7, 1998...... $ 475 $1,004,565 $ 21,365 $(1,276,456) $ (250,051)
====== ========== ======== =========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
F-31
<PAGE>
I.I.T. HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR ENDED DECEMBER 31 JANUARY 1, 1998
----------------------- THROUGH
1996 1997 SEPTEMBER 7, 1998
--------- ----------- -------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................ $ (7,885) $ (893,479) $ (424,115)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Non-cash compensation expense.................. -- 1,002,316 --
Depreciation................................... 13,556 30,253 27,580
Deferred taxes................................. 14,832 (58,372) --
Change in assets and liabilities:
Accounts receivable.......................... (72,937) (408,715) (665,254)
Other current assets......................... (1,655) (11,415) (54,897)
Other assets................................. -- -- 618
Accounts payable............................. 13,899 (6,737) 46,625
Accrued expenses............................. 59,200 306,685 1,607,710
Client advances.............................. 55,824 (55,824) --
-------- ---------- ----------
Net cash provided by (used in) operating
activities..................................... 74,834 (95,288) 538,267
INVESTING ACTIVITIES
Acquisition of equipment and vehicle............. (19,989) (41,779) (44,948)
Sale of vehicle.................................. -- -- 17,504
-------- ---------- ----------
Net cash used in investing activities............ (19,989) (41,779) (27,444)
FINANCING ACTIVITIES
Issuance of common stock......................... 1,724 -- --
Proceeds (repayments) from note payable to
stockholder.................................... 68,890 (37,791) (53,660)
Bank overdraft................................... (50,733) 157,056 (157,056)
Repayments of note payable....................... (5,998) (5,083) (10,036)
Repayments of capital leases..................... -- (10,482) (15,784)
-------- ---------- ----------
Net cash provided by (used in) financing
activities..................................... 13,883 103,700 (236,536)
Effect of exchange rate changes on cash.......... 835 (21,753) 42,283
-------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents.................................... 69,563 (55,120) 316,570
Cash and cash equivalents at beginning of year... -- 69,563 14,443
-------- ---------- ----------
Cash and cash equivalents at end of year......... $ 69,563 $ 14,443 $ 331,013
======== ========== ==========
SUPPLEMENTAL INFORMATION
Interest paid.................................... $ 2,917 $ 8,977 $ 19,735
======== ========== ==========
SCHEDULE OF NONCASH INVESTING ACTIVITIES
Property and equipment acquired under capital
leases......................................... $ -- $ 44,465 $ --
======== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
F-32
<PAGE>
I.I.T. HOLDING, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REORGANIZATION AND BASIS OF PRESENTATION
I.I.T. Holding, Inc. and subsidiaries ("the Company") provides internet
consulting, integration, and support services to commercial companies in the
United States and South America. I.I.T. Holding, Inc. was formed in February
1998 when the shareholders of International Information Technology Inc. and
International Information Technology IIT, C.A., enterprises under common
control, exchanged their stock for 100% of the stock of I.I.T. Holding, Inc. The
accompanying consolidated financial statements for all periods presented include
the combined financial position and results of operations of the companies
previously under common control. All significant intercompany transactions have
been eliminated in preparation of the consolidated financial statements.
CONVERSION TO U.S. DOLLARS
The financial information for a Venezuelan subsidiary includes financial
information converted from Venezuelan Bolivares to U.S. Dollars.
Assets and liabilities were converted at the rate in effect at the balance
sheet date and the statement of operations was converted at the average rate
during the periods.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly-liquid instruments, including certificates of deposit, purchased with a
maturity of three months or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments that subject the Company to concentrations of credit
risk consist primarily of accounts receivable. The Company grants credit in the
normal course of business to its clients. As part of this ongoing procedure, the
Company monitors the creditworthiness of its clients. The Company does not
believe that it is subject to any unusual credit risk beyond the normal credit
risk inherent in its business.
For the period ended September 7, 1998, two customers accounted for 24%
($1,042,674), and 10% ($457,784) of total revenue, and three customers accounted
for 38% ($508,212), 13% ($177,874) and 10% ($139,758) of accounts receivable at
September 7, 1998.
For the year ended December 31, 1997, three clients accounted for 33%
($927,964), 17% ($478,042), and 11% ($309,321) of total revenues, and three
clients accounted for 44% ($279,055), 16% ($101,474), and 11% ($69,764) of
accounts receivable at December 31, 1997. For the year ended December 31, 1996,
three clients accounted for 57% ($425,803), 29% ($216,637), and 11% ($82,173) of
F-33
<PAGE>
I.I.T. HOLDING, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
total revenues, and three clients accounted for 42% ($94,710), 24% ($54,120),
and 11% ($24,805) of accounts receivable at December 31, 1996.
REVENUE RECOGNITION
Revenue is recognized in the period the services are performed.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expense was
approximately $73,000 and $30,000 in 1997 and 1996, respectively. Advertising
expense was approximately $27,000 for the period ended September 7, 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 and its components. SFAS No. 130 only impacts display as
opposed to actual amounts recorded. Comprehensive income includes net income and
all other non-owner changes in equity that are excluded from net income, such as
foreign currency translation adjustments. SFAS No. 130 was adopted in 1998.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information (SFAS No. 131). This Statement requires that
public business enterprises report certain information about operating segments
in complete sets of financial statements of the enterprise and in condensed
financial statements of interim periods issued to shareholders. It also requires
that public business enterprises report certain information about their product
and services, the geographic areas in which they operate, and their major
customers. The Company adopted the provisions of SFAS No. 131 in 1998 which did
not have a significant impact on the Company's definition of operating segments
and related disclosures.
2. LEASES
The Company has entered into various capital leases for computer equipment
during 1997. Computer equipment acquired under capital lease obligations was
approximately $44,000. Depreciation expense was $11,116 and $6,000 for the
period ended September 7, 1998 and for the year ended December 31, 1997,
respectively.
F-34
<PAGE>
I.I.T. HOLDING, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. LEASES (CONTINUED)
Future lease payments under capital and operating leases are summarized as
follows:
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
-------------- ----------------
<S> <C> <C>
Four months ended December 31, 1998..................... $ 3,703 $ 14,884
1999.................................................. 13,503 54,454
2000.................................................. 5,844 39,165
2001.................................................. -- 517
------- --------
Total minimum lease payments........................ 23,050 $109,020
========
Less amounts representing interest...................... 4,651
-------
Present value of minimum lease payments (including
current portion of $9,803)............................ $18,399
=======
</TABLE>
Rent expense was $47,476, $32,000 and $17,000 for the period ended September
7, 1998, and for the years ended December 31, 1997 and 1996, respectively.
Capital leases have effective interest rates which range from 6% to 25%.
3. ACCRUED EXPENSES
Accrued expenses are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1997 SEPTEMBER 7, 1998
---------- -------- -----------------
<S> <C> <C> <C>
Accrued bonuses, payroll and payroll taxes..... $60,000 $287,120 $1,763,891
Accrued consulting............................. -- 67,965 124,236
Accrued expenses............................... -- 11,600 86,268
------- -------- ----------
Total accrued expenses..................... $60,000 $366,685 $1,974,395
======= ======== ==========
</TABLE>
4. EMPLOYEE BENEFIT PLAN
The Company has established a defined contribution benefit plan effective
January 1, 1998. The plan covers substantially all employees of the Company who
are 21 years of age or older. Participants may contribute up to 15% of their
annual compensation to the plan, and the Company matches up to 3% of annual
compensation. In 1998, the Company recorded contributions to the plan of
$37,502.
5. NOTE PAYABLE
The note payable, which matured in 1997, was due to a financing
organization, and required monthly installments of $552, including interest at
9.90%.
6. COMMON STOCK
Upon reorganization in February 1998, the Company was authorized to issue
100 shares of common stock with a par value of $5.00 per share. At September 7,
1998, 95 shares were issued and outstanding.
F-35
<PAGE>
I.I.T. HOLDING, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCK COMPENSATION EXPENSE
In August 1997, the sole stockholder of the Company transferred 473 shares
of the outstanding common stock to management employees for no consideration. An
independent appraisal was obtained which estimated the fair value of the shares
on the date of transfer at $1,002,316. This transfer was treated as a
contribution to additional paid-in capital by the sole stockholder, with an
offsetting charge to compensation expense. In 1997, the Company recorded
compensation expense of $1,002,316 relating to the transfer of these shares.
8. INCOME TAXES
Deferred income tax assets and liabilities are determined based upon
differences between financial reporting and the tax basis of assets and
liabilities and are measured using the enacted tax rate and laws that will be in
effect when the differences are expected to reverse.
The components of the income tax provision are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------- PERIOD ENDED
1996 1997 SEPTEMBER 7, 1998
-------- -------- -----------------
<S> <C> <C> <C>
Current...................................... $ -- $ -- $ --
Deferred..................................... 14,832 (58,372) --
------- -------- ---------
Total.................................... $14,832 $(58,372) $ --
======= ======== =========
</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
net deferred income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 7,
----------------------- ------------
1996 1997 1998
-------- -------- ------------
<S> <C> <C> <C>
Deferred tax assets:
Payroll accrual............................... $ 23,964 $ 71,734 $ 53,801
Bonus accrual................................. -- 30,934 365,395
Other accruals................................ 5,239 40,537 50,849
Contributions................................. 40 -- --
Stock compensation............................ -- 219,150
U.S. net operating loss carryforward.......... 11,871 163,092 143,267
-------- -------- --------
Total deferred tax assets..................... 41,114 525,447 613,312
Valuation allowance for deferred tax assets... -- (279,506) (431,882)
-------- -------- --------
Net deferred tax assets....................... 41,114 245,941 181,430
Deferred tax liabilities:
Accounts receivable........................... (90,065) (235,744) (176,808)
Depreciation.................................. (9,103) (9,570) (3,995)
Other......................................... (319) (627) (627)
-------- -------- --------
(99,487) (245,941) (181,430)
-------- -------- --------
Total net deferred tax liability............ $(58,373) $ -- $ --
======== ======== ========
</TABLE>
F-36
<PAGE>
I.I.T. HOLDING, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
At September 7, 1998 the Company's U.S. subsidiary has net operating loss
carryforwards of approximately $359,000 available to offset future taxable
income of the U.S. operations. These carryforwards begin to expire in 2012.
The Company's Venezuelan subsidiary had cumulative net operating losses in
the amount of $110,000 through December 31, 1997. These net operating losses
resulted in net deferred tax assets of approximately $23,000 and $5,000 at
December 31, 1997 and 1996, respectively. Management has determined that it is
more likely than not that these net operating losses will not be utilized;
therefore, a full valuation allowance was recorded against these deferred tax
assets at December 31, 1997 and 1996. During the period from January 1, 1998
through September 7, 1998, the subsidiary utilized approximately $92,000 of the
net operating loss carryforward, and increased the valuation allowance by
approximately $2,500 to $25,500, which fully offsets the net deferred tax asset
of $25,500 at September 7, 1998. The remaining net operating loss carryforward
of approximately $18,000 will expire in 2000.
9. GEOGRAPHIC SEGMENT INFORMATION
The Company is engaged in one business segment. This segment includes
providing internet consulting, integration, and support services principally to
commercial companies located throughout the United States and South America. The
following table presents information regarding geographic segments for the
period from January 1, 1998 through September 7, 1998 and the years ended
December 31, 1997 and 1996. There were no service transfers between the United
States and South America. Operating profit (loss) is total service revenue less
cost of service revenue, general and administrative expenses, sales and
marketing and depreciation.
<TABLE>
<CAPTION>
UNITED STATES SOUTH AMERICA TOTAL
------------- ------------- ----------
<S> <C> <C> <C> <C>
Consulting revenue:.............................. 1998 $3,896,502 $509,058 $4,405,560
1997 2,664,214 147,797 2,812,011
1996 743,687 3,336 747,023
Depreciation:.................................... 1998 $ 21,819 $ 5,761 $ 27,580
1997 26,919 3,334 30,253
1996 12,720 836 13,556
Operating profit (loss):......................... 1998 $ (382,361) $(24,401) $ (406,762)
1997 (844,036) (98,838) (942,874)
1996 39,481 (29,617) 9,864
Interest expense:................................ 1998 $ 5,420 $ 11,933 $ 17,353
1997 4,782 4,195 8,977
1996 2,345 572 2,917
Identifiable assets:............................. 1998 $1,646,768 $158,262 $1,805,030
1997 692,702 76,361 769,063
1996 279,616 68,247 347,863
</TABLE>
10. IMPACT OF YEAR 2000 (UNAUDITED)
Some older computer programs were written using two digits rather than four
to define the applicable year. As a result, those computer programs have
time-sensitive software that recognize a date using "00" as the year 1900 rather
than the year 2000. This could cause a system failure or
F-37
<PAGE>
I.I.T. HOLDING, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. IMPACT OF YEAR 2000 (UNAUDITED) (CONTINUED)
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company is assessing the modifications or replacement of its software
that may be necessary for its computer systems to function properly with respect
to the dates in the year 2000 and thereafter. The Company does not believe that
the cost of either modifying existing software or converting to new software
will be significant or that the year 2000 issue will pose significant
operational problems for its computer systems.
F-38
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Advanced Communication Resources, Inc.
We have audited the accompanying balance sheets of Advanced Communication
Resources, Inc. as of September 30, 1998 and December 31, 1997 and 1996, and the
related statements of operations, stockholders' equity and cash flows for the
years ended December 31, 1997 and 1996 and the nine months ended September 30,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Advanced Communication
Resources, Inc. as of September 30, 1998 and December 31, 1997 and 1996, and the
results of its operations and its cash flows for the years ended December 31,
1997 and 1996 and the nine months ended September 30, 1998, in conformity with
generally accepted accounting principles.
/s/ Mahoney Cohen & Company, CPA, P.C.
New York, New York
March 3, 1999
F-39
<PAGE>
ADVANCED COMMUNICATION RESOURCES, INC.
BALANCE SHEETS
ASSETS (NOTE 5)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1997 1998
------------ ------------ -------------
<S> <C> <C> <C>
Current assets:
Cash.................................................. $ 34,204 $ 179,982 $ 28,317
Accounts receivable, net of allowance for
uncollectible accounts of $81,050 in 1996, $50,000
in 1997 and 1998 (Note 3)........................... 817,803 1,559,330 1,550,942
Other current assets.................................. 26,584 40,447 25,526
Due from stockholders (Note 9)........................ -- 43,570
Due from affiliate (Note 9)........................... 342,994 -- --
---------- ---------- ----------
Total current assets.............................. 1,221,585 1,779,759 1,648,355
Property and equipment, net (Note 4).................... 144,190 110,857 180,026
Other assets............................................ 20,360 6,788 167,278
---------- ---------- ----------
$1,386,135 $1,897,404 $1,995,659
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (Note 5)................................ $ 725,000 $ 525,000 $ 400,000
Accounts payable and accrued expenses................. 366,372 435,998 462,914
Deferred income taxes (Note 7)........................ 50,000 117,000 118,000
Due to stockholders (Note 9).......................... 4,850 120,000 --
---------- ---------- ----------
Total current liabilities......................... 1,146,222 1,197,998 980,914
Commitments and contingencies (Note 10)
Stockholders' equity (Note 6):
Common stock, no par value:
Authorized--200 shares
Issued and outstanding--150 shares as of December 31,
1996 and 1997; 100 shares as of September 30,
1998................................................ 1,500 1,500 1,000
Retained earnings..................................... 288,413 747,906 1,013,745
---------- ---------- ----------
289,913 749,406 1,014,745
Less: Treasury stock, at cost......................... 50,000 50,000 --
---------- ---------- ----------
Total stockholders' equity........................ 239,913 699,406 1,014,745
---------- ---------- ----------
$1,386,135 $1,897,404 $1,995,659
========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
F-40
<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>
Net revenue (Note 3)............................... $4,848,112 $6,646,245 $5,416,982
Direct costs (Notes 6 and 9)....................... 3,768,134 4,230,576 3,536,404
---------- ---------- ----------
Gross margin....................................... 1,079,978 2,415,669 1,880,578
Operating expenses (Note 9):
Selling.......................................... 545,251 377,783 371,511
General and administrative....................... 1,470,758 1,499,654 1,152,228
---------- ---------- ----------
Total operating expenses....................... 2,016,009 1,877,437 1,523,739
---------- ---------- ----------
Income (loss) before provision for (benefit from)
income taxes..................................... (936,031) 538,232 356,839
Provision for (benefit from) income taxes.......... (86,947) 78,739 41,500
---------- ---------- ----------
Net income (loss).................................. $ (849,084) $ 459,493 $ 315,339
========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
F-41
<PAGE>
ADVANCED COMMUNICATION RESOURCES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON RETAINED TREASURY
STOCK EARNINGS STOCK TOTAL
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Balance, January 1, 1996........................... $1,500 $1,137,497 $ -- $1,138,997
Purchase of treasury stock (Note 6)................ -- -- (50,000) (50,000)
Net loss........................................... -- (849,084) -- (849,084)
------ ---------- -------- ----------
Balance, December 31, 1996......................... 1,500 288,413 (50,000) 239,913
Net income......................................... -- 459,493 -- 459,493
------ ---------- -------- ----------
Balance, December 31, 1997......................... 1,500 747,906 (50,000) 699,406
Retirement of treasury stock (Note 6).............. (500) (49,500) 50,000 --
Net income......................................... -- 315,339 -- 315,339
------ ---------- -------- ----------
Balance, September 30, 1998........................ $1,000 $1,013,745 $ -- $1,014,745
====== ========== ======== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
F-42
<PAGE>
ADVANCED COMMUNICATION RESOURCES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
--------------------------- -----------------
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1997 1998
------------ ------------ -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................ $(849,084) $ 459,493 $ 315,339
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities:
Depreciation and amortization.................. 101,480 80,062 100,681
Deferred income taxes.......................... (90,000) 67,000 1,000
Change in assets and liabilities:
Accounts receivable.......................... 903,600 (741,527) 8,388
Other current assets......................... (9,509) (13,863) 14,921
Accounts payable and accrued expenses........ (88,006) 69,626 26,916
--------- --------- ---------
Net cash provided by (used in) operating
activities............................... (31,519) (79,209) 467,245
--------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment............... (55,995) (33,157) (162,882)
Payments for software development................ -- -- (167,278)
--------- --------- ---------
Cash used in investing activities.......... (55,995) (33,157) (330,160)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from (repayments of) notes payable...... 225,000 (200,000) (125,000)
Proceeds from (repayments of) loans from
stockholders................................... -- 120,000 (120,000)
Repayments of (advances to) loans to
stockholders................................... 88,850 70,150 (43,750)
Repayments from (advances to) affiliates......... (213,668) 267,994 --
Purchase of common stock for treasury............ (50,000) -- --
--------- --------- ---------
Net cash provided by (used in) financing
activities............................... 50,182 258,144 (288,750)
--------- --------- ---------
Net increase (decrease) in cash.................... (37,332) 145,778 (151,665)
Cash, beginning of year............................ 71,536 34,204 179,982
--------- --------- ---------
Cash, end of year/period........................... $ 34,204 $ 179,982 $ 28,317
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year/period for:
Interest......................................... $ 60,421 $ 6,132 $ 23,047
Income taxes..................................... $ 10,093 $ 14,414 $ 10,715
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
In connection with the retirement of 50 shares of treasury stock, $500 was
charged against common stock and $49,500 was offset against retained earnings.
SEE ACCOMPANYING NOTES.
F-43
<PAGE>
ADVANCED COMMUNICATION RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY
Advanced Communication Resources, Inc. (the "Company") provides computer
consulting services, including consultation to Fortune 500, financial services
and other companies located in the New York metropolitan area.
On October 2, 1998, 100% of the Company's stock was acquired by
USinternetworking, Inc.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Machinery and equipment and
furniture and fixtures are depreciated by the straight-line method over
estimated useful lives ranging from three to five years. Leasehold improvements
are amortized over the shorter of the term of the lease or their estimated
useful life. Major additions and betterments are capitalized, and repairs and
maintenance are charged to operations in the period incurred.
INCOME TAXES
The Company, with the consent of its stockholders, elected treatment as a
small business corporation under Subchapter S of the Internal Revenue Code and
the corresponding provisions of the New York State Franchise Tax law. Under the
aforementioned provisions, corporate income or loss and any tax credits earned
are included in the stockholders' individual income tax returns. The provision
for income taxes represents New York State Subchapter S and New York City
corporation taxes.
The Company reports on a cash basis for income tax purposes. Deferred state
and local taxes are provided for the differences between the cash basis of
accounting and the accrual basis of accounting utilized in the preparation of
these financial statements. Pursuant to the cash method of accounting, revenue
is recorded when received, rather than when earned, and expenses are recorded
when paid, rather than when incurred.
In connection with the sale of the Company's stock, the subchapter S status
for both federal and state purposes was technically terminated.
REVENUE RECOGNITION
The Company recognizes revenue as professional services are performed. On
fixed fee engagements, which historically have not been material, revenue is
recognized as earned in accordance with the contract.
F-44
<PAGE>
ADVANCED COMMUNICATION RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPUTER SOFTWARE COSTS
Pursuant to Statement of Financial Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
issued by the Financial Accounting Standards Board, the Company is required to
capitalize certain software development and production costs once technological
feasibility has been achieved. Software development costs incurred prior to
achieving technological feasibility as well as certain licensing costs are
charged to research and development expense as incurred. Computer software costs
of $207,997 at September 30, 1998 and $40,719 at December 31, 1997 and 1996,
included in other assets, are recorded at cost and amortized by the
straight-line method over three years. 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
December 31, 1996, respectively.
Capitalized software development and purchased software costs are reported
at the lower of unamortized cost or net realizable value. Commencing upon
initial product release, these costs are amortized based on the straight-line
method over the estimated life, generally one year for internal software
development costs and twelve to thirty-six months for purchased software. Fully
amortized software costs are removed from the financial records.
ADVERTISING EXPENSES
Advertising expenses amounting to approximately $7,600 and $20,500 for the
years ended December 31, 1997 and 1996, respectively, are charged to operations
during the period in which they are incurred.
NOTE 3--CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
The Company provides consulting services to companies in the financial
services industry, primarily located in the New York metropolitan area. In the
normal course of business, payment for the Company's services is due generally
within thirty days of invoicing. Management's credit evaluation process and the
reasonably short collection terms help mitigate any risks. At September 30,
1998, three customers comprised approximately 8% ($124,000), 10% ($155,000) and
13% ($202,000) of the Company's outstanding accounts receivable. These same
three customers accounted for approximately 16% ($867,000), 12% ($650,000) and
11% ($596,000) of net revenue for the nine months ended September 30, 1998. At
December 31, 1997, two customers comprised approximately 17% ($265,000) and 21%
($327,000) of the Company's outstanding accounts receivable. These same two
customers accounted for approximately 23% ($1,529,000) and 19% ($1,263,000) of
net revenue for the year ended December 31, 1997. Additionally, three customers
accounted for approximately 26% ($1,261,000), 14% ($679,000) and 12% ($582,000)
of net revenue for the year ended December 31, 1996.
The Company places its cash with financial institutions. Accounts are
insured by the Federal Deposit Insurance Corporation up to $100,000.
F-45
<PAGE>
ADVANCED COMMUNICATION RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 4--PROPERTY AND EQUIPMENT
Property and equipment is comprised of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1996 1997 1998
-------- -------- -------------
<S> <C> <C> <C>
Machinery and equipment..................................... $247,047 $280,204 $313,318
Furniture and fixtures...................................... 45,042 45,042 65,528
Leasehold improvements...................................... 57,079 57,079 68,742
-------- -------- --------
349,168 382,325 447,588
Less: Accumulated depreciation and amortization............. 204,978 271,468 267,562
-------- -------- --------
$144,190 $110,857 $180,026
======== ======== ========
</TABLE>
NOTE 5--NOTES PAYABLE
Notes payable consists of:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1997 1998
------------ ------------ -------------
<S> <C> <C> <C>
Bank credit facility providing for a $750,000 line of
credit. Borrowings for advances under the line bear
interest at 1% above the prime rate (9.5% at December
31, 1997). The line is collateralized by substantially
all of the Company's assets and is personally guaranteed
by the Company's stockholders........................... $ -- $400,000 $400,000
Demand note payable to a commercial bank which bore
interest at 1% in excess of the bank's prime lending
rate (9.75% at December 31, 1996); the note was
collateralized by all of the assets of the Company and
was personally guaranteed by the Company's
stockholders............................................ 500,000 -- --
Installment note payable to a former stockholder which
bears interest at 75% of the prime lending rate of a
commercial bank (6.37% at December 31, 1997). The note
is collateralized by fifty shares of the Company's
treasury stock held in escrow by the former stockholder
and subordinated to the Company's bank debt. Principal
payments in the amount of $25,000 are to be made
quarterly through March 1, 1999 (A)..................... 225,000 125,000 --
-------- -------- --------
$725,000 $525,000 $400,000
======== ======== ========
</TABLE>
On October 2, 1998 the credit facility was paid in full.
- ------------------------
(A) The note contains provisions for minimum working capital, current ratio and
stockholders' equity. The arrangement also limits compensation to the
officers of the Company. At December 31, 1997 and 1996, the Company was in
violation of certain financial covenants. Accordingly, the entire balance
outstanding as of December 31, 1997 and 1996 has been classified as a
current liability.
F-46
<PAGE>
ADVANCED COMMUNICATION RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6--STOCKHOLDERS' EQUITY
TREASURY STOCK
On December 13, 1995, the Company entered into a stock purchase agreement to
purchase a stockholder's 33.3% common stock interest in the Company. The
purchase price for the stock was $50,000, paid upon execution of the purchase
agreement. The transaction was consummated during 1996.
During September 1998, the Company retired 50 shares of treasury stock.
In connection with the stock purchase agreement, the Company entered into a
one year $350,000 consulting agreement with the former stockholder with $50,000
payable upon closing and $25,000 per quarter payable over three years. In
addition, the Company entered into a non-compete agreement with the stockholder
covering one year for which the former stockholder was paid $100,000. The
amounts related to the above agreements were charged to operations in 1996 and
are included in the accompanying statement of operations.
NOTE 7--INCOME TAXES
The provision for (benefit from) state and local income taxes for the
periods ended consists of:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1997 1998
------------ ------------ -------------
<S> <C> <C> <C>
Current................................................. $ 3,053 $11,739 $40,500
Deferred................................................ (90,000) 67,000 1,000
-------- ------- -------
$(86,947) $78,739 $41,500
======== ======= =======
</TABLE>
The Company's provision for local income taxes for the nine months ended
September 30, 1998 and for the years ended December 31, 1997 and 1996 was
determined under the alternative tax method.
The Company's effective state and local tax rate for the nine months ended
September 30, 1998 and the years ended December 31, 1997 and 1996 was 11.6%,
17%, and 13.6%, respectively.
Deferred state and local income taxes arise from the difference in the
amount of revenue and expenses reported on the accrual method of accounting for
financial statement reporting and the cash method of accounting for income tax
purposes.
NOTE 8--RETIREMENT PLAN
The Company formed an IRS approved 401(k) plan during 1996, covering all
eligible full-time employees. Contributions to the plan are based upon a
matching contribution of 50% of employee contributions limited to 3% of salary.
For the nine months ended September 30, 1998 and years ended December 31, 1997
and 1996, 401(k) expense amounted to approximately $35,000, $45,000 and $47,000,
respectively.
NOTE 9--RELATED PARTY TRANSACTIONS
CONSULTING SERVICES
The Company subcontracts the consulting services of two companies affiliated
through common minority ownership interests. For the year ended December 31,
1997, fees incurred and paid to these
F-47
<PAGE>
ADVANCED COMMUNICATION RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 9--RELATED PARTY TRANSACTIONS (CONTINUED)
companies amounted to $125,000. There were no fees incurred during the year
ended December 31, 1996.
RENT EXPENSE
The Company occupies office space leased by an affiliate. Total rent charged
to operations for the years ended December 31, 1997 and 1996 were approximately
$90,000 and $75,000, respectively. For the nine months ended September 30, 1998
total rent expense charged to operations was approximately $71,000. These
amounts will not be repaid.
DUE FROM AFFILIATE
During 1996, the Company made non-interest bearing advances to an affiliate.
These advances were repaid in full during 1997.
DUE TO/FROM STOCKHOLDERS
Advances to and from the Company's stockholders are non-interest bearing and
are due (payable) on demand.
NOTE 10--COMMITMENTS AND CONTINGENCIES
LETTER OF CREDIT
At December 31, 1997, the Company is contingently liable pursuant to a
letter of credit in the amount of $10,000 in favor of a trade organization's
legal defense fund. A certificate of deposit in the amount of $10,000
collateralizes the Company's obligation and is included in other current assets
in the accompanying balance sheets.
ASSIGNMENT OF LEASE
On October 2, 1998, the Company assumed the lease obligation of an
affiliate. Future minimum lease payments, excluding escalation charges, are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C>
1998-Remainder.............................................. $ 29,000
1999........................................................ 120,000
2000........................................................ 124,000
2001........................................................ 128,000
2002........................................................ 131,000
Thereafter.................................................. 33,000
--------
$565,000..
========
</TABLE>
EMPLOYEE AND CONTRACTOR AGREEMENTS
The Company executes agreements with all technical employees and contractors
which contain certain provisions designed to protect the Company's intellectual
property. The agreements provide for an indefinite term, cancellable by either
party upon ten days written notice.
F-48
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
The following Unaudited Pro Forma Consolidated Statement of Operations is
based on the historical consolidated financial statements of USI and the
historical financial statements of ACR and IIT during the periods presented,
adjusted to give effect to those acquisitions.
The Unaudited Pro Forma Consolidated Statement of Operations for the year
ended December 31, 1998 gives effect to the acquisitions as if they had occurred
as of January 1, 1998. The pro forma adjustments are described in the
accompanying notes and are based upon available information and certain
assumptions that management believes are reasonable.
The Unaudited Pro Forma Consolidated Statement of Operations does not
purport to represent what USI's results of operations would actually have been
had the acquisitions in fact occurred on such dates or to project USI's results
of operations for any future date or period. The Unaudited Pro Forma
Consolidated Statement of Operations should be read in conjunction with the
consolidated financial statements of USI, ACR and IIT, and the related notes
thereto, included elsewhere in this Prospectus and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
IIT was purchased in September 1998 and ACR was purchased in October 1998
and have been accounted for under the purchase method of accounting. The total
purchase price for each of the acquisitions has been allocated to the
identifiable tangible and intangible assets and liabilities of the applicable
acquired business based upon their fair values with the remainder allocated to
goodwill.
P-1
<PAGE>
USINTERNETWORKING, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
USI(1) ACR IIT TOTAL ADJUSTMENTS(2) CONSOLIDATED
-------- -------- -------- ---------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 119 $7,489 $6,900 $ 14,508 $ (570)(a) $ 13,938
-------- ------ ------ -------- ------- --------
Costs and expenses:
Cost of sales and services......... 3,111 4,868 3,781 11,760 -- 11,760
Selling, general and administrative
expenses......................... 27,524 2,172 2,299 31,995 3,738 (b) 35,733
Non-cash stock compensation
expense.......................... 231 -- -- 231 -- 231
-------- ------ ------ -------- ------- --------
Operating income (loss)............ (30,747) 449 820 (29,478) (4,308) (33,786)
Interest income.................... (365) -- -- (365) -- (365)
Interest expense................... 2,675 24 6 2,705 -- 2,705
-------- ------ ------ -------- ------- --------
Income (loss) before income taxes.... (33,057) 425 814 (31,818) (4,308) (36,126)
Provision for income taxes........... -- 14 -- 14 -- 14
-------- ------ ------ -------- ------- --------
Net (loss) income.................... $(33,057) $ 411 $ 814 $(31,832) $(4,308) $(36,140)
======== ====== ====== ======== ======= ========
Basic and diluted loss per common
share attributable to common
stockholders....................... $ (38.55)
--------
</TABLE>
- ------------------------
(1) For the period from inception, January 14, 1998, to December 31, 1998.
(2) Pro forma adjustments to the unaudited consolidated statement of operations
for the twelve months ended December 31, 1998 are made to reflect the
following:
(a) To record the elimination of intercompany revenue.
(b) To record amortization of goodwill related to the acquisitions over the
estimated useful life of 5 years. This additional amortization is not
deductible for income tax purposes.
P-2
<PAGE>
USINTERNETWORKING, INC.
[LOGO]
$125,000,000
7% CONVERTIBLE SUBORDINATED NOTES DUE NOVEMBER 1, 2004
AND 5,031,181 SHARES OF COMMON STOCK ISSUABLE
UPON CONVERSION OF THE NOTES
112,701 SHARES OF COMMON STOCK
<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 Company, 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 and the NASD filing fee.
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 34,392
Accounting Fees and Expenses................................ 40,000
Legal Fees and Expenses..................................... 100,000
Printing and Mailing Expenses............................... 50,000
Miscellaneous............................................... 10,000
========
Total....................................................... $234,392
--------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware
("Section 145") permits a Delaware corporation to indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending, or
completed action, suit, or proceeding, whether civil, criminal, administrative,
or investigative (other than an action by or in the right of the corporation) by
reason of the fact that such person is or was a director, officer, employee, or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee, or agent of another corporation, partnership,
joint venture, trust, or other enterprise, against expenses (including
attorneys' fees), judgments, fines, and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit, or
proceeding if such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such person's conduct was unlawful.
In the case of an action by or in the right of the corporation, Section 145
permits the corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that such person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against expenses (including attorneys'
fees) actually and reasonably incurred by such person in connection with the
defense or settlement of such action or suit if he acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interest of the corporation. No indemnification may be made in respect of any
claim, issue, or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
To the extent that a present or former director or officer of a corporation
has been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in the preceding two paragraphs, Section 145 requires
that such person be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection therewith.
Section 145 provides that expenses (including attorneys' fees) incurred by
an officer or director in defending any civil, criminal, administrative, or
investigative action, suit or proceeding may be paid by
II-1
<PAGE>
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.
The Company's Certificate provides that an officer or director of the
Company will not be personally liable to the Company or its 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 the Company
or its stockholders, nor does it relieve the Company or its officers or
directors from compliance with federal or state securities laws. The Certificate
also generally provides that the Company shall indemnify, to the fullest extent
permitted by law, any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit, investigation,
administrative hearing or any other proceeding (each, a "Proceeding") by reason
of the fact that he is or was a director or officer of the Company, or is or was
serving at the request of the Company 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
the Company 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, the best interests of
the Company, or (ii) with respect to any criminal action or proceeding, the
officer or director had reasonable cause to believe his conduct was unlawful.
The Bylaws of the Company provide that it shall 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 a director or officer of the
Company, and may indemnify any employee or agent of the Company in such
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 the best interests of the Company or who had reasonable cause to
believe that his or her conduct was unlawful. Indemnification must be provided
to any director, officer, employee or agent of the Company to the extent such
person has been successful, 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.
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 Company since January 14, 1998.
Further included is the consideration, if any, received by the Company 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.
1. At various times during the period from January 1998 through March 22, 1999,
the Company granted to employees and directors options to purchase an
aggregate of 3,426,869 shares of Common Stock with exercise prices ranging
from $2.64 per share to $6.00 per share. 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.
II-2
<PAGE>
2. On January 14, 1998, the Company issued 625,000 shares of Common Stock to
Christopher R. McCleary for $5,000 in cash.
3. On April 1, 1998, the Company issued 718,750 shares of Common Stock to
Stephen E. McManus and Christopher Poelma for an aggregate purchase price of
$57,500. The purchase price for the Common Stock was paid with cash and
notes payable to the Company.
4. On May 31, 1998, the Company 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. The Company 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 the Company owed him.
5. On June 18, 1998, the Company 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. The Company simultaneously issued 5,833.33
shares of Series A Preferred Stock for $3.5 million to U S WEST. The
purchase price for such shares was paid in cash at the time of issuance.
6. On June 19, 1998, the Company issued 3,000 shares of Series A Preferred
Stock for an aggregate purchase price of $1.6 million to HAGC Partners,
Chris Horgan (who later transferred his interest to his affiliate,
Southeastern Technology Fund, L.P.) and the Account Management Purchasers.
The purchase price for such shares was paid in cash at the time of issuance.
The Company simultaneously issued 1,166.67 shares of Series A Preferred
Stock for a purchase price of $700,002 to USI Partners. The purchase price
for such shares was paid in cash at the time of issuance.
7. On July 27, 1998, the Company issued to Andrew A. Stern 625,000 shares of
Common Stock with a fair market value of $1,000,000. Mr. Stern paid $5,000
in cash for these shares, and the remainder was recorded as a compensation
expense to the Company.
8. On September 8, 1998, the Company issued convertible promissory notes in the
aggregate amount of $9,095,000, together with warrants to purchase 974,450
shares of Common Stock for $3.44 per share, to certain of the existing
holders of the Series A Preferred Stock. The purchase price for such notes
and warrants was paid in cash at the time of issuance. The Company also
issued warrants to purchase 50,000 shares of Common Stock for $16.00 per
share, to IIT as part of the purchase price paid in the acquisition of IIT.
9. On September 22, 1998, the Company issued warrants to purchase 74,404 shares
of Common Stock for $3.36 per share to Trans America Business Credit in
connection with loans the Company obtained from it.
10. On September 30, 1998, the Company issued warrants to purchase 971 shares of
Series B Preferred Stock for $1,050.00 per share, to Venture Lending and
Leasing in connection with loans the Company obtained from it.
11. On October 2, 1998, the Company issued warrants to purchase 50,000 shares of
Common Stock for $16.00 per share, to ACR as part of the purchase price paid
in the acquisition of ACR.
12. On December 16, 1998, the Company issued convertible promissory notes in the
aggregate amount of $8 million to certain of the existing holders of the
Series A Preferred Stock. The purchase price for such notes was paid in cash
at the time of issuance.
13. On December 18, 1998, the Company issued warrants to purchase 17,857 shares
of Common Stock for $3.36 per share, to Leasing Technology, Inc. in
connection with loans the Company obtained from it.
14. On December 24, 1998, the Company issued convertible promissory notes in the
amount of $5 million to U S WEST. The purchase price for such notes was paid
in cash at the time of issuance.
15. On December 31, 1998, the Company 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
II-3
<PAGE>
described above, certain holders of Series A Preferred Stock, and a number
of new investors. Of the total purchase price for such shares, $40,147,500
was paid in cash and $22,095,000 was paid by conversion of outstanding
convertible promissory notes with an equivalent principal amount, all at the
time of issuance.
16. On October 8, 1999, the Company entered into an asset purchase agreement
with Conklin & Conklin, Inc. A portion of the purchase price is to be paid
in shares of the Company's Common Stock in January 2002 in accordance with
the formula set forth in the asset purchase agreement.
17. On October 29, 1999 the Company issued $100,000,000 7% Convertible
Subordinated Notes Due November 1, 2004. The purchase price of such notes
was paid in cash at the time of issuance. The issuance of these notes was
not registered under the Securities Act in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act, and resales of
these Notes have been exempt from registration under Rule 144A.
18. On November 5, 1999 the Company issued $25,000,000 7% Convertible
Subordinated Notes Due November 1, 2004. The purchase price of such notes
was paid in cash at the time of issuance. The issuance of these notes was
not registered under the Securities Act in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act, and resales of
these Notes have been exempt from registration under Rule 144A.
The issuances and resales of the securities above were made in reliance on
one or more exemptions from registration under the Securities Act, including
those provided by Section 4(2) and Rules 144A and 701 thereunder. The purchasers
of these securities represented that they had adequate access, through their
employment with the Company or otherwise, to information about the Company.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
3.1(a) Second Amended and Restated Certificate of Incorporation of
the Company.
3.2(a) Amended and Restated Bylaws of the Company.
4.1(b) Specimen Certificate for shares of Common Stock, $.001 par
value, of the Company.
4.2(c) Indenture for the 7% Convertible Subordinated Notes due
November 1, 2004 between the Company, as issuer, and the
Bank of New York, as Trustee, dated as of October 29, 1999.
5.1(*) Opinion of Latham & Watkins with respect to the validity of
the Common Stock.
10.1(b) Stock Purchase Agreement between the Company and the Initial
Series A Purchasers dated June 18, 1998.
10.2(b) Stock Purchase Agreement between the Company and certain of
the Initial Series A Purchases dated September 18, 1998.
10.3(b) Stock Purchase Agreement between the Company and US WEST
dated June 18, 1998.
10.4(b) Stock Purchase Agreement between the Company and the Account
Management Purchasers dated June 19, 1998.
10.5(b) Stock Purchase Agreement between the Company and HAGC
Partners dated June 19, 1998.
10.6(b) Stock Purchase Agreement between the Company and Chris
Horgen dated June 19, 1998.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.7(b) Stock Purchase Agreement between the Company and USI
Partners, Ltd. dated June 19, 1998.
10.8(b) Stock Purchase Agreement among the Company, IIT Holding,
Inc., Luis Sebastian Alegrett, Michael Mai, Carlos E. Bravo,
and Vicente Perez de Tudela dated August 28, 1998.
10.9(b) Amended and Restated Stock Purchase Agreement among the
Company, Advanced Communication Resources, Inc., Matthew D.
Kanter, The Benjamin Kanter 1997 QSST Trust, the Ronald
Kanter 1997 QSST Trust and David S. Walden dated October 2,
1998.
10.10(b) Stock Purchase Agreement between the Company and certain
other parties dated December 31, 1998.
10.11(b) Amended and Restated Stockholders Agreement between the
Company and certain other parties dated December 31, 1998.
10.12(b) Employment Agreement between the Company and Christopher R.
McCleary dated May 29, 1998.
10.13(b) Employment Agreement between the Company and Stephen E.
McManus dated June 2, 1998.
10.14(b) Employment Agreement between the Company and Andrew A. Stern
dated July 27, 1998.
10.15(b) Employment Agreement between the Company and Jeffrey L.
McKnight dated December 15, 1998.
10.16(b)(e) iMAP Agreement between the Company and US WEST, Inc. dated
January 15, 1999.
10.17(b)(e) Note Purchase Agreement among the Company and the Account
Management Purchasers dated September 8, 1998.
10.18(b)(e) Note Purchase Agreement between the Company and Southeastern
Technology Fund, L.P. dated September 8, 1998.
10.19(b)(e) Software License and Services Agreement between the Company
and Broadvision, Inc. dated July 22, 1998.
10.20(d) Note Purchase Agreement among the Company and the Account
Management Purchasers dated September 8, 1998.
10.21(d) Note Purchase Agreement between the Company and the
Southeastern Technology Fund, L.P. dated September 8, 1998.
10.22(b) Note Purchase Agreement between the Company and certain
other parties dated September 8, 1998.
10.23(d) Note Purchase Agreement between the Company and US WEST,
Inc. dated September 8, 1998.
10.24(b) Note Purchase Agreement between the Company and certain
other parties dated December 16, 1998.
10.25(b) Note Purchase Agreement between the Company and US WEST
dated December 29, 1998.
10.26(b)(e) SiebelNet Agreement between the Company and SiebelNet, Inc.
dated January 31, 1999.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.27(b)(e) Marketing Services Agreement by and between the Company, and
US West Communications Services, Inc. and US WEST Interprise
America, Inc. dated January 31, 1999.
10.28(b) Lease Agreement between Consortium One--Annapolis, LLC and
the Company dated April 3, 1998.
10.29(b) Amended and Restated Stock Option Plan.
10.30(b) Nonqualified Stock Option Agreement between USI and
Christopher McCleary dated March 19, 1999.
10.31(a) Registration Rights Agreement between the Company and Credit
Suisse First Boston Corporation, Morgan Stanley & Co.
Incorporated, Bear, Stearns & Co. Inc., Legg Mason Wood
Walker, Incorporated, Wasserstein Perella Securities, Inc.,
C.E. Unterberg, Towbin and The Robinson-Humphrey Company,
LLC for the benefit of the holders of the 7% Convertible
Subordinated Notes due November 1, 2004.
21.1(a) Subsidiaries of the Company.
23.1(a) Consent of Mahoney Cohen & Company, P.C., independent
auditors (regarding ACR financial statements).
23.2(a) Consent of Bassan & Associados S.C., independent auditors
(regarding IIT financial statements).
23.3(a) Consent of Ernst & Young LLP, independent auditors
(regarding IIT financial statements).
23.4(a) Consent of Ernst & Young LLP, independent auditors
(regarding the Company's financial statements).
23.5(*) Consent of Latham & Watkins (included in Exhibit 5.1).
24.1(a) Power of Attorney (included on signature page).
25.1(a) Form T-1 Statement of Eligibility under the Trust Indenture
Act of 1939, as amended, of Bank of New York as Trustee
under the Indenture for the 7% Convertible Subordinated
Notes due November 1, 2004.
27.1(a) Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment.
(a) Filed herewith.
(b) Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended (Reg. No. 333-70717)
(c) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1999 filed by the Company on November 15,
1999.
(d) Not filed, in accordance with Instruction No. 2 to Item 601 of Regulation
S-K, because the contract is substantially identical to Exhibit 10.22 except
as to the parties thereto and the principal amount of the note.
(e) Confidential treatment obtained as to certain portions.
II-6
<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 Company
pursuant to the provisions contained in the Articles of Incorporation, as
amended, and By-Laws, as amended, of the Company and the laws of the State of
Delaware or otherwise, the Company 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 Company of expenses incurred or paid by a director, officer or
controlling person of the Company 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 Company 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 Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;"
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
II-7
<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 December 21, 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, Harold C. Teubner, Jr.
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>
Chairman of the Board and
/s/ CHRISTOPHER R. MCCLEARY Chief Executive Officer
------------------------------------------- (Principal Executive December 21, 1999
Christopher R. McCleary Officer)
/s/ STEPHEN E. MCMANUS President--E-Commerce
------------------------------------------- Business Unit and December 21, 1999
Stephen E. McManus Director
Executive Vice President
/s/ HAROLD C. TEUBNER, JR. and Chief Financial
------------------------------------------- Officer (Principal December 21, 1999
Harold C. Teubner, Jr. Financial and Accounting
Officer)
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ R. DEAN MEISZER
------------------------------------------- Director December 21, 1999
R. Dean Meiszer
/s/ BENJAMIN DIESBACH
------------------------------------------- Director December 21, 1999
Benjamin Diesbach
/s/ RAY A. ROTHROCK
------------------------------------------- Director December 21, 1999
Ray A. Rothrock
/s/ FRANK A. ADAMS
------------------------------------------- Director December 21, 1999
Frank A. Adams
/s/ WILLIAM F. EARTHMAN
------------------------------------------- Director December 21, 1999
William F. Earthman
/s/ JOHN H. WYANT
------------------------------------------- Director December 21, 1999
John H. Wyant
/s/ JOSEPH R. ZELL
------------------------------------------- Director December 21, 1999
Joseph R. Zell
/s/ MICHAEL C. BROOKS
------------------------------------------- Director December 21, 1999
Michael C. Brooks
/s/ DAVID J. POULIN
------------------------------------------- Director December 21, 1999
David J. Poulin
/s/ CATHY M. BRIENZA
------------------------------------------- Director December 21, 1999
Cathy M. Brienza
</TABLE>
II-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
3.1(a) Second Amended and Restated Certificate of Incorporation of
the Company.
3.2(a) Amended and Restated Bylaws of the Company.
4.1(b) Specimen Certificate for shares of Common Stock, $.001 par
value, of the Company.
4.2(c) Indenture for the 7% Convertible Subordinated Notes due
November 1, 2004, between the Company, as issuer, and the
Bank of New York, as Trustee, dated as of October 29, 1999.
5.1(*) Opinion of Latham & Watkins with respect to the validity of
the Common Stock.
10.1(b) Stock Purchase Agreement between the Company and the Initial
Series A Purchasers dated June 18, 1998.
10.2(b) Stock Purchase Agreement between the Company and certain of
the Initial Series A Purchases dated September 18, 1998.
10.3(b) Stock Purchase Agreement between the Company and US WEST
dated June 18, 1998.
10.4(b) Stock Purchase Agreement between the Company and the Account
Management Purchasers dated June 19, 1998.
10.5(b) Stock Purchase Agreement between the Company and HAGC
Partners dated June 19, 1998.
10.6(b) Stock Purchase Agreement between the Company and Chris
Horgen dated June 19, 1998.
10.7(b) Stock Purchase Agreement between the Company and USI
Partners, Ltd. dated June 19, 1998.
10.8(b) Stock Purchase Agreement among the Company, IIT Holding,
Inc., Luis Sebastian Alegrett, Michael Mai, Carlos E. Bravo,
and Vicente Perez de Tudela dated August 28, 1998.
10.9(b) Amended and Restated Stock Purchase Agreement among the
Company, Advanced Communication Resources, Inc., Matthew D.
Kanter, The Benjamin Kanter 1997 QSST Trust, the Ronald
Kanter 1997 QSST Trust and David S. Walden dated October 2,
1998.
10.10(b) Stock Purchase Agreement between the Company and certain
other parties dated December 31, 1998.
10.11(b) Amended and Restated Stockholders Agreement between the
Company and certain other parties dated December 31, 1998.
10.12(b) Employment Agreement between the Company and Christopher R.
McCleary dated May 29, 1998.
10.13(b) Employment Agreement between the Company and Stephen E.
McManus dated June 2, 1998.
10.14(b) Employment Agreement between the Company and Andrew A. Stern
dated July 27, 1998.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.15(b) Employment Agreement between the Company and Jeffrey L.
McKnight dated December 15, 1998.
10.16(b)(e) iMAP Agreement between the Company and US WEST, Inc. dated
January 15, 1999.
10.17(b)(e) Note Purchase Agreement among the Company and the Account
Management Purchasers dated September 8, 1998.
10.18(b)(e) Note Purchase Agreement between the Company and Southeastern
Technology Fund, L.P. dated September 8, 1998.
10.19(b)(e) Software License and Services Agreement between the Company
and Broadvision, Inc. dated July 22, 1998.
10.20(d) Note Purchase Agreement among the Company and the Account
Management Purchasers dated September 8, 1998.
10.21(d) Note Purchase Agreement between the Company and the
Southeastern Technology Fund, L.P. dated September 8, 1998.
10.22(b) Note Purchase Agreement between the Company and certain
other parties dated September 8, 1998.
10.23(d) Note Purchase Agreement between the Company and US WEST,
Inc. dated September 8, 1998.
10.24(b) Note Purchase Agreement between the Company and certain
other parties dated December 16, 1998.
10.25(b) Note Purchase Agreement between the Company and US WEST
dated December 29, 1998.
10.26(b)(e) SiebelNet Agreement between the Company and SiebelNet, Inc.
dated January 31, 1999.
10.27(b)(e) Marketing Services Agreement by and between the Company, and
US West Communications Services, Inc. and US WEST Interprise
America, Inc. dated January 31, 1999.
10.28(b) Lease Agreement between Consortium One--Annapolis, LLC and
the Company dated April 3, 1998.
10.29(b) Amended and Restated Stock Option Plan.
10.30(b) Nonqualified Stock Option Agreement between the Company and
Christopher McCleary dated March 19, 1999.
10.31(a) Registration Rights Agreement between the Company and Credit
Suisse First Boston Corporation, Morgan Stanley & Co.
Incorporated, Bear, Stearns & Co. Inc., Legg Mason Wood
Walker, Incorporated, Wasserstein Perella Securities, Inc.,
C.E. Unterberg, Towbin and The Robinson-Humphrey Company,
LLC for the benefit of the holders of the 7% Convertible
Subordinated Notes due November 1, 2004.
21.1(a) Subsidiaries of the Registrant.
23.1(a) Consent of Mahoney Cohen & Company, P.C., independent
auditors (regarding ACR financial statements).
23.2(a) Consent of Bassan & Associados S.C., independent auditors
(regarding IIT financial statements).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
23.3(a) Consent of Ernst & Young LLP, independent auditors
(regarding IIT financial statements).
23.4(a) Consent of Ernst & Young LLP, independent auditors
(regarding the Company's financial statements).
23.5(*) Consent of Latham & Watkins (included in Exhibit 5.1).
24.1(a) Power of Attorney (included on signature page).
25.1(a) Form T-1 Statement of Eligibility under the Trust Indenture
Act of 1939, as amended, of Bank of New York, as Trustee,
under the Indenture for the 7% Convertible Subordinated
Notes due November 1, 2004.
27.1(a) Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment.
(a) Filed herewith.
(b) Incorporated by reference to the Company's Registration Statement of Form
S-1, as amended (Reg. No. 333-70717)
(c) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1999 filed by the Company on November 15,
1999.
(d) Not filed, in accordance with Instruction No. 2 to Item 601 of Regulation
S-K, because the contract is substantially identical to Exhibit 10.22 except
as to the parties thereto and the principal amount of the note.
(e) Confidential treatment obtained as to certain portions.
<PAGE>
Exhibit 3.1
SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
USINTERWORKING, INC.
(INCORPORATED JANUARY 14, 1998)
***********
I, Andrew A. Stern, Executive Vice President and Chief Financial
Officer of USinterworking, Inc. (the "Corporation"), a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, do hereby certify that the First Amended and Restated Certificate of
Incorporation of USinterworking, Inc. originally filed with the Secretary of
State of the State of Delaware on December 31, 1998, and amended on March 22,
1999 and April 8 1999, has been amended and restated in accordance with
provisions of Sections 242 and 245 of the General Corporation Law of the State
of Delaware, and, as amended and restated, is set forth in its entirety as
follows:
FIRST. The name of the Corporation is USinterworking, Inc.
SECOND. The address of the registered office of the Corporation in the
State of Delaware is 1209 Orange Street, Wilmington, Delaware, 19801 in New
Castle County. The name of its registered agent at such address is The
Corporation Trust Company.
THIRD. The nature of the business or purposes to be conducted or
promoted is to engage in any lawful act or activity for which corporations may
be organized under the General Corporation Law of the State of Delaware.
FOURTH. The total number of shares of all classes of capital stock
which the Corporation shall have authority to issue is76,000,000 shares,
consisting of 75,000,000 shares of Common Stock with a par value of $.001 per
share (the "Common Stock") and 1,000,000 shares of Preferred Stock with a par
value or $.001 per share (the "Preferred Stock").
A description of the respective classes of stock and a statement of
the designations, powers, preferences and rights, and the qualifications,
limitations and restrictions of the Preferred Stock and Common Stock are as
follows:
<PAGE>
A. COMMON STOCK
1. GENERAL. All shares of Common Stock will be identical and will
entitle the holders thereof to the same rights, powers and privileges. The
rights, powers and privileges of the holders of the Common Stock are subject to
and qualified by the rights of holders of the Preferred Stock.
2. DIVIDENDS. Dividends may be declared and paid on the Common Stock
from funds lawfully available therefor as and when determined by the Board of
Directors and subject to any preferential dividend rights of any then
outstanding Preferred Stock.
3. DISSOLUTION, LIQUIDATION OR WINDING UP. In the event of any
dissolution, liquidation or winding up of the affairs of the Corporation,
whether voluntary or involuntary, each issued and outstanding share of Common
Stock shall entitle the holder thereof to receive an equal portion of the net
assets of the Corporation available for distribution to the holders of Common
Stock, subject to any preferential rights of any then outstanding Preferred
Stock.
4. VOTING RIGHTS. Except as otherwise required by law or this Second
Amended and Restated Certificate of Incorporation, each holder of Common Stock
shall have one vote in respect of each share of stock held of record by such
holder on the books of the Corporation for the election of directors and on all
matters submitted to a vote of stockholders of the Corporation. Except as
otherwise required by law or provided herein, holders of Common Stock shall vote
together with holders of the Preferred Stock as a single class, subject to any
special or preferential voting rights of any then outstanding Preferred Stock.
There shall be no cumulative voting.
B. PREFERRED STOCK
The Preferred Stock may be issued in one or more series at such time
or times and for such consideration or considerations as the Board of Directors
of the Corporation may determine. Each series shall be so designated as to
distinguish the shares thereof from the shares of all other series and classes.
Except as otherwise provided in this Amended and Restated Certificate of
Incorporation, different series of Preferred Stock shall not be construed to
constitute different classes of shares for the purpose of voting by classes.
The Board of Directors is expressly authorized to provide for the
issuance of all or any shares of the undesignated Preferred Stock in one or more
series, each with such designations, preferences, voting powers (or special,
preferential or no voting powers), relative, participating, optional or other
special right, and privileges and such qualifications, limitations or
restrictions thereof as shall be stated in the resolution or resolutions adopted
by the Board of Directors to create such series, and a certificate of said
resolution or resolutions (a "Certificate of Designation") shall be filed in
accordance with the General Corporation Law of the State of Delaware. The
authority of the Board of Directors with respect to each such series shall
include, without limitation of the foregoing, the right to provide that the
shares of each such series may
2
<PAGE>
be: (i) subject to redemption at such time or times and at such price or prices;
(ii) entitled to receive dividends (which may be cumulative or non-cumulative)
at such rates, on such conditions, and at such times, and payable in preference
to, or in such relation to, the dividends payable on any other class or classes
or any other series; (iii) entitled to such rights upon the dissolution of, or
upon any distribution of the assets of, the Corporation, (iv) convertible into,
or exchangeable for, shares of any other class or classes of stock, or of any
other series of the same or any other class or classes of stock of the
Corporation at such price or prices or at such rates of exchange and with such
adjustments, if any; (v) entitled to the benefit of such limitations, if any, on
the issuance of additional shares of such series or shares of any other series
of Preferred Stock; or (vi) entitled to such other preferences, powers,
qualifications, rights and privileges, all as the Board of Directors may deem
advisable and as are not inconsistent with law and the, provisions of this
Second Amended and Restated Certificate of Incorporation.
FIFTH. The Corporation is to have perpetual existence.
SIXTH. The following provisions are included for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its Board of Directors and stockholders:
1. The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors of the Corporation.
2. The Board of Directors of the Corporation is expressly authorized
to adopt, amend or repeal the By-laws of the Corporation, subject to any
limitation thereof contained in the By-laws. The stockholders shall also have
the power to adopt, amend or repeal the By-laws of the Corporation; PROVIDED,
HOWEVER, in addition to any vote of the holders of any class or series of stock
of the Corporation required by law or by this Second Amended and Restated
Certificate of Incorporation, the affirmative vote of the holders of at least
seventy-five percent (75%) of the voting power of all of the then outstanding
shares of the capital stock of the Corporation entitled to vote generally in the
election of directors, voting together as a single class, shall be required to
adopt, amend or repeal any provision of the By-laws of the Corporation.
3. Stockholders of the Corporation may not take any action by written
consent in lieu of a meeting.
4. Special meetings of stockholders may be called at any time only by
the Chief Executive Officer, the Chairman of the Board of Directors (if any) or
a majority of the Board of Directors. Business transacted at any special meeting
of stockholders shall be limited to matters relating to the purpose or purposes
stated in the notice of meeting.
5. The books of the Corporation may be kept at such place within or
without the State of Delaware as the By-laws of the Corporation may provide or
as may be designated from time to time by the Board of Directors of the
Corporation.
SEVENTH.
3
<PAGE>
1. NUMBER OF DIRECTORS. The number of directors which shall constitute
the whole Board of Directors shall be determined by resolution of a majority of
the Board of Directors, but in no event shall the number of directors be less
than three. The number of directors may be decreased at any time and from time
to time by a majority of the directors then in office, but only to eliminate
vacancies existing by reason of the death, resignation, removal or expiration of
the term of one or more directors. The DIRECTORS shall be elected at the annual
meeting of stockholders by such stockholders as have the right to vote on such
election. Directors need not be stockholders of the Corporation.
2. CLASS OF DIRECTOR. The Board of Directors shall be and is divided
into three classes, Class I, Class II and Class III. No one class shall have
more than one director more than any other class.
3. ELECTION OF DIRECTORS. Elections of directors need not be by
written ballot except as and to the extent provided in the By-laws of the
Corporation.
4. TERMS OF OFFICE. Each director shall serve for a term ending on the
date of the third annual meeting following the annual meeting at which such
director was elected; PROVIDED, HOWEVER, that each initial director in Class I
shall serve for a term ending on the date of the annual meeting next following
the end of the Corporation's fiscal year ending December 31, 1999; each initial
director in Class II shall serve for a term ending on the date of the annual
meeting next following the end of the Corporation's fiscal year ending
December 31, 2000; and each initial director in Class III shall serve for a
term ending on the date of the annual meeting next following the end of the
Corporation's fiscal year ending December 31, 2001.
5. ALLOCATION OF DIRECTORS AMONG CLASSES IN THE EVENT OF INCREASES OR
DECREASES IN THE NUMBER OF DIRECTORS. In the event of any increase or decrease
in the authorized number of directors, (i) each director then serving as such
shall nevertheless continue as director of the class of which he or she is a
member until the expiration of such director's current term or his or her prior
death, retirement or resignation and (ii) the newly created or eliminated
directorships resulting from such increase or decrease shall be apportioned by
the Board of Directors among the three classes of directors so as to ensure that
no one class has more than one director more than any other class. To the extent
possible, consistent with the foregoing rule, any newly created directorships
shall be added to those classes whose terms of office are to expire at the
earliest dates following such allocation. No decrease in the number of director
constituting the whole Board of Directors shall shorten the term of an incumbent
director.
6. TENURE. Notwithstanding any provisions to the contrary contained
herein, each director shall hold office until his or her successor is elected
and qualified, or until his or her earlier death, resignation or removal.
7. VACANCIES. Unless and until filled by the stockholders, any vacancy
in the board of directors, however occurring, including a vacancy resulting from
an enlargement of the board of directors, may be filled only by vote of a
majority of the directors then in office, even if less than a quorum, or by a
sole remaining director. A director elected to fill a vacancy shall
4
<PAGE>
be elected for the unexpired term of his or her predecessor in office, if
applicable, and a director chosen to fill a position resulting from an increase
in the number of directors shall hold office until the next election of the
class for which such director shall have been chosen and until his or her
successor is elected and qualified, or until his or her earlier death,
resignation or removal.
8. QUORUM. A majority of the total number of the whole Board of
Directors shall constitute a quorum at all meetings of the Board of Directors.
In the event one or more of the directors shall be disqualified to vote at any
meeting, then the required quorum shall be reduced by one for each such director
so disqualified; PROVIDED, HOWEVER, that in no case shall less than one-third
(1/3) of the number so fixed constitute a quorum. In the absence of a quorum at
any such meeting, a majority of the directors present may adjourn the meeting
from time to time without further notice other than announcement at the meeting,
until a quorum shall be present.
9. ACTION AT MEETING. At any meeting of the Board of Directors at
which a quorum is present, the vote of a majority of those present shall be
sufficient to take any action, unless a different vote is specified by law or
the Corporation's By-laws.
10. REMOVAL. Directors may be removed only for cause. Any one or more
or all of the directors may be removed with cause only by the holders of at
least a majority of the shares then entitled to vote at an election of
directors.
11. STOCKHOLDER NOMINATIONS AND INTRODUCTION OF BUSINESS, ETC. Advance
notice of stockholder nominations for election of directors and other business
to be brought by stockholders before a meeting of stockholders shall be given in
the manner provided in the Corporation's By-laws.
12. RIGHTS OF PREFERRED STOCK. The provisions of this Article are
subject to the rights of the holders of any series of Preferred Stock from time
to time outstanding.
EIGHTH. No director (including any advisory director) of the
Corporation shall be personally liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director notwithstanding
any provision of law imposing such liability; PROVIDED, HOWEVER, that to the
extent provided by applicable law, this provision shall not eliminate the
liability of a director (i) for any breach of the 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 General Corporation Law of the State of Delaware,
or (iv) for any transaction from which the director derived an improper personal
benefit. No amendment to or repeal of this provision shall apply to or have any
effect on the liability or alleged liability of any director for or with respect
to any acts or omissions of such director occurring prior to such amendment or
repeal.
NINTH. The Board of Directors of the Corporation, when evaluating any
offer of another party (a) to make a tender or exchange offer for any equity
security of the Corporation or (b) to effect a business combination, shall, in
connection with the exercise of its judgment in determining what is in the best
interests of the Corporation as whole, be authorized to give due
5
<PAGE>
consideration to any such factors as the Board of Directors determines to be
relevant, including, without Limitation:
(i) the interests of the Corporation's stockholders, including
the possibility that these interests might be best served by the
continued independence of the Corporation;
(ii) whether the proposed transaction might violate federal or
state laws;
(iii) not only the consideration being offered in the proposed
transaction, in relation to the then current market price for the
outstanding capital stock of the Corporation, but also to the market
price for the capital stock of the Corporation over a period of years,
the estimated price that might be achieved in a negotiated sale of the
Corporation as a whole or in part or through orderly liquidation, the
premiums over market price for the securities of other corporations in
similar transactions, current political, economic and other factors
bearing on securities prices and the Corporation's financial condition
and future prospects; and
(iv) the social, legal and economic effects upon employees,
suppliers, customers, creditors and others having similar relationships
with the Corporation, upon the communities in which the Corporation
conducts its business and upon the economy of the state, region and
nation.
In connection with any such evaluation, the Board of Directors is authorized to
conduct such investigations and engage in such legal proceedings as the Board of
Directors may determine.
TENTH.
1. ACTIONS, SUITS AND PROCEEDINGS OTHER THAN BY OR IN THE RIGHT OF THE
CORPORATION. The Corporation shall indemnify each 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 he is or was, or has agreed to become, a director or
officer of the Corporation, or is or was serving, or has agreed to serve, at the
request of the Corporation, as a director, officer or trustee of, or in a
similar capacity with, another corporation partnership, joint venture, trust or
other enterprise (including any employee benefit plan) (all such persons being
referred to hereafter as "Indemnitee"), or by reason of any action alleged to
have been taken or omitted in such capacity, against all expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or on his behalf in connection with such action, suit
or proceeding and any appeal therefrom, if he acted in good faith and in a
manner he 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 his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction or upon a
plea of NOLO CONTENDERE or its
6
<PAGE>
equivalent, shall not, of itself, create a presumption that the person did not
act in good faith and in a manner which he 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 reasonable cause to believe that his conduct
was unlawful. Notwithstanding anything to the contrary in this Article, except
as set forth in Section 6 below, the Corporation shall not indemnify an
Indemnitee seeking indemnification in connection with a proceeding (or part
thereof) initiated by the Indemnitee unless the initiation thereof was approved
by the Board of Directors of the Corporation.
2. ACTIONS OR SUITES OR IN THE RIGHT OF THE CORPORATION. The
Corporation shall indemnify any Indemnitee 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 he is or was, or has agreed to become, a director or
officer of the Corporation, or is or was serving, or has agreed to serve, at the
request of the Corporation, as a director, officer or trustee of, or in a
similar capacity with, another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan), or by reason of any
action alleged to have been taken or omitted in such capacity, against all
expenses (including attorneys' fees) and amounts paid in settlement actually and
reasonably incurred by him or on his behalf in connection with such action, suit
or proceeding and any appeal therefrom, if he acted in good faith and in a
manner he reasonably believed to be in, or not opposed to, the best interests of
the Corporation, except that no indemnification shall 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 of Delaware or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of such liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses (including attorneys' fees)
which the Court of Chancery of Delaware or such other court shall deem proper.
3. INDEMNIFICATION FOR EXPENSES OF SUCCESSFUL PARTY. Notwithstanding
the other provisions of this Article, to the extent that an Indemnitee has been
successful, on the merits or otherwise, in defense of any action, suit or
proceeding referred to in Sections 1 and 2 of this Article, or in defense of any
claim, issue or matter therein, or on appeal from any such action, suit or
proceeding, he shall be indemnified against all expenses (including attorneys'
fees) actually and reasonably incurred by him or on his behalf in connection
therewith. Without limiting the foregoing, if any action, suit or proceeding is
disposed of, on the merits or otherwise (including a disposition without
prejudice), without (i) the disposition being adverse to the Indemnitee, (ii) an
adjudication that the Indemnitee was liable to the Corporation, (iii) a plea of
guilty or NOLO CONTENDERE by the Indemnitee, (iv) an adjudication that the
Indemnitee did not act in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Corporation, and (v) with
respect to any criminal proceeding, an adjudication that the Indemnitee had
reasonable cause to believe his conduct was unlawful, the Indemnitee shall be
considered for the purpose hereof to have been wholly successful with respect
thereto.
4. NOTIFICATION AND DEFENSE OF CLAIM. As a condition precedent to his
right to be indemnified, the Indemnitee must notify the Corporation in writing
as soon as practicable
7
<PAGE>
of any action, suit, proceeding or investigation involving him for which
indemnity will or could be sought. With respect to any action, suit, proceeding
or investigation of which the Corporation is so notified, the Corporation will
be entitled to participate therein at its own expense and/or to assume the
defense thereof at its own expense, with legal counsel reasonably acceptable to
the Indemnitee. After notice from the Corporation to the Indemnitee of its
election so to assume such defense, the Corporation shall not be liable to the
Indemnitee for any legal or other expenses subsequently incurred by the
Indemnitee in correction with such claim, other than as provided below in this
Section 4. The Indemnitee shall have the right to employ his own counsel in
connection with such claim, but the fees and expenses of such counsel incurred
after notice from the Corporation of its assumption of the defense thereof shall
be at the expense of the Indemnitee unless (i) the employment of counsel by the
Indemnitee has been authorized by the Corporation, (ii) counsel to the
Indemnitee shall have reasonably concluded that there may be a conflict of
interest or position on any significant issue between the Corporation and the
Indemnitee in the conduct of the defense of such action, or (iii) the
Corporation shall not in fact have employed counsel to assume the defense of
such action, in each of which cases the fees and expenses of counsel for the
Indemnitee shall be at the expense of the Corporation, except as otherwise
expressly provided by this Article. The Corporation shall not be entitled,
without the consent of the Indemnitee, to assume the defense of any claim
brought by or in the right of the Corporation or as to which counsel for the
Indemnitee shall have reasonably made the conclusion provided for in clause (ii)
above.
5. ADVANCE OF EXPENSES. Subject to the provisions of Section 6 below,
in the event that the Corporation does not assume the defense pursuant to
Section 4 of this Article of any action, suit, proceeding or investigation of
which the Corporation receives notice under this Article, any expenses
(including attorneys' fees) incurred by an Indemnitee in defending a civil or
criminal action, suit, proceeding or investigation or any appeal therefrom shall
be paid by the Corporation in advance of the final disposition of such matter,
PROVIDED, HOWEVER, that the payment of such expenses incurred by an Indemnitee
in advance of the final disposition of such matter shall be made only upon
receipt of an undertaking by or on behalf of the Indemnitee to repay all amounts
so advanced in the event that it shall ultimately be determined that the
Indemnitee is not entitled to be indemnified by the Corporation as authorized in
this Article. Such undertaking may be accepted without reference to the
financial ability of such person to make such repayment.
6. PROCEDURE FOR INDEMNIFICATION. In order to obtain indemnification
or advancement of expenses pursuant to Section 1, 2, 3 or 5 of this Article, the
Indemnitee shall submit to the Corporation a written request, including in such
request such documentation and information as is reasonably available to the
Indemnitee and is reasonably necessary to determine whether and to what extent
the Indemnitee is entitled to indemnification or advancement of expenses. Any
such indemnification or advancement of expenses shall be made promptly, and in
any event within 60 days after receipt by the Corporation of the written request
of the Indemnitee, unless with respect to requests under Section 1, 2 or 5 the
Corporation determines, by clear and convincing evidence, within such 60-day
period that the Indemnitee did not meet the applicable standard of conduct set
forth in Section 1 or 2, as the case may be. Such determination shall be made in
each instance by (a) a majority vote of the directors of the
8
<PAGE>
Corporation who are not at that time parties to the action, suit or proceeding
in question ("disinterested directors"), even though less than a quorum, (b) if
there are no such disinterested directors, or if such disinterested directors so
direct, by independent legal counsel (who may be regular legal counsel to the
corporation) in a written opinion, (c) a majority vote of a quorum of the
outstanding shares of stock of all classes entitled to vote for directors,
voting as a single class, which quorum of the outstanding shares of stock of all
classes entitled to vote for directors, voting as a single class, which quorum
shall consist of stockholders who are not at the time parties to the action,
suit or proceeding in question, or (d) a court of competent jurisdiction.
7. REMEDIES.
The right to indemnification or advances as granted by this Article
shall be enforceable by the Indemnitee in any court of competent jurisdiction if
the corporation denies such request, in whole or in part, or if no disposition
thereof is made within the 60-day period referred to above in Section 6. Unless
otherwise provided by law, the burden of proving that the Indemnitee is not
entitled to indemnification or advancement of expenses under this Article shall
be on the Corporation. Neither the failure of the Corporation to have made a
determination prior to the commencement of such action that indemnification is
proper in the circumstances because the Indemnitee has met the applicable
standard of conduct, nor an actual determination by the Corporation pursuant to
Section 6 that the Indemnitee has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that the Indemnitee has
not met the applicable standard of conduct. The Indemnitee's expenses (including
attorney's fees) incurred in connection with successfully establishing his right
to indemnification, in whole or in part, in any such proceeding shall also be
indemnified by the Corporation.
8. SUBSEQUENT AMENDMENT.
No amendment, termination or repeal of this Article or of the relevant
provisions of the General Corporation Law of the State of Delaware or any other
applicable laws shall affect or diminish in any way the rights of any Indemnitee
to indemnification under the provisions hereof with respect to any action, suit,
proceeding or investigation arising out of or relating to any action,
transactions or facts occurring prior to the final adoption of such amendment,
termination or repeal.
9. OTHER RIGHTS.
The indemnification and advancement of expenses provided by this
Article shall not be deemed exclusive of any other rights to which an Indemnitee
seeking indemnification or advancement of expenses may be entitled under any law
(common or statutory), agreement or vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in any other disinterested directors or otherwise both as to action in
his official capacity and as to action in any other capacity while holding
office for the Corporation, and shall continue as to an Indemnitee who has
ceased to be a director or officer, and shall inure to the benefit of the
estate, heirs, executors and administrators of the Indemnitee. Nothing contained
in this Article shall be deemed to prohibit, and the Corporation is specifically
authorized to enter into, agreements with officers and directors providing
indemnification rights
9
<PAGE>
and procedures different from those set forth in this Article. In addition, the
Corporation may, to the extent authorized from time to time by the Board of
Directors, grant indemnification rights to other employees or agents of the
Corporation or other persons serving the Corporation and such rights may be
equivalent to, greater or less than, those set forth in this Article.
10. PARTIAL INDEMNIFICATION. If an Indemnitee is entitled under any
provision of this Article to indemnification by the Corporation for some or a
portion of the expenses (including attorneys' fees), judgments, fines or amounts
paid in settlement actually and reasonably incurred by him or on his behalf in
connection with any action, suit, proceeding or investigation and any appeal
therefrom but not, however, for the total amount thereof , the Corporation shall
nevertheless indemnify the Indemnitee for the portion of such expenses
(including attorneys, fees), judgments, fines or amounts paid in settlement to
which the Indemnitee is entitled.
11. INSURANCE. The Corporation may purchase and maintain Insurance at
its expense, to protect itself and any director, officer, employee or agent of
the Corporation or another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan) against any expenses,
liability or loss incurred by him in any such capacity, or arising out of his
status as such, whether or not the Corporation would have the power to indemnify
such person against such expense, liability or loss under the General
Corporation Law of the State of Delaware.
12. MERGER OR CONSOLIDATION. If the Corporation is merged into or
consolidated with another corporation and the Corporation is not the surviving
corporation, the surviving corporation shall assume the obligations of the
Corporation under this Article with respect to any action, suit, proceeding or
investigation arising out of or relating to any actions, transactions or facts
occurring prior to the date of such merger or consolidation.
13. SAVINGS CLAUSE. If this Article or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnity each Indemnitee as to any expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement in
connection with any action, suit, proceeding or investigation, whether civil,
criminal or administrative, including an action by or in the right of the
Corporation, to the fullest extent permitted by an applicable portion of this
Article that shall not have been invalidated and to the fullest extent permitted
by applicable law.
14. DEFINITIONS. Terms used herein and defined in Section 145(h) and
Section 145(i) of the General Corporation Law of the State of Delaware shall
have the respective meanings assigned to such terms in such Section 145(h) and
Section 145(i).
15. SUBSEQUENT LEGISLATION. If the General Corporation Law of the
State of Delaware is amended after adoption of this Article to expand further
the indemnification permitted to Indemnitees, then the Corporation shall
indemnify such persons to the fullest extent permitted by the General
Corporation Law of the State of Delaware, as so amended.
10
<PAGE>
ELEVENTH. The Corporation reserves the right to amend or repeal any
provision contained in this Second Amended and Restated Certificate of
Incorporation in the manner prescribed by the laws of the State of Delaware and
all rights conferred upon stockholders are granted subject to this reservation,
PROVIDED, HOWEVER, that in addition to the vote of the holders of any class or
series of stock of the Corporation required by law or by this Second Amended and
Restated Certificate of Incorporation but in addition to any vote of the holders
of any class or series of stock of the Corporation required by law, this Second
Amended and Restated Certificate of Incorporation or a Certificate of
Designation with respect to a series of Preferred Stock, the affirmative vote of
the holders of shares of voting Stock of the Corporation representing at least
seventy-five percent (75%) of the voting power of all of the then outstanding
shares of the capital stock of the Corporation entitled to vote generally in the
election of directors voting together as a single class, shall be required to
(i) reduce or eliminate the number of authorized shares of Common Stock or the
number of authorized shares of Preferred Stock set forth in Article FOURTH or
(ii) amend or repeal, or adopt any provision inconsistent with, Parts A and B of
Article FOURTH and Articles FIFTH, SIXTH, SEVENTH, EIGHTH, NINTH, TENTH and this
Article ELEVENTH of this Second Amended and Restated Certificate of
Incorporation.
IN WITNESS WHEREOF, the undersigned has hereunto signed his name and
affirms that the statements made in this Second Amended and Restated Certificate
of Incorporation are true under the penalties of perjury this 14th day of April,
1999.
/S/ WILLIAM T. PRICE
-------------------------------
William T. Price
Vice President and Secretary
11
<PAGE>
Exhibit 3.2
AMENDED AND RESTATED
BY-LAWS
OF
USINTERNETWORKING, INC.
<PAGE>
BY-LAWS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
ARTICLE 1. STOCKHOLDERS...........................................................................................3
1.1. PLACE OF MEETING...........................................................................3
1.2. ANNUAL MEETING ............................................................................3
1.3. SPECIAL MEETING............................................................................3
1.4. NOTICE OF MEETINGS.........................................................................3
1.5. VOTING LIST................................................................................3
1.6. QUORUM.....................................................................................4
1.7. ADJOURNMENTS...............................................................................4
1.8. VOTING AND PROXIES.........................................................................4
1.9. ACTION AT MEETING..........................................................................5
1.10. INTRODUCTION OF BUSINESS AT MEETINGS......................................................6
1.11. ACTION WITHOUT MEETING....................................................................8
ARTICLE 2. DIRECTORS..............................................................................................8
2.1. GENERAL POWERS.............................................................................8
2.2. NUMBER: ELECTION AND QUALIFICATION.........................................................8
2.3. CLASSES OF DIRECTORS.......................................................................9
2.4. TERMS IN OFFICE............................................................................9
2.5. ALLOCATION OF DIRECTORS AMONG CLASSES IN THE EVENT OF INCREASES OR
DECREASES IN THE NUMBER OF DIRECTORS..................................................9
2.6. TENURE.....................................................................................9
2.7. VACANCIES..................................................................................9
2.8. RESIGNATION................................................................................9
2.9. REGULAR MEETINGS...........................................................................9
2.10. SPECIAL MEETINGS..........................................................................9
2.11. NOTICE OF SPECIAL MEETING................................................................10
2.12. MEETINGS BY TELEPHONE CONFERENCE CALLS...................................................10
2.13. QUORUM...................................................................................10
2.14. ACTION AT MEETING........................................................................10
2.15. ACTION BY WRITTEN CONSENT................................................................10
2.16. REMOVAL..................................................................................10
2.17. COMMITTEES...............................................................................10
2.18. COMPENSATION OF DIRECTORS................................................................11
2.19. AMENDMENTS TO ARTICLE....................................................................11
ARTICLE 3. OFFICERS..............................................................................................11
3.1. ENUMERATION...............................................................................11
3.2. ELECTION..................................................................................12
3.3. QUALIFICATION.............................................................................12
i
<PAGE>
3.4. TENURE....................................................................................12
3.5. RESIGNATION AND REMOVAL...................................................................12
3.6. VACANCIES.................................................................................12
3.7. CHAIRMAN OF THE BOARD AND VICE-CHAIRMAN OF THE BOARD......................................12
3.8. CHIEF EXECUTIVE OFFICER...................................................................12
3.9. PRESIDENT.................................................................................13
3.10. VICE PRESIDENTS..........................................................................13
3.11. SECRETARY AND ASSISTANT SECRETARIES......................................................13
3.12. TREASURER AND ASSISTANT TREASURERS.......................................................14
3.13. SALARIES.................................................................................14
3.14. ACTION WITH RESPECT TO SECURITIES OF OTHER CORPORATIONS..................................14
ARTICLE 4. CAPITAL STOCK.........................................................................................14
4.1. ISSUANCE OF STOCK.........................................................................14
4.2. CERTIFICATES OF STOCK.....................................................................14
4.3. TRANSFERS.................................................................................15
4.4. LOST, STOLEN OR DESTROYED CERTIFICATES....................................................15
4.5. RECORD DATE...............................................................................15
ARTICLE 5. GENERAL PROVISIONS....................................................................................16
5.1. FISCAL YEAR...............................................................................16
5.2. CORPORATE SEAL............................................................................16
5.3. NOTICES...................................................................................16
5.4. WAIVER OF NOTICE..........................................................................16
5.5. EVIDENCE OF AUTHORITY.....................................................................16
5.6. FACSIMILE SIGNATURES......................................................................16
5.7. RELIANCE UPON BOOKS, REPORTS AND RECORDS..................................................16
5.8. TIME PERIODS..............................................................................17
5.9. CERTIFICATE OF INCORPORATION..............................................................17
5.10. TRANSACTIONS WITH INTERESTED PARTIES.....................................................17
5.11. SEVERABILITY.............................................................................17
5.12. PRONOUNS.................................................................................18
ARTICLE 6. AMENDMENTS............................................................................................18
6.1. BY THE BOARD OF DIRECTORS.................................................................18
6.2. BY THE STOCKHOLDERS.......................................................................18
</TABLE>
ii
<PAGE>
AMENDED AND RESTATED
BY-LAWS
OF
USINTERNETWORKING, INC. (the "Corporation")
ARTICLE 1
STOCKHOLDERS
1.1 PLACE OF MEETING. All meetings of stockholders shall be held at
such place within or without the State of Delaware as may be designated from
time to time by the Chairman of the Board (if any), the board of directors of
the Corporation (the "Board of Directors") or the Chief Executive Officer or, if
not so designated, at the registered office of the Corporation.
1.2 ANNUAL MEETING . The annual meeting of stockholders for the
election of directors and for the transaction of such other business as may
properly be brought before the meeting shall be held on a date to be fixed by
the Chairman of the Board (if any), Board of Directors or the Chief Executive
Officer (which date shall not be a legal holiday in the place where the meeting
is to be held) at the time and place to be fixed by the Chairman of the Board,
the Board of Directors or the Chief Executive Officer and stated in the notice
of the meeting.
1.3 SPECIAL MEETING. Special meetings of stockholders may be called at
any time by the Chairman of the Board (if any), a majority of the Board of
Directors or the Chief Executive Officer and shall be held at such place, on
such date and at such time as shall be fixed by the Board of Directors or the
person calling the meeting. Business transacted at any special meeting of
stockholders shall be limited to matters relating to the purpose or purposes
stated in the notice of meeting.
1.4 NOTICE OF MEETINGS. Except as otherwise provided by law, written
notice of each meeting of stockholders, whether annual or special, shall be
given not less than 10 nor more than 60 days before the date of the meeting to
each stockholder entitled to vote at such meeting. The notices of all meetings
shall state the place, date and hour of the meeting. The notice of a special
meeting shall state, in addition, the purpose or purposes for which the meeting
is called. If mailed, notice is given when deposited in the United States mail,
postage prepaid, directed to the stockholder at his or her address as it appears
on the records of the Corporation.
1.5 VOTING LIST. The officer who has charge of the stock ledger of the
Corporation shall prepare, at least 10 days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
10 days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in
3
<PAGE>
the notice of the meeting, or if not so specified, at the place where the
meeting is to be held. The list shall also be produced and kept at the time and
place of the meeting during the whole time of the meeting, and may be inspected
by any stockholder who is present. This list shall presumptively determine the
identity of the stockholders entitled to vote at the meeting and the number of
shares held by each of them.
1.6 QUORUM. Except as otherwise provided by law, the Certificate of
Incorporation or these By-Laws, the holders of a majority of the shares of the
capital stock of the Corporation issued and outstanding and entitled to vote at
the meeting, present in person or represented by proxy, shall constitute a
quorum for the transaction of business. Shares held by brokers which such
brokers are prohibited from voting (pursuant to their discretionary authority on
behalf of beneficial owners of such shares who have not submitted a proxy with
respect to such shares) on some or all of the matters before the stockholders,
but which shares would otherwise be entitled to vote at the meeting ("Broker
Non-Votes") shall be counted, for the purpose of determining the presence or
absence of a quorum, toward the total voting power of the shares of capital
stock of the Corporation. If a quorum has been established for the purpose of
conducting the meeting, a quorum shall be deemed to be present for the purpose
of all votes to be conducted at such meeting, provided that where a separate
vote by a class or classes, or series thereof, is required, a majority of the
voting power of the shares of such class or classes, or series, present in
person or represented by proxy shall constitute a quorum entitled to take action
with respect to that vote on that matter. If a quorum shall fail to attend any
meeting, the chairman of the meeting or the holders of a majority of the voting
power of the shares of stock entitled to vote who are present, in person or by
proxy, may adjourn the meeting to another place, date, or time.
1.7 ADJOURNMENTS. Any meeting of stockholders may be adjourned to any
other time and to any other place at which a meeting of stockholders may be held
under these By-Laws by the stockholders present or represented at the meeting
and entitled to vote, although less than a quorum, or, if no stockholder is
present, by any officer entitled to preside at or to act as Secretary of such
meeting. It shall not be necessary to notify any stockholder of any adjournment
of less than 30 days if the time and place of the adjourned meeting are
announced at the meeting at which adjournment is taken, unless after the
adjournment a new record date is fixed for the adjourned meeting. At the
adjourned meeting, the Corporation may transact any business which might have
been transacted at the original meeting.
1.8 VOTING AND PROXIES. At any meeting of the stockholders, each
stockholder shall have one vote for each share of stock entitled to vote at such
meeting held of record by such stockholder and a proportionate vote for each
fractional share so held, unless otherwise provided in the Certificate of
Incorporation. Each stockholder of record entitled to vote at a meeting of
stockholders, or to express consent or dissent to corporate action in writing
without a meeting, may vote or express such consent or dissent in person or may
authorize another person or persons to vote or act for such stockholder by
written proxy executed by such stockholder or his or her authorized agent or by
a transmission permitted by law and delivered to the Secretary of the
Corporation. No such proxy shall be voted or acted upon after three years from
the date of its execution, unless the proxy expressly provides for a longer
period. Any copy, facsimile telecommunication or other reliable reproduction of
the writing or transmission created pursuant
4
<PAGE>
to this Section 1.8 may be substituted or used in lieu of the original writing
or transmission for any and all purposes for which the original writing or
transmission could be used, provided that such copy, facsimile telecommunication
or reproduction shall be a complete reproduction of the entire original writing
or transmission.
All voting, including on the election of directors but
excepting where otherwise required by law or the Certificate of Incorporation,
may take place via a voice vote. Any vote not taken by voice shall be taken by
ballots, each of which shall state the name of the stockholder or proxy voting
and such other information as may be required under the procedure established
for the meeting.
The Corporation may, and to the extent required by law or the
Certificate of Incorporation, shall, in advance of any meeting of stockholders,
appoint one or more inspectors to act at such meeting and make a written report
thereof. The Corporation may designate one or more persons as alternate
inspectors to replace any inspector who fails to act. If no inspector or
alternate is able to act at a meeting of stockholders, the person presiding at
such meeting may, and to the extent required by law or the Certificate of
Incorporation, shall, appoint one or more inspectors to act at such meeting.
Each inspector, before entering upon the discharge of his duties, shall take and
sign an oath faithfully to execute the duties of inspector with strict
impartiality and according to the best of his or her ability.
1.9 ACTION AT MEETING. When a quorum is present at any meeting of
stockholders, the holders of a majority of the stock present or represented and
voting on a matter (or if there are two 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 such
matter) shall decide any matter to be voted upon by the stockholders at such
meeting, except when a different vote is required by express provision of law,
the Certificate of Incorporation or these By-Laws. Any election by stockholders
shall be determined by a plurality of the votes cast by the stockholders
entitled to vote at the election. Except as otherwise provided by the
Certificate of Incorporation, all elections of directors shall be determined by
a plurality of the votes cast, and except as otherwise required by law or the
Certificate of Incorporation, all other matters shall be determined by a
majority of the votes cast affirmatively or negatively. For the purposes of this
paragraph, Broker Non-Votes represented at the meeting but not permitted to vote
on a particular matter shall not be counted, with respect to the vote on such
matter, in the number of (a) votes cast, (b) votes cast affirmatively, or (c)
votes cast negatively.
1.10 INTRODUCTION OF BUSINESS AT MEETINGS.
A. ANNUAL MEETINGS OF STOCKHOLDERS.
(1) Nominations of persons for election to the Board of
Directors and the proposal of business to be considered by the
stockholders may be made at an annual meeting of stockholders (a)
pursuant to the Corporation's notice of meeting, (b) by or at the
direction of the Board of Directors or (c) by any stockholder of the
Corporation who was a stockholder of record at the time of giving of
notice provided for in this Section 1.
5
<PAGE>
10, who is entitled to vote at the meeting and who complies with the
notice procedures set forth in this Section 1.10.
(2) For nominations or other business to be properly brought
before an annual meeting by a stockholder pursuant to clause (c) of
paragraph (A)(1) of this Section 1.10, the stockholder must have given
timely notice thereof in writing to the Secretary of the Corporation
and such other business must otherwise be a proper matter for
stockholder action. To be timely, a stockholders notice shall be
delivered to the Secretary at the principal executive offices of the
Corporation not later than the close of business on the one hundred
twentieth (120th) day nor earlier than the close of business on the one
hundred fiftieth (150th) day prior to the first anniversary of the date
of the proxy statement delivered to stockholders in connection with the
preceding year's annual meeting provided, however, that if either (i)
the date of the annual meeting is more than thirty (30) days before or
more than sixty (60) days after such an anniversary date or (ii) no
proxy statement was delivered to stockholders in connection with the
preceding year's annual meeting, notice by the stockholder to be timely
must be so delivered not earlier than the close of business on the
ninetieth (90th) day prior to such annual meeting and not later than
the close of business on the later of the sixtieth (60th) day prior to
such annual meeting or the close of business on the tenth (10th) day
following the day on which public announcement of the date of such
meeting is first made by the Corporation. Such stockholder's notice
shall set forth (a) as to each person whom the stockholder proposes to
nominate for election or reelection as a director, all information
relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") (including such
person's written consent to being named in the proxy statement as a
nominee and to serving as a director if elected); (b) as to any other
business that 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 and
any material interest in such business of such stockholder and the
beneficial. owner, if any, on whose behalf the proposal is made; and
(c) as to the stockholder giving the notice and the beneficial owner,
if any, on whose behalf the nomination or proposal is made (i) the name
and address of such stockholder, as they appear on the Corporation's
books, and of such beneficial owner and (ii) the class and number of
shares of capital stock of the Corporation that are owned beneficially
and held of record by such stockholder and such beneficial owner.
(3) Notwithstanding anything in the second sentence of
paragraph (A)(2) of this Section 1.10 to the contrary, in the event
that the number of directors to be elected to the Board of Directors of
the Corporation is increased and there is no public announcement by the
Corporation naming all of the nominees for director or specifying the
size of the increased Board of Directors at least seventy (70) days
prior to the first anniversary of the preceding year's annual meeting
(or, if the annual meeting is held more than thirty (30) days before or
sixty (60) days after such anniversary date, at least seventy (70) days
prior to such annual meeting), a stockholder's notice required by this
6
<PAGE>
Section 1. 10 shall also be considered timely, but only with respect to
nominees for any new positions created by such increase, if it shall be
delivered to the Secretary at the principal executive office of the
Corporation not later than the close of business on the tenth (10th)
day following the day on which such public announcement is first made
by the Corporation.
B. SPECIAL MEETINGS OF STOCKHOLDERS. Only such business shall
be conducted at a special meeting of stockholders as shall have been brought
before the meeting pursuant to the Corporation's notice of meeting.
Nominations of persons for election to the Board of Directors may be made at
a special meeting of stockholders at which directors are to be elected
pursuant to the Corporation's notice of meeting (a) by or at the direction of
the Board of Directors or (b) provided that the Board of Directors has
determined that directors shall be elected at such meeting, by any
stockholder of the Corporation who is a stockholder of record at the time of
giving of notice of the special meeting, who shall be entitled to vote at the
meeting and who complies with the notice procedures set forth in this Section
1.10. If the Corporation calls a special meeting of stockholders for the
purpose of electing one or more directors to the Board of Directors, any such
stockholder may nominate a person or persons (as the case may be), for
election to such position(s) as specified in the Corporation's notice of
meeting, if the stockholder's notice required by paragraph (A)(2) of this
Section 1.10 shall be delivered to the Secretary at the principal executive
offices of the Corporation not earlier than the ninetieth (90th) day prior to
such special meeting nor later than the later of (x) the close of business of
the sixtieth (60th) day prior to such special meeting or (y) the close of
business of the tenth (10th) day following the day on which public
announcement is first made of the date of such special meeting and of the
nominees proposed by the Board of Directors to be elected at such meeting.
C. GENERAL.
(1) Only such persons who are nominated in accordance with
the procedures set forth in this Section 1.10 shall be eligible to
serve as directors and only such business shall be conducted at a
meeting of stockholders as shall have been brought before the
meeting in accordance with the procedures set forth in this Section
1.10 Except as otherwise provided by law, the Certificate of
Incorporation or these By-Laws, the chairman of the meeting shall
have the power and duty to determine whether a nomination or any
business proposed to be brought before the meeting was made or
proposed, as the case may be, in accordance with the procedures set
forth in this Section 1.10 and, if any proposed nomination or
business is not in compliance herewith, to declare that such
defective proposal or nomination shall be disregarded.
(2) For purposes of this Section 1.10, "public
announcement" shall mean disclosure in a press release reported by
the Dow Jones News Service, Associated Press or comparable national
news service or in a document publicly filed by the Corporation with
the Securities and Exchange Commission pursuant to Section 13, 14 or
15(d) of the Exchange Act.
7
<PAGE>
(3) Notwithstanding the foregoing provisions of this
Section 1.10, a stockholder shall also comply with all applicable
requirements of the Exchange Act and the rules and regulations
thereunder with respect to the matters set forth herein. Nothing in
this Section 1.10 shall be deemed to affect any rights (i) of
stockholders to request inclusion of proposals in the Corporation's
proxy statement pursuant to Rule 14a-8 under the Exchange Act or
(ii) of the holders of any series of Preferred Stock to elect
directors under specified circumstances.
1.11 ACTION WITHOUT MEETING. Stockholders of the Corporation may not
take any action by written consent in lieu of a meeting. Notwithstanding any
other provision of law, the Certificate of Incorporation or these By-Laws, and
notwithstanding the fact that a lesser percentage may be specified by law, the
affirmative vote of the holders of at least seventy-five percent (75%) of the
votes which all the stockholders would be entitled to cast at any annual
election of directors or class of directors shall be required to amend or
repeal, or to adopt any provision inconsistent with, this Section 1.11.
ARTICLE 2
DIRECTORS
2.1 GENERAL POWERS. The business and affairs of the Corporation shall
be managed by or under the direction of a Board of Directors, who may exercise
all of the powers of the Corporation except as otherwise provided by law or the
Certificate of Incorporation. In the event of a vacancy in the Board of
Directors, the remaining directors, except as otherwise provided by law or the
Certificate of Incorporation, may exercise the powers of the full Board of
Directors until the vacancy is filled.
2.2 NUMBER: ELECTION AND QUALIFICATION. The number of directors which
shall constitute the whole Board of Directors shall be determined by resolution
of the Board of Directors, but in no event shall be less than three. The number
of directors may be decreased at any time and from time to time by a majority of
the directors then in office, but only to eliminate vacancies existing by reason
of the death, resignation, removal or expiration of the ten-n of one or more
directors. The directors shall be elected at the annual meeting of stockholders
by such stockholders as have the right to vote on such election. Directors need
not be stockholders of the Corporation.
2.3 CLASSES OF DIRECTORS. The Board of Directors shall be and is
divided into three classes: Class I, Class II and Class III. No one class shall
have more than one director more than any other class.
2.4 TERMS IN OFFICE. Each director shall serve for a term ending on the
date of the third annual meeting following the annual meeting at which such
director was elected; provided, however, that each initial director in Class I
shall serve for a term ending on the date of the annual meeting following the
end of the Corporation's fiscal year ending December 31, 1999; each initial
director in Class II shall serve for a term ending on the date of the annual
meeting following the end of the Corporation's fiscal year ending December 31,
2000; and each initial
8
<PAGE>
director in Class III shall serve for a term ending on the date of the annual
meeting following the end of the Corporation's fiscal year ending December 31,
2001.
2.5 ALLOCATION OF DIRECTORS AMONG CLASSES IN THE EVENT OF INCREASES OR
DECREASES IN THE NUMBER OF DIRECTORS. In the event of any increase or decrease
in the authorized number of directors, (i) each director then serving as such
shall nevertheless continue as director of the class of which he or she is a
member until the expiration of such director's current term or his or her prior
death, retirement or resignation and (ii) the newly created or eliminated
directorships resulting from such increase or decrease shall be apportioned by
the Board of Directors among the three classes of directors, subject to Section
2.3. To the extent possible, consistent with the foregoing rule, any newly
created directorships shall be added to those classes whose terms of office are
to expire at the earliest dates following such allocation, unless otherwise
provided for from time to time by resolution adopted by a majority of the
directors then in office, although less than a quorum. No decrease in the number
of directors constituting the whole Board of Directors shall shorten the term of
an incumbent Director.
2.6 TENURE. Notwithstanding any provisions to the contrary contained
herein, each director shall hold office until his or her successor is elected
and qualified, or until his or her earlier death, resignation or removal.
2.7 VACANCIES. Unless and until filled by the stockholders, any vacancy
in the Board of Directors, however occurring, including a vacancy resulting from
an enlargement thereof, may be filled by vote of a majority of the directors
then in office, although less than a quorum, or by a sole remaining director. A
director elected to fill a vacancy shall be elected for the unexpired term of
his or her predecessor in office, and a director chosen to fill a position
resulting from an increase in the number of directors shall hold office until
the next annual meeting of stockholders at which directors of the class to which
such position belongs are to be elected and until his or her successor is
elected and qualified, or until his or her earlier death, resignation or
removal.
2.8 RESIGNATION. Any director may resign by delivering his or her
written resignation to the Corporation at its principal office or to the Chief
Executive Officer or Secretary. 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.
2.9 REGULAR MEETINGS. Regular meetings of the Board of Directors may be
held without notice at such time and place, either within or without the State
of Delaware, as shall be determined from time to time by the Board of Directors;
provided that any director who is absent when such a determination is made shall
be given notice of the determination. Directors may be held without notice
immediately after and at the same place as the annual meeting of Regular
meetings of the Board of Directors shall be held at such place or places, on
such date or dates, and at such time or times as shall have been established by
the Board of Directors and publicized among all directors. A notice of each
regular meeting shall not be required.
2.10 SPECIAL MEETINGS Special meetings of the Board of Directors may be
held at any time and place, within or without the State of Delaware, designated
in a call by the Chairman of
9
<PAGE>
the Board (if any), the Chief Executive Officer, two or more directors, or by
one director in the event that there is only a single director in office.
2.11 NOTICE OF SPECIAL MEETING. Notice of any special meeting of
directors shall be given to each director by the Secretary or by the officer or
one of the directors calling the meeting. Notice shall be duly given to each
director (i) by giving notice to such director in person or by telephone at
least 48 hours in advance of the meeting, (ii) by sending a telegram or
delivering written notice by facsimile transmission or by hand, to his or her
last known business or home address at least 48 hours in advance of the meeting,
or (iii) by mailing written notice to his or her last known business or home
address at least 72 hours in advance of the meeting. A notice or waiver of
notice of a meeting of the Board of Directors need not specify the purposes of
the meeting.
2.12 MEETINGS BY TELEPHONE CONFERENCE CALLS. Directors or any members
of any committee designated by the Board of Directors may participate in a
meeting of the Board of Directors or such committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation by such
means shall be deemed to constitute presence in person at such meeting.
2.13 QUORUM. A majority of the total number of the whole Board of
Directors shall constitute a quorum at all meetings of the Board of Directors.
In the event one or more of the directors shall be disqualified to vote at any
meeting, then the required quorum shall be reduced by one for each such director
so disqualified; provided, however, that in no case shall less than one-third
(1/3) of the total number of the whole Board of Directors constitute a quorum.
In the absence of a quorum at any such meeting, a majority of the directors
present may adjourn the meeting from time to time without further notice other
than announcement at the meeting, until a quorum shall be present.
2.14 ACTION AT MEETING. At any meeting of the Board of Directors at
which a quorum is present, the vote of a majority of those present shall be
sufficient to take any action, unless a different vote is specified by law, the
Certificate of Incorporation or these By-Laws.
2.15 ACTION BY WRITTEN CONSENT. Any action required or permitted to be
taken at any meeting of the Board of Directors or of any committee of the Board
of Directors may be taken without a meeting, if all members of the Board of
Directors or committee, as the case may be, consent to such action in writing,
and the written consents are filed with the minutes of proceedings of the Board
of Directors or committee.
2.16 REMOVAL. Any one or more or all of the directors may be removed
with cause only by the holders of at least a majority of the shares then
entitled to vote at an election of directors.
2.17 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 of
Directors may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any
10
<PAGE>
meeting of such committee. In the absence or disqualification of a member of a
committee, the member or members of such committee present at any meeting and
not disqualified from voting, whether or not such member or members constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at such meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of Directors
and subject to the provisions of the General Corporation Law of the State of
Delaware, shall have and may exercise all the powers and authority of the Board
of Directors in the management of the business and affairs of the Corporation
and may authorize the seal of the Corporation to be affixed to all papers which
may require it. Each such committee shall keep minutes and make such reports as
the Board of Directors may from time to time request. Except as the Board of
Directors may otherwise determine or as provided herein, any committee may make
rules for the conduct of its business, but unless otherwise provided by the
directors or in such rules, its business shall be conducted as nearly as
possible in the same manner as is provided in these By-Laws for the Board of
Directors. Adequate provisions shall be made for notice to members of all
meeting of committees. One-third (1/3) of the members of any committee shall
constitute a quorum unless the committee shall consist of one (1) or two (2)
members, in which event one (1) member shall constitute a quorum; and all
matters shall be determined by a majority vote of the members present. Action
may be taken by any committee without a meeting if all members thereof consent
thereto in writing, and the writing or writings are filed with the minutes of
the proceedings of such committee.
2.18 COMPENSATION OF DIRECTORS. Directors may be paid such compensation
for their services and such reimbursement for expenses of attendance at meetings
as the Board of Directors may from time to time determine. No such payment shall
preclude any director from serving the Corporation or any of its parent or
subsidiary corporations in any other capacity and receiving compensation for
such service.
2.19 AMENDMENTS TO ARTICLE. Notwithstanding any other provisions of
law, the Certificate of Incorporation or these By-Laws, and notwithstanding the
fact that a lesser percentage may be specified by law, the affirmative vote of
the holders of a least seventy-five percent (75%) of the votes which all the
stockholders would be entitled to cast at any annual election of directors or
class of directors shall be required to amend or repeal, or to adopt any
provision inconsistent with, this Article 2.
ARTICLE 3
OFFICERS
3.1 ENUMERATION. The officers of the Corporation shall consist of a
Chief Executive Officer, a President, a Secretary, a Treasurer and such other
officers with such other titles as the Board of Directors shall determine,
including, but not limited to, a Chairman of the Board, a Vice-Chairman of the
Board, and one or more Vice Presidents, Assistant Treasurers and Assistant
Secretaries. The Board of Directors may appoint such other officers as it may
deem appropriate.
11
<PAGE>
3.2 ELECTION. The Chief Executive Officer, President, Treasurer and
Secretary shall be elected annually by the Board of Directors at its first
meeting following the annual meeting of stockholders. Other officers may be
appointed by the Board of Directors at such meeting or at any other meeting.
3.3 QUALIFICATION. No officer need be a stockholder. Any two or more
offices may be held by the same person.
3.4 TENURE. Except as otherwise provided by law, by the Certificate of
Incorporation or by these By-Laws, each officer shall hold office until his or
her successor is elected and qualified, unless a different term is specified in
the vote choosing or appointing such officer, or until his or her earlier death,
resignation or removal.
3.5 RESIGNATION AND REMOVAL. Any officer may resign by delivering his
or her written resignation to the Chairman of the Board (if any), to the Board
of Directors at a meeting thereof, to the Corporation at its principal office or
to the Chief Executive Officer or Secretary. 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.
Any officer may be removed at any time, with or without cause, by
vote of a majority of the entire number of directors then in office.
Except as the Board of Directors may otherwise determine, no
officer who resigns or is removed shall have any right to any compensation as an
officer for any period following his or her resignation or removal, or any right
to damages on account of such removal, whether his or her compensation be by the
month or by the year or otherwise, unless such compensation is expressly
provided in a duly authorized written agreement with the Corporation.
3.6 VACANCIES. The Board of Directors may fill any vacancy occurring in
any office for any reason and may, in its discretion, leave unfilled for such
period as it may determine any offices other than those of President, Treasurer
and Secretary. Each such successor shall hold office for the unexpired term of
his predecessor and until his or her successor is elected and qualified, or
until his or her earlier death, resignation or removal.
3.7 CHAIRMAN OF THE BOARD AND VICE-CHAIRMAN OF THE BOARD. The Chairman
of the Board, if any, shall preside at all meetings of the Board of Directors
and stockholders at which he or she is present and shall perform such duties and
possess such powers as are designated by the Board of Directors. If the Board of
Directors appoints a Vice-Chairman of the Board, he or she shall, in the absence
or disability of the Chairman of the Board, perform the duties and exercise the
powers of the Chairman of the Board and shall perform such other duties and
possess such other powers as may from time to time be designated by the Board of
Directors.
3.8 CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall, subject
to the direction of the Board of Directors, have general charge and supervision
of the business of the Corporation. Unless otherwise provided by the Board of
Directors, the Chief Executive Officer shall preside at all meetings of the
stockholders, and, if a director, at all meetings of the Board of
12
<PAGE>
Directors. Unless the Board of Directors has designated another officer as the
Chief Executive Officer, the Chief Executive Officer shall be the Chief
Executive Officer of the Corporation. The Chief Executive Officer shall perform
such other duties and shall have such other powers as the Board of Directors may
from time to time prescribe. The Chief Executive Officer shall have the power to
enter into contracts and otherwise bind the Corporation in matters arising in
the ordinary course of the Corporation's business.
3.9 PRESIDENT. The President shall perform such duties and possess such
powers as the Board of Directors or the Chief Executive Officer may from time to
time prescribe. In the event of the absence, inability or refusal to act of the
Chief Executive Officer, the President shall perform the duties of the Chief
Executive Officer and, when so performing, shall have all the powers of and be
subject to all the restrictions upon the Chief Executive Officer. Unless
otherwise determined by the Board of Directors, the President shall have the
power to enter into contracts and otherwise bind the Corporation in matters
arising in the ordinary course of the Corporation's business.
3.10 VICE PRESIDENTS. Any Vice President shall perform such duties and
possess such powers as the Board of Directors or the Chief Executive Officer may
from time to time prescribe. In the event of the absence, inability or refusal
to act of the President, the Vice President (or if there shall be more than one,
the Vice Presidents in the order determined by the Board of Directors) shall
perform the duties of the President and, when so performing, shall have all the
powers of and be subject to all the restrictions upon the President. The Board
of Directors may assign to any Vice President the title of Executive Vice
President, Senior Vice President or any other title selected by the Board of
Directors. Unless otherwise determined by the Board of Directors, any Vice
President shall have the power to enter into contracts and otherwise bind the
Corporation in matters arising in the ordinary course of the Corporation's
business.
3.11 SECRETARY AND ASSISTANT SECRETARIES. The Secretary shall perform
such duties and shall have such powers as the Board of Directors or the Chief
Executive Officer may from time to time prescribe. In addition, the Secretary
shall perform such duties and have such powers as are incident to the office of
secretary, including without limitation the duty and power to give notices of
all meetings of stockholders and special meetings of the Board of Directors, to
attend all meetings of stockholders and the Board of Directors and keep a record
of the proceedings, to maintain a stock ledger and prepare lists of stockholders
and their addresses as required, to be custodian of corporate records and the
corporate seal and to affix and attest to the same on documents.
Any Assistant Secretary shall perform such duties and possess
such powers as the Board of Directors, the Chief Executive Officer or the
Secretary may from time to time prescribe. In the event of the absence,
inability or refusal to act of the Secretary, the Assistant Secretary (or if
there shall be more than one, the Assistant Secretaries in the order determined
by the Board of Directors) shall perform the duties and exercise the powers of
the Secretary.
13
<PAGE>
In the absence of the Secretary or any Assistant Secretary at
any meeting of stockholders or directors, the person presiding at the meeting
shall designate a temporary secretary to keep a record of the meeting.
3.12 TREASURER AND ASSISTANT TREASURERS.. The Treasurer shall perform
such duties and shall have such powers as the Board of Directors or the Chief
Executive Officer may from time to time prescribe. In addition, the Treasurer
shall perform such duties and have such powers as are incident to the office of
treasurer, including without limitation the duty and power to keep and be
responsible for all funds and securities of the Corporation, to deposit funds of
the Corporation in depositories selected in accordance with these By-Laws, to
disburse such funds as ordered by the Board of Directors, to make proper
accounts for such funds, and to render as required by the Board of Directors
statements of all such transactions and of the financial condition of the
Corporation.
The Assistant Treasurers shall perform such duties and possess
such powers as the Board of Directors, the Chief Executive Officer or the
Treasurer may from time to time prescribe. In the event of the absence,
inability or refusal to act of the Treasurer, the Assistant Treasurer (or if
there shall be more than one, the Assistant Treasurers in the order determined
by the Board of Directors) shall perform the duties and exercise the powers of
the Treasurer.
3.13 SALARIES. Officers of the Corporation shall be entitled to such
salaries, compensation or reimbursement as shall be fixed or allowed from time
to time by the Board of Directors.
3.14 ACTION WITH RESPECT TO SECURITIES OF OTHER CORPORATIONS. Unless
otherwise directed by the Board of Directors, the Chief Executive Officer or any
officer of the Corporation authorized by the Chief Executive Officer shall have
power to vote and otherwise act on behalf of the Corporation, in person or by
proxy, at any meeting of stockholders of or with respect to any action of
stockholders of any other corporation in which the Corporation may hold
securities and otherwise to exercise any and all rights and powers which this
Corporation may possess by reason of its ownership of securities in such other
corporation.
ARTICLE 4
CAPITAL STOCK
4.1 ISSUANCE OF STOCK. Unless otherwise voted by the stockholders and
subject to the provisions of the Certificate of Incorporation, 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 issued, authorized capital stock of the
Corporation held in its treasury may be issued, sold, transferred or otherwise
disposed of by vote of the Board of Directors in such manner, for such
consideration and on such terms as the Board of Directors may determine.
4.2 CERTIFICATES OF STOCK. Every holder of stock of the Corporation
shall be entitled to have a certificate, in such form as may be prescribed by
law and by the Board of Directors, certifying the . number and class of shares
owned by such stockholder in the Corporation. Each such certificate shall be
signed by, or in the name of the Corporation by, the Chairman or Vice-
14
<PAGE>
Chairman, if any, of the Board of Directors, or the President or a Vice
President, and the Treasurer or an Assistant Treasurer, or the Secretary or an
Assistant Secretary of the Corporation. Any or all of the signatures on such
certificate may be a facsimile.
Each certificate for shares of stock which are subject to any
restriction on transfer pursuant to the Certificate of Incorporation, the
By-Laws, applicable securities laws or any agreement among any number of
shareholders or among such holders and the Corporation shall have conspicuously
noted on the face or back of such certificate either the full text of such
restriction or a statement of the existence of such restriction.
4.3 TRANSFERS. Except as otherwise established by rules and regulations
adopted by the Board of Directors, and subject to applicable law, shares of
stock may be transferred on the books of the Corporation by the surrender to the
Corporation or its transfer agent of the certificate representing such shares,
properly endorsed or accompanied by a written assignment or power of attorney
properly executed, and with such proof of authority or the authenticity of
signature as the Corporation or its transfer agent may reasonably require.
Except as may be otherwise required by law, by the Certificate of Incorporation
or by these By-Laws, the Corporation shall be entitled to treat the record
holder of stock as shown on its books as the owner of such stock for all
purposes, including the payment of dividends and the right to vote with respect
to such stock, regardless of any transfer, pledge or other disposition of such
stock, until the shares have been transferred on the books of the Corporation in
accordance with the requirements of these By-Laws.
4.4 LOST, STOLEN OR DESTROYED CERTIFICATES. The Corporation may issue a
new certificate of stock in place of any previously issued certificate alleged
to have been lost, stolen, or destroyed, upon such terms and conditions as the
Chief Executive Officer may prescribe, including the presentation of reasonable
evidence of such loss, theft or destruction and the giving of such indemnity as
the Chief Executive Officer may require for the protection of the Corporation or
any transfer agent or registrar.
4.5 RECORD DATE. The Board of Directors may fix in advance a date as a
record date for the determination of the stockholders entitled to notice of or
to vote at any meeting of stockholders or to express consent (or dissent) to
corporate action in writing without a meeting, or entitled to receive payment of
any dividend or other distribution or allotment of any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action. Such record date shall not be more than 60 nor less than 10 days before
the date of such meeting, nor more than 60 days prior to any other action to
which such record date relates.
If no record date is fixed, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day before the day on which notice is given,
or, if notice is waived, at the close of business on the day before the day on
which the meeting is held. The record date for determining stockholders entitled
to express consent to corporate action in writing without a meeting, when no
prior action by the Board of Directors is necessary, shall be the day on which
the first written consent is expressed. The record date for determining
stockholders for any other purpose shall be at the
15
<PAGE>
close of business on the day on which the Board of Directors adopts the
resolution relating to such purpose.
A determination of stockholders of record entitled to notice
of or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
ARTICLE 5
GENERAL PROVISIONS
5.1 FISCAL YEAR. The fiscal year of the Corporation shall be fixed by
resolution of the Board of Directors.
5.2 CORPORATE SEAL. The corporate seal shall be in such form as shall
be approved by the Board of Directors.
5.3 NOTICES. Except as otherwise specifically provided herein or
required by law or the Certificate of Incorporation, all notices required to be
given to any stockholder, director, officer, employee or agent of the
Corporation shall be in writing and may in every instance be effectively given
by hand delivery to the recipient thereof, by depositing such notice in the
mails, postage paid, or by sending such notice by prepaid telegram, facsimile
transmission or by e-mail. Any such notice shall be addressed to such
stockholder, director, officer, employee or agent at his or her last known
address as the same appears on the books of the Corporation. The time when such
notice is received shall be deemed to be the time of the giving of the notice.
5.4 WAIVER OF NOTICE. Whenever any notice whatsoever is required to be
given by law, by the Certificate of Incorporation or by these By-Laws, a waiver
of such notice either in writing signed by the person entitled to such notice or
such person's duly authorized attorney, or by telegraph, facsimile transmission
or any other available method, whether before, at or after the time stated in
such waiver, or the appearance of such person or persons at such meeting in
person or by proxy, shall be deemed equivalent to such notice.
5.5 EVIDENCE OF AUTHORITY. A certificate by the Secretary, or an
Assistant Secretary, or a temporary Secretary, as to any action taken by the
stockholders, directors, a committee or any officer or representative of the
Corporation shall, as to all persons who rely on the certificate in good faith,
be conclusive evidence of such action.
5.6 FACSIMILE SIGNATURES. In addition to the provisions for use of
facsimile signatures elsewhere specifically authorized in these By-Laws,
facsimile signatures of any officer or officers of the Corporation may be used
whenever and as authorized by the Board of Directors or a committee thereof.
5.7 RELIANCE UPON BOOKS, REPORTS AND RECORDS. Each director, each
member of any committee designated by the Board of Directors, and each officer
of the Corporation shall, in the performance of his or her duties, be fully
protected in relying in good faith upon the books of account or other records of
the Corporation and upon such information, opinions, reports or
16
<PAGE>
statements presented to the Corporation by any of its officers or employees or
committees of the Board of Directors so designated, or by any other person as to
matters which such director or committee member reasonably believes are within
such other person's professional or expert competence and who has been selected
with reasonable care by or on behalf of the Corporation.
5.8 TIME PERIODS. In applying any provision of these By-Laws that
requires that an act be done or not be done a specified number of days prior to
an event or that an act be done during a period of a specified number of days
prior to an event, calendar days shall be used, the day of the doing of the act
shall be excluded, and the day of the event shall be included.
5.9 CERTIFICATE OF INCORPORATION. All references in these By-Laws to
the Certificate of Incorporation shall be deemed to refer to the Certificate of
Incorporation of the Corporation, as amended and in effect from time to time.
5.10 TRANSACTIONS WITH INTERESTED PARTIES No contract or transaction
between the Corporation and one or more of the directors or officers, or between
the Corporation and any other corporation, partnership, association, or other
organization in which one or more of the directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because such director or officer is present at or
participates in the meeting of the Board of Directors or a committee of the
Board of Directors which authorizes the contract or transaction or solely
because his, her or their votes are counted for such purpose, if-
(1) The material facts as to his or her relationship or
interest and as to the contract or transaction are disclosed or are
known to the Board of Directors or the committee, and the Board or
committee in good faith authorizes the contract or transaction by the
affirmative vote of a majority, of the disinterested directors, even
though the disinterested directors be less than a quorum;
(2) The material facts as to his or her relationship or
interest and as to the contract or transaction are disclosed or are
known to the stockholders entitled to vote thereon, and the contract or
transaction is specifically approved in good faith by vote of the
stockholders; or
(3) The contract or transaction is fair as to the Corporation
as of the time it is authorized, approved or ratified, by the Board of
Directors, a committee of the Board of Directors, or the stockholders.
Common or interested directors may be counted in determining
the presence of a quorum at a meeting of the Board of Directors or of a
committee which authorizes the contract or transaction.
5.11 SEVERABILITY. Any determination that any provision of these
By-Laws is for any reason inapplicable, illegal or ineffective shall not affect
or invalidate any other provision of these By-Laws.
17
<PAGE>
5.12 PRONOUNS. All pronouns used in these By-Laws shall be deemed to
refer to the masculine, feminine or neuter, singular or plural, as the identity
of the persons or persons so designated may require.
ARTICLE 6
AMENDMENTS
6.1 BY THE BOARD OF DIRECTORS. Except as is otherwise set forth in
these By-Laws, these By-Laws may be altered, amended or repealed, or new by-laws
may be adopted, by the affirmative vote of a majority of the directors present
at any regular or special meeting of the Board of Directors at which a quorum is
present.
6.2 BY THE STOCKHOLDERS. Except as otherwise set forth in these
By-Laws, these By-Laws may be altered, amended or repealed or new by-laws may be
adopted by the affirmative vote of the holders of a majority of the shares of
the capital stock of the Corporation issued and outstanding and entitled to vote
at any regular meeting of stockholders, or at any special meeting of
stockholders, provided notice of such alteration, amendment, repeal or adoption
of new by-laws shall have been stated in the notice of such special meeting.
<PAGE>
Exhibit 10.31
------------------------------------
REGISTRATION RIGHTS AGREEMENT
by and among
USINTERNETWORKING, INC.,
as Issuer
and
THE INITIAL PURCHASERS NAMED HEREIN
Dated October 29, 1999
------------------------------------
<PAGE>
THIS REGISTRATION RIGHTS AGREEMENT is made and entered into as
of October 29, 1999 by and among USinternetworking, Inc., a Delaware corporation
(the "COMPANY"), and Credit Suisse First Boston Corporation, Morgan Stanley &
Co. Incorporated, Bear, Stearns & Co. Inc., Legg Mason Wood Walker,
Incorporated, Wasserstein Perella Securities, Inc., C.E. Unterberg, Towbin and
The Robinson-Humphrey Company, LLC (the "INITIAL PURCHASERS") pursuant to the
Purchase Agreement, dated October 25, 1999 (the "PURCHASE AGREEMENT"), among the
Company and the Initial Purchasers. In order to induce the Initial Purchasers to
enter into the Purchase Agreement, the Company has agreed to provide the
registration rights set forth in this Agreement. The execution of this Agreement
is a condition to the closing under the Purchase Agreement.
The Company agrees with the Initial Purchasers, (i) for their
benefit as Initial Purchasers and (ii) for the benefit of the beneficial owners
(including the Initial Purchasers) from time to time of the Notes (as defined
herein) and the beneficial owners from time to time of the Underlying Common
Stock (as defined herein) issued upon conversion of the Notes (each of the
foregoing a "HOLDER" and, together, the "HOLDERS"), as follows:
SECTION 1. DEFINITIONS. Capitalized terms used herein without
definition shall have their respective meanings set forth in the Purchase
Agreement. As used in this Agreement, the following terms shall have the
following meanings:
ADDITIONAL INTEREST: See Section 2(e) hereof.
ADDITIONAL INTEREST ACCRUAL PERIOD: See Section 2(e) hereof.
ADDITIONAL INTEREST PAYMENT DATE: Each interest payment date
under the Indenture.
AFFILIATE: With respect to any specified person, an
"affiliate," as defined in Rule 144, of such person.
AMENDMENT EFFECTIVENESS DEADLINE DATE: See Section 2(d)
hereof.
APPLICABLE CONVERSION PRICE: The Applicable Conversion Price
as of any date of determination means the Conversion Price in effect as of such
date of determination or, if no Notes are then outstanding, the Conversion Price
that would be in effect were Notes then outstanding.
BUSINESS DAY: Each Monday, Tuesday, Wednesday, Thursday and
Friday that is not a day on which banking institutions in The City of New York
are authorized or obligated by law or executive order to close.
<PAGE>
-3-
COMMON STOCK: The shares of common stock, $0.001 par value, of
the Company and any other shares of common stock as may constitute "Common
Stock" for purposes of the Indenture, including the Underlying Common Stock.
COMPANY: The Company shall have the meaning set forth in the
first paragraph of this Agreement and shall also include the Company's
successors.
CONVERSION PRICE: Conversion Price shall have the meaning
assigned such term in the Indenture.
CSFBC: Credit Suisse First Boston Corporation.
DEFERRAL NOTICE: See Section 3(i) hereof.
DEFERRAL PERIOD: See Section 3(i) hereof.
EFFECTIVENESS DEADLINE DATE: See Section 2(a) hereof.
EFFECTIVENESS PERIOD: Two years from the date of the Initial
Shelf Registration Statement or, if a shorter period, from the date of the
Initial Shelf Registration Statement until either of (i) the sale pursuant to a
Shelf Registration Statement of all the Registrable Securities or (ii) the
expiration of the holding period applicable to the Registrable Securities held
by Holders that are not Affiliates of the Company under Rule 144(k) under the
Securities Act.
EVENT: See Section 2(e) hereof.
EVENT DATE: See Section 2(e) hereof.
EVENT TERMINATION DATE: See Section 2(e) hereof.
EXCHANGE ACT: The Securities Exchange Act of 1934, as amended,
and the rules and regulations of the SEC promulgated thereunder.
FILING DEADLINE DATE: See Section 2(a) hereof.
HOLDER: See the second paragraph of this Agreement.
INDENTURE: The Indenture dated as of the date hereof between
the Company and The Bank of New York, as trustee, pursuant to which the Notes
are being issued.
INITIAL PURCHASERS: Credit Suisse First Boston Corporation,
Morgan Stanley & Co. Incorporated, Bear, Stearns & Co. Inc., Legg Mason Wood
Walker, Incorporated,
<PAGE>
-4-
Wasserstein Perella Securities, Inc., C.E. Unterberg, Towbin and The
Robinson-Humphrey Company, LLC .
INITIAL SHELF REGISTRATION STATEMENT: See Section 2(a) hereof.
ISSUE DATE: October 29, 1999.
LOSSES: See Section 6 hereof.
MANAGING UNDERWRITERS: See Section 8 hereof.
MATERIAL EVENT: See Section 3(i) hereof.
NOTES: The Convertible Subordinated Notes due 2004 of the
Company to be purchased pursuant to the Purchase Agreement.
NOTICE AND QUESTIONNAIRE: A written notice delivered to the
Company by a Holder containing any information with respect to the Holder
necessary to amend the Registration Statement or supplement the related
Prospectus with respect to the intended distribution of Registrable Securities
by such Holder.
NOTICE HOLDER: On any date, any Holder that has delivered a
Notice and Questionnaire to the Company on or prior to such date and holds
Registrable Securities, as of such dates.
OFFERING CIRCULAR. The final offering circular dated October
25, 1999 relating to the issuance of the Notes.
PROSPECTUS: The prospectus included in any Registration
Statement (including, without limitation, a prospectus that discloses
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A promulgated under the
Securities Act), as amended or supplemented by any amendment or prospectus
supplement, including post-effective amendments, and all materials incorporated
by reference or explicitly deemed to be incorporated by reference in such
Prospectus.
PURCHASE AGREEMENT: See the first paragraph of this Agreement.
RECORD HOLDER: The holder of record of such Note on the record
date with respect to the interest payment date under the Indenture on which such
Additional Interest Payment Date shall occur.
REGISTRABLE SECURITIES: The Notes, until such Notes have been
converted or exchanged into the Underlying Common Stock and, at all times
subsequent to any such
<PAGE>
-5-
conversion or exchange, the Underlying Common Stock and any securities into or
for which such Underlying Common Stock have been converted or exchanged, and any
security issued with respect thereto upon any stock dividend, split or similar
event until, in the case of any such security, (A) the earliest of (i) its
effective registration under the Securities Act and resale in accordance with
the Registration Statement covering it, (ii) expiration of the holding period
that would be applicable thereto under Rule 144(k) under the Securities Act were
it not held by an Affiliate of the Company or (iii) its sale to the public
pursuant to Rule 144, and (B) as a result of the event or circumstance described
in any of the foregoing clauses (i) through (iii), the legends with respect to
transfer restrictions required under the Indenture are removed or removable in
accordance with the terms of the Indenture.
REGISTRATION EXPENSES: See Section 5 hereof.
REGISTRATION STATEMENT: Any registration statement of the
Company that covers any of the Registrable Securities pursuant to the provisions
of this Agreement including the Prospectus, amendments and supplements to such
registration statement, including post-effective amendments, all exhibits, and
all materials incorporated by reference or explicitly deemed to be incorporated
by reference in such registration statement.
RESTRICTED SECURITIES: As this term is defined in Rule 144.
RULE 144: Rule 144 under the Securities Act, as such Rule may
be amended from time to time, or any similar rule or regulation hereafter
adopted by the SEC.
RULE 144A: Rule 144A under the Securities Act, as such Rule
may be amended from time to time, or any similar rule or regulation hereafter
adopted by the SEC.
SEC: The Securities and Exchange Commission.
SECURITIES ACT: The Securities Act of 1933, as amended, and
the rules and regulations promulgated by the SEC thereunder.
SHELF REGISTRATION STATEMENT: See Section 2(a) hereof.
SUBSEQUENT SHELF REGISTRATION STATEMENT: See Section 2(b)
hereof.
TIA: The Trust Indenture Act of 1939, as amended.
TRUSTEE: The Bank of New York (or any successor entity), the
Trustee under the Indenture.
UNDERLYING COMMON STOCK: The Common Stock into which the Notes
are convertible or issued upon any such conversion.
<PAGE>
-6-
SECTION 2. SHELF REGISTRATION. (a) The Company shall prepare
and file or cause to be prepared and filed with the SEC, as soon as practicable
but in any event by the date (the "FILING DEADLINE DATE") sixty (60) days after
the Issue Date, a Registration Statement for an offering to be made on a delayed
or continuous basis pursuant to Rule 415 of the Securities Act (a "SHELF
REGISTRATION STATEMENT") registering the resale from time to time by Holders
thereof of all of the Registrable Securities (the "INITIAL SHELF REGISTRATION
STATEMENT"). The Initial Shelf Registration Statement shall be on an appropriate
form permitting registration of such Registrable Securities for resale by such
Holders in accordance with the methods of distribution elected by the Holders
and set forth in the Initial Shelf Registration Statement. The Company shall use
its best efforts to cause the Initial Shelf Registration Statement to be
declared effective under the Securities Act as promptly as is practicable but in
any event within one hundred and fifty (150) days after the Issue Date (the
"EFFECTIVENESS DEADLINE DATE"), and to keep the Initial Shelf Registration
Statement (or any Subsequent Shelf Registration Statement) continuously
effective under the Securities Act until the expiration of the Effectiveness
Period. At the time the Initial Shelf Registration Statement is declared
effective, each Holder that became a Notice Holder and that has provided the
Company with an appropriately completed Notice and Questionnaire on or prior to
the date five (5) Business Days prior to such time of effectiveness shall be
named as a selling securityholder in the Initial Shelf Registration Statement
and the related Prospectus in such a manner as to permit such Holder to deliver
such Prospectus to purchasers of Registrable Securities in accordance with
applicable law. Except as disclosed on SCHEDULE I hereto, none of the Company's
security holders (other than the Holders of Registrable Securities) shall have
the right to include any of the Company's securities in the Shelf Registration
Statement.
(b) If the Initial Shelf Registration Statement or any
Subsequent Shelf Registration Statement ceases to be effective for any reason at
any time during the Effectiveness Period, the Company shall use its best efforts
to obtain the prompt withdrawal of any order suspending the effectiveness
thereof, and in any event shall within thirty (30) days of such cessation of
effectiveness amend the Shelf Registration Statement in a manner reasonably
expected to obtain the withdrawal of the order suspending the effectiveness
thereof, or file an additional Shelf Registration Statement covering all of the
securities that as of the date of such filing are Registrable Securities (a
"SUBSEQUENT SHELF REGISTRATION STATEMENT"). If a Subsequent Shelf Registration
Statement is filed, the Company shall use its best efforts to cause the
Subsequent Shelf Registration Statement to become effective as promptly as is
practicable after such filing and to keep such Registration Statement (or
subsequent Shelf Registration Statement) continuously effective until the end of
the Effectiveness Period.
(c) The Company shall supplement and amend the Shelf
Registration Statement if required by the rules, regulations or instructions
applicable to the registration
<PAGE>
-7-
form used by the Company for such Shelf Registration Statement, if required by
the Securities Act or, to the extent to which the Company does not reasonably
object, as reasonably requested by an Initial Purchaser in the event that it is
participating in the Shelf Registration Statement or by the Trustee on behalf of
a majority in interest of the registered Holders or by any Managing Underwriter
in the event of an underwritten offering.
(d) Each Holder of Registrable Securities agrees that if such
Holder wishes to sell Registrable Securities pursuant to a Shelf Registration
Statement and related Prospectus, it will do so only in accordance with this
Section 2(d) and Section 3(i). Each Holder of Registrable Securities wishing to
sell Registrable Securities pursuant to a Shelf Registration Statement and
related Prospectus agrees to deliver a Notice and Questionnaire to the Company
at least five (5) Business Days prior to any intended distribution of
Registrable Securities under the Shelf Registration Statement. From and after
the date the Initial Shelf Registration Statement is declared effective, the
Company shall, as promptly as practicable after the date a Notice and
Questionnaire is delivered (i) if required by applicable law, file with the SEC
a post-effective amendment to the Shelf Registration Statement or prepare and,
if required by applicable law, file a supplement to the related Prospectus or a
supplement or amendment to any document incorporated therein by reference or
file any other document required under the Securities Act so that the Holder
delivering such Notice and Questionnaire is named as a selling securityholder in
the Shelf Registration Statement and the related Prospectus in such a manner as
to permit such Holder to deliver such Prospectus to purchasers of the
Registrable Securities in accordance with applicable law and, if the Company
shall file a post-effective amendment to the Shelf Registration Statement, use
commercially reasonable efforts to cause such post-effective amendment to be
declared effective under the Securities Act as promptly as is practicable, but
in any event by the date (the "AMENDMENT EFFECTIVENESS DEADLINE DATE") that is
forty-five (45) days after the date such post-effective amendment is required by
this clause to be filed; (ii) provide such Holder copies of any documents filed
pursuant to Section 2(d)(i); and (iii) notify such Holder as promptly as
practicable after the effectiveness under the Securities Act of any
post-effective amendment filed pursuant to Section 2(d)(i); provided that if
such Notice and Questionnaire is delivered during a Deferral Period, the Company
shall so inform the Holder delivering such Notice and Questionnaire and shall
take the actions set forth in clauses (i), (ii) and (iii) above upon expiration
of the Deferral Period in accordance with Section 3(i). Notwithstanding anything
contained herein to the contrary, (i) the Company shall be under no obligation
to name any Holder that is not a Notice Holder as a selling securityholder in
any Registration Statement or related Prospectus; and the Company shall not be
obligated to file more than one (1) post-effective amendment or supplement for
the purpose of naming Holders as selling securityholders who were not named in
the Initial Shelf Registration Statement at the time of effectiveness in any
twenty (20) day period following the effectiveness of the Initial Shelf
Registration Statement. Any Holder who subsequently provides a Notice and
Questionnaire required by this Section 2(d) pursuant to the
<PAGE>
-8-
provisions of this Section (whether or not such Holder has supplied the Notice
and Questionnaire at the time the Initial Shelf Registration Statement was
declared effective) shall be named as a selling securityholder in the Shelf
Registration Statement and related Prospectus in accordance with the
requirements of this Section 2(d).
(e) The parties hereto agree that the Holders of Registrable
Securities will suffer damages, and that it would not be feasible to ascertain
the extent of such damages with precision, if (i) the Initial Shelf Registration
Statement has not been filed on or prior to the Filing Deadline Date, (ii) the
Initial Shelf Registration Statement has not been declared effective under the
Securities Act on or prior to the Effectiveness Deadline Date, (iii) the Company
has failed to perform its obligations set forth in Section 2(d) within the time
period required therein or (iv) the aggregate duration of Deferral Periods in
any period exceeds the number of days permitted in respect of such period
pursuant to Section 3(i) hereof or (each of the events of a type described in
any of the foregoing clauses (i) through (iv) are individually referred to
herein as an "EVENT," and the Filing Deadline Date in the case of clause (i),
the Effectiveness Deadline Date in the case of clause (ii), the date by which
the Company is required to perform its obligations set forth in Section 2(d) in
the case of clause (iii) (including the filing of any post-effective amendment
prior to the Amendment Effectiveness Deadline Date) and the date on which the
aggregate duration of Deferral Periods in any period exceeds the number of days
permitted by Section 3(i) hereof in the case of clause (iv) being referred to
herein as an "EVENT DATE"). Events shall be deemed to continue until the "EVENT
TERMINATION DATE," which shall be the following dates with respect to the
respective types of Events: the date the Initial Shelf Registration Statement is
filed in the case of an Event of the type described in clause (i), the date the
Initial Shelf Registration Statement is declared effective under the Securities
Act in the case of an Event of the type described in clause (ii), the date the
Company performs its obligations set forth in Section 2(d) in the case of an
Event of the type described in clause (iii) (including, without limitation, the
date the relevant post-effective amendment to the Shelf Registration Statement
is declared effective under the Securities Act), and termination of the Deferral
Period that caused the limit on the aggregate duration of Deferral Periods in a
period set forth in Section 3(i) to be exceeded in the case of the commencement
of an Event of the type described in clause (iv).
Accordingly, subject to the last sentence of Section 3(i),
commencing on (and including) any Event Date and ending on (but excluding) the
relevant Event Termination Date (an "ADDITIONAL INTEREST ACCRUAL PERIOD"), the
Company agrees to pay, as additional interest and not as a penalty, an amount
(the "ADDITIONAL INTEREST"), payable on the Additional Interest Payment Dates to
Record Holders of Registrable Securities, for each portion of such Additional
Interest Accrual Period beginning on and including an Additional Interest
Payment Date (or, in respect of the first time that the Additional Interest is
to be paid to Holders on an Additional Interest Payment Date as a result of the
occurrence
<PAGE>
-9-
of any particular Event, from the Event Date) and ending on but excluding the
first to occur of (A) the date of the end of the Additional Interest Accrual
Period or (B) the next Additional Interest Payment Date, with respect to Notes
at a rate per annum equal to one-half of one percent (0.5 %) of the aggregate
principal amount of such Notes, determined as of the Business Day immediately
preceding the next Additional Interest Payment Date; provided that in the case
of an Additional Interest Accrual Period that is in effect solely as a result of
an Event of the type described in clause (iii) of the immediately preceding
paragraph, such Additional Interest shall be paid only to the Holders that have
delivered Notice and Questionnaires that caused the Company to incur the
obligations set forth in Section 2(d) the non-performance of which is the basis
of such Event, provided, further, that any Additional Interest accrued with
respect to any Note or portion thereof called for redemption on a redemption
date prior to the Additional Interest Payment Date, shall, in any such event, be
paid instead to the Holder who submitted such Note or portion thereof for
redemption on the applicable redemption date on such date. Notwithstanding the
foregoing, no Additional Interest shall accrue as to any Registrable Security
from and after the earlier of (x) the date such security is no longer a
Registrable Security and (y) the expiration of the Effectiveness Period. The
rate of accrual of the Additional Interest with respect to any period shall not
exceed the rate provided for in this paragraph notwithstanding the occurrence of
multiple concurrent Events. Following the cure of all Events requiring the
payment by the Company of Additional Interests to the Holders of Registrable
Securities pursuant to this Section, the accrual of Additional Interests will
cease (without in any way limiting the effect of any subsequent Event requiring
the payment of Additional Interest by the Company).
The Trustee shall be entitled, on behalf of Holders of Notes
or Underlying Common Stock, to seek any available remedy for the enforcement of
this Agreement, including for the payment of any Additional Interest.
Notwithstanding the foregoing, the parties agree that Additional Interest
payable for a violation of the terms of this Agreement shall be the sole quantum
of damages payable for breach of such provisions.
All of the Company's obligations set forth in this Section
2(e) that are outstanding with respect to any Registrable Security at the time
such security ceases to be a Registrable Security shall survive until such time
as all such obligations with respect to such security have been satisfied in
full (notwithstanding termination of this Agreement pursuant to Section 9(k)).
The parties hereto agree that the additional interest provided
for in this Section 2(e) constitute a reasonable estimate of the damages that
may be incurred by Holders of Registrable Securities by reason of the failure of
the Initial Shelf Registration Statement to be filed or declared effective or
available for effecting resales of Registrable Securities in accordance with the
provisions hereof.
<PAGE>
-10-
SECTION 3. REGISTRATION PROCEDURES. In connection with the
registration obligations of the Company under Section 2 hereof, the Company
shall:
(a) Before filing any Registration Statement or Prospectus or
any amendments or supplements thereto with the SEC, furnish to CSFBC and counsel
to the Initial Purchasers copies of all such documents proposed to be filed and
use its bests efforts to reflect in each such document when so filed with the
SEC such comments as the Initial Purchasers and counsel to the Initial Purchaser
reasonably shall propose within three (3) Business Days of the delivery
following such copies to CSFBC and counsel to the Initial Purchasers.
(b) Prepare and file with the SEC such amendments and
post-effective amendments to each Registration Statement as may be necessary to
keep such Registration Statement continuously effective for the applicable
period specified in Section 2(a); cause the related Prospectus to be
supplemented by any required Prospectus supplement, and as so supplemented to be
filed pursuant to Rule 424 (or any similar provisions then in force) under the
Securities Act; and use its best efforts to comply with the provisions of the
Securities Act applicable to it with respect to the disposition of all
securities covered by such Registration Statement during the Effectiveness
Period in accordance with the intended methods of disposition by the sellers
thereof set forth in such Registration Statement as so amended or such
Prospectus as so supplemented.
(c) As promptly as practicable (i) give notice to the Holders,
counsel to the Notice Holders and the Initial Purchasers when any Registration
Statement or any post-effective amendment has been declared effective and (ii)
give notice to the Notice Holders, counsel to the Notice Holders and the Initial
Purchasers (A) of any request, following the effectiveness of the Initial Shelf
Registration Statement under the Securities Act, by the SEC or any other federal
or state governmental authority for amendments or supplements to any
Registration Statement or related Prospectus or for additional information, (B)
of the issuance by the SEC or any other federal or state governmental authority
of any stop order suspending the effectiveness of any Registration Statement or
the initiation or threatening of any proceedings for that purpose, (C) of the
receipt by the Company of any notification with respect to the suspension of the
qualification or exemption from qualification of any of the Registrable
Securities for sale in any jurisdiction or the initiation or threatening of any
proceeding for such purpose, (D) of the occurrence of (but not the nature of or
details concerning) a Material Event and (E) of the determination by the Company
that a post-effective amendment to a Registration Statement will be filed with
the SEC, which notice may, at the discretion of the Company (or as required
pursuant to Section 3(i)), state that it constitutes a Deferral Notice, in which
event the provisions of Section 3(i) shall apply.
<PAGE>
-11-
(d) Use its best efforts to obtain the withdrawal of any order
suspending the effectiveness of a Registration Statement or the lifting of any
suspension of the qualification (or exemption from qualification) of any of the
Registrable Securities for sale in any jurisdiction in which they have been
qualified for sale, in either case as promptly as practicable.
(e) As promptly as practicable (if reasonably requested by any
Notice Holder or by an Initial Purchaser (with respect to any portion of an
unsold allotment from the original offering if such Initial Purchaser is
participating in the Shelf Registration Statement)), incorporate in a Prospectus
supplement or post-effective amendment to a Registration Statement such
information as such Notice Holder or Initial Purchaser shall, on the basis of an
opinion of nationally recognized counsel experienced in such matters, determine
to be required to be included therein and make any required filings of such
Prospectus supplement or such post-effective amendment; provided, that the
Company shall not be required to take any actions under this Section 3(e) that
are not, in the reasonable opinion of counsel for the Company, in compliance
with applicable law.
(f) As promptly as practicable furnish to each Notice Holder
and CSFBC, without charge, at least one (1) conformed copy of the Registration
Statement and any amendment thereto, including financial statements but
excluding schedules, all documents incorporated or deemed to be incorporated
therein by reference and all exhibits (unless requested in writing to the
Company by such Notice Holder or CSFBC, as the case may be).
(g) During the Effectiveness Period, deliver to each Notice
Holder in connection with any sale of Registrable Securities pursuant to a
Registration Statement, without charge, as many copies of the Prospectus or
Prospectuses relating to such Registrable Securities (including each preliminary
prospectus) and any amendment or supplement thereto as such Notice Holder may
reasonably request; and the Company hereby consents (except during such periods
that a Deferral Notice is outstanding and has not been revoked) to the use of
such Prospectus or each amendment or supplement thereto by each Notice Holder in
connection with any offering and sale of the Registrable Securities covered by
such Prospectus or any amendment or supplement thereto in the manner set forth
therein.
(h) Prior to any public offering of the Registrable Securities
pursuant to a Shelf Registration Statement, register or qualify or cooperate
with the Notice Holders in connection with the registration or qualification (or
exemption from such registration or qualification) of such Registrable
Securities for offer and sale under the securities or Blue Sky laws of such
jurisdictions within the United States as any Notice Holder reasonably requests
in writing (which request may be included in the Notice and Questionnaire);
prior to any public offering of the Registrable Securities pursuant to a Shelf
Registration Statement, keep each such registration or qualification (or
exemption therefrom) effective during the Effectiveness Period in connection
with such Notice Holder's offer and sale of Registrable
<PAGE>
-12-
Securities pursuant to such registration or qualification (or exemption
therefrom) and do any and all other acts or things necessary or advisable to
enable the disposition in such jurisdictions of such Registrable Securities in
the manner set forth in the relevant Registration Statement and the related
Prospectus; provided, that the Company will not be required to (i) qualify as a
foreign corporation or as a dealer in securities in any jurisdiction where it
would not otherwise be required to qualify but for this Agreement or (ii) take
any action that would subject it to general service of process in suits or to
taxation in any such jurisdiction where it is not then so subject.
(i) Upon (A) the issuance by the SEC of a stop order
suspending the effectiveness of a Shelf Registration Statement or the initiation
of proceedings with respect to a Shelf Registration Statement under Section 8(d)
or 8(e) of the Securities Act, (B) the occurrence of any event or the existence
of any fact (a "MATERIAL EVENT") as a result of which any Registration Statement
shall contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading, or any Prospectus shall contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or (C) the occurrence or existence
of any pending corporate development, public filing with the SEC or other
similar event with respect to the Company that, in the reasonable discretion of
the Company, makes it appropriate to suspend the availability of a Shelf
Registration Statement and the related Prospectus, (i) in the case of clause (B)
above, subject to the next sentence, as promptly as practicable prepare and
file, if necessary pursuant to applicable law, a post-effective amendment to
such Registration Statement or a supplement to the related Prospectus or any
document incorporated therein by reference or file any other required document
that would be incorporated by reference into such Registration Statement and
Prospectus so that such Registration Statement does not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading, and
such Prospectus does not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading, and, in the case of a post-effective amendment to a
Registration Statement, subject to the next sentence, use its best efforts to
cause it to be declared effective as promptly as is practicable, and (ii) give
notice to the Notice Holders that the availability of the Shelf Registration
Statement is suspended (a "DEFERRAL NOTICE") and, upon receipt of any Deferral
Notice, each Notice Holder agrees not to sell any Registrable Securities
pursuant to the Registration Statement until such Notice Holder's receipt of
copies of the supplemented or amended Prospectus provided for in clause (i)
above, or until it is advised in writing by the Company that the Prospectus may
be used, and has received copies of any additional or supplemental filings that
are incorporated or deemed incorporated by reference in such Prospectus. The
Company will use its best
<PAGE>
-13-
efforts to ensure that the use of the Prospectus may be resumed (x) in the case
of clause (A) above, as promptly as is practicable, (y) in the case of clause
(B) above, as soon as, in the sole judgment of the Company, public disclosure of
such Material Event would not be prejudicial to or contrary to the interests of
the Company or, if necessary to avoid unreasonable burden or expense, as soon as
practicable thereafter and (z) in the case of clause (C) above, as soon as, in
the discretion of the Company, such suspension is no longer appropriate. The
Company shall be entitled to exercise its right under this Section 3(i) to
suspend the availability of the Shelf Registration Statement or any Prospectus,
without incurring or accruing any obligation to pay Additional Interest pursuant
to Section 2(e), for one or more periods not to exceed 30 days in any
three-month period or not to exceed an aggregate 90 days in any 12-month period
(such period, during which the availability of the Registration Statement and
any Prospectus is suspended being a "DEFERRAL PERIOD").
(j) Use its best efforts to comply with all applicable rules
and regulations of the SEC and make generally available to its securityholders
earning statements (which need not be audited) satisfying the provisions of
Section 11(a) of the Securities Act and Rule 158 thereunder (or any similar rule
promulgated under the Securities Act) no later than 45 days after the end of any
3-month period (or 90 days after the end of any 12-month period if such period
is a fiscal year) commencing on the first day of the first fiscal quarter of the
Company commencing after the effective date of a Registration Statement, which
statements shall cover said periods.
(k) In the case of registration of resales of the Notes, cause
the Indenture to be qualified under the Trust Indenture Act of 1939, as amended
(the "TIA"), cooperate with the Trustee and the Notice Holders to effect such
changes to the Indenture as may be required for the Indenture to be so qualified
in accordance with the terms of the TIA and execute, and use commercially
reasonable efforts to cause the Trustee to execute, all documents as may be
required to effect such changes and all other forms and documents required to be
filed with the SEC to enable the Indenture to be so qualified in a timely
manner.
(l) Cooperate with each Notice Holder to facilitate the timely
preparation and delivery of certificates representing Registrable Securities
sold or to be sold pursuant to a Registration Statement, which certificates
shall not bear any restrictive legends unless required by applicable law, and
cause such Registrable Securities to be in such denominations as are permitted
by the Indenture and registered in such names as such Notice Holder may request
in writing at least two (2) Business Days prior to any sale of such Registrable
Securities.
(m) Provide a CUSIP number for all Registrable Securities
covered by each Registration Statement not later than the effective date of such
Registration Statement and provide the Trustee and the transfer agent for the
Common Stock with printed certificates
<PAGE>
-14-
for the Registrable Securities that are in a form eligible for deposit with The
Depository Trust Company.
(n) Use its best efforts to cause the Underlying Common Stock
to be listed on any securities exchange or any automated quotation system on
which similar securities issued by the Company are then listed, to the extent
the Underlying Common Stock satisfies applicable listing requirements.
(o) Provide such information as is required for any filings
required to be made with the National Association of Securities Dealers, Inc.
(p) In the event of an underwritten offering, enter into such
agreements and take all such other reasonable actions in connection therewith
(including those reasonably requested by the Managing Underwriters, if any, or
the Holders of a majority of the Registrable Securities being sold) in order to
expedite or facilitate the disposition of such Registrable Securities and in
such connection, whether or not an underwriting agreement is entered into, and
if the registration is an underwritten registration, (i) make such
representations and warranties, subject to the Company's ability to do so, to
the Holders of such Registrable Securities and the underwriters with respect to
the business of the Company and its subsidiaries, the Registration Statement,
Prospectus and documents incorporated by reference or deemed incorporated by
reference, if any, in each case, in form, substance and scope as are customarily
made by issuers to underwriters in underwritten offerings and confirm the same
if and when requested; (ii) to obtain opinions of counsel to the Company and
updates thereof (which counsel and opinions (in form, scope and substance) shall
be reasonably satisfactory to the Managing Underwriters, if any, and the Holders
of a majority of the Registrable Securities being sold) addressed to each of the
underwriters covering the matters customarily covered in opinions requested in
underwritten offerings and such other matters as may be reasonably requested by
the Managing Underwriters; (iii) obtain "cold comfort" letters and updates
thereof from the independent certified public accountants of the Company (and,
if necessary, any other certified public accountants of any subsidiary of the
Company or any business acquired or to be acquired by the Company for which
financial statements and financial data are, or are required to be, included in
the Registration Statement), addressed to each of the Managing Underwriters, if
any, such letters to be in customary form and covering matters of the type
customarily covered in "cold comfort" letters in connection with underwritten
offerings; and (iv) deliver such documents and certificates as may be reasonably
requested by the Holders of a majority of the Registrable Securities being sold,
the Managing Underwriters, if any, to evidence the continued validity of the
representations and warranties of the Company and its subsidiaries made pursuant
to clause (i) above and to evidence compliance with any customary conditions
contained in the underwriting agreement or other agreement entered into by the
Company. The above shall be done at each closing under such underwriting or
similar agreement as and to the extent required thereunder.
<PAGE>
-15-
(q) If requested in connection with a disposition of
Registrable Securities pursuant to a Registration Statement, make available for
inspection by a representative of the Holders of a majority of the Registrable
Securities being sold, any Managing Underwriter participating in any disposition
of Registrable Securities, if any, and any attorney or accountant retained by
such selling holders or underwriter, financial and other records, pertinent
corporate documents and properties of the Company and its subsidiaries, and
cause the executive officers, directors and employees of the Company and its
subsidiaries to supply all information reasonably requested by any such
representative, Managing Underwriter, attorney or accountant in connection with
such disposition; subject to reasonable assurances by each such person that such
information will be used only in connection with matters relating to such
Registration Statement, provided, however, that such persons shall first agree
in writing with the Company that any information that is reasonably and in good
faith designated by the Company in writing as confidential at the time of
delivery of such information shall be kept confidential by such persons, unless
(i) disclosure of such information is required by court or administrative order
or is necessary to respond to inquiries of regulatory authorities, (ii)
disclosure of such information is required by law (including any disclosure
requirements pursuant to Federal securities laws in connection with the filing
of any Registration Statement or the use of any prospectus referred to in this
Agreement), (iii) such information becomes generally available to the public
other than as a result of a disclosure or failure to safeguard by any such
person or (iv) such information becomes available to any such person from a
source other than the Company and such source is not bound by a confidentiality
agreement.
SECTION 4. HOLDER'S OBLIGATIONS. Each Holder agrees, by
acquisition of the Registrable Securities, that no Holder of Registrable
Securities shall be entitled to sell any of such Registrable Securities pursuant
to a Registration Statement or to receive a Prospectus relating thereto, unless
such Holder has furnished the Company with a Notice and Questionnaire as
required pursuant to Section 2(d) hereof and the information set forth in the
next sentence. Each Notice Holder agrees promptly to furnish to the Company all
information required to be disclosed in order to make the information previously
furnished to the Company by such Notice Holder not misleading and any other
information regarding such Notice Holder and the distribution of such
Registrable Securities as the Company may from time to time reasonably request.
Any sale of any Registrable Securities by any Holder shall constitute a
representation and warranty by such Holder that the information relating to such
Holder and its plan of distribution is as set forth in the Prospectus delivered
by such Holder in connection with such disposition, that such Prospectus does
not as of the time of such sale contain any untrue statement of a material fact
relating to or provided by such Holder or its plan of distribution and that such
Prospectus does not as of the time of such sale omit to state any material fact
relating to or provided by such Holder or its plan of distribution necessary to
make the statements in such Prospectus, in the light of the circumstances under
which they were made, not misleading.
<PAGE>
-16-
SECTION 5. REGISTRATION EXPENSES. The Company shall bear all
fees and expenses incurred in connection with the performance by the Company of
its obligations under this Agreement whether or not any of the Registration
Statements are declared effective. Such fees and expenses shall include, without
limitation, (i) all registration and filing fees (including, without limitation,
fees and expenses of counsel (x) with respect to filings required to be made
with the National Association of Securities Dealers, Inc. and (y) of compliance
with federal and state securities or Blue Sky laws (including, without
limitation, reasonable fees and disbursements of the counsel specified in the
next sentence in connection with Blue Sky qualifications of the Registrable
Securities under the laws of such jurisdictions as the Notice Holders of a
majority of the Registrable Securities being sold pursuant to a Registration
Statement may designate), (ii) printing expenses (including, without limitation,
expenses of printing certificates for Registrable Securities in a form eligible
for deposit with The Depository Trust Company), (iii) duplication expenses
relating to copies of any Registration Statement or Prospectus delivered to any
Holders hereunder, (iv) fees and disbursements of counsel for the Company in
connection with the Shelf Registration Statement, (v) the fees and disbursements
of the independent public accountants of the Company, including the expenses of
any special audits or "cold comfort" letters required by or incident to such
performance and compliance, (vi) reasonable fees and disbursements of the
Trustee and of the registrar and transfer agent for the Common Stock and their
respective counsel and (vii) Securities Act liability insurance obtained by the
Company in its sole discretion. In addition, the Company shall bear or reimburse
the Notice Holders for the reasonable fees and disbursements (not to exceed
$25,000) of one firm of legal counsel for the Holders, which shall initially be
Cahill Gordon & Reindel, but which may, with the written consent of CSFBC (which
shall not be unreasonably withheld), be another nationally recognized law firm
experienced in securities law matters designated by the Company. In addition,
the Company shall pay the internal expenses of the Company (including, without
limitation, all salaries and expenses of officers and employees performing legal
or accounting duties), the expense of any annual audit, the fees and expenses
incurred in connection with the listing of the Registrable Securities on any
securities exchange on which similar securities of the Company are then listed
and the fees and expenses of any person, including special experts, retained by
the Company. Notwithstanding the provisions of this Section 5, each seller of
Registrable Securities shall pay selling expenses and all registration expenses
to the extent the Company is prohibited from paying such expenses under
applicable law.
SECTION 6. INDEMNIFICATION. (a) INDEMNIFICATION BY THE
COMPANY. The Company shall indemnify and hold harmless each Holder and each
person, if any, who controls any Holder (within the meaning of either Section 15
of the Securities Act or Section 20 of the Exchange Act) from and against any
losses, liabilities, claims, damages and expenses (including, without
limitation, any legal or other expenses reasonably incurred in connection with
defending or investigating any such action or claim) (collectively,
<PAGE>
-17-
"LOSSES"), arising out of or based upon any untrue statement or alleged untrue
statement of a material fact contained in any Registration Statement or
Prospectus or in any amendment or supplement thereto or in any preliminary
prospectus, or arising out of or based upon any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading; provided, however, that the Company shall
not be liable in any such case to the extent that any such Losses arise out of
or are based upon an untrue statement or alleged untrue statement contained in
or omission or alleged omission from any of such documents in reliance upon and
conformity with any of the information relating to the Holders furnished to the
Company in writing by a Holder expressly for use therein; provided further that
the indemnification contained in this paragraph shall not inure to the benefit
of any Holder of Registrable Securities (or to the benefit of any person
controlling such Holder) on account of any such Losses arising out of or based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in any preliminary prospectus provided in each case the Company
has complied with its several obligations under Section 3(a) hereof if, to the
extent that a prospectus relating to such Securities was required to be
delivered by such Holder under the Securities Act, either (A) (i) such Holder
failed to send or deliver a copy of the Prospectus with or prior to the delivery
of written confirmation of the sale by such Holder to the person asserting the
claim from which such Losses arise and (ii) the Prospectus would have corrected
such untrue statement or alleged untrue statement or such omission or alleged
omission, or (B) (x) such untrue statement or alleged untrue statement, omission
or alleged omission is corrected in an amendment or supplement to the Prospectus
and (y) having previously been furnished by or on behalf of the Company with
copies of the Prospectus as so amended or supplemented, such Holder thereafter
fails to deliver such Prospectus as so amended or supplemented, with or prior to
the delivery of written confirmation of the sale of a Registrable Security to
the person asserting the claim from which such Losses arise. The Company shall
also indemnify each underwriter and each person who controls such person (within
the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange
Act) to the same extent and with the same limitations as provided above with
respect to the indemnification of the Holders of Registrable Securities.
(b) INDEMNIFICATION BY HOLDERS OF REGISTRABLE SECURITIES. Each
Holder agrees, severally and not jointly, to indemnify and hold harmless the
Company and its respective directors and officers, and each person, if any, who
controls the Company (within the meaning of either Section 15 of the Securities
Act or Section 20 of the Exchange Act) or any other Holder, from and against all
Losses arising out of or based upon any untrue statement or alleged untrue
statement of a material fact contained in any Registration Statement or
Prospectus or in any amendment or supplement thereto or in any preliminary
prospectus, or arising out of or based upon any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, to the extent, but only to the extent,
that such untrue statement or
<PAGE>
-18-
alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with information furnished to the Company in writing by
such Holder expressly for use in such Registration Statement or Prospectus or
amendment or supplement thereto. In no event shall the liability of any selling
Holder of Registrable Securities hereunder be greater in amount than the dollar
amount of the net proceeds received by such Holder upon the sale of the
Registrable Securities pursuant to the Registration Statement giving rise to
such indemnification obligation.
(c) CONDUCT OF INDEMNIFICATION PROCEEDINGS. In case any
proceeding (including any governmental investigation) shall be instituted
involving any person in respect of which indemnity may be sought pursuant to
either of the two preceding paragraphs, such person (the "INDEMNIFIED PARTY")
shall promptly notify the person against whom such indemnity may be sought (the
"INDEMNIFYING PARTY") in writing and the indemnifying party, upon request of the
indemnified party, shall retain counsel reasonably satisfactory to the
indemnified party to represent the indemnified party and any others the
indemnifying party may designate in such proceeding and shall pay the reasonable
fees and disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying party
shall not, in respect of the legal expenses of any indemnified party in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for the fees and expenses of more than one separate firm (in addition
to any local counsel) for all indemnified parties, and that all such fees and
expenses shall be reimbursed as they are incurred. Such separate firm shall be
designated in writing by, in the case of parties indemnified pursuant to Section
6(a), the Holders of a majority (with Holders of Notes deemed to be the Holders,
for purposes of determining such majority, of the number of shares of Underlying
Common Stock into which such Notes are or would be convertible or exchangeable
as of the date on which such designation is made) of the Registrable Securities
covered by the Registration Statement held by Holders that are indemnified
parties pursuant to Section 6(a) and, in the case of parties indemnified
pursuant to Section 6(b), the Company. The indemnifying party shall not be
liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
from and against any loss or liability by reason of such settlement or judgment.
No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened proceeding
in respect of which any indemnified party is or could have been a party and
indemnity could have been sought
<PAGE>
-19-
hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on claims
that are the subject matter of such proceeding and does not include a statement
as to, or an admission of, fault, culpability or a failure to act by or on
behalf of an indemnified party.
(d) CONTRIBUTION. To the extent that the indemnification
provided for in this Section 6 is unavailable to an indemnified party under
Section 6(a) or 6(b) hereof in respect of any Losses or is insufficient to hold
such indemnified party harmless, then each applicable indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the amount paid
or payable by such indemnified party as a result of such Losses (i) in such
proportion as is appropriate to reflect the relative benefits received by the
indemnifying party or parties on the one hand and the indemnified party or
parties on the other hand or (ii) if the allocation provided in clause (i) above
is not permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) above but also
to the relative fault of the indemnifying party or parties on the one hand and
of the indemnified party or parties on the other hand in connection with the
statements or omissions that resulted in such Losses, as well as any other
relevant equitable considerations. Benefits received by the Company shall be
deemed to be equal to the total net proceeds from the initial placement pursuant
to the Purchase Agreement (before deducting expenses) of the Notes pursuant to
the Purchase Agreement. Benefits received by any Holder shall be deemed to be
equal to the value of receiving Registrable Securities that are registered under
the Securities Act. The relative fault of the Holders on the one hand and the
Company on the other hand shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Holders or by the Company, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. Benefits received by any underwriter shall be deemed to
be equal to the total underwriting discounts and commissions, as set forth on
the cover page of the Prospectus forming a part of the Registration Statement
which resulted in such Losses. The Holders' respective obligations to contribute
pursuant to this paragraph are several in proportion to the respective number of
Registrable Securities they have sold pursuant to a Registration Statement, and
not joint.
The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 6(d) were determined by pro
rata allocation or by any other method or allocation that does not take into
account the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an indemnified party as a result of the
Losses referred to in the immediately preceding paragraph shall be deemed to
include, subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding this Section 6(d), an
indemnifying party that is a
<PAGE>
-20-
selling Holder of Registrable Securities shall not be required to contribute any
amount in excess of the amount by which the net proceeds received by such
indemnifying party from Registrable Securities sold and distributed to the
public exceeds the amount of any damages that such indemnifying party has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
(e) The indemnity, contribution and expense reimbursement
obligations of the parties hereunder shall be in addition to any liability any
indemnified party may otherwise have hereunder, under the Purchase Agreement or
otherwise.
(f) The indemnity and contribution provisions contained in
this Section 6 shall remain operative and in full force and effect regardless of
(i) any termination of this Agreement, (ii) any investigation made by or on
behalf of any Holder or any person controlling any Holder, or the Company, or
the Company's officers or directors or any person controlling the Company and
(iii) the sale of any Registrable Securities by any Holder.
SECTION 7. INFORMATION REQUIREMENTS. The Company covenants
that, if at any time before the end of the Effectiveness Period the Company is
not subject to the reporting requirements of the Exchange Act, it will cooperate
with any Holder of Registrable Securities and take such further reasonable
action as any Holder of Registrable Securities may reasonably request in writing
(including, without limitation, making such reasonable representations as any
such Holder may reasonably request), all to the extent required from time to
time to enable such Holder to sell Registrable Securities without registration
under the Securities Act within the limitation of the exemptions provided by
Rule 144 and Rule 144A under the Securities Act and customarily taken in
connection with sales pursuant to such exemptions. Upon the written request of
any Holder of Registrable Securities, the Company shall deliver to such Holder a
written statement as to whether it has complied with such filing requirements,
unless such a statement has been included in the Company's most recent report
filed pursuant to Section 13 or Section 15(d) of Exchange Act. Notwithstanding
the foregoing, nothing in this Section 7 shall be deemed to require the Company
to register any of its securities (other than the Common Stock) under any
section of the Exchange Act.
The Company shall file the reports required to be filed by it
under the Exchange Act and shall comply with all other requirements set forth in
the instructions to Form S-3 in order to allow the Company to be eligible to
file registration statements on Form S-3 as soon as is permissible under the
Securities Act. As soon as practicable after the Company first satisfies the
eligibility requirements for the use Form S-3, the Company shall convert any
Registration Statement on Form S-1 to Form S-3.
<PAGE>
-21-
SECTION 8. UNDERWRITTEN REGISTRATIONS. If any of the
Registrable Securities covered by any Shelf Registration Statement are to be
sold in an underwritten offering, the investment banker or investment bankers
and manager or managers that will administer the offering ("MANAGING
UNDERWRITERS") will be selected by the Holders of a majority of the Registrable
Securities to be included in such offering, PROVIDED, HOWEVER, that such
Managing Underwriters must be reasonably satisfactory to the Company. No person
may participate in any underwritten registration hereunder unless such person
(i) agrees to sell such person's Registered Securities on the basis reasonably
provided in any underwriting arrangements approved by the persons entitled
hereunder to approve such arrangements and (ii) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents reasonably required under the terms of such underwriting
agreements.
SECTION 9. MISCELLANEOUS.
(a) NO CONFLICTING AGREEMENTS. Except for "piggy-back"
registration rights held by the security holders listed on Schedule I hereto or
as otherwise disclosed in the Offering Circular, (i) the Company is not, as of
the date hereof, a party to, nor shall it, on or after the date of this
Agreement, enter into, any agreement with respect to its securities that
conflicts with the rights granted to the Holders of Registrable Securities in
this Agreement or that permits other holders of the Company's outstanding
securities to offer such securities for resale under the Registration Statement,
and (ii) the Company represents and warrants that the rights granted to the
Holders of Registrable Securities hereunder do not in any way conflict with the
rights granted to the holders of the Company's securities under any other
agreements.
(b) AMENDMENTS AND WAIVERS. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the Company has obtained the written consent of Holders
of a majority of the then outstanding Underlying Common Stock constituting
Registrable Securities (with Holders of Notes deemed to be the Holders, for
purposes of this Section, of the number of outstanding shares of Underlying
Common Stock into which such Notes are or would be convertible or exchangeable
as of the date on which such consent is requested). Notwithstanding the
foregoing, a waiver or consent to depart from the provisions hereof with respect
to a matter that relates exclusively to the rights of Holders of Registrable
Securities whose securities are being sold pursuant to a Registration Statement
and that does not directly or indirectly affect the rights of other Holders of
Registrable Securities may be given by Holders of at least a majority of the
Registrable Securities being sold by such Holders pursuant to such Registration
Statement; provided, that the provisions of this sentence may not be amended,
modified, or supplemented except in accordance with the provisions of the
immediately preced-
<PAGE>
-22-
ing sentence. Each Holder of Registrable Securities outstanding at the time of
any such amendment, modification, supplement, waiver or consent or thereafter
shall be bound by any such amendment, modification, supplement, waiver or
consent effected pursuant to this Section 9(b), whether or not any notice,
writing or marking indicating such amendment, modification, supplement, waiver
or consent appears on the Registrable Securities or is delivered to such Holder.
(c) NOTICES. All notices and other communications provided for
or permitted hereunder shall be made in writing by hand delivery, by telecopier,
by courier guaranteeing overnight delivery or by first-class mail, return
receipt requested, and shall be deemed given (i) when made, if made by hand
delivery, (ii) upon confirmation, if made by telecopier, (iii) one (1) Business
Day after being deposited with such courier, if made by overnight courier or
(iv) on the date indicated on the notice of receipt, if made by first-class
mail, to the parties as follows:
(1) if to a Holder of Registrable Securities that is not a
Notice Holder, at the address for such Holder then appearing in the
Note Register (as defined in the Indenture);
(2) if to a Notice Holder, at the most current address given
by such Holder to the Company in a Notice and Questionnaire or any
amendment thereto;
(3) if to the Company, to:
USinternetworking, Inc.
One USi Plaza
Annapolis, MD 21401-7478
Attention: General Counsel
Telecopy No.: (410) 263-8645
with a copy to:
Latham & Watkins
1001 Pennsylvania Avenue, N.W.
Suite 1300
Washington, DC 20004
Attention: John Watson, Esq.
Telecopy No.: (202) 637-2201
(4) if to the Initial Purchasers to:
<PAGE>
-23-
Credit Suisse First Boston Corporation
11 Madison Avenue
New York, New York 10010
Attention: Transaction Advisory Group
Telecopy No.: (212) 325-8278
with a copy to:
Cahill Gordon & Reindel
80 Pine Street
New York, NY 10005
Attention: William B. Gannett, Esq.
Telecopy No.: (212) 269-5420
(5) if to counsel for the Initial Purchasers, to Cahill
Gordon & Reindel at the above address and telecopy number (or as
otherwise requested by the Notice Holders),
or to such other address as such person may have furnished to the other persons
identified in this Section 9(c) in writing in accordance herewith.
(d) APPROVAL OF HOLDERS. Whenever the consent or approval of
Holders of a specified percentage of Registrable Securities is required
hereunder, Registrable Securities held by the Company or its affiliates (other
than the Initial Purchasers or subsequent Holders of Registrable Securities if
such subsequent Holders are deemed to be such affiliates solely by reason of
their holdings of such Registrable Securities) shall not be counted in
determining whether such consent or approval was given by the Holders of such
required percentage.
(e) SUCCESSORS AND ASSIGNS. Any person who purchases any
Registrable Securities from the Initial Purchasers shall be deemed, for purposes
of this Agreement, to be an assignee of the Initial Purchasers. This Agreement
shall inure to the benefit of and be binding upon the successors and assigns of
each of the parties and shall inure to the benefit of and be binding upon each
Holder of any Registrable Securities.
(f) COUNTERPARTS. This Agreement may be executed in any number
of counterparts and by the parties hereto in separate counterparts, each of
which when so executed shall be deemed to be original and all of which taken
together shall constitute one and the same agreement.
(g) HEADINGS. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
<PAGE>
-24-
(h) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAWS.
(i) SEVERABILITY. If any term provision, covenant or
restriction of this Agreement is held to be invalid, illegal, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions set forth herein shall remain in full force and effect and shall in
no way be affected, impaired or invalidated thereby, and the parties hereto
shall use their best efforts to find and employ an alternative means to achieve
the same or substantially the same result as that contemplated by such term,
provision, covenant or restriction, it being intended that all of the rights and
privileges of the parties shall be enforceable to the fullest extent permitted
by law.
(j) ENTIRE AGREEMENT. This Agreement is intended by the
parties as a final expression of their agreement and is intended to be a
complete and exclusive statement of the agreement and understanding of the
parties hereto in respect of the subject matter contained herein and the
registration rights granted by the Company with respect to the Registrable
Securities. Except as provided in the Purchase Agreement, there are no
restrictions, promises, warranties or undertakings, other than those set forth
or referred to herein, with respect to the registration rights granted by the
Company with respect to the Registrable Securities. This Agreement supersedes
all prior agreements and undertakings among the parties with respect to such
registration rights. No party hereto shall have any rights, duties or
obligations other than those specifically set forth in this Agreement.
(k) TERMINATION. This Agreement and the obligations of the
parties hereunder shall terminate upon the end of the Effectiveness Period,
except for any liabilities or obligations under Section 5 or 6 hereof and the
obligations to make payments of and provide for additional interest under
Section 2(e) hereof to the extent such damages have accrued prior to the end of
the Effectiveness Period, each of which shall remain in effect in accordance
with its terms.
<PAGE>
-25-
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first written above.
USINTERNETWORKING, INC.
By:
----------------------------------------
Name:
Title:
The foregoing Registration Rights
Agreement is hereby confirmed and
accepted as of the date first
above written.
CREDIT SUISSE FIRST BOSTON CORPORATION
MORGAN STANLEY & CO. INCORPORATED
BEAR, STEARNS & CO. INC.
LEGG MASON WOOD WALKER, INCORPORATED
WASSERSTEIN PERELLA SECURITIES, INC.
THE ROBINSON-HUMPHREY COMPANY, LLC
C.E. UNTERBERG, TOWBIN
By: CREDIT SUISSE FIRST BOSTON CORPORATION
By:
------------------------------------------
Name:
Title:
<PAGE>
-26
SCHEDULE I TO THE
REGISTRATION RIGHTS AGREEMENT
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES OR
- ---- SHARE EQUIVALENTS
-------------------
<S> <C>
Venrock Associates II, L.P.................................................................. 597,370
HAGC Partners .............................................................................. 74,999
Southeastern Technology Fund, L.P. ....................................................... 349,999
Account Management Corporation
Richard C. Albright ..................................................................... 47,618
Bruce H. Brandaleone .................................................................... 47,618
Nicholas de Wolf ........................................................................ 47,618
Christopher de Roetth ................................................................... 38,243
Elisabeth de Roetth ..................................................................... 18,751
Peter de Roetth ......................................................................... 28,867
Christopher Egan ........................................................................ 19,493
Michael J. Egan ......................................................................... 19,493
Richard J. Egan ......................................................................... 47,618
Richard J. Egan and Maureen
E. Egan Grandchildren's Trust............................................................ 19,493
Donald A. Foss .......................................................................... 47,618
David Friend ............................................................................ 38,243
Roger M. Marino ......................................................................... 47,618
William G. Miller ....................................................................... 38,243
James K. Schuler ........................................................................ 38,243
Carolyn H. Walter ....................................................................... 9,375
Jane E. Westervelt ...................................................................... 67,856
PNC Bank, N.A. Trustee ..................................................................... 282,737
PNC Bank, N.A. Custodian ................................................................... 282,737
AEH Profit Sharing Trust ................................................................... 29,762
Castellini Management Company .............................................................. 596,237
Siebel Systems, Inc. ....................................................................... 192,000(1)
Arbor Venture Partners, L.L.C. ............................................................. 148,809
IIT Acquisition Warrants ................................................................... 50,000
ACR Acquisition Warrants ................................................................... 62,500
Leasing Technologies, Inc................................................................... 17,857
</TABLE>
- ----------------------------
1 Represents $6,000,000 value of Common Stock estimated at $31.25 per share.
<PAGE>
Exhibit 21.1
Subsidiaries
<TABLE>
<CAPTION>
NAME JURISDICTION OF INCORPORATION
- ---- -----------------------------
<S> <C>
IIT Holding Inc. FL
International Information Technology, Inc. CA
International Information Technology IIT, C.A. Venezuela
Advanced Communications Resources, Inc. NY
USi License Subsidiary No. 1, LLC DE
USi License Subsidiary No. 2, LLC DE
USi License Subsidiary No. 3, LLC DE
USi License Subsidiary No. 4, LLC DE
USi License Subsidiary No. 5, LLC DE
USi License Subsidiary No. 6, LLC DE
USi License Subsidiary No. 7, LLC DE
USi License Subsidiary No. 8, LLC DE
</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 March 3, 1999, with respect to the financial
statements of Advanced Communication Resources, Inc., included in the
registration statement and related prospectus of USinternetworking, Inc.
dated December 21, 1999.
/s/ Mahoney Cohen & Company,
CPA, P.C.
New York, New York
December 21, 1999
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated August 20, 1998, with respect to the financial
statements of International Information Technology IIT, C.A., included in the
registration statement and related prospectus of USinternetworking, Inc.
dated December 21, 1999.
/s/ Bassan & Associados S.C.
Caracas, Venezuela
December 21, 1999
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 23, 1999, with respect to the consolidated
financial statements of I.I.T. Holding, Inc., included in the registration
statement on Form S-1 and related prospectus of USINTERNETWORKING, INC. dated
December 21, 1999.
/s/ Ernst & Young LLP
Baltimore, Maryland
December 16, 1999
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated May 13, 1999, except for Note 21 and paragraph 3
of Note 22, as to which the date is December 3, 1999, with respect to the
consolidated financial statements of USINTERNETWORKING, INC., included in the
registration statement on Form S-1 and related prospectus of USINTERNETWORKING,
INC. dated December 21, 1999.
/s/ Ernst & Young LLP
Baltimore, Maryland
December 16, 1999
<PAGE>
Exhibit 25.1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) |__|
----------------
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
One Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
----------------
USinternetworking, Inc.
(Exact name of obligor as specified in its charter)
Delaware 522078325
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
One Usi Plaza
Annapolis, Maryland 21401-7478
(Address of principal executive offices) (Zip code)
----------------
7% Convertible Subordinated Notes due 2004
(Title of the indenture securities)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE
TRUSTEE:
(a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO
WHICH IT IS SUBJECT.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Name Address
- -------------------------------------------------------------------------------
<S> <C>
Superintendent of Banks of the State of 2 Rector Street, New York,
New York N.Y. 10006, and Albany, N.Y. 12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York,
N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York 10005
</TABLE>
(b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Yes.
2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
None.
16. LIST OF EXHIBITS.
EXHIBITS IDENTIFIED IN PARENTHESES BELOW, ON FILE WITH THE COMMISSION,
ARE INCORPORATED HEREIN BY REFERENCE AS AN EXHIBIT HERETO, PURSUANT TO
RULE 7A-29 UNDER THE TRUST INDENTURE ACT OF 1939 (THE "ACT") AND 17
C.F.R. 229.10(d).
1. A copy of the Organization Certificate of The Bank of New York
(formerly Irving Trust Company) as now in effect, which contains
the authority to commence business and a grant of powers to
exercise corporate trust powers. (Exhibit 1 to Amendment No. 1 to
Form T-1 filed with Registration Statement No. 33-6215, Exhibits
1a and 1b to Form T-1 filed with Registration Statement No.
33-21672 and Exhibit 1 to Form T-1 filed with Registration
Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to Form
T-1 filed with Registration Statement No. 33-31019.)
6. The consent of the Trustee required by Section 321(b) of the Act.
(Exhibit 6 to Form T-1 filed with Registration Statement No.
33-44051.)
7. A copy of the latest report of condition of the Trustee published
pursuant to law or to the requirements of its supervising or
examining authority.
-2-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New
York, a corporation organized and existing under the laws of the State of New
York, has duly caused this statement of eligibility to be signed on its behalf
by the undersigned, thereunto duly authorized, all in The City of New York, and
State of New York, on the 20th day of December, 1999.
THE BANK OF NEW YORK
By: /s/ MICHAEL CULHANE
-----------------------
Name: MICHAEL CULHANE
Title: VICE PRESIDENT
<PAGE>
- --------------------------------------------------------------------------------
Consolidated Report of Condition of
THE BANK OF NEW YORK
of One Wall Street, New York, N.Y. 10286
And Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System, at the close of business September 30,
1999, published in accordance with a call made by the Federal Reserve Bank of
this District pursuant to the provisions of the Federal Reserve Act.
<TABLE>
<CAPTION>
Dollar Amounts
In Thousands
<S> <C>
ASSETS
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coin............. $ 6,394,412
Interest-bearing balances...................................... 3,966,749
Securities:
Held-to-maturity securities.................................... 805,227
Available-for-sale securities.................................. 4,152,260
Federal funds sold and Securities purchased under
agreements to resell........................................... 1,449,439
Loans and lease financing receivables:
Loans and leases, net of unearned
income.......................... 37,900,739
LESS: Allowance for loan and
lease losses.................... 572,761
LESS: Allocated transfer risk
reserve......................... 11,754
Loans and leases, net of unearned income,
allowance, and reserve...................................... 37,316,224
Trading Assets................................................... 1,646,634
Premises and fixed assets (including capitalized
leases)....................................................... 678,439
Other real estate owned.......................................... 11,571
Investments in unconsolidated subsidiaries and
associated companies.......................................... 183,038
Customers' liability to this bank on acceptances
outstanding................................................... 349,282
Intangible assets................................................ 790,558
Other assets..................................................... 2,498,658
-----------
Total assets..................................................... $60,242,491
-----------
-----------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
LIABILITIES
Deposits:
In domestic offices........................................... $26,030,231
Noninterest-bearing............... 11,348,986
Interest-bearing.................. 14,681,245
In foreign offices, Edge and Agreement
subsidiaries, and IBFs...................................... 18,530,950
Noninterest-bearing............... 156,624
Interest-bearing.................. 18,374,326
Federal funds purchased and Securities sold under
agreements to repurchase...................................... 2,094,678
Demand notes issued to the U.S.Treasury.......................... 232,459
Trading liabilities.............................................. 2,081,462
Other borrowed money:
With remaining maturity of one year or less................... 863,201
With remaining maturity of more than one year
through three years......................................... 449
With remaining maturity of more than three years.............. 31,080
Bank's liability on acceptances executed and
outstanding................................................... 351,286
Subordinated notes and debentures................................ 1,308,000
Other liabilities................................................ 3,055,031
Total liabilities................................................ 54,578,827
EQUITY CAPITAL
Common stock..................................................... 1,135,284
Surplus.......................................................... 815,314
Undivided profits and capital reserves........................... 3,759,164
Net unrealized holding gains (losses) on
available-for-sale securities................................ (15,440)
Cumulative foreign currency translation
adjustments.................................................. (30,658)
-----------
Total equity capital............................................ 5,663,664
-----------
Total liabilities and equity capital............................ $60,242,491
-----------
-----------
</TABLE>
<PAGE>
I, Thomas J. Mastro, Senior Vice President and Comptroller of the
above-named bank do hereby declare that this Report of Condition has been
prepared in conformance with the instructions issued by the Board of Governors
of the Federal Reserve System and is true to the best of my knowledge and
belief.
Thomas J. Mastro
We, the undersigned directors, attest to the correctness of this Report
of Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
Thomas A. Reyni
Alan R. Griffith Directors
Gerald L. Hassell
- --------------------------------------------------------------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM OUR
FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPT 30, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 28,577
<SECURITIES> 40,425
<RECEIVABLES> 9,875
<ALLOWANCES> (341)
<INVENTORY> 0
<CURRENT-ASSETS> 84,377
<PP&E> 91,383
<DEPRECIATION> (9,710)
<TOTAL-ASSETS> 205,071
<CURRENT-LIABILITIES> 37,641
<BONDS> 0
0
0
<COMMON> 60,814
<OTHER-SE> 72,045
<TOTAL-LIABILITY-AND-EQUITY> 205,071
<SALES> 20,852
<TOTAL-REVENUES> 20,852
<CGS> 0
<TOTAL-COSTS> 89,257
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,793
<INCOME-PRETAX> (69,052)
<INCOME-TAX> 0
<INCOME-CONTINUING> (69,052)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (69,052)
<EPS-BASIC> (2.49)
<EPS-DILUTED> (2.49)
</TABLE>
