<PAGE>
As filed with the Securities and Exchange Commission on June 25, 1999
Registration No. 333-78751
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Amendment No.1
to
REGISTRATION STATEMENT
on Form S-1
Under
THE SECURITIES ACT OF 1933
U.S. INTERACTIVE, INC.
(Exact name of registrant as specified in its charter)
Delaware 7379 22-3316696
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code No.) Identification No.)
2012 Renaissance Boulevard
King of Prussia, PA 19406
(610) 313-9700
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
-----------------------
Stephen T. Zarrilli
Chief Executive Officer
U.S. INTERACTIVE, INC.
2012 Renaissance Boulevard
King of Prussia, PA 19406
(610) 313-9700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------------
<TABLE>
<CAPTION>
Copies of all communications to:
<S> <C> <C> <C>
James A. Ounsworth, Esq. N. Jeffrey Klauder, Esq. Lawrence F. Shay, Esq. Stephen A. Riddick, Esq.
Safeguard Scientifics, Inc. Morgan, Lewis & Bockius LLP Dilworth Paxson LLP Brobeck, Phleger &
800 The Safeguard Building 1701 Market Street 3200 Mellon Bank Center Harrison LLP
435 Devon Park Drive Philadelphia, Pennsylvania 1735 Market Street 701 Pennsylvania Avenue, N.W.
Wayne, Pennsylvania 19087 19103-2921 Philadelphia, PA 19103-7595 Washington, DC 20004
(610) 293-0600 (215) 963-5694 (215) 575-7036 (202) 737-6625
</TABLE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement. If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, please 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, please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
Explanatory Note
This Registration Statement contains two forms of prospectus. One will
be used in connection with an offering of the registrant's common stock to the
general public and the other will be used in the Directed Share Subscription
Program offering of the registrant's common stock to shareholders of Safeguard
Scientifics, Inc. The prospectuses will be identical except that a letter to
shareholders of Safeguard Scientifics, Inc. detailing the procedures for the
Directed Share Subscription Program will be bound to the cover of the prospectus
used in that program. The letter to shareholders of Safeguard Scientifics, Inc.
is filed as Exhibit 99.1 to this Registration Statement.
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to Completion dated June 25, 1999
PROSPECTUS
5,200,000 Shares
U.S. INTERACTIVE, INC.
Common Stock
- --------------------------------------------------------------------------------
We are a provider of Internet professional services helping companies take
advantage of the business opportunities presented by the Internet.
We are offering 4,000,000 shares of our common stock in an initial public
offering. Several of our stockholders are offering a total of 1,200,000 shares
owned by them in the offering. We anticipate that the initial public offering
price will be between $10 and $12 per share. We have applied for quotation of
our common stock on the Nasdaq National Market under the symbol "USIT." No
public market currently exists for our shares.
Investing in our common stock involves risks. See "Risk Factors"
beginning on page 6.
Per Share Total
----------- ------
Public Offering Price ..................... $ $
Underwriting Discount ..................... $ $
Proceeds to U.S. Interactive .............. $ $
Proceeds to Selling Stockholders .......... $ $
At our request, the underwriters have reserved 200,000 shares of our
common stock for sale at the public offering price to our employees, directors
and other persons with relationships with us. See "Plan of Distribution." As
part of this offering, we are offering 1,700,000 shares of our common stock at
the initial public offering price to certain shareholders of Safeguard
Scientifics, Inc. See "The Directed Share Subscription Program."
We have granted the underwriters a 30-day option to purchase up to 600,000
additional shares of our common stock at the initial public offering price to
cover any over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
We expect to deliver these shares on , 1999.
- --------------------------------------------------------------------------------
LEHMAN BROTHERS
HAMBRECHT & QUIST
ADAMS, HARKNESS & HILL, INC.
, 1999
<PAGE>
Enabling the
Electronic
Enterprise.
LOGO
We are a provider of Interent professional services helping companies take
advantage of the business opportunity presented by the Internet.
<PAGE>
An Integrated Solution
We provide integrated Internet strategy consulting, marketing, and technology
services that enable our clients to align their people, processes, and systems
to form an electronic enterprise.
e-ROADMAP GRAPHIC
DAIRY FARM TOYOTA ROYAL CARIBBEAN INTERNATIONAL
LOGO LOGO LOGO
<PAGE>
The e-RoadmapTM
Our proprietory development plan, e-Roadmap, serves as a blueprint to define and
create a customized solution for a client's Internet initiative. The e-Roadmap
is built on a framework which includes twenty-two specific deliverables.
e-ROADMAP GRAPHIC (Continued)
DELOITTE CONSULTING SPRINT PIONEER
LOGO LOGO LOGO
<PAGE>
VL MethodologyTM
To provide rapid development while monitoring quality and cost efficiency, we
employ our IVL Methodology. Under this approach each project is comprised of an
"Innovation" phase where we define the overall project vision and scope, a
"Validation" phrase of prototyping and testing, and a "Launch" phase of final
solution development and integration.
e-ROADMAP GRAPHIC (Continued)
PECO ENERGY UNUM. GRANITE FINANCIAL
LOGO LOGO LOGO
<PAGE>
The Stops Along the Way
The services that comprise the e-Roadmap are applied in three phases -
Innovation, Validation and Launch - and represent the four U.S. Interactive
practice areas of electronic commerce, knowledge management, digital marketing
and enterprise relationship management.
US Interactive has enabled the Electronic Enterprise for the following clients.
e-ROADMAP GRAPHIC (Continued)
THE STAMFORD HOSPITAL LEXUS THOMSON
LOGO LOGO LOGO
<PAGE>
LOGO
Capture, an extranet solution,
serves as the communication center for all of our projects and permits a client
to provide feedback electronically. We believe that by permitting our clients to
monitor and comment on a project's direction and progress on a real-time basis,
Capture improves our ability to deliver final solutions that will meet client
expectations.
Offices US Interactive is located in the following cities:
o Los Angeles, CA o Murray Hill, NJ o New York, NY o Philadelphia, PA o
Singapore o Washington, DC
and on the Web at:
http://www.usinteractive.com
TYPE HERE
GRAPHIC
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page Page
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Prospectus Summary ............................... 1 Business ......................................... 30
Risk Factors ..................................... 6 Management ....................................... 44
Forward-Looking Statement ........................ Certain Relationships and Related
Use of Proceeds .................................. 14 Transactions .................................. 50
Dividend Policy .................................. 15 Principal and Selling Shareholders ............... 52
The Directed Share Subscription Program .......... Description of Capital Stock ..................... 55
Capitalization ................................... 16 Shares Eligible for Future Sale .................. 58
Dilution ......................................... 17 Plan of Distribution ............................. 60
Selected Consolidated Financial Data ............. 18 Legal Matters .................................... 63
Management's Discussion and Analysis of Experts .......................................... 63
Financial Condition and Results of Additional Information ........................... 63
Operations .................................... 20 Index to Consolidated Financial Statements . F-1
</TABLE>
ABOUT THIS PROSPECTUS
Investors should rely only on the information contained in this
prospectus. U.S. Interactive and the underwriters have not authorized anyone to
provide any different or additional information. This prospectus is not an
offer to sell or a solicitation of an offer to buy our common stock in any
jurisdiction where it is unlawful. The information contained in this prospectus
is accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of our common stock. This
preliminary prospectus is subject to completion prior to this offering.
The U.S. Interactive logo design is a registered trademark of U.S.
Interactive, Inc. In addition, U.S. Interactive has filed for trademark
registration of "U.S. Interactive," "IVL Methodology" and "e-Roadmap." This
prospectus also includes trademarks and tradenames of other parties.
Until _____, 1999, all dealers selling shares of our common stock, whether
or not participating in this offering, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
i
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and financial statements and notes appearing elsewhere in this
prospectus. Generally, the information in this prospectus assumes that the
over-allotment option granted to the underwriters is not exercised.
U.S. Interactive, Inc.
Our Business
We are a provider of Internet professional services helping companies take
advantage of the business opportunities presented by the Internet. We provide
integrated Internet strategy consulting, marketing and technology services that
enable our clients to align their people, processes and systems to form an
electronic enterprise. An electronic enterprise utilizes Internet-based
technologies to transact business, communicate information and share knowledge
across employees, customers and suppliers. Electronic enterprises are designed
to:
o better service customers and increase revenue opportunities
o more effectively target, attract and communicate with prospective
customers
o increase efficiency and reduce costs
o better utilize the experience and expertise of its organization
o streamline processes between the enterprise and its trading partners
We deliver our services through a development plan that we created and
call e-RoadmapTM. e-Roadmap is a group of service offerings that can be
customized to meet the needs of each client. These services are delivered
through our IVL MethodologyTM. Our IVL Methodology is comprised of three phases
during which our services are performed. These phases include:
o an "Innovation" phase, during which we define the overall vision and
scope for a project
o a "Validation" phase, during which we create and test a prototype that
addresses the client's objective
o a "Launch" phase, during which we refine, integrate and deploy the
final solution.
To facilitate our implementation process, we employ an extranet, called
"Capture", for ongoing client communication on individual projects. Extranets
are linked computer networks designed for use by a company and third parties
that the company designates. Capture serves as a communications center for a
client project that enables our clients to monitor and comment on a project's
direction and progress on a real-time basis.
We have performed over 400 client projects to date. For the twelve month
period ending March 31, 1999, we performed approximately 180 client projects
for companies such as adidas, Deloitte Consulting LLP, Disney Online,
GeoCities, Royal Caribbean International, Sprint and Toyota.
Our Market Opportunity
The emergence and adoption of the Internet are changing the way consumers
and organizations communicate, share information and conduct business.
Businesses are attempting to utilize innovative Internet strategies to develop
a competitive advantage to:
o attract and retain customers
o lower sales costs
o improve operational efficiencies
1
<PAGE>
o strengthen supplier relationships
o improve communications
However, many businesses lack the in-house expertise required to develop and
deploy these solutions. Instead, many businesses are seeking third-party
service providers that can deliver integrated Internet strategy consulting,
marketing and technology expertise to help them develop and deploy Internet
business solutions. International Data Corp., or IDC, estimates that the market
for Internet professional services will grow from $7.8 billion in 1998 to $78.6
billion in 2003.
Our Strategy
Our strategy is to strengthen our position as a provider of Internet-based
business solutions. Key elements of this strategy include:
o increasing the size and scope of our business opportunities with our
clients
o enhancing our knowledge management and knowledge distribution
capabilities
o hiring and retaining skilled professionals in the areas of strategic
business consulting, online marketing and Internet technology
o strengthening our relationships with technology companies such as
Microsoft, Vignette, Trilogy Software, BroadVision, Digex and Open Market
o expanding geographically into other metropolitan markets, both
domestically and internationally
Risk Factors
There are many risks associated with an investment in our common stock.
The market for Internet professional services is intensely competitive and
subject to rapid technological change. Many of our competitors have advantages
over us. There are relatively low barriers to entry into our business. We
expect that competition will increase in the future. We have incurred
significant losses since we were formed and have an accumulated deficit of
approximately $12.8 million as of March 31, 1999. We incurred net losses of
$2.9 million for the three months ended March 31, 1999 and $8.4 million for the
year ended December 31, 1998. Our revenue may never be sufficient for us to
recognize a profit. We may continue to incur substantial losses even if our
revenues increase. These and other risks are addressed under the caption "Risk
Factors" beginning on page 6 of this prospectus.
Additional Information
We were formed in August 1991 and commenced our operations in May 1994. We
changed our name from MasterSmith, Inc. to U.S. Interactive, Inc. in November
1995 and reincorporated in Delaware in September 1998. Our principal executive
offices are located at 2012 Renaissance Boulevard, King of Prussia,
Pennsylvania 19406, and our telephone number is (610) 313-9700. We maintain a
site on the World Wide Web at www.usinteractive.com. The information found on
our site is not a part of this prospectus and should not be relied upon when
making a decision to invest in our common stock.
2
<PAGE>
The Offering
<TABLE>
<CAPTION>
<S> <C>
Common stock offered by U.S. Interactive ............. 4,000,000 shares
Common stock offered by the selling stockholders 1,200,000 shares
Common stock outstanding after this offering ......... 18,376,734 shares
Use of proceeds ...................................... Capital expenditures, opening of new
offices, repayment of debt, funding of
potential acquisitions and general corpo-
rate purposes. U.S. Interactive will not
receive any proceeds from the sale of
shares by the selling stockholders.
Proposed Nasdaq National Market symbol ............... USIT
</TABLE>
Common stock outstanding after this offering:
o is based on the number of shares outstanding as of June 1, 1999
o assumes the conversion of all outstanding shares of series A, B, C and D
preferred stock into an aggregate of 5,341,096 shares of common stock
which will automatically occur at the closing of this offering
o excludes 2,656,895 shares of common stock issuable upon the exercise of
stock options outstanding at June 1, 1999, at a weighted average exercise
price of $4.76 per share
o excludes 3,251,800 shares of common stock reserved for future grant under
U.S. Interactive's stock option plans
o excludes 70,000 shares of common stock issuable upon the exercise of a
warrant outstanding at June 1, 1999, at an exercise price of $3.50 per
share
The Directed Share Subscription Program
As part of this offering, we are offering shares of our common stock to
certain shareholders of Safeguard Scientifics, Inc. in a directed share
subscription program. The program is described in greater detail below under
the heading "The Directed Share Subscription Program."
3
<PAGE>
Summary Consolidated Financial Information
The following summary historical consolidated financial data has been
derived from our audited and unaudited consolidated financial statements and is
not necessarily indicative of future anticipated results of operations. This
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the Consolidated
Financial Statements and the notes thereto, and the other information contained
in this prospectus.
The financial data for the year ended December 31, 1994, is for the period
beginning May 1, 1994, the date that we commenced operations.
On July 2, 1998, we completed a merger with Digital Evolution, Inc., an
Internet professional services company. We issued 4,383,954 shares of our
common stock and 1,573,533 shares of our series A preferred stock to the former
shareholders of Digital Evolution in this merger. The unaudited pro forma
consolidated statements of operations data for the year ended December 31, 1998
and the three months ended March 31, 1998 reflect the effect of the Digital
Evolution merger as if the transaction had occurred on January 1, 1998.
The pro forma balance sheet data gives effect to the conversion of all of
our outstanding convertible preferred stock into common stock which will
automatically occur upon the closing of this offering. The pro forma, as
adjusted, balance sheet data gives effect to the sale of the shares offered by
us at an assumed initial public offering price of $11.00 and the application of
the net proceeds as described in "Use of Proceeds," after deducting the
underwriting discount and estimated offering expenses. The financial data for
the three months ended March 31, 1999 includes the operations of the business
acquired from InVenGen LLC since March 12, 1999, the date of acquisition.
4
<PAGE>
Summary Consolidated Financial Information
<TABLE>
<CAPTION>
May 1, 1994
(inception) to
December 31, Year Ended December 31,
---------------- --------------------------------------------------
1994 1995 1996 1997 1998
---------------- ---------- ----------- ----------- ------------
(Unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenue ...................... $ 200 $ 935 $ 1,950 $ 6,061 $ 13,636
Operating costs and
expenses:
Project personnel and
related expenses ........... 177 544 945 2,841 7,405
Management and
administrative ............. 17 316 1,012 2,196 7,876
Marketing and sales ......... -- 5 277 1,013 2,054
Depreciation and
amortization ............... 6 17 61 269 4,592
------- ------ ------- ------- --------
Total operating
expenses ................ 200 882 2,295 6,319 21,927
------- ------ ------- ------- --------
Income (loss) from
operations .................. -- 53 (345) (258) (8,291)
Other income (expense),
net ......................... -- (2) 235 (32) (152)
------- -------- ------- ------- --------
Income (loss) before
income tax expense .......... -- 51 (110) (290) (8,443)
Income tax expense ........... -- 13 19 -- --
------- ------- ------- ------- --------
Net income (loss) ............ -- 38 (129) (290) (8,443)
Accretion of mandatorily
redeemable preferred
stock to redemption
value ....................... -- -- -- -- (625)
------- ------- ------- ------- --------
Net income (loss) attribut-
able to common stock-
holders ..................... $ -- $ 38 $ (129) $ (290) $ (9,068)
======= ======= ======= ======= ========
Net income (loss) per
common share:
Basic and diluted ............ $ -- $ .01 $ (.03) $ (.06) $ (1.36)
======= ======= ======= ======= ========
Weighted average shares
outstanding used in the
basic and diluted per
common share calcula-
tion ........................ 2,813 2,813 4,486 4,737 6,670
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year
Ended
December Three Months Ended
31, March 31, (unaudited)
------------- ----------------------------------------
1998 1998 1998 1999
------------- ------------ ------------- -----------
(Pro Forma) (Actual) (Pro Forma) (Actual)
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenue ...................... $ 16,446 $2,378 $ 4,178 $ 6,123
Operating costs and
expenses:
Project personnel and
related expenses ........... 9,995 1,249 2,656 3,071
Management and
administrative ............. 9,653 690 1,507 2,683
Marketing and sales ......... 2,392 351 500 723
Depreciation and
amortization ............... 8,704 91 2,141 2,496
--------- ------ -------- --------
Total operating
expenses ................ 30,744 2,381 6,804 8,973
--------- ------ -------- --------
Income (loss) from
operations .................. (14,298) (3) (2,626) (2,850)
Other income (expense),
net ......................... (149) (17) (14) (92)
--------- ------- -------- --------
Income (loss) before
income tax expense .......... (14,447) (20) (2,640) (2,942)
Income tax expense ........... -- -- -- --
--------- ------- -------- --------
Net income (loss) ............ (14,447) (20) (2,640) (2,942)
Accretion of mandatorily
redeemable preferred
stock to redemption
value ....................... (852) -- (103) (374)
--------- ------- -------- --------
Net income (loss) attribut-
able to common stock-
holders ..................... $ (15,299) $ (20) $ (2,743) $ (3,316)
========= ======= ======== ========
Net income (loss) per
common share:
Basic and diluted ............ $ (1.73) $ -- $ (.30) $ (.40)
========= ======= ======== ========
Weighted average shares
outstanding used in the
basic and diluted per
common share calcula-
tion ........................ 8,862 4,737 9,121 8,249
</TABLE>
<TABLE>
<CAPTION>
March 31, 1999
---------------------------------------
Pro Forma,
Actual Pro Forma As Adjusted
---------- ----------- ------------
(in thousands)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents .................................. $ 2,327 $ 2,327 $40,457
Working capital ............................................ 1,596 1,596 41,101
Total assets ............................................... 25,464 25,464 63,594
Mandatorily redeemable convertible preferred stock ......... 17,667 -- --
Total stockholders' equity (deficit) ....................... (2,028) 15,639 56,044
</TABLE>
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RISK FACTORS
You should carefully consider the risks described below and other
information in this prospectus before making an investment decision. If any of
the following risks actually occur, our business, financial condition or
results of operations could be materially adversely affected. As a result, the
trading price of our common stock may decline, and you may lose all or part of
your investment.
Risks Related to U.S. Interactive
Management of Growth -- We may be unable to manage our future growth
effectively.
Our revenue has increased by 157% for the three months ended March 31,
1999 compared to the three months ended March 31, 1998 and by 125% for the year
ended December 31, 1998 from the year ended December 31, 1997. Our growth has
placed significant demands on our resources. A key part of our strategy is to
increase our revenues, both by hiring more personnel and by acquiring
additional companies, which may continue to place a strain on our resources.
Our success depends on our ability to effectively manage our future growth. To
manage any future growth effectively, we must, among other things, do the
following:
o hire, train and retain highly qualified employees
o estimate our project costs and requirements accurately
o efficiently match employees with client projects
o maintain levels of expertise that are expected by clients
o continue to refine our operational, financial and other systems
o improve, upgrade and expand our infrastructure
o integrate the operations of any acquired companies
o manage expansion into additional geographic territories
If we do not effectively manage any future growth, our revenues and
profitability will be materially adversely affected.
Hiring and Retaining Key Personnel and Other Employees -- Our success is
dependent on our personnel, who we may not be able to retain.
Our success depends on the continued employment of our executive
management team. The employment of any of our senior executives could cease at
any time. If one or more members of our executive management team cease to be
employed by U.S. Interactive, we could be materially adversely affected. This
is particularly true of Eric Pulier, our Chairman and Stephen T. Zarrilli, our
President and Chief Executive Officer.
Additionally, our success depends on our ability to identify, hire, train
and retain individuals who are highly skilled in the Internet and its rapidly
changing technology. There is intense competition in our industry for qualified
personnel. There is currently a shortage of such personnel due to the rapid
growth of the Internet. This shortage is likely to continue for the foreseeable
future. We have had difficulty hiring a sufficient number of technical
6
<PAGE>
employees. We may not be able to attract, assimilate or retain enough qualified
personnel to support our growth, and this would have a material adverse affect
on our ability to retain existing projects and bid for new projects.
Revenue Concentration -- We generate a large part of our revenues from a
limited number of clients.
For the year ended December 31, 1998, our five largest customers by dollar
volume accounted for approximately 36% of our revenues. For the quarter ended
March 31, 1999, our five largest clients by dollar volume accounted for
approximately 48% of our revenues. Two of these clients, Dairy Farm
International and Juggernaut Partners, accounted for 14% and 13% of our
revenues in this quarter. We may be unable to sustain the volume of work we
perform for these clients. We do not have long-term contracts with these
clients. They may terminate their relationship with us at any time without
penalty. These clients may not retain us in the future. Any cancellation,
deferral or significant reduction in work performed for these clients could
have a material adverse effect on our business, financial condition and results
of operations.
Eric Pulier, our Chairman of the Board, and John D. Shulman, a director,
are members of Juggernaut Partners, and own, in the aggregate, 41.6% of the
equity interest in Juggernaut Partners. Mr. Shulman is the Chairman, Chief
Executive Officer and a manager of Juggernaut Partners. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business--Clients" and "Certain Relationships and Related Transactions" for
more information relating to our clients.
Variability of Operating Results -- The variability of our operating results
may adversely affect our stock price.
Our operating results have fluctuated from quarter to quarter and may
continue to fluctuate in the future. These fluctuations may be significant. It
is difficult for us to forecast accurately the frequency and duration of our
projects. We incur expenses, which are mainly fixed expenses, based on our
expectations concerning the costs of our future projects. We may not be able to
adjust our spending in a timely manner to compensate for any shortfall in our
projected revenues. In the event of such a shortfall, our expenses as a
percentage of our revenue would increase. Our operating results may fluctuate
because of:
o the number, size and scope of projects
o the accuracy of our project estimates
o project delays
o our ability to hire, train and retain qualified personnel
o the amount and timing of client expenditures for our consulting services
o the amount and timing of our capital expenditures and other costs
relating to the expansion of our operations
o the amortization of goodwill relating to acquisitions
o our ability to utilize our employees in a cost efficient manner
We also have experienced seasonality with respect to our revenues that has
resulted in lower revenue during summer, year-end vacation and holiday periods.
Our quarterly operating results may not meet the expectations of analysts
or investors. This may cause a decline in the market price of our common stock.
7
<PAGE>
Contract Terminations -- If a large client project or a significant number of
other client projects are terminated or reduced, we may have a large number of
employees who are not generating revenue.
Most of our client projects may be canceled by the client without penalty.
We may have a large number of employees who are not generating revenue if a
large client project or a significant number of client projects are terminated
or materially reduced. When a client project is completed, terminated,
postponed or materially reduced, we must shift our employees to other client
projects or they will not be generating revenue. If we do not use these
employees efficiently on other projects, our revenues and profitability will
decrease.
Fixed-Price Contracts -- We have many fixed-price contracts which creates a
risk that the costs we incur in performing these contracts will exceed the
revenues we will receive for these contracts.
For the three months ended March 31, 1999, approximately 83% of our
revenue was derived from fixed-price contracts. There are many risks and
difficulties associated with fixed-price contracts. To achieve profitability
from fixed-price contracts, we must, among other things:
o accurately estimate the resources required to perform these contracts
o complete our project on a timely basis
o effectively manage our client's expectations
o complete the project within budget and to our client's satisfaction
If we do not successfully accomplish these goals, we could be exposed to
cost overruns and penalties. If this were to occur in connection with a large
project or a sufficient number of projects, our revenues and profitability
would decrease.
Complex and Critical Projects -- If we fail to meet our clients' expectations,
we could severely damage our reputation and have difficulty attracting new
business.
Many of our projects are complex and critical to the success of our
clients' businesses. Our reputation could be severely damaged if we fail to
meet a client's expectations. This could materially adversely affect our
ability to attract new business from that client or others. In addition, some
clients might sue us in an attempt to collect monetary damages. If these events
were to occur, our revenues, profitability and financial condition may be
materially adversely affected.
Limited Management History -- We have experienced recent significant changes in
our senior management team, and our current senior mangement team is unproven.
Our success depends on the ability of our management team to work together
efficiently. We have experienced significant recent changes in our senior
management team.
o Larry W. Smith, one of our co-founders, resigned as Chief Executive
Officer in January 1999 and as a director in May 1999
o Richard J. Masterson, one of our co-founders, resigned as President and
director in May 1999
o Stephen T. Zarrilli, who has been with U.S. Interactive since 1995, most
recently as Senior Vice President and Chief Financial Officer, was
promoted to acting Chief Operating Officer in December 1998, Chief
Executive Officer in March 1999 and President in May 1999
8
<PAGE>
o Philip L. Calamia, who has been with U.S. Interactive since December
1996, most recently as Corporate Controller, was promoted to Chief
Financial Officer in April 1999
o Ajit Prabhu, who has been with U.S. Internactive since March 1999, was
appointed as Chief Technology Officer since May 1999
o Michael M. Carter, who has been with U.S. Interactive since April 1998,
most recently as Director of Corporate Marketing, was promoted to Vice
President of Marketing in December 1998
Our business, revenues, profitability and financial condition will be
materially adversely affected if our new management team does not manage our
business effectively.
History of Losses -- We have a history of losses, and we may never achieve
significant or sustained profitability.
Since our inception, we have incurred significant losses. As of March 31,
1999, we had an accumulated deficit of approximately $12.8 million. We incurred
net losses of $2.9 million for the three months ended March 31, 1999 and $8.4
million for the year ended December 31, 1998. Our revenue may never be
sufficient for us to recognize a profit. We intend to continue to make
significant investments in:
o the development of our infrastructure
o marketing and sales
o geographic expansion
As a result, we may continue to incur substantial losses even if our revenues
increase. We may never achieve significant or sustained profitability.
Acquisitions -- We may be unable to effectively solve the financial and other
challenges or avoid unanticipated liabilities arising from our acquisitions.
We merged with Digital Evolution in July 1998, and acquired the business
of InVenGen LLC in March 1999. The process of integrating the operational,
managerial and financial aspects of these and other acquired companies may
divert our resources from our existing business. Our ability to complete
existing client projects and obtain new client projects will be adversely
affected if we cannot manage our integration process effectively. Additionally,
our financial condition may be materially adversely affected if we incur any
material liabilities that had not been disclosed or anticipated.
Strategic Relationships -- We are dependent on strategic relationships, and we
may not be successful in retaining our current relationships or entering into
new relationships.
We have established strategic relationships with over 20 companies which
give us access to these companies' technology, training and support. We believe
that a significant portion of our revenue has come, and we expect will continue
to come, from leads generated by these relationships. These relationships are
non-exclusive and the agreements or other understandings underlying these
relationships are general in nature and do not legally bind the parties. As a
result, these relationships can only be expected to continue for so long as
there are mutual business benefits and the parties maintain good working
relationships. We may not be able to enter into future relationships that would
afford us access to new technologies that
9
<PAGE>
we need to remain competitive in our industry. If we lose any one of our
existing strategic relationships, or fail to enter into new relationships, our
business, financial condition and results of operations may be materially
adversely affected.
Intellectual Property -- Our success depends, in part, on intellectual property
which may be difficult to protect. This could affect our ability to compete
effectively.
Existing trade secret and copyright laws give us only limited protection
for our copyrights, trademarks and trade secrets. Third parties may attempt to
disclose, obtain or use our intellectual property without paying us. This is
particularly true in foreign countries where laws or law enforcement practices
may not protect our intellectual property rights as fully as in the United
States. Others may independently develop and obtain patents or copyrights for
technologies that are similar or superior to our technologies.
Year 2000 -- Year 2000 compliance issues may adversely affect either our
clients or us.
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. As a consequence,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions of operations, including a temporary inability to process
transactions or engage in normal business activities. Computers that properly
recognize the year 2000 are "year 2000 compliant."
We cannot currently predict the extent to which the year 2000 issue will
affect our information systems or those of our existing and prospective
clients. We may be materially adversely affected if many organizations that
have significant exposure to the year 2000 issue dedicate all or a substantial
portion of their information technology expenditures to dealing with year 2000
problems. If this were to occur, these organizations would likely reduce their
planned investments in Internet solutions.
Risks Related to Our Industry
Competition -- We may not be able to compete successfully.
The market for Internet professional services is intensely competitive and
subject to rapid technological change. We compete with:
o other Internet professional services firms
o information technology consulting and integration firms
o web design firms
o management consulting firms
o computer hardware and software vendors
In addition, we face potential competition from the in-house technology
and marketing departments of our clients and potential clients.
Many of our current and potential competitors have advantages over us.
These advantages include longer operating histories, larger client bases and
significantly greater financial, personnel, marketing, sales and public
relations resources. These competitors may increase their commitments to our
market in response to the growth of the Internet.
10
<PAGE>
There are relatively low barriers to entry into our business. We expect
that we will face additional competition from new entrants into the market in
the future. Existing or future competitors may develop or offer services that
provide significant performance, price, creative or other advantages over those
offered by us.
Our revenues and profitability will be adversely affected if we do not
compete successfully.
Market Acceptance -- Market acceptance of our industry is uncertain.
Widespread market acceptance of the outsourcing of the design, development
and maintenance of Internet-based applications to Internet professional
services firms is uncertain. Many of our potential clients may ultimately
decide to perform these services in-house. In-house personnel may have better
access to both key client decision-makers and the information required to
prepare proposals for such solutions. If independent providers of Internet
professional services prove to be unreliable, ineffective or too expensive, or
if software companies develop tools that are sufficiently user-friendly and
cost-effective, companies may instead choose to design, develop or maintain
their Internet-based applications internally. We will be materially adversely
affected if the market for our services does not continue to develop or
develops more slowly than we expect, or if our services are not accepted by the
market.
Rapid Technological Change -- Our industry is characterized by rapid
technological change, a pace which we may not be able to match.
The market for Internet professional services is characterized by rapid
technological change, including:
o changing client requirements and preferences
o frequent new product and service introductions embodying new processes
and technologies
o evolving industry standards and practices
These changes could render our existing service practices and methods
out-of-date. Our success will depend, in large part, on our ability to:
o improve on the performance and reliability of existing services
o develop new services and solutions that address increasingly
sophisticated and varied client needs
o respond to technological advances
o respond to emerging industry standards and practices
o respond to the innovations of our competitors
If we do not respond effectively to these developments, our business,
financial condition and results of operations would be materially adversely
affected.
Decline in Internet Usage -- Lack of growth or decline in Internet usage could
cause our business to suffer.
We have derived all of our revenue from projects involving the Internet.
Our business will be adversely affected if Internet usage does not continue to
grow. Internet usage may not
11
<PAGE>
continue to grow because of inadequate network infrastructure, security
concerns, inconsistent service quality and lack of cost-effective, high-speed
service, among other reasons. On the other hand, if Internet usage grows, the
Internet infrastructure may not support the demands this growth will place on
it. As a result, the Internet's performance and reliability may decline. In
addition, outages and delays have occurred throughout the Internet network
infrastructure and have interrupted Internet service. If these outages or
delays occur frequently in the future, Internet usage could grow more slowly or
decline.
We may also incur substantial costs to keep up with changes surrounding
the Internet. Unresolved critical issues concerning the commercial use and
government regulation of the Internet include the following:
o security
o cost and ease of Internet access
o intellectual property ownership
o privacy
o taxation
o liability issues
Any costs we incur due to these factors would materially and adversely affect
our business, financial condition and results of operations.
Risks Related to the Offering
Shares Eligible for Future Sale -- If our current stockholders sell additional
shares of our common stock, our stock price may decline.
The market price of our common stock could decline as a result of sales of
a large number of shares in the market after this offering, or the perception
that such sales could occur. This may make it more difficult for us to raise
funds through future offerings of our common stock. The shares of our common
stock outstanding on June 1, 1999 will become eligible for sale without
registration pursuant to Rule 144 or Rule 701 under the Securities Act as
follows:
o 1,583,114 shares are currently eligible for sale into the public market
under Rule 144(k)
o 3,962,250 shares will be eligible for sale under Rule 144 or Rule 701
beginning 90 days after the date of this prospectus
o the remaining 7,631,330 shares of Common Stock will become eligible for
sale from time to time after the date of this prospectus under Rule 144
upon expiration of their respective holding periods.
Some holders of shares of our common stock and all the holders of our
preferred stock outstanding immediately prior to the offering will also have
registration rights relating to a total of 9,491,475 shares of our common
stock, enabling them to require us to register their shares under the
Securities Act for sale. In connection with the offering, our executive
officers and directors and certain of our stockholders, who will hold a total
of 13,030,602 shares outstanding after the offering, have agreed not to sell
shares of our common stock for 180 days after the date of this prospectus
without the consent of Lehman Brothers Inc.
12
<PAGE>
Control Over U.S. Interactive -- The interests of our controlling stockholders
may conflict with our interests and the interests of our other stockholders.
Upon the consummation of the offering, six stockholders, including two
former executive officers and Safeguard, collectively, will own approximately
% of our outstanding common stock. If our controlling stockholders chose to
act together, they may be able to exert considerable influence over us,
including in the election of directors and the approval of actions submitted to
our stockholders. In addition, without the consent of these stockholders, we
may be prevented from entering into transactions that could be beneficial to
us. The interests of our controlling stockholders could conflict with the
interests of our other stockholders.
Allocation of Net Proceeds -- The offering's net proceeds may be allocated in
ways with which you and other stockholders may not agree.
We have not determined how the majority of the proceeds of the offering
will be spent. Our management may spend the offering's net proceeds in ways
which you and our other stockholders may not agree. See "Use of Proceeds."
Dilution -- The total price investors will pay for our common stock in the
offering will be much more than the value of our assets after subtracting our
liabilities.
The price you will pay for our common stock will be much more than the
book value per share of our outstanding stock after the offering. In addition,
investors in the offering will contribute 58% of the total amount paid by all
investors in U.S. Interactive but will own only 22% of the shares outstanding.
Market Price -- The price per share of our common stock in the offering may not
be indicative of the market price that will prevail after the offering.
Since our stock has not yet traded publicly, our management and the
underwriters will negotiate the initial public offering price per share of our
common stock. The price they determine may not reflect the market price that
will prevail after the offering. As a result, you could suffer a loss if the
market price of our common stock after the offering is less than the price you
paid per share.
Volatility of Stock Price -- Our common stock price is likely to be highly
volatile.
The public markets often experience extreme price and volume fluctuations.
In some cases these fluctuations are unrelated to the operating performance of
particular companies or industries. New issues and securities of
Internet-related securities in particular are often subject to greater
fluctuation than the stock markets in general. The trading prices of our common
stock may fluctuate widely. This volatility may result from many events
directly involving us, including our operating results, potential litigation,
strategic alliance developments and analysts' statements. Volatility may also
result from developments not directly involving us such as general economic,
industry and market conditions and competitive developments. In particular, the
market prices of the securities of Internet-related companies have been
especially volatile. In the past, companies that have experienced volatility in
the market price of their stock have been the object of securities class action
litigation. We would incur substantial costs and experience a diversion of our
management's attention and resources if we were the object of securities class
action litigation.
Anti-takeover Mechanisms -- Our certificate of incorporation and Delaware law
contain provisions that could discourage a takeover.
Our certificate of incorporation provides for the division of our board of
directors into three classes and provides our board of directors the power to
issue shares of preferred stock
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<PAGE>
without stockholder approval. In addition, Section 203 of the Delaware General
Corporation Law contains provisions which impose restrictions on stockholder
action to acquire control of U.S. Interactive. The effect of these provisions
of our certificate of incorporation and Delaware law provisions would likely
discourage third parties from seeking to obtain control of U.S. Interactive.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements under the captions
"Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business" and elsewhere. These
forward-looking statements include statements about the following:
o implementing our business strategy
o managing our growth and employee costs
o our business and growth strategies and other statements contained herein
that are not historical facts
When used in this prospectus, the words "anticipate," "believe,"
"estimate," "expect," "seek," "intend," "may" and similar expressions are
generally intended to identify forward-looking statements. There are important
factors that could cause actual results to differ materially from those
expressed or implied by such forward-looking statements, including:
o changes in general economic and business conditions and those in the
Internet professional services market in particular
o changes in Internet-related technologies
o actions of competitors
o the extent to which we are able to expand our business into new markets
o our inability to effectively manage our growth
o the level of demand for our services
o changes in our business strategies
o our inability to obtain financing when required
o other factors discussed under "Risk Factors"
USE OF PROCEEDS
The estimated net proceeds to U.S. Interactive from the sale of the 4.0
million shares of our common stock in this offering are estimated to be
approximately $40.4 million. This is based on an assumed initial public
offering price of $11.00 per share, after deducting underwriting discounts and
estimated offering expenses payable by us. We will not receive any proceeds
from the sale of our common stock by our selling stockholders.
We intend to use approximately $10.0 million for equipment, software and
the expansion of our facilities and the balance of the net proceeds to repay
the outstanding balance under our revolving credit agreement and for general
corporate purposes. In addition, we may use a portion of the net proceeds from
this offering for acquisitions. We currently are not, however, engaged in any
negotiations regarding any acquisition. Pending such uses, we will invest the
net proceeds of this offering in short-term, investment grade securities. The
outstanding
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<PAGE>
balance under our revolving credit agreement was $1.1 million on June 1, 1999.
Borrowings under the revolving credit agreement bear interest at variable rates
which averaged 9.0% at June 1, 1999. We may reborrow amounts under our
revolving credit agreement, which will be available for future borrowings
through June 30, 2000.
DIVIDEND POLICY
We have not paid cash dividends on our common stock. We do not currently
anticipate paying any cash dividends, as we currently intend to retain all
future earnings to fund the development and growth of our business. Future
decisions regarding cash dividends on our common stock will be made by our
board of directors. These decisions will depend on our results of operations,
financial position, capital requirements, general business conditions and
restrictions imposed by any financing arrangements. Our revolving credit
agreement currently prohibits the payment of dividends.
THE DIRECTED SHARE SUBSCRIPTION PROGRAM
As part of this offering, we are offering 1,700,000 shares of our common
stock in a directed share subscription program to certain shareholders of
Safeguard, one of our principal stockholders. Safeguard's shareholders may
subscribe for one share of our common stock for every 20 shares of Safeguard
common stock held by them, and may not transfer the opportunity to subscribe to
another person except involuntarily by operation of law. Persons who owned at
least 491 shares of Safeguard's common stock as of June 24, 1999 are eligible
to purchase shares directly from us or Safeguard under the program.
Shareholders of Safeguard who own between 100 and 490 shares of Safeguard
common stock will be eligible to purchase interests in a unit investment trust
that will invest its assets solely in our common stock. The shares offered to
the unit investment trust are included in the 1,700,000 shares. Shareholders
who own less than 100 shares of Safeguard common stock will be ineligible to
participate in the directed share subscription program. If any of the shares
offered by us under the program are not purchased by the shareholders of
Safeguard then Safeguard or one or more of its designees will purchase these
shares from us. Prior to this offering, Safeguard beneficially owned 16.3% of
our common stock. After this offering, Safeguard will beneficially own
approximately ____%, of our common stock, assuming that all 1,700,000 shares
are purchased by shareholders of Safeguard and the unit investment trust.
Safeguard will beneficially own approximately ___%, of our common stock if none
of the 1,700,000 shares are purchased by the shareholders of Safeguard or the
unit investment trust. The purchase price under the program, whether paid by
Safeguard, its shareholders or the unit investment trust, will be the same
price per share as set forth on the cover page of this prospectus. For purposes
of this prospectus, when we present financial data that reflects this offering,
we have assumed that all 1,700,000 shares offered under the directed share
subscription program are sold.
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<PAGE>
CAPITALIZATION
The following table sets forth:
o our actual total capitalization as of March 31, 1999
o our pro forma capitalization that gives effect to the conversion of all
shares of preferred stock into common stock which will automatically
occur upon the consummation of this offering
o our pro forma as adjusted capitalization to give effect to the sale of
4,000,000 shares of common stock by us pursuant to this offering and the
application of the estimated net proceeds of approximately $40.4 million
therefrom.
You should read this information together with the consolidated financial
statements and notes to those consolidated financial statements appearing
elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of March 31, 1999
---------------------------------------
Pro Forma,
Pro As
Actual Forma Adjusted
----------- ----------- -----------
(in thousands, except share data)
<S> <C> <C> <C>
Long-term debt and capital lease obligations, current portion ............ $ 462 $ 462 $ 162
========= ========= =========
Long-term debt and capital lease obligations, net of current portion ..... 1,113 1,113 213
--------- --------- ---------
Series A mandatorily redeemable convertible preferred stock, par
value $0.001 per share; 1,573,533 shares authorized, 1,384,709
issued and outstanding - actual; no shares issued and outstanding
-- pro forma and pro forma as adjusted .................................. 4,113 -- --
Series B mandatorily redeemable convertible preferred stock, par
value $0.001 per share; 1,052,632 shares authorized; 1,021,053
shares issued and outstanding - actual; no shares issued and out-
standing -- pro forma and pro forma as adjusted ......................... 1,160 -- --
Series C mandatorily redeemable convertible preferred stock, par
value $0.001 per share; 595,706 shares authorized; 595,706 issued
and outstanding -- actual; no shares issued and outstanding -- pro
forma and pro forma as adjusted ......................................... 1,045 -- --
Series D mandatorily redeemable convertible preferred stock, par
value $0.001 per share; 2,339,628 shares authorized; 2,339,628
issued and outstanding - actual; no shares issued and outstanding -
pro forma and pro forma as adjusted ..................................... 11,349 -- --
Stockholders' equity (deficit):
Preferred stock, $.001 par value, per share; 15,000,000 shares autho-
rized, 5,341,096 shares issued and outstanding as series A, series B,
series C and series D - actual; no shares issued and outstanding pro
forma and pro forma as adjusted .........................................
Common stock, par value $0.001 per share; 90,000,000 shares autho-
rized, 10,074,699 shares issued of which 9,035,388 are outstanding
-- actual; 15,415,795 shares issued of which 14,376,484 are out-
standing -- pro forma; and 19,415,795 shares issued of which
18,376,484 shares are outstanding - pro forma as adjusted ............... 10 15 19
Additional paid-in capital ............................................... 16,871 34,533 74,934
Deferred stock compensation .............................................. (1,346) (1,346) (1,346)
Treasury stock; 1,039,311 shares, at cost ................................ (4,812) (4,812) (4,812)
Accumulated deficit ...................................................... (12,751) (12,751) (12,751)
--------- --------- ---------
Total stockholders' (deficit) equity .................................. (2,028) 15,639 56,044
--------- --------- ---------
Total capitalization .................................................. $ 16,752 $ 16,752 $ 56,257
========= ========= =========
</TABLE>
The foregoing table excludes as of June 1, 1999:
o 2,656,895 shares of common stock issuable upon the exercise of
outstanding warrants and stock options at a weighted average exercise
price of $4.76 per share
o 3,251,800 shares of common stock reserved for future grant under our
stock option plans
o 70,000 shares of common stock issuable upon the exercise of a warrant
outstanding at June 1, 1999, at an exercise price of $3.50 per share
16
<PAGE>
DILUTION
Our pro forma net tangible book value at March 31, 1999 was $2.5 million
or $.17 per share after giving effect to the conversion of all shares of
convertible preferred stock into common stock in which will automatically occur
upon the completion of this offering. Pro forma net tangible book value per
share represents the amount of our stockholders' equity less intangible assets
divided by the total number of shares of common stock outstanding on a pro
forma basis after giving effect to the conversion of all shares of convertible
preferred stock into common stock.
Net tangible book value dilution per share represents the difference
between the amount per share paid by the purchasers of shares of our common
stock in this offering and the net tangible book value per share of our common
stock immediately after completion of this offering. Our pro forma net tangible
book value as of March 31, 1999 would have been $42.9 million, or $2.33 per
share after:
o giving effect to our sale of 4,000,000 shares of common stock offered by
this prospectus at the assumed initial public offering price of $11.00 per
share
o deducting underwriting discounts and commissions and estimated offering
expenses
o giving effect to the conversion of 5,341,096 shares of outstanding
convertible preferred stock which will automatically occur upon completion
of this offering. This represents an immediate increase in pro forma net
tangible book value of $2.16 per share to existing stockholders and an
immediate dilution in pro forma net tangible book value of $8.67 per share
to new investors purchasing shares at the assumed initial public offering
price.
The following table illustrates this per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial offering price per share ................................. $ 11.00
Pro forma net tangible book value per share as of March 31, 1999 ......... $ 0.17
Increase per share attributable to new investors ......................... $ 2.16
------
Pro forma net tangible book value per share after this offering .......... $ 2.33
-------
Net tangible book value dilution per share to new investors. ............. $ 8.67
=======
</TABLE>
The following table sets forth, as of March 31, 1999, the difference
between the number of shares of common stock purchased from U.S. Interactive,
the total consideration paid and the average price per share paid by the
existing stockholders and by the new investors at the assumed initial public
offering price of $11.00 per share for shares purchased in this offering,
before deducting the underwriting discounts and commissions and estimated
offering expenses:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------------ -------------------------- Average Price
Number Percent Amount Percent Per Share
------------ --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
Existing stockholders ......... 14,376,484 78% $32,203,324 42% $ 2.24
New investors ................. 4,000,000 22 44,000,000 58 $ 11.00
---------- -- ----------- -- -------
Total ...................... 18,376,484 100% $76,203,324 100%
========== === =========== ===
</TABLE>
The foregoing tables exclude 2,726,895 shares of common stock issuable
upon exercise of an outstanding warrant and outstanding stock options at a
weighted average exercise price of $4.73 per share. These tables also exclude
3,251,800 shares reserved for future grants under our stock option plans. The
exercise of the outstanding warrant and stock options will cause further
dilution to new investors.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statement of operations data for each of the years in the
three-year period ended December 31, 1998, and the consolidated balance sheet
data as of December 31, 1997, and 1998, are derived from our consolidated
financial statements, which have been audited by KPMG LLP, independent
accountants, and are included elsewhere in this prospectus. The consolidated
statement of operations data for the year ended December 31, 1995, and the
balance sheet data as of December 31, 1995, and 1996, have been derived from
our audited financial statements that are not included in this prospectus. The
consolidated statement of operations data for the period from May 1, 1994
(inception), to December 31, 1994, and the consolidated balance sheet data as
of December 31, 1994, have been derived from our unaudited consolidated
financial statements not included in this prospectus. The consolidated
financial data set forth below for each of the three-month periods ended March
31, 1998 and 1999, and the consolidated balance sheet data at March 31, 1999,
were derived from unaudited consolidated financial statements prepared by us
and are included elsewhere in this prospectus. The unaudited interim
consolidated financial statements have been prepared on substantially the same
basis as the audited consolidated financial statements and, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results of operations for
such periods. The historical results are not necessarily indicative of results
to be expected for any future period. The selected consolidated financial data
set forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the consolidated
financial statements and the notes thereto and the unaudited pro forma combined
statements of operations.
The unaudited pro forma consolidated statements of operations data for the
year ended December 31, 1998 and the three months ended March 31, 1998 reflect
the effects of the Digital Evolution merger, as if the transaction had occurred
on January 1, 1998.
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
May 1, 1994
(inception) to
December 31, Year Ended December 31,
---------------- --------------------------------------------------
1994 1995 1996 1997 1998
---------------- ---------- ----------- ----------- ------------
(Unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenue .................... $ 200 $ 935 $ 1,950 $ 6,061 $ 13,636
Operating costs and
expenses:
Project personnel and
related expenses ......... 177 544 945 2,841 7,405
Management and
administrative ........... 17 316 1,012 2,196 7,876
Marketing and sales ....... -- 5 277 1,013 2,054
Depreciation and
amortization ............. 6 17 61 269 4,592
------- ------ ------- ------- --------
Total operating
expenses .............. 200 882 2,295 6,319 21,927
------- ------ ------- ------- --------
Income (loss) from
operations ................ -- 53 (345) (258) (8,291)
Other income (expense),
net ....................... -- (2) 235 (32) (152)
------- -------- ------- ------- --------
Income (loss) before
income tax expense ........ -- 51 (110) (290) (8,443)
Income tax expense ......... -- 13 19 -- --
------- ------- ------- ------- --------
Net income (loss) .......... -- 38 (129) (290) (8,443)
Accretion of mandatorily
redeemable preferred
stock to redemption
value ..................... -- -- -- -- (625)
------- ------- ------- ------- --------
Net income (loss)
attributable to common
stockholders .............. $ -- $ 38 $ (129) $ (290) $ (9,068)
======= ======= ======= ======= ========
Net income (loss) per
common share:
Basic and diluted .......... $ -- $ .01 $ (.03) $ (.06) $ (1.36)
======= ======= ======== ======== =========
Weighted average shares
outstanding used in the
basic and diluted per
common share
calculation ............... 2,813 2,813 4,486 4,737 6,670
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, March 31, (unaudited)
-------------- ----------------------------------------
1998 1998 1998 1999
-------------- ------------ ------------- -----------
(Pro Forma) (Actual) (Pro Forma) (Actual)
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenue .................... $ 16,446 $2,378 $ 4,178 $ 6,123
Operating costs and
expenses:
Project personnel and
related expenses ......... 9,995 1,249 2,656 3,071
Management and
administrative ........... 9,653 690 1,507 2,683
Marketing and sales ....... 2,392 351 500 723
Depreciation and
amortization ............. 8,704 91 2,141 2,496
--------- ------ -------- --------
Total operating
expenses .............. 30,744 2,381 6,804 8,973
--------- ------ -------- --------
Income (loss) from
operations ................ (14,298) (3) (2,626) (2,850)
Other income (expense),
net ....................... (149) (17) (14) (92)
--------- ------- -------- --------
Income (loss) before
income tax expense ........ (14,447) (20) (2,640) (2,942)
Income tax expense ......... -- -- -- --
--------- ------- -------- --------
Net income (loss) .......... (14,447) (20) (2,640) (2,942)
Accretion of mandatorily
redeemable preferred
stock to redemption
value ..................... (852) -- (103) (374)
--------- ------- -------- --------
Net income (loss)
attributable to common
stockholders .............. $ (15,299) $ (20) $ (2,743) $ (3,316)
========= ======= ======== ========
Net income (loss) per
common share:
Basic and diluted .......... $ (1.73) $ -- $ (.30) $ (.40)
========= ======= ======== ========
Weighted average shares
outstanding used in the
basic and diluted per
common share
calculation ............... 8,862 4,737 9,121 8,249
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1994 1995 1996 1997 1998
------------- ------ --------- --------- ----------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents ........... $99 $ 13 $ 594 $ 786 $ 3,698
Working capital ..................... 96 105 747 701 1,916
Total assets ........................ 99 238 1,770 4,122 22,262
Mandatorily redeemable convert-
ible preferred stock ............... -- -- -- -- 17,293
Total stockholders' equity (deficit) -- 73 1,111 1,795 (1,820)
<CAPTION>
March 31,
-------------------------------------
1999
-------------------------------------
Pro Forma,
Actual Pro Forma As Adjusted
---------- ----------- ------------
(in thousands)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents ........... $ 2,327 $ 2,327 $40,457
Working capital ..................... 1,596 1,596 41,101
Total assets ........................ 25,464 25,464 63,594
Mandatorily redeemable convert-
ible preferred stock ............... 17,667 -- --
Total stockholders' equity (deficit) (2,028) 15,639 56,044
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with "Selected
Consolidated Financial Data," our consolidated financial statements and the
notes to those financial statements elsewhere in this prospectus. In addition
to historical information, this discussion contains forward-looking information
that involves risks and uncertainties. Our actual results could differ
materially from those anticipated by such forward-looking information due to
competitive factors, risks associated with our expansion plans and other
factors discussed under "Risk Factors" and elsewhere in this prospectus.
Overview
Revenue. Our revenue is derived from fixed-fee or time and materials
contracts. Revenue under fixed-fee arrangements is recognized on the
percentage-of-completion method based on the ratio of costs incurred to total
estimated costs. Fees and expenditures in excess of billings represent the
costs incurred on projects and anticipated profits earned on projects in excess
of amounts billed to date. These amounts are recorded as an asset. Billings in
excess of fees and expenditures represent amounts billed in excess of costs
incurred and estimated profit earned. These amounts are recorded as a
liability. Revenues exclude reimbursable expenses charged to clients. Losses on
projects in progress are recognized when known.
Approximately 83% of our revenue for the three months ended March 31,
1999, was derived from fixed-fee arrangements. The percentage of our revenue
that is derived from fixed-fee arrangements may increase in the future.
Substantially all of our client projects may be terminated early by the client
without penalty.
Cost Structure. The largest portion of our costs consists of
employee-related expenses for our project personnel and other direct costs,
such as third-party vendor costs. The remainder of our costs are associated
with the development of our business and the support of our project personnel,
such as marketing and sales, and management and administrative support.
Marketing and sales consists primarily of personnel costs and commissions as
well as the costs associated with our development and maintenance of our
marketing materials and programs. Management and administrative expense
consists primarily of the costs associated with:
o operations
o finance
o human resources
o information systems
o facilities
o other administrative support for project personnel
We regularly review our fees for services, compensation and overhead costs
in an effort to remain competitive within our industry. In addition, we monitor
the progress of client projects with client senior management from time to
time. Monitoring the costs and progress associated with each project is aided
by our intranet-based project management systems. We manage the activities of
our service delivery personnel by monitoring project schedules closely and
staffing requirements for new projects. Most of our client projects are, and
may in the future be, terminated by the client without penalty. As a result, an
unanticipated termination of a client project could require us to maintain
underutilized employees, resulting in a higher than
20
<PAGE>
expected percentage and number of inactive professionals. While we intend to
adjust our professional staff to reflect our active projects, we must maintain
a sufficient number of senior professionals to oversee existing and anticipated
client projects and participate with our sales efforts to secure new client
projects.
Variability of Operating Results. Our operating results have fluctuated
from quarter to quarter and may continue to fluctuate in the future. These
fluctuations may be significant. It is difficult for us to forecast accurately
the frequency and duration of our projects. We incur expenses, which are mainly
fixed expenses, based on our expectations concerning the costs of our future
projects. We may not be able to adjust our spending in a timely manner to
compensate for any shortfall in our projected revenues. In the event of such a
shortfall, our expenses as a percentage of our revenue would increase. Our
operating results may fluctuate because of:
o the number, size and scope of projects
o the accuracy of our project estimates
o project delays
o our ability to hire, train and retain qualified personnel
o the amount and timing of client expenditures for our consulting services
o the amount and timing of our capital expenditures and other costs
relating to the expansion of our operations
o the amortization of goodwill relating to acquisitions
o our ability to utilize our employees in a cost efficient manner
We also have experienced seasonality with respect to our revenues that has
resulted in lower revenue during summer, year-end vacation and holiday periods.
Our quarterly operating results may not meet the expectations of analysts
or investors. This may cause a decline in the market price of our common stock.
In July 1998 we completed the Digital Evolution merger which resulted in
issuances of 4,383,954 shares of common stock and 1,573,533 shares of series A
preferred stock to the shareholders of Digital Evolution. Prior to the merger,
Digital Evolution was an Internet professional services firm. The Digital
Evolution merger has been accounted for using the purchase method of
accounting. Of the total value of the consideration paid of $17.0 million,
$872,000 has been allocated to the fair value of the net tangible assets
acquired and liabilities assumed, and $16.1 million has been allocated to
goodwill and other intangible assets, which will be amortized over a two-year
period. The annual amortization expense associated with this goodwill and other
intangible assets is approximately $8.0 million. The results of operations of
Digital Evolution have been consolidated with our results of operations since
July 1, 1998.
In March 1999 we acquired the business of InVenGen, a regional Internet
professional services firm specializing in network services, e-commerce
security and technology infrastructures. We issued 584,800 shares of our common
stock in this acquisition having an estimated fair market value of $2.9
million. The acquisition was accounted for using the purchase method of
accounting.
21
<PAGE>
Results of Operations
The following table sets forth, as a percentage of revenue, our statement
of operations for the years ended December 31, 1996, 1997 and 1998 and the
three months ended March 31, 1999. The results of operations for the three
months ended March 31, 1998 is presented on a pro forma basis to reflect the
Digital Evolution merger as if this merger had occurred on January 1, 1998.
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, ended March 31,
------------------------------------- --------------------------
1996 1997 1998 1998 1999
---------- ---------- ----------- ------------- ----------
Statement of Operations Data: (Pro Forma) (Actual)
<S> <C> <C> <C> <C> <C>
Revenue ................................ 100% 100% 100% 100% 100%
Operating costs and expenses:
Project personnel and related
expenses ............................ 49 47 54 64 50
Management and administrative ......... 52 36 58 36 44
Marketing and sales ................... 14 17 15 12 12
Depreciation and amortization ......... 3 4 34 51 41
--- ---- ---- --- -----
Total operating expenses ............ 118 104 161 163 147
--- ---- ---- --- -----
Operating loss ......................... (18) (4) (61) (63) (47)
Other income (expense), net ............ 12 (1) (1) -- (1)
--- ----- ------ --- ------
Loss before income tax expense ......... (6) (5) (62) (63) (48)
Income tax expense ..................... (1) -- -- -- --
----- ---- ----- --- -----
Net loss ............................... (7) (5) (62) (63) (48)
Accretion of mandatorily redeemable
preferred stock to redemption value -- -- (5) (3) (6)
---- ---- ------ ------ ------
Net loss attributable to common
stockholders .......................... (7)% (5)% (67)% (66)% (54)%
==== ==== ===== ===== =====
</TABLE>
Actual Three Months Ended March 31, 1999 Compared to Pro Forma Three Months
Ended March 31, 1998
Revenue. Revenue increased $1.9 million, or 45%, to $6.1 million for the
three months ended March 31, 1999 from $4.2 million for the three months ended
March 31, 1998. This growth is attributable to services delivered to new
clients, additional projects for existing clients and larger average project
sizes. Approximately 74% of the increase was attributable to 69 new clients and
26% was attributable to overall increases in project sizes.
Project Personnel and Related Expenses. Project personnel and related
expenses consist primarily of payroll, associated taxes, employee benefits and
any third-party fees incurred in the delivery of our services. These costs
increased $400,000, or 15%, to $3.1 million for the three months ended March
31, 1999, from $2.7 million for the three months ended March 31, 1998. The
increase was primarily attributable to the hiring of additional project
personnel associated with the increased demand for our services. Headcount for
project personnel as of March 31, 1999 was 155 compared with 117 as of March
31, 1998. As a percentage of revenue, project personnel and related expenses
were 50% for the three months ended March 31, 1999 and 64% for the three months
ended March 31, 1998.
Management and Administrative. Management and administrative increased
$1.2 million, or 80%, to $2.7 million for the three months ended March 31, 1999
from $1.5 million for the
22
<PAGE>
three months ended March 31, 1998. The increase was primarily attributable to
expenses incurred to accommodate our current and anticipated growth, including
the expansion of office facilities and the increased costs of management and
administrative personnel and other general operating expenses in the areas of
accounting, human resources and general operations. Office rent expense
increased $500,000 for the three months ended March 31, 1999 from $200,000 for
the three months ended March 31, 1998. Management and administrative headcount
increased to 51 as of March 31, 1999 from 32 as of March 31, 1998. The
increases in office rent and personnel accounted for 50% and 22% of the overall
increase. As a percentage of revenue, management and administrative was 44% for
the three months ended March 31, 1999 and 36% for the three months ended March
31, 1998.
Marketing and Sales. Marketing and sales increased $223,000, or 45%, to
$723,000 for the three months ended March 31, 1999, from $500,000 for the three
months ended March 31, 1998. The increase was attributable to our investment in
our marketing and sales programs, primarily related to the hiring of nine new
business development and marketing personnel and the implementation and
continuance of other marketing programs. As a percentage of revenue, marketing
and sales was 12% for the three months ended March 31, 1999 and 12% for the
three months ended March 31, 1998.
Depreciation and Amortization. Depreciation and amortization increased
$400,000 to $2.5 million for the three months ended March 31, 1999 from $2.1
million for the three months ended March 31, 1998. The increase is attributable
to capital expenditures for new equipment and leasehold improvements.
Approximately $2.0 million of amortization expense in each period is associated
with the goodwill and other intangible assets of $16.1 million recorded in
connection with the Digital Evolution merger. This amount is being amortized
over a two-year period.
Other Income (Expense). Other expense increased by $78,000 to $92,000 for
the three months ended March 31, 1999 from $14,000 for the three months ended
March 31, 1998. The increase is primarily attributable to increased borrowings
under our bank line of credit and interest incurred under our term loan
partially offset by an increase in interest income. The average aggregate
balance outstanding on our line of credit and our term loan was $2.8 million
during the three months ended March 31, 1999, as compared to $268,000 during
the three months ended March 31, 1998. Interest expense under these facilities
was $52,000 for the three months ended March 31, 1999 and $7,000 for the three
months ended March 31, 1998.
Income Tax Expense. As a result of our losses we had no income tax expense
for either the three months ended March 31, 1999 or the three months ended
March 31, 1998. As of March 31, 1999 we had approximately $7.9 million and $6.8
million of federal and state net operating loss carryforwards, respectively,
available to offset future taxable income. The federal net operating loss
carryforwards will expire between 2010 and 2018, if not utilized. The state net
operating loss carryforwards will expire through the year 2013, if not
utilized.
Under the Tax Reform Act of 1986, the utilization of a corporation's net
operating loss carryforward is limited following a greater than 50% change in
ownership. Due to our prior and current equity transactions, our net operating
loss carryforwards may be subject to an annual limitation. Any unused annual
limitation may be carried forward to future years for the balance of the net
operating loss carryforward period.
Net Loss. As a result of the factors described above, our net loss was
$2.9 million for the three months ended March 31, 1999 and $2.6 million for the
three months ended March 31, 1998.
23
<PAGE>
1998 Compared to 1997
Revenue. Revenue increased by $7.5 million, or 123%, to $13.6 million for
the year ended December 31, 1998 from $6.1 million for the year ended December
31, 1997. The increase is primarily attributable to the Digital Evolution
merger as well as an increase in the volume of services delivered to new
clients and additional work delivered for existing clients. Approximately 23%
of the increase was attributable to the Digital Evolution client base and 77%
was attributable to overall increases in project sizes.
Project Personnel and Related Expenses. Project personnel and related
expenses increased by $4.6 million, or 164%, to $7.4 million for the year ended
December 31, 1998 from $2.8 million for the year ended December 31, 1997. The
absolute increase was attributable to the hiring of additional project
personnel associated with the increase in the volume of services delivered to
clients. Direct salary expense increased $4.2 million as a result of 58 new
hires and overall increases in compensation expense. As a percentage of
revenue, project personnel and related expenses were 54% for the year ended
December 31, 1998 and 47% for the year ended December 31, 1997.
Management and Administrative. Management and administrative increased
$5.7 million, or 259%, to $7.9 million for the year ended December 31, 1998
from $2.2 million for the year ended December 31, 1997. The absolute increase
was primarily attributable to expenses incurred to accommodate our current and
anticipated growth, including the expansion of some of our office facilities
and the increased cost of management and administrative personnel and other
general operating expenses in the areas of accounting, human resources and
general operations. Office rent expense increased to $1.1 million for the year
ended December 31, 1998 from $213,000 for the year ended December 31, 1997.
Headcount for management and administrative staff increased to 36 from 19. As a
percentage of revenue, management and administrative was 58% for the year ended
December 31, 1998 and 36% for the year ended December 31, 1997.
Marketing and Sales. Marketing and sales increased by $1.1 million, or
110%, to $2.1 million for the year ended December 31, 1998, from $1.0 million
for the year ended December 31, 1997. The absolute increase in these expenses
was attributable to the hiring of business development and marketing personnel,
increased public relations activities and the implementation and continuance of
our marketing programs. Total marketing and sales personnel headcount was 16 as
of December 31, 1998, compared to nine as of December 31, 1997. As a percentage
of revenue, marketing and sales were 15% for the year ended December 31, 1998,
and 17% for the year ended December 31, 1997.
Depreciation and Amortization. Depreciation and amortization increased by
$4.3 million to $4.6 million for the year ended December 31, 1998 from $269,000
for the year ended December 31, 1997. The increase was primarily due to
amortization expense of $4.0 million associated with the Digital Evolution
merger which was effective July 2, 1998. The remaining amount of depreciation
was related to increased investments in furniture and equipment in prior years.
Other Income (Expense). Other expense increased by $120,000 to $152,000
for the year ended December 31, 1998 from $32,000 for the year ended December
31, 1997. The increase is primarily attributable to increased borrowings under
our bank line of credit, partially offset by an increase in interest income.
Interest expense related to these borrowings was $93,000 for the year ended
December 31, 1998 and $25,000 for the year ended December 31, 1997.
Income Tax Expense. As a result of our losses, we had no income tax
expense. As of December 31, 1998 we had approximately $7.1 million and $5.9
million of federal and state net operating loss carryforwards, respectively,
available to offset future taxable income.
24
<PAGE>
Net Loss. As a result of the factors described above, our net loss was
$8.4 million for the year ended December 31, 1998 and $290,000 for the year
ended December 31, 1997.
1997 Compared to 1996
Revenue. Revenue increased by $4.1 million, or 205%, to $6.1 million for
the year ended December 31, 1997, from $2.0 million for the year ended December
31, 1996. This reflected an increase in the volume of services delivered to new
clients, additional projects for existing clients and larger average project
sizes.
Project Personnel and Related Expenses. Project personnel and related
expenses increased by $1.9 million, or 201%, to $2.8 million for the year ended
December 31, 1997 from $945,000 for the year ended December 31, 1996. The
absolute increase was attributable to the hiring of 24 additional project
personnel associated with the increase in service revenue generated by us. As a
percentage of revenue, project personnel and related expense was 47% for the
year ended December 31, 1997 and 49% for the year ended December 31, 1996.
Management and Administrative. Management and administrative increased by
$1.2 million, or 120%, to $2.2 million for the year ended December 31, 1997
from $1.0 million for the year ended December 31, 1996. The absolute increase
was primarily attributable to expenses incurred to accommodate our current and
anticipated growth, including the expansion of our office facilities and the
increased costs of management and administrative personnel and other general
operating expenses in the areas of accounting, human resources and general
operations. Total management and administrative personnel increased by 10 to 19
as of December 31, 1997. As a percentage of revenue, management and
administrative was 36% for the year ended December 31, 1997 and 52% for the
year ended December 31, 1996.
Marketing and Sales. Marketing and sales increased by $723,000, or 261%,
to $1.0 million for the year ended December 31, 1997 from $277,000 for the year
ended December 31, 1996. The absolute and percentage increases were
attributable to the hiring of business development and marketing personnel,
increased public relations activities and the implementation and continuance of
our marketing programs. Marketing and sales personnel headcount increased by
seven to nine as of December 31, 1997. As a percentage of revenue, marketing
and sales expense was 17% for the year ended December 31, 1997 and 14% for the
year ended December 31, 1996.
Depreciation and Amortization. Depreciation and amortization increased by
$208,000, or 341%, to $269,000 for the year ended December 31, 1997 from
$61,000 for the year ended December 31, 1996. The increase was primarily due to
amortization expense associated with an acquisition of an Internet professional
services firm that we completed in May 1997, and the increase in certain
capitalized equipment and leasehold improvements related to our expansion of
our facilities. The expansion of our facilities was required by the increase in
personnel related to our growth.
Other Income (Expense). Other income principally related to the
recognition of a gain on the sale of an investment of $225,000. This gain
resulted from the May 1996 sale of our interest in a firm that provided
Internet advertising representation services.
Income Tax Expense. As a result of our losses, we had no federal income
tax expense. State income tax expense were $19,000 for the year ended December
31, 1996.
Net Loss. As a result of the factors described above, our net loss was
$290,000 for the year ended December 31, 1997 and $129,000 for the year ended
December 31, 1996.
25
<PAGE>
Our Unaudited Quarterly Operating Results
The following table presents our unaudited historical quarterly statement
of operations. We believe that all necessary adjustments, consisting only of
normal recurring adjustments, have been included in the amounts stated below to
present fairly such quarterly information. The operating results for any
quarter are not necessarily indicative of results for any subsequent period.
The results of operations of Digital Evolution have been consolidated with
our results since the beginning of the quarter ended September 30, 1998.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------
Jun. 30, Sept. 30, Dec. 31, Mar. 31,
1997 1997 1997 1998
------------ ------------- ------------ ------------
Statement of Operations Data: (in thousands, unaudited)
<S> <C> <C> <C> <C>
Revenue ...................................... $1,186 $1,618 $2,287 $2,378
Operating costs and expenses:
Project personnel and related expenses 646 774 937 1,249
Management and administrative ............... 507 580 683 690
Marketing and sales ......................... 202 306 358 351
Depreciation and amortization ............... 64 69 91 91
------- ------ ------ ------
Total operating expenses ................... 1,419 1,729 2,069 2,381
------- ------ ------ ------
Income (loss) from operations ................ (233) (111) 218 (3)
Other income (expense), net .................. (8) (11) (14) (17)
--------- ------ ------ ------
Net income (loss) ............................ (241) (122) 204 (20)
Accretion of mandatorily redeemable
preferred stock to redemption value ......... -- -- -- --
-------- ------ ------ ------
Net income (loss) attributable to
common stockholders ......................... $ (241) $ (122) $ 204 $ (20)
======== ====== ====== ======
As a Percentage of Revenue:
Revenue ...................................... 100% 100% 100% 100%
Operating costs and expenses:
Project personnel and related expenses 54 48 41 52
Management and administrative ............... 43 36 30 29
Marketing and sales ......................... 17 19 15 15
Depreciation and amortization ............... 5 4 4 4
-------- ------ ------ ------
Total operating expenses ................... 119 107 90 100
-------- ------ ------ ------
Income (loss) from operations ................ (19) (7) 10 --
Other income (expense), net .................. (1) (1) (1) (1)
--------- -------- -------- -------
Net income (loss) ............................ (20) (8) 9 (1)
Accretion of mandatorily redeemable
preferred stock to redemption value ......... -- -- -- --
-------- ------- ------- ------
Net income (loss) attributable to
common stockholders ......................... (20)% (8)% 9% (1)%
======== ======= ======= ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------
Jun. 30, Sept. 30, Dec. 31, Mar. 31,
1998 1998 1998 1999
------------- -------------- -------------- --------------
Statement of Operations Data: (in thousands, unaudited)
<S> <C> <C> <C> <C>
Revenue ...................................... $2,546 $ 4,554 $ 4,158 $ 6,123
Operating costs and expenses:
Project personnel and related expenses 1,424 2,412 2,320 3,071
Management and administrative ............... 1,200 2,747 3,239 2,683
Marketing and sales ......................... 490 623 590 723
Depreciation and amortization ............... 123 2,181 2,197 2,496
------ ------- ------- -------
Total operating expenses ................... 3,237 7,963 8,346 8,973
------ ------- ------- -------
Income (loss) from operations ................ (691) (3,409) (4,188) (2,850)
Other income (expense), net .................. (12) (76) (47) (92)
------ ------- ------- -------
Net income (loss) ............................ (703) (3,485) (4,235) (2,942)
Accretion of mandatorily redeemable
preferred stock to redemption value ......... -- (251) (374) (374)
------ ------- ------- -------
Net income (loss) attributable to
common stockholders ......................... $ (703) $(3,736) $(4,609) $(3,316)
====== ======= ======= =======
As a Percentage of Revenue:
Revenue ...................................... 100% 100% 100% 100%
Operating costs and expenses:
Project personnel and related expenses 56 53 56 50
Management and administrative ............... 47 60 78 44
Marketing and sales ......................... 19 14 14 12
Depreciation and amortization ............... 5 48 53 41
------ ------- ------- -------
Total operating expenses ................... 127 175 201 147
------ ------- ------- -------
Income (loss) from operations ................ (27) (75) (101) (47)
Other income (expense), net .................. (1) (2) (1) (1)
--------- ---------- ---------- ----------
Net income (loss) ............................ (28) (77) (102) (48)
Accretion of mandatorily redeemable
preferred stock to redemption value ......... -- (5) (9) (6)
-------- ---------- ---------- ----------
Net income (loss) attributable to
common stockholders ......................... (28)% (82)% (111)% (54)%
======== ========= ========= =========
</TABLE>
Liquidity and Capital Resources
Since inception, we have financed our operations primarily from sales of
preferred stock and borrowings under bank credit facilities. To date, we have
raised approximately $12.7 million, net of offering expenses, through the sale
of our preferred stock. At March 31, 1999, we had approximately $2.3 million in
cash and cash equivalents.
26
<PAGE>
Net cash used in operating activities for the years ended December 31,
1996, 1997 and 1998 and for the three months ended March 31, 1998 and 1999, was
$208,000, $23,000, $3.4 million, $446,000 and $1.2 million, respectively. Cash
used in operating activities in each of these periods was primarily the result
of net losses, adjusted for non-cash items primarily related to depreciation
and amortization, increases in accounts receivable and fees and expenditures in
excess of billings, partially offset by increases in accounts payable and
accrued expenses.
Net cash used in investing activities for the years ended December 31,
1996, 1997 and 1998 and for the three months ended March 31, 1998 and 1999 was
$255,000, $612,000, $649,000, $118,000 and $270,000, respectively. Cash used in
investing activities in each period consisted primarily of purchases of
furniture and equipment and to a lesser extent in 1997 the acquisition of an
Internet professional services firm.
Net cash provided by financing activities for the years ended December 31,
1996, 1997 and 1998 and for the three months ended March 31, 1998 and 1999 was
$1.0 million, $827,000, $7.0 million, $447,000 and $62,000, respectively. In
1996 and 1997 the cash provided by financing activities was almost entirely
from the sale of our preferred stock. In 1998 the cash provided by our
financing activities was from the sale of our preferred stock and borrowings
under our credit facility, offset by our repurchase of common stock and
preferred stock from certain of our stockholders.
As of March 31, 1999, our principal commitments consisted of obligations
under equipment leases and notes payable that funded our purchases of furniture
and equipment. The equipment leasing arrangements consist primarily of U.S.
Interactive paying rental fees to third party leasing providers at interest
rates between 9% and 10.5%. Although we have no material commitments for
capital expenditures, we anticipate an increase in our capital expenditures
consistent with anticipated growth in our operations, infrastructure and
personnel.
As of March 31, 1999 U.S. Interactive had a $3.3 million line of credit
and a $1.2 million term loan with a commercial bank. Under the terms of the
line of credit, borrowings are subject to a limit of 75% of eligible accounts,
as defined in the line of credit. The line of credit bears interest at a rate
of prime plus 1.25% (9% at March 31, 1999). There was $1.1 million outstanding
and $1.6 million available under the line of credit as of March 31, 1999. The
term loan matures on July 1, 2003. The term loan bears interest at a rate of
prime plus 1.75% (9.5% at March 31, 1999) and had $1.2 million outstanding as
of March 31, 1999. The commercial bank waived our non-compliance with our
financial covenants under the line of credit and the term loan as of March 31,
1999. In June 1999, the commercial bank extended the expiration date of the
line of credit to June 30, 2000 and amended the financial covenants.
We believe that the net proceeds from this offering, combined with current
cash balances and borrowings available under our credit facilities, will be
sufficient to fund our requirements for working capital and capital
expenditures for at least the next 24 months. Thereafter we may sell additional
equity or debt securities or seek additional credit facilities. Sales of
additional equity or convertible debt securities would result in additional
dilution to our stockholders. We may need to raise additional funds sooner in
order to support more rapid expansion, develop new or enhanced services and
products, respond to competitive pressures, acquire complementary businesses or
technologies or take advantage of unanticipated opportunities. Our future
liquidity and capital requirements will depend upon numerous factors, including
the success of our existing and new service offerings and competing
technological and market developments. Additional financing, if any, may not be
available on satisfactory terms.
27
<PAGE>
Year 2000
Background. Many computer systems and applications currently use two-digit
fields to designate a year. As the century date change occurs, date-sensitive
systems may recognize the year 2000 as 1900, or not at all. This inability to
recognize, or properly treat, the year 2000 may cause systems to process
financial and operational information incorrectly, resulting in system failures
and other business problems.
Risk Factors. We may experience operations interruptions because of year
2000 problems. Clients' and potential clients' purchasing patterns may be
affected by year 2000 issues as companies expend significant resources to
correct their current systems for year 2000 compliance. These clients and
potential clients may have fewer funds available to purchase our services.
Also, we may experience operations difficulties caused by undetected errors or
defects in the technology we use in our internal systems. We may also become
involved in disputes regarding year 2000 problems involving solutions we
developed or implemented or the interaction of our Internet solutions with
other applications for our clients. Year 2000 problems could require us to
incur delays and unanticipated expenses. We have formulated an approach to
address our exposure to these risk factors.
Approach. We are assessing the impact of the year 2000 issue on our
current and future client projects and internal information systems. We have
performed a preliminary assessment of the year 2000 readiness of our internal
information systems, including the hardware and software we use to provide and
deliver our Internet solutions. We have engaged a consulting firm to further
assess the year 2000 readiness of our internal software and information
systems. Currently, we expect the consulting firm to provide us with the
results of their assessment in June 1999. We plan to perform a year 2000
simulation on our software and information systems during the second and third
quarters of 1999. Based on the results, we will revise our internal software
and systems as necessary. Based on our preliminary assessment, we do not
anticipate any requirement for material modification.
We have identified and will require all vendors who provide material
hardware or software for our information systems to provide assurances of their
year 2000 compliance. We have also identified and will seek assurances of year
2000 compliance from our material non-information technology providers. We plan
to complete this process during the third quarter of 1999. Until our testing is
complete and all of our material vendors and providers are contacted, we will
not be able to completely evaluate whether our systems will need to be revised
or replaced.
We also performed a preliminary assessment of the impact of the year 2000
issue involving solutions we have developed or implemented for our clients. Our
consulting firm is also further assessing this impact. From this evaluation, we
expect to perform certain year 2000 simulation tests on the solutions we
developed for our clients.
Status. Our testing to date has included our major infrastructure items,
hardware platforms and operating systems in our offices. Desktop computing,
servers, switching and routing platforms have been inventoried, with only minor
modifications required to the network and routing platforms.
We have largely completed the implementation of year 2000 compliant
internal computer applications for our main financial and internal management
information systems.
Cost. Based on the work done to date, we expect the cost for work,
material and upgrades needed to complete our year 2000 process will not exceed
approximately $200,000. This includes the cost of upgrades, software
modification and related consulting fees.
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Contingency Plans. As discussed above, we are engaged in an ongoing year
2000 assessment and have not yet developed any contingency plans. We will
assess the results of our year 2000 simulation testing and third-party vendor
and service provider responses to determine the nature and extent of any
contingency plans.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates
primarily to the increase or decrease in the amount of interest income we can
earn on our available funds for investment and on the increase or decrease in
the amount of interest expense we must pay with respect to our various
outstanding debt instruments. The risk associated with fluctuating interest
expense is limited, however, to the exposure related to those debt instruments
and credit facilities which are tied to market rates. We do not plan to use
derivative financial instruments in our investment portfolio. We plan to ensure
the safety and preservation of our invested principal funds by limiting default
risks, market risk and reinvestment risk. We plan to mitigate default risk by
investing in high-credit quality securities.
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BUSINESS
Overview
We are a provider of Internet professional services helping companies take
advantage of the business opportunities presented by the Internet. We provide
integrated Internet strategy consulting, marketing and technology services that
enable our clients to align their people, processes and systems to form an
electronic enterprise. An electronic enterprise utilizes Internet-based
technologies to transact business, communicate information and share knowledge
across employees, customers and suppliers. Electronic enterprises are designed
to:
o better service customers and increase revenue opportunities
o more effectively target, attract and communicate with prospective
customers
o increase efficiency and reduce costs
o better utilize the experience and expertise of its organization
o streamline processes between the enterprise and its trading partners
We deliver our services through a development plan that we created and
call e-Roadmap. e-Roadmap is a group of service offerings that can be
customized to meet the needs of each client. These services are delivered
through our IVL Methodology. Our IVL Methodology is comprised of three phases
during which our services are performed. These phases include:
o an "Innovation" phase, during which we define the overall vision and
scope for a project
o a "Validation" phase, during which we create and test a prototype that
addresses the client's objective
o a "Launch" phase, during which we refine, integrate and deploy the final
solution.
To facilitate our implementation process, we employ an extranet called
"Capture" for ongoing client communication on individual projects. Capture
serves as a communications center for a client project that enables our clients
to monitor and comment on a project's direction and progress on a real-time
basis. We believe this provides our clients with a higher degree of confidence
that the ultimate deliverables will meet their expectations.
Industry
The emergence and adoption of the Internet are changing the way consumers
and organizations communicate, share information and conduct business. IDC
estimates that the number of Internet users worldwide will grow from
approximately 70 million in 1997, to 320 million in 2002. Forrester Research
estimates that the revenues generated from Internet commerce will grow from
approximately $43.0 billion in 1998, to $1.3 trillion in 2003. The Internet is
increasingly transforming traditional buyer and seller relationships and having
a profound effect on businesses.
Early adoption of the Internet as a business tool for many businesses
consisted of advertising and promotional web sites. These sites provided
marketing material that largely replicated traditional paper-based marketing
messages in a static web page environment, sometimes referred to as
brochure-ware. Businesses often relied on in-house information technology
personnel, Internet advertising firms, or web design companies to develop and
deploy these web sites.
As the Internet continued to gain in popularity and new Internet business
models began to develop, businesses recognized the Internet's potential as a
powerful selling and
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communication vehicle. This next generation of Internet business models
involved the development and use of transactional web sites for the
presentation of catalogued product information combined with basic transaction
and communication capabilities layered on top of advertising and marketing
messages. However, these sites provided only basic features and processing
capabilities with little or no integration with the business's technology
systems. Moreover, a large number of these sites simply replicated traditional
business models and functioned as additional distribution channels for their
core business strategies similar to a direct mail catalogue program.
Today, a large and growing number of businesses are realizing that the
Internet offers much greater potential than being merely an extension of their
traditional core businesses. As businesses feel the effects of the Internet on
the competitive landscape and confront the emergence and success of radically
new business models, they are increasingly realizing that the Internet is
fundamentally transforming the way they compete. This realization is forcing
businesses to reevaluate their Internet strategies and, most importantly,
review their entire operational models in order to align their business
objectives more closely to their business processes and systems. Businesses are
attempting to utilize innovative Internet solutions to improve their
competitive position and take advantage of:
o greater opportunities to attract and retain profitable customers
o improved operational efficiencies
o strengthened supply chain partner relationships
o improved communications within organizations
As a result, businesses are increasingly seeking third-party service
providers to help them create and build business-driven Internet solutions. To
service this emerging need, many of the traditional service providers such as
management consultants, traditional IT service providers and advertising firms
have created groups within their organizations that focus on the Internet needs
of their clients. However, many of these existing providers lack the breadth of
services to provide a comprehensive Internet solution. Most management
consulting firms focus on business strategy and traditional mainframe and
client/server development services. Traditional IT service providers are
primarily engaged in traditional mainframe and client/server systems
development and deployment, and the implementation of traditional business
applications such as enterprise resource planning. Many interactive agencies,
which include web page design firms and advertising agencies, have considerable
expertise in Internet marketing and creative development, but lack deep
technology and business strategy capabilities. Thus, many businesses have begun
to seek third-party providers that can provide them with an integrated service
offering, a solution that balances the necessary components of the three
disciplines of Internet strategy, marketing, and technology.
This demand for an integrated service offering has led to the emergence of
a new breed of third-party service provider, the Internet professional services
firm. This new type of service provider must not only have the necessary
expertise to service this emerging market, but also provide a structured
approach to integrating strategy, marketing and technology to create a single,
unified Internet solution. IDC estimates that the market for Internet
professional services will grow from approximately $7.8 billion in 1998, to
$78.6 billion in 2003.
Our Solution
We provide Internet-based business solutions that help our clients create
electronic enterprises. We deliver our services through integrated,
multi-skilled teams consisting of
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business strategists, Internet marketing experts and IT professionals. We
combine our people, processes and integrated service offerings to deliver
flexible solutions to our clients primarily on a fixed-time, fixed-price basis.
Key elements of our solution include:
o defined service offerings
o Internet-focused delivery methodology
o an integrated, client-focused delivery model
Defined Service Offerings. Our proprietary development plan, e-Roadmap,
serves as a blueprint to define and create a customized solution for an
organization's specific Internet initiative. The e-Roadmap is built on a
framework which includes twenty-two specific project deliverables, also called
defined service offerings. These service offerings have been designed from our
experience with clients. e-Roadmap establishes a specific sequence for the
delivery of these defined service offerings to create a customized solution for
each client.
These service offerings are utilized across U.S. Interactive's four
practice areas. These practice areas, which allow us to focus our resources on
specific areas of product development and implementation skills, are as
follows:
o Electronic Commerce: This practice area consists of building Internet
sites that enable business-to-business, or business-to-consumer
transactions. Clients benefit from new revenue streams and/or decreasing
costs by eliminating inefficient processes such as manual purchase order
requests.
o Digital Marketing: This practice area entails establishing and promoting
the new digital or Internet-based brand. Our digital marketing practice
helps our clients create Internet sites, programs, and campaigns to market
their company and its products or services.
o Enterprise Relationship Management: This practice area encompasses
providing consulting, development, and integration expertise to link
customer databases and management systems to the Internet.
o Kowledge Management: This practice area relates to the system by which an
organization stores and exchanges information pertaining to their
particular industry, company, customers, and competitors. By leveraging
Internet-based technologies, these solutions primarily take the form of
intranet and document management applications. An intranet is a computer
network for use by a company and its employees.
Given the rapid pace of development within the Internet professional
services industry, we believe that our focus on innovation within the
application of our e-Roadmap development plan is critical to our clients'
long-term satisfaction and success.
Internet-focused Delivery Methodology. Since our inception, we have been
focused exclusively on delivering Internet-based business solutions. To provide
rapid development while monitoring quality and cost-efficiency, we employ our
service offerings in phases in accordance with our IVL Methodology. Under this
approach, each project is comprised of an "Innovation" phase where we define
overall project vision and scope, a "Validation" phase of prototyping and
testing, and a "Launch" phase of final development and integration. We employ
our IVL Methodology when completing projects encompassing only one practice
area or an electronic enterprise solution which would encompass all of our four
practice areas.
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Integrated, Client-focused Delivery Model. We provide our solutions
through the use of multi-skilled project teams led by our client service
personnel. Our integrated strategy, marketing and technology capabilities help
us to provide our clients with solutions that align their business's
objectives, processes and systems. Our client-focused delivery model ensures
that one Client Services Manager or Director is on the project and is
responsible for the overall client relationship. Our client services personnel
focus their efforts on ensuring that the appropriate skills are combined to
meet the particular needs of each client. These professionals have day-to-day
project and client relationship management responsibility and also conduct the
majority of our strategy work. Client feedback is secured through a series of
facilitated workshops, interviews, and prototyping sessions. These techniques
are used to help create consensus on requirements and solutions. We also
provide an extranet individually customized to over 65% of all client
engagements. These extranets, which we call Capture, are password protected
websites established to provide communications electronically. Capture allows
for shared:
o detailed work plans
o project updates
o team communication
o creative and technical prototypes
o new business proposals
Capture serves as the communication center for many of our projects and permits
a client to provide feedback electronically. We believe that by enabling our
clients to monitor and comment on a project's direction and progress on a
real-time basis, Capture improves our ability to deliver final solutions that
will meet client expectations.
Our Strategy
U.S. Interactive's strategy is to strengthen its position as a provider of
Internet-based business solutions.
Expand Client Relationships. We seek to use our client service delivery
model to increase business opportunities with our clients. Our client service
personnel work closely with our clients and our project managers to identify
these opportunities. Additionally, the application of our proprietary e-Roadmap
development plan includes an assessment of our clients' needs which provides
insight into potential opportunities for expanding their Internet initiatives.
We are also extending the use of Capture beyond the term of particular projects
in order to enhance our communication with our clients and enable us to market
our services more proactively. We believe these actions will enable us to
continue building long-term client relationships and better respond to our
clients' evolving needs.
Enhance Knowledge Management and Knowledge Distribution Capabilities. We
seek to use our knowledge management and knowledge distribution capabilities to
more efficiently employ our resources and institutionalize the collective
knowledge and experience gained from over 400 client projects. Our knowledge
management system consists of databases, written materials and related internal
procedures. Our intranet provides access to this knowledge management system,
which includes:
o reusable templates for new business presentations
o project management tools
o application development knowledge
o libraries of creative material
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We are continuing to make substantial investments in our intranet to improve
access to our knowledge management system. This enables our service delivery
professionals to utilize our past experiences to speed deployment of our
solutions.
Hire and Retain Skilled Employees. We intend to identify, hire, train and
retain individuals who are highly skilled in the rapidly changing technology of
the Internet. We have, therefore, sought to create a corporate culture that
offers employee stock ownership, promotion from within, providing advanced
training, challenging assignments and involvement in many facets of our
business.
Specifically, we currently are implementing the following initiatives:
o creation of specific career path models for all levels of staff
o development of formalized training curriculum
o further implementation of in-depth staff orientation programs
o creation of formal staff advisor and mentoring programs
Strengthen Relationships with Technology and Internet Infrastructure
Companies. We seek to enter into relationships with companies that we believe
are well positioned to take advantage of current and future electronic
enterprise opportunities. We have established and maintain over 20 strategic
relationships with software and infrastructure firms, such as Microsoft,
Vignette, Trilogy Software, BroadVision, Digex and Open Market. We believe that
these non-exclusive relationships enable us to deliver more effective solutions
to our clients with greater efficiency due to the advanced training and
information we receive regarding the availability of new products and features
which are provided by these third parties. These relationships have also been
an important source for identifying new client business opportunities.
Expand Geographically. We intend to continue to expand geographically in
order to enhance our profile and market reach both domestically and
internationally. We utilize a disciplined approach to geographic expansion
through phased entry into metropolitan markets. This phased approach begins
with the founding of local sales offices and the establishment of additional
delivery personnel based on the growth of our business within a particular
market. Additionally, we will from time to time evaluate the acquisition of
other Internet professional service businesses to accelerate our growth in
particularly attractive geographic markets.
Services, Clients, Strategic Relationships and Marketing and Sales Services
Our solutions are developed using three primary elements, our e-Roadmap,
IVL Methodology and Capture extranet.
e-Roadmap
Electronic enterprise solutions involve the use of Internet-based
technology in order to integrate an organization's business objectives,
processes and systems. These solutions align an enterprise with its various
customers, suppliers and partners. We deliver these solutions in an integrated
manner utilizing our e-Roadmap development plan. Our e-Roadmap development plan
incorporates a combination of defined service offerings from our four primary
practice areas to create a customized solution for our clients. These four
practice areas are:
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Electronic Commerce. We provide a broad range of electronic commerce
solutions including:
o Internet catalogue systems
o e-commerce software package implementation
o custom e-commerce software development
o complex transaction processing solutions
Our e-commerce solutions enable clients to market products and services,
fulfill and confirm orders, approve and process credit card transactions and
deliver on-line customer service.
Digital Marketing. We provide Internet marketing services which we call
"Digital Marketing." These services primarily focus on:
o website design and development
o media planning and buying
o affiliate marketing program development
o brand creation and management
These services help our customers create a compelling Internet presence to
market their company, products or services.
Enterprise Relationship Management. We provide a range of Enterprise
Relationship Management services that are designed to enable organizations to
utilize the Internet to acquire, retain and develop customers. Our solutions
utilize an organization's past investments in call center infrastructures,
sales force automation and customer management applications, aligning those
systems with new Internet opportunities. Call center infrastructures include
the systems used by many companies for customer inquiries which are typically
based on mainframe computers and use client/server computing applications.
Sales force automation solutions entail client/server computing applications
designed to centrally manage and facilitate the analysis of sales prospects and
forecasts. Customer management systems are client/server based applications
that store, monitor and analyze customer information. The services we provide
in this practice area include:
o customer care audits
o software evaluation workshops
o customer care application design
o overall systems development and integration
Knowledge Management. We believe that the wealth of employee knowledge
that a company acquires over time is a principal component of that company's
expertise. We provide services that allow a company to gather, organize and
present knowledge in an electronically accessible form. Components of knowledge
management include:
o intranet development
o data warehousing design and development
o document management
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IVL Methodology
Our IVL Methodology is a process to establish project goals, develop
working prototypes of proposed solutions, and to develop and deploy the agreed
upon solution. We believe this methodology ensures that the goals of a project
are clearly defined and delivered quickly. We group our services within our
three IVL Methodology phases.
The "Innovation" phase focuses on high level strategic planning and
development of the proposed electronic enterprise solution. We seek to promote
creative thinking and align business objectives by using a series of techniques
including facilitated workshops between our service delivery team and the
client's internal project team, as well as one-on-one interviews with the
client.
The "Validation" phase focuses on providing and proving the concepts or
strategies developed during the Innovation phase. Validation can be achieved
through extended market research and concept prototype development.
The "Launch" phase consists of the final development and deployment of
specialized solutions. We accomplish this through a series of design and
development reviews and checkpoints with the client.
The service deliverables we offer within each of our IVL Methodology
phases are explained below.
<TABLE>
<CAPTION>
Methodology e-Roadmap
Phase Service Deliverables Service Description
- ------------- ------------------------------- -------------------------------------------
<S> <C> <C>
Innovation Business Case Strategy development, cost-benefit
analysis and return on investment
evaluations
Knowledge Audit Documenting the forms and methods of
access and storage of knowledge capital
Customer Care Audit Providing a framework for customer
service offerings, detailed analysis of
current consumer attitudes
Enterprise Architecture Audit Aligning current technology
infrastructures to the Internet
Channel Audit Identifying new and existing Internet
distribution channels
Competitive Analysis Rating existing web presence against
competitors' sites, ease of navigation,
design, technology and presentation
Validation Digital Prototyping Visual demonstration of the proposed
solution
Digital Brand Positioning Generating guidelines for brand
Strategy development through competitive
product, service and/or consumer
research analysis
Digital Channel Strategy Strategic analysis of client's value chain
</TABLE>
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<TABLE>
<CAPTION>
Methodology e-Roadmap
Phase Service Deliverables Service Description
- -------------------- ------------------------------ --------------------------------------------
<S> <C> <C>
Validation (cont.) Software Evaluation Workshop Bypasses the Request for Proposal (RFP)
process to identify the most effective
software application
Creative Concepts Creating brand logos, banner
advertisements and layout and design of
websites
Systems Architecture Establishing dynamic guidelines for
technology architecture
Usability Testing Testing a preliminary solution through a
target market sampling
Development Implementation Using client's priorities to create project
Plan phases for "Launch"
Launch Enterprise Design and Iterative construction and definition of
Development requirements, determining project scope
Custom Software Development Creating reusable code and software
applications
Custom Commerce Solutions Integration and development of Internet
business solutions
Enterprise Software Partnering with Internet software
Implementation application providers to integrate
e-commerce, digital marketing, enterprise
relationship management and knowledge
management solutions
Systems Integration Integration of a client's existing
technologies to new Internet enterprise
systems
Media Plan Analysis and recommendation of Internet
media, placement, distribution and
tracking
Media Placement and Tracking Placing and measuring the effectiveness
of print and Internet promotional
campaigns
</TABLE>
Capture
As part of many of our client engagements, we create individually
customized extranets, which we call Capture, to facilitate communication
throughout the project. Capture allows a client to monitor the progress of the
project electronically through a password protected extranet site. The Capture
extranet site allows a client to view detailed work plans, project updates,
team communication, creative/technical prototypes and new business proposals.
Capture also allows us to gather instant feedback from key decision-makers
within a client's organization regarding specific elements of a engagement.
This feedback allows us to address client issues during the development phase.
We intend to continue to expand the features of Capture over time.
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Clients
Set forth below is a selected list of our clients from whom we generated
significant revenues since January 1, 1998.
adidas Royal Caribbean International
Dairy Farm International Sprint
Deloitte Consulting LLP Stamford Health Systems
Disney Online Starbright Foundation
GeoCities TVN Bank
Granite Financial Team One/Lexus
International Gaming Technology Thomson Consumer Electronics
Microtek Toyota
PECO Energy Unum
Pioneer Electronics
Selected Case Studies
e-Commerce
Challenge: Dairy Farm International, a Hong Kong-based food retailer and
Asia's largest supermarket holding company, engaged us to create an e-commerce
business for their holdings across Asia, Australia and New Zealand.
Solution: U.S. Interactive developed a strategy for the creation of a new,
separate e-commerce corporation that included a brand identity intended to be
recognized and accepted as a trusted vendor in 15 different countries with
different languages and cultures. We began performing these services in May
1998. U.S. Interactive's strategy included the development of a comprehensive
technical architecture to facilitate secure transactions, supply chain
management and fulfillment. This application allowed Dairy Farm International
to:
o integrate product image/information databases
o track and profile customers
o monitor warehouse inventory
o enhance order fulfillment
o integrate regional data systems
These services provide management with a unified view of the inventories
of 1,350 individual stores. Additionally, these services enable customers to
utilize local currencies and multiple payment methods. We also created a new
brand identity called "I-Go" to be paired with the existing Dairy Farm
International brand. We created an online shopping experience with features to
help customize consumer purchase transactions. These features included
automatic delivery routing for same day service and direct debit payment.
e-Roadmap services delivered:
o business case
o enterprise architecture audit
o brand audit
o digital brand positioning strategy
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o customer care audit
o creative concepts
o digital channel strategy
o systems architecture
o development implementation plan
o enterprise design and development
o enterprise software implementation
o custom commerce solution
o custom software development
o systems integration
Digital Marketing
Challenge: Royal Caribbean International, the second largest cruise
vacation company in the world, decided to build an Internet presence that would
permit the company to sell cruise vacations and provide travel information on
the Internet, without jeopardizing its relationships with authorized travel
agents, its primary distribution channel. Working with U.S. Interactive, Royal
Caribbean developed a comprehensive Internet initiative focused on building
market share, increasing brand awareness and creating new channels of
distribution.
Solution: We have worked with Royal Caribbean to construct a three
year-phased plan that encompassed extensive business case analysis, site
analysis, consumer research and overall organizational alignment to the
Internet.
We began the project in December 1996 by creating a web site that allows
consumers to shop for and plan vacation packages. Selected vacation packages
are routed to authorized travel agents to encourage and secure their
participation in the selling process. Upon the successful deployment of
vacation planner, Royal Caribbean had us build and launch an Internet-based
direct marketing component called "brochure builder." Over the course of the
last three years, Royal Caribbean has been able to attract more potential
buyers, increase consumer brand awareness and minimize travel agents'
resistance to an Internet-based selling process. In addition, the information
generated by this site has allowed Royal Caribbean to create over 150,000
customer profiles.
e-Roadmap services delivered:
o business case
o brand audit
o channel audit
o competitive analysis
o digital brand positioning strategy
o creative concepts
o digital channel strategy
o enterprise software implementation
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o systems integration
o media plan
o media placement and tracking
Enterprise Relationship Management
Challenge: Toyota is the fourth largest automaker in the United States.
Customer satisfaction surveys showed that Toyota Motor Sales USA was rated
highly for vehicle satisfaction, but poorly for dealership sales and service.
In response, Toyota developed a program called TQE: Total Quality Experience.
Part of the program's mission was to develop a tool to streamline the
dealership sales process.
Solution: We have worked with Toyota since September 1997 to develop and
implement TCMS (Toyota Customer Management System). TCMS was built around a
large-scale intranet system incorporating product, pricing and manufacturing
information. These components can be customized by Toyota to meet its specific
needs. This application automates many aspects of the sales process to allow an
individual consumer, while visiting a dealership, to identify, view and track
their desired automobile online. Additionally, TCMS allows Toyota to enhance
its consumer profiles and demographics, linking that data directly to its
manufacturing process.
e-Roadmap services delivered:
o systems architecture
o systems integration
o digital prototyping
o custom software development
o usability testing
o development implementation plan
Knowledge Management
Challenge: Deloitte Consulting LLP has worked with us since January 1998
to integrate its Internet presence with its overall corporate initiatives to
continue to be consistently recognized as one of the three best consulting
firms in the world. Recruiting is among the most critical functions to the firm
due to the competitive nature of attracting qualified IT and business
consultants. As part of this initiative, Deloitte Consulting sought to leverage
the Internet to develop an Internet recruiting application to support its
on-going global recruiting needs.
Solution: Working with Deloitte Consulting LLP, U.S. Interactive designed
and deployed a worldwide Internet recruiting application that supports global
recruiting efforts for 24 countries within 60 days. U.S. Interactive developed
an application that scans resumes and translates them into a standardized
digital format that is accessible across multiple technology platforms. Resumes
are entered into Deloitte Consulting's knowledge management intranet and
automatically routed to the appropriate human resource professionals in various
business units around the world.
e-Roadmap services delivered:
o brand audit
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o business case execution
o digital creative execution
o usability testing
o enterprise design and development
o enterprise software implementation
o systems integration
Strategic Relationships
We seek to enter into relationships with companies that we believe are
well positioned to take advantage of current and future electronic enterprise
opportunities. The agreements or other understandings underlying these
relationships are non-exclusive, often general in nature and non-binding.
However, we believe that these non-exclusive relationships enable us to deliver
more effective solutions to our clients with greater efficiency due to the
advanced training and information regarding the availability of new products
and features which we receive from these third parties. In order to facilitate
this exchange, we have developed a preferred partner extranet. A preferred
partner extranet is a series of extranet sites based on the Capture template
and customized to a particular company with whom we have a strategic
relationship. These extranets allow for the sharing of presentations,
proposals, and information pertaining to the described company, client, or
prospect. Currently, we have two working preferred partner extranets, and we
intend to implement similar extranets for more than half of our strategic
relationships.
These relationships have also been an important source for new client
opportunities. We currently maintain strategic relationships with over 20
companies. Some of these strategic relationships include:
o Microsoft. We are a Microsoft Certified Solutions Provider. Our
activities include the integration and development of Microsoft's web and
e-commerce software and tools.
o Vignette. Vignette is a provider of content management solutions for
e-commerce. We and Vignette Corporation have a "Solution Provider"
agreement to deliver solutions to companies building businesses online.
This relationship provides for the installation, implementation, training,
customization, project management and content loading of software to our
joint clients.
o Trilogy Software. Trilogy is a provider of enterprise software solutions
for sales, marketing and customer relationship management automation. We
and Trilogy have an "Authorized Service Provider" agreement under which we
jointly provide clients with front-office sales, marketing and customer
service business software solutions including installation, implementation
and training services. These services enable sales representatives,
channel partners and the home office to work together to serve customers
more efficiently by changing the way their products are bought and sold.
o BroadVision. BroadVision is a provider of e-Commerce and Internet-based
business software. We and BroadVision have an "Integrator" relationship in
which both organizations provide clients online business solutions based
on BroadVision's software.
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o Digex. Digex is a provider of complex Internet hosting services. We and
Digex have an "Authorized Alliance" agreement under which web-site
management and hosting services are provided to clients.
o Open Market. Open Market develops Internet commerce and information
publishing software. We and Open Market have a relationship that allows
both companies to develop, market and deliver business solutions for
Internet commerce and electronic publishing services.
Marketing and Sales
Our marketing efforts are focused on increasing our brand awareness and
market share through:
o defining our services as deliverable products
o entering into and managing strategic alliances
o public relations
o marketing communications
o seminar and forum development and direct mail
All information pertaining to these activities, including industry research and
development trends, is distributed internally through the use of the marketing
section of our intranet. As of May 1, 1999, our marketing department consisted
of six full-time employees encompassing both field and corporate marketing.
We primarily market and sell our services through a direct sales force. As
of May 1, 1999, our direct sales force consisted of ten full-time sales
professionals whose primary responsibilities are to close new business
opportunities marketed to senior executives of national and international
corporations.
Competition
The market for Internet professional services is intensely competitive and
subject to rapid technological change. We compete with:
o other Internet professional services firms (such as Viant and Scient)
o information technology consulting and integration firms (such as
Cambridge Technology Partners and Sapient)
o Web design firms (such as Modem Media . Poppe Tyson and Razorfish)
o management consulting firms (such as Diamond Technology Partners and
Andersen Consulting)
o computer hardware and software vendors (such as IBM and Unysis)
In addition, we face competition with the in-house technology and
marketing departments of our clients and potential clients.
We believe that the principal competitive factors in our industry are:
o integrated Internet strategy, marketing and technology
o reliability
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o client service
o technology expertise and client industry knowledge
o cost certainty
o referenceable customer base
There are relatively low barriers to entry into our business. We expect
that we will face additional competition from new entrants into the market in
the future. Existing or future competitors may develop or offer services that
provide significant performance, price, creative or other advantages over those
offered by us.
Employees
As of June 1, 1999, we employed approximately 240 people in five offices,
consisting of approximately 170 project personnel, 20 marketing and sales
personnel and 50 administrative personnel. Project personnel includes client
service personnel, project managers, designers, programmers and other personnel
designated to complete client projects. Administrative personnel includes
finance and accounting, human resources and general administration personnel.
None of our employees are covered by any collective bargaining agreements. We
have not experienced any work stoppages and believe our relationships with our
employees are good.
Facilities
U.S. Interactive's principal administrative, finance, marketing and sales
offices are located in approximately 28,000 square feet of leased office space
in King of Prussia, Pennsylvania. The lease for this office space is for a term
of seven years and expires on May 14, 2005. U.S. Interactive also leases office
space in:
o Los Angeles, California
o New York, New York
o Murray Hill, New Jersey
o Washington, D.C.
We lease all of our facilities and believe our current facilities are adequate
to meet our needs for the foreseeable future.
Legal Proceedings
U.S. Interactive is not a party to any material legal proceedings.
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<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table presents information about each of U.S. Interactive's
executive officers and directors. U.S. Interactive's board of directors is
divided into three classes serving staggered three-year terms.
<TABLE>
<CAPTION>
Year of Annual Meeting that
Name Age Position(s) with Company Term as Director Expires
- ------------------------------ ----- ----------------------------- ----------------------------
<S> <C> <C> <C>
Eric Pulier .................. 32 Chairman of the Board 1999
Stephen T. Zarrilli .......... 38 Director, President and 2000
Chief Executive Officer
Philip L. Calamia ............ 36 Vice President and
Chief Financial Officer
Ajit Prabhu .................. 39 Chief Technology Officer
Michael M. Carter ............ 26 Vice President of Marketing
Robert E. Keith, Jr. ......... 57 Director 2001
John D. Shulman .............. 36 Director 1999
E. Michael Forgash ........... 41 Director 1999
</TABLE>
- ------------
Eric Pulier is one of our co-founders and has been the Chairman of the
Board since July 1998 and was Chief Technology Officer from July 1998 to May
1999. Mr. Pulier was the founder of Digital Evolution and served as the
President and a director of Digital Evolution from May 1994 to July 1998, which
performed consulting services for MCI Telecommunications, Microsoft and Rand
Corporation. Mr. Pulier is currently a technology advisor to the Vice President
of the United States.
Stephen T. Zarrilli served as our director from August 1995 until July
1998, and began his current term as a director in April 1999. He has served as
President since May 1999 and as Chief Executive Officer since March 1999, and
prior thereto as acting Chief Operating Officer from December 1998 until March
1999. Mr. Zarrilli served as our Senior Executive Vice President and Chief
Financial Officer from August 1998 through December 1998, as our Executive Vice
President of Finance and Administration from September 1996 until July 1998,
and as Secretary, Treasurer and Chief Financial Officer from January 1995 until
September 1996. From May 1994 to December 1994, Mr. Zarrilli served as Director
of Finance for American Gaming Corporation, a publicly held development stage
gaming company. From July 1983 to April 1994, Mr. Zarrilli was employed by
Deloitte & Touche LLC, an international accounting and consulting firm, most
recently as a Senior Manager in the firm's emerging businesses practice group.
Philip L. Calamia has served as Vice President, Chief Financial Officer
and Secretary since April 1999, as Vice President, Finance and Accounting from
July 1998, until March 1999, and as Corporate Controller from December 1996
until July 1998. Prior to joining U.S. Interactive, from March 1995 until
December 1996, Mr. Calamia was Manager of Financial Reporting at Mediq/PRN a
national medical services company. Prior to Mediq/PRN, from January 1993 until
March 1995, Mr. Calamia was with the accounting firm Deloitte & Touche. Mr.
Calamia is a Certified Public Accountant.
Ajit Prabhu has served as Chief Technology Officer since May 1999,
following our acquisition of InVenGen LLC an internet professional services
company he co-founded in August 1997. He served as a Managing Director of
InVenGen from that time until March 1999.
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<PAGE>
Mr. Prabhu was a Senior Manager with the Deloitte & Touche Consulting Group
from April 1993 to August 1997, and acting Chief Operating Officer of NetDox,
Inc. from February 1996 to August 1997. Mr. Prabhu was a senior engineer with
AT&T Bell Laboratories (now Lucent Technologies) from 1984 to 1993.
Michael M. Carter has served as our Vice President of Marketing since
December 1998, and as Director, Corporate Marketing from April 1998, to
December 1998. Prior to joining U.S. Interactive, Mr. Carter served as
Worldwide Marketing Manager, Network Services Group for Cambridge Technology
Partners (Massachusetts) from December 1997, to April 1998, as
Marketing/Business Development Manager, Mid-Atlantic Region from January 1997
to December 1997, and consultant from July 1996, to December 1996, for
Cambridge Technology Partners (Massachusetts), Inc. Mr. Carter serves on the
advisory board of Softplus, a customer relationship management solution
provider.
Robert E. Keith, Jr. has been our director since June 1996. Mr. Keith is
also Managing General Partner of Technology Leaders II, L.P. and has had
principal operating responsibility for Technology Leaders II, L.P. since 1988.
Mr. Keith also serves as a director of American Education Centers, Inc.,
Cambridge Technology Partners (Massachusetts), Inc., Diablo Research
Corporation, LLC, Interactive Media Systems, Inc., Internet Capital Group, Inc.
Masterpack International, Inc., MultiGenParadigm, Inc., Naviant Technology
Solutions, Inc., Sansource, Inc., and Whisper Communications, Inc. and is Vice
Chairman of the Board of Safeguard Scientifics, Inc.
John D. Shulman has been our director since July 1998. Mr. Shulman has
served as President & Chief Executive Officer of ONYX International, LLC, a
merchant banking and venture capital firm, since 1995. Prior to this, Mr.
Shulman was Director of Development for the Tower Companies, a diversified real
estate and investment firm from 1988 to 1994. Mr. Shulman also serves as a
director of Juggernaut Partners, LLC, Interactive Video Technologies, Inc.,
Phar-Mor, Inc., ChemLink Laboratories, LLC, Taiwan Mezzanine Fund I and
Performance Distribution, Inc.
E. Michael Forgash has been our director since October 1998. Mr. Forgash
has been Vice President, Operations of Safeguard Scientifics, since January
1998. Prior to joining Safeguard Scientifics, Mr. Forgash was President and
Chief Executive Officer of Creative Multimedia from August 1996, to October,
1997. Prior to that, Mr. Forgash was President at Continental HealthCare
Systems from November 1994 to July 1996. Mr. Forgash also serves as a director
of Internet Capital Group, 4anything.com, Inc., Who? Vision Systems, Inc., XL
Vision, Inc. and Integrated Visions, Inc., all of which are privately-held
companies.
The number of directors is presently fixed at nine. Due to the
resignations of Messrs. Masterson and Smith as directors in May 1999, there are
presently four vacancies on our board of directors. We intend to add four
additional directors as promptly as practicable after the completion of the
offering. Two of these directorships will have terms that expire in 2000 and
two of these directorships will have terms that expire in 2001. Each of the
current directors was elected to the board of directors pursuant to an
agreement that terminates upon the consummation of the offering.
Board Committees
Our board of directors has a compensation committee and an audit
committee. The compensation committee is comprised of Robert E. Keith and
Michael Forgash. The audit committee is comprised of Robert E. Keith and
Michael Forgash. The compensation committee is responsible for the
administration of all salary and incentive compensation plans for our officers,
including bonuses and options granted under our option plans. The audit
committee is responsible for reviewing with management our financial controls
and accounting and
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<PAGE>
reporting activities. In addition, the audit committee will review the
qualifications of our independent auditors, make recommendations to the board
of directors regarding the selection of independent auditors, review the scope,
fees and results of any audit and review any non-audit services and related
fees.
Compensation Committee Interlocks and Insider Participation
Our board of directors did not have a compensation committee until October
1998. Prior to this time determinations regarding the compensation of our
officers were made by the board of directors.
Election of Directors -- Stockholders' Agreement
Most of the holders of our common stock and preferred stock are parties to
a stockholders' agreement which fixes the number of directors of U.S.
Interactive at nine and which divides the holders into four groups, each of
which is entitled to elect a specified number of directors. The stockholders'
agreement terminates upon consummation of this offering. The termination of the
stockholders' agreement will not affect either the current term of such
directors or their ability to be re-elected as directors.
Compensation of Directors
U.S. Interactive does not pay fees to directors for serving on our board
of directors. Outside directors are reimbursed for their reasonable
out-of-pocket expenses incurred in attending the meetings of the board of
directors and committees thereof.
Executive Compensation
The following table sets forth certain information concerning compensation
paid or accrued during the fiscal year ended December 31, 1998 with respect to
our Chief Executive Officer and our other executive officers. Larry W. Smith
resigned as the Chief Executive Officer on February 26, 1999 and as a director
on May 18, 1999. Richard J. Masterson resigned as President and as a director
on May 18, 1999. Mr. Zarrilli was named Chief Executive Officer on March 1,
1999 and President on May 18, 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Awards
-------------
Securities
Annual Compensation
------------------------ Underlying All Other
Name and Principal Position(s) Salary Bonus Options Compensation(1)
- -------------------------------------------- ----------- ---------- ------------- ----------------
<S> <C> <C> <C> <C>
Eric Pulier, Chairman of the Board ......... $226,000 $ 50,000 --(2) $ 530
Stephen T. Zarrilli, Chief Executive Officer
and President ............................. 175,000 $100,000 31,525 3,697
Larry W. Smith, Former Chief Executive
Officer ................................... 175,000 -- 63,051 2,750
Richard J. Masterson, Former President
and Chief Operating Officer ............... 175,000 -- 63,051 2,750
</TABLE>
- ------------
(1) Represents premiums paid for life insurance and company matching of 401(k)
contributions.
(2) Excludes options to purchase 190,961 of our common stock in exchange for
options to purchase shares of common stock of Digital Evolution held by
Mr. Pulier at the time we merged with Digital Evolution.
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<PAGE>
The following table provides information on stock options granted by us in
1998 to Messrs. Smith, Masterson and Zarrilli, our executive officers during
1998 who received grants in 1998.
Option Grants in Last Fiscal Year(1)
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------------------------
Percent of Potential Realizable
Number of Total Value at Assumed
Shares Options Annual Rate of
Underlying Granted to Stock Price Appreciation
for Option Term(2)
Options Employees in Exercise Expiration -----------------------
Name Granted Fiscal Year Price Date 5% 10%
- ------------------------------ --------------- -------------- ---------- ---------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Stephen T. Zarrilli .......... 31,525 3.9% $ 3.85 6/15/08 $ 76,330 $193,435
Larry W. Smith ............... 63,051(3) 7.8 3.85 6/15/08(3) 152,662 386,875
Richard J. Masterson ......... 63,051(4) 7.8 3.85 6/15/08(4) 152,662 386,875
</TABLE>
- ------------
(1) Excludes options to purchase 190,961 of our common stock in exchange for
options to purchase shares of common stock of Digital Evolution held by
Mr. Pulier at the time we merged with Digital Evolution.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation of 5% and 10%
compounded annually from the date the respective options were granted to
their expiration date based upon an assumed initial public offering price
of $11.00 per share. These assumptions are not intended to forecast future
appreciation of our stock price. The potential realizable value
computation does not take into account federal or state income tax
consequences of option exercises or sales of appreciated stock.
(3) The options expired unexercisable on May 26, 1999, subsequent to
termination of employment of Mr. Smith on February 26, 1999.
(4) These options will expire on August 16, 1999, due to the termination of
employment of Mr. Masterson on May 18, 1999.
Employment Agreements
When we merged with Digital Evolution, Inc. in July 1998, we entered into
an employment agreement with Eric Pulier whereby he became our Chairman and
Chief Technology Officer. Mr. Pulier was the President and a member of the
board of directors of Digital Evolution. The agreement is for a term of one
year, and automatically renews for additional one-year periods, unless either
party provides 30 days notice of non-renewal. Under the agreement, Mr. Pulier
receives a base salary of $235,000, and he may receive a bonus at the
discretion of the board of directors. We are also obligated to provide Mr.
Pulier the benefits which we offer our other senior executives generally,
including medical, life and disability insurance, use of an automobile,
vacation and fringe benefits. We can terminate the agreement before the end of
its term for "cause" and under certain other circumstances, including the death
or disability of Mr. Pulier. In addition, Mr. Pulier may resign by giving us
notice. If the agreement is terminated other than for "cause" or Mr. Pulier's
voluntary resignation, we will make severance payments to Mr. Pulier in the
amount of his base salary and bonus, if any, through the balance of the term of
the agreement. In addition, any unvested options which he held at the time of
such early termination would become vested. The employment agreement contains
restrictions on Mr. Pulier's ability to compete with us during the term of the
agreement. We may extend these non-competition provisions for a period of up to
an additional 12 months if we have not terminated the agreement for "cause" and
we pay him his base salary and provide him benefits he had prior to the
termination.
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We intend to extend an employment agreement to Mr. Zarrilli providing for
his employment as Chief Executive Officer and President. We expect his
agreement to be similar to the agreement for Mr. Pulier. We expect Mr.
Zarrilli's agreement to have a one-year term that automatically renews for
additional one-year terms unless either party provides 30 days notice of
non-renewal.
Severance Agreements
Larry W. Smith resigned as our Chief Executive Officer effective as of
February 26, 1999 and as a director in May 1999. We entered into a severance
agreement, effective as of February 26, 1999, in connection with his
resignation. Under the severance agreement Mr. Smith is entitled to receive
from us:
o a severance payment of $131,250 payable in nine equal monthly
installments
o accrued but unused vacation time of $12,115, which we paid to him in
March 1999
o health, life and disability insurance and other benefits for the
nine-month period commencing February 26, 1999, including auto
reimbursement expenses up to a maximum of $700 per month until the
severance payment is paid in full
In addition, all of Mr. Smith's unvested stock options to purchase a total of
11,103 shares of our common stock were fully vested. Mr. Smith also reaffirmed
his non-disclosure and non-competition agreements which expire in February
2000.
Richard Masterson resigned as our President and as a director on May 18,
1999. We entered into a severance agreement, effective as of May 18, 1999, in
connection with his resignation. Under the severance agreement Mr. Masterson is
entitled to receive from us:
o a severance payment of $131,250 payable in nine equal monthly
installments
o health, life and disability insurance and other benefits for the nine
month period commencing May 18, 1999, including auto reimbursement
expenses up to a maximum of $500 per month until the severance payment is
paid in full
In addition, all of Mr. Masterson's unvested stock options to purchase a total
of 11,103 shares of our common stock were fully vested. Mr. Masterson also
reaffirmed his non-disclosure and non-competition agreements which expire in
February 2000.
Stock Option Plans
We have adopted:
o a 1998 Performance Incentive Plan
o an amended and restated 1998 Stock Option Plan
o an amended and restated 1997 Stock Option Plan
o an amended and restated 1996 Stock Option Plan
1998 Performance Incentive Plan. Under the 1998 Performance Incentive
Plan, officers, employees and non-employee directors may receive up to
3,000,000 shares of common stock pursuant to the grant of incentive stock
options, non-qualified stock options, stock appreciation rights, restricted
stock and performance units. The 1998 Performance Incentive Plan is
administered by the compensation committee of the board of directors consisting
of two or more "outside directors" as defined under section 162(m) of the
Internal Revenue Code
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of 1986, and who are "non-employee directors" as defined under Rule 16b-3 of
the Securities Exchange Act of 1934. The compensation committee presently
consists of Messrs. Keith and Forgash. No stock options or other benefits have
been awarded or granted under the 1998 Performance Incentive Plan.
The terms of options granted under the 1998 Performance Incentive Plan are
as follows:
o the option price per share for any non-qualified stock option or
incentive stock option shall not be less than the fair market value of the
common stock at the time of the grant
o if an incentive stock option is granted to a person who owns more than
10% of the total combined voting power of all our classes of stock, the
exercise price shall not be less that 110% of the fair market value on the
date of grant
o the term of each stock option may not exceed ten years, and in the case a
person who owns more than 10% of the total combined voting power of all
our classes of stock, the term of each stock option may not exceed five
years
o payment for the exercise of an option shall be made in cash, or, as shall
be otherwise approved in advance by the option plan committee, in shares
of common stock already owned by the option holder, valued at the fair
market value of the common stock on the date of exercise
o the option plan committee may also allow, in its sole discretion, a
"cashless exercise" for the exercise of stock options
Upon the occurrence of events constituting of a change in control within
the meaning of the 1998 Performance Incentive Plan, in the sole discretion of
the board of directors,
o all outstanding stock options and stock appreciation rights may become
fully exercisable
o all conditions and restrictions of all restricted stock grants may be
deemed satisfied
o all performance grants may be deemed fully earned
1998 Stock Option Plan. The 1998 Stock Option Plan provides for the
issuance to key executives and other employees of incentive stock options and
non-qualified stock options to purchase up to a total of 1,397,236 shares of
common stock. The 1998 Stock Option Plan is administered by the compensation
committee of the board of directors. As of June 1, 1999, options issued under
the 1998 Stock Option Plan to purchase a total of 1,389,533 shares of common
stock at a weighted average exercise price per share of $6.78 were outstanding,
of which options to purchase 140,500 shares at a weighted average exercise
price of $7.18 were fully vested. Options vested under the 1998 Stock Option
Plan will first become exercisable upon completion of this offering. As of this
date, we had 7,703 shares of common stock available for future grant under this
plan. No options are issuable under the 1998 Stock Option Plan after September
2008.
The terms of options granted under the 1998 Stock Option Plan are as
determined by the option plan committee, subject to the following:
o the option price per share for any non-qualified stock option or
incentive stock option shall not be less than the fair market value of the
common stock at the time of the grant
o if an incentive stock option is granted to a person who owns more than
10% of the total combined voting power of all our classes of stock, the
exercise price shall not be less that 110% of the fair market value on the
date of grant
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o the term of each stock option may not exceed ten years, and in the case a
person who owns more than 10% of the total combined voting power of all
our classes of stock, the term of each stock option may not exceed five
years
o payment for the exercise of an option shall be made in cash, or, as shall
be otherwise approved in advance by the option plan committee, in shares
of common stock already owned by the option holder, valued at the fair
market value of the common stock on the date of exercise
o the option plan committee may also allow, in its sole discretion, a
"cashless exercise" for the exercise of stock options
1997 Stock Option Plan. The 1997 Stock Option Plan provides for the
issuance to key executives and other employees of incentive stock options and
non-qualified stock options to purchase up to a total of 600,000 shares of
common stock. The terms of the 1997 Stock Option Plan are substantially similar
to the terms of the 1998 Stock Option Plan except that exercisability is not
subject to completion of this offering. This plan is presently administered by
the compensation committee of the board of directors. As of June 1, 1999,
options issued under the 1997 Stock Option Plan to purchase a total of 355,903
shares of common stock at a weighted average exercise price per share of $2.90
were outstanding, of which options to purchase 227,229 shares were fully vested
and exercisable at a weighted average exercise price of $2.37. As of that date,
we had 244,097 shares of common stock available for future grant under this
plan. No options are issuable under the 1997 Stock Option Plan after September
2008.
1996 Stock Option Plan. Digital Evolution had historically granted stock
options to its officers and key employees under a stock plan. As part of our
merger with Digital Evolution, all of these options which were outstanding at
the time of the merger were converted into stock options to acquire common
stock at the ratio of .99 shares of U.S. Interactive for each share covered by
a Digital Evolution option. No further stock options will be granted under this
former Digital Evolution plan.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In September 1998, we purchased a total of 1,039,311 shares of our common
stock from nine of our stockholders and a total of 220,403 shares of our
preferred stock from four of our stockholders. The sellers of such shares
included:
o Richard Masterson -- 153,608 shares of common stock
o Eric Pulier -- 169,916 shares of common stock
o John Shulman -- 40,600 shares of common stock
o Larry Smith -- 159,368 shares of common stock
o Stephen Zarrilli -- 73,646 shares of common stock
o Churchill MegaSOFT -- 315,558 shares of common stock
All shares were purchased at $4.63 per share.
In September 1998, we sold 2,339,628 shares of our series D preferred
stock to Safeguard 98 Capital, L.P. for $10.8 million, or $4.63 per share.
50
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In July and October 1997, we sold an aggregate of 595,706 shares of our
series C preferred stock to Technology Leaders II L.P., Technology Leaders II
Offshore C.V., and Internet Capital Group, L.L.C. at a purchase price of $1.68
per share.
In July 1998, Richard J. Masterson sold 78,100 shares of our common stock,
Larry W. Smith sold 44,327 shares of our common stock, and Stephen T. Zarrilli
sold 37,995 shares of our common stock to Technology Leaders II L.P. or
Technology Leaders II Offshore C.V. at a price of $3.50 per share.
Eric Pulier, our Chairman of the Board, and John Shulman, a director, are
members of Juggernaut Partners, and own, in the aggregate, 41.6% of the equity
interest in Juggernaut Partners. Mr. Shulman is the Chairman, Chief Executive
Officer and a manager of Juggernaut Partners. Pursuant to a professional
services and consulting agreement dated January 6, 1999, U. S. Interactive is
providing professional services to Juggernaut Partners, including strategic
design and development, in connection with Juggernaut Partners' development of
an Internet global exchange platform. The agreement provides that Juggernaut
Partners will pay a total of approximately $3.7 million for the services
provided by U. S. Interactive through August 1999. The professional services
and consulting agreement dated January 6, 1999 replaces a prior agreement
pursuant to which Juggernaut Partners paid a total of approximately $900,000
for the similar services provided by U.S. Interactive. Juggernaut represented
more than 13% of our revenues for the three months ended March 31, 1999.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock by:
o our chief executive officer, our four other most highly compensated
executive officers and our directors
o all directors and executive officers as a group
o each person known to us to own beneficially more than 5% of our
outstanding shares
o each selling stockholder
A person has beneficial ownership of shares if the individual has the
power to vote or dispose of the shares. This power can be exclusive or shared,
direct or indirect. In addition, a person beneficially owns shares underlying
options that are presently exercisable or will become exercisable within 60
days of the date of this prospectus.
The address for all directors and executives is 2012 Renaissance
Boulevard, King of Prussia, Pennsylvania 19406.
As of June 1, 1999, there were 9,035,638 shares of our common stock,
outstanding and 5,341,096 shares of common stock issuable upon conversion of
all outstanding preferred stock.
To calculate a stockholder's percentage of beneficial ownership, we must
include in the numerator and denominator those shares underlying options
beneficially owned by that stockholder. Options held by other stockholders,
however, are disregarded in this calculation. Therefore, the denominator used
in calculating beneficial ownership among our stockholders may differ.
The table below assumes that the underwriters have not exercised their
over-allotment option. In addition, the symbol "*" means that the percentage is
less than one percent.
<TABLE>
<CAPTION>
Beneficial Ownership Beneficial Ownership
Prior to Offering After Offering(1)
--------------------------------- --------------------------
Beneficial Owner Number Percentage Shares Percentage
- ----------------------------------------- ------------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Executive Officers and Directors:
Eric Pulier ............................ 3,698,545(1) 25.5% 3,698,545
Stephen T. Zarrilli .................... 576,592(2) 4.0 594,592
John D. Shulman ........................ 308,536(3) 2.1 308,536
Philip L. Calamia ...................... 67,000(4) * 67,000 *
E. Michael Forgash ..................... -- -- -- --
Robert E. Keith, Jr. ................... -- -- -- --
All directors and executive officers as a
group (6 persons) ...................... 4,650,673(5) 31.9 4,668,673
Other Five Percent Holders:
Safeguard Scientifics, Inc. ............ 2,339,628(6) 16.3
Technology Leaders II .................. 1,184,175(7) 8.2 1,184,175
Selling Stockholders:
Richard J. Masterson ................... 1,189,511(8) 8.2 889,511
Larry W. Smith ......................... 1,168,701(9) 8.1 768,701
</TABLE>
- ------------
(1) Includes 127,308 shares issuable upon exercise of options, 1,080 shares
issuable upon exercise of options held by Heather Pulier, Mr. Pulier's
wife, 2,314,094 shares owned by Churchill MegaSoft, a California
partnership in dissolution, of which Mr. Pulier is
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<PAGE>
co-general partner and with respect to which Mr. Pulier has sole authority
for all investments, voting and disposition decisions. On June 16, 1999,
the partnership distributed 2,016,358 of the shares formerly held by the
partnership to Mr. Pulier and 297,736 shares to Mr. Pulier's brother, Greg
Pulier.
(2) Includes 31,525 shares issuable upon exercise of options, 17,142 shares
held as Custodian under the Uniform Transfers to Minors act for the
benefit of Mr. Zarrilli's three children, and 5,000 shares held as Voting
Trustee for the benefit of Mr. Pulier's minor son under a certain Voting
Trust Agreement, which trust shall automatically terminate upon completion
of this offering, at which time the 5,000 shares will be distributed to
Mr. Zarrilli as Custodian under the California Uniform Transfers to Minors
Act. Does not include a total of 18,000 shares which will be distributed
to Mr. Zarrilli as Custodian under certain states' Uniform Transfers to
Minors Act upon the dissolution of certain Voting Trust Agreements upon
completion of the offering, as noted in notes 2 and 3, above.
(3) Includes 10,799 shares issuable upon exercise of options.
(4) Includes 52,000 shares issuable upon exercise of options, of which 43,000
will become exercisable upon completion of the offering.
(5) Includes 222,726 shares issuable upon exercise of options, including 1,080
shares issuable upon exercise of options held by Mr. Pulier's wife.
(6) Includes 2,339,628 shares of series D preferred stock issued to Safeguard
98 Capital L.P. Safeguard Delaware, Inc., a wholly-owned subsidiary of
Safeguard Scientific, Inc., is the sole general partner of Safeguard 98
Capital L.P. and has sole authority and responsibility for all
investments, voting and disposition decisions regarding such shares.
Safeguard Delaware, Inc. holds approximately a 91.2% general partnership
interest in Safeguard 98 Capital L.P. Safeguard Scientific, Inc. disclaims
beneficial ownership of shares of U.S. Interactive's common stock and
preferred stock held by the various other entities referred to in note 9,
below. Robert E. Keith, a director of U.S. Interactive, is a director of
Safeguard. The address of Safeguard is Safeguard Scientifics, Inc., 800
The Safeguard Building, 435 Devon Park Drive, Wayne, Pennsylvania 19087.
(7) Includes 93,445 shares of common stock issued to Technology Leaders II
Offshore C.V, 117,635 shares of common stock, 293,316 shares of series B
convertible preferred stock and 248,990 shares of series C convertible
preferred stock issued to Technology Leaders II L.P., and 233,000 shares
of series B convertible preferred stock and 197,789 shares of series C
convertible preferred stock issued to TL Ventures Third Corp. Technology
Leaders II consists of Technology Leaders II L.P. and Technology Leaders
II Offshore C.V., TL Ventures Third Corp. is wholly-owned by Technology
Leaders II Offshore C.V., Technology Leaders II Management, L.P., is the
sole general partner of Technology Leaders II L.P. and co-general partner
of Technology Leaders II Offshore C.V., Technology Leaders II L.P. and
Technology Leaders II Offshore C.V. are venture capital funds that are
required by their governing documents to make all investment, voting and
disposition actions in tandem. Technology Leaders II Management L.P. has
sole authority and responsibility for all investments, voting and
disposition decisions for Technology Leaders II.
The general partners of Technology Leaders II Management L.P. are: (i)
Technology Leaders Management, Inc., a wholly-owned subsidiary of
Safeguard, (ii) Robert E. Keith, a director of U. S. Interactive, Gary J.
Anderson, M.D., Ira M. Lubert and Mark J. DeNino, and (iii) four other
corporations (the "TLA Corporations") owned by natural persons, one of whom
is a director of Safeguard. Technology Leaders II Management L.P. is
managed by an
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executive committee, by whose decisions the general partners have agreed to
be bound, which consists of ten voting members including: (i) Warren V.
Musser, who is a designee of Technology Leaders Management, Inc., (ii) Mr.
Keith, Dr. Anderson, Mr. DeNino, and Christopher Moller, Ph.D.,
individually, and (iii) one designee of each of the TLA Corporations and
(as a non-voting member) Clayton S. Rose. There is currently one vacancy on
the executive committee. Technology Leaders Management, Inc. is the
administrative manager of Technology Leaders II, subject to the control and
direction of the executive committee of Technology Leaders II Management
L.P. Mr. Keith is a director of Safeguard. Technology Leaders Management,
Inc. holds a 34.0% general partnership interest in Technology Leaders II
Management L.P. The address of Technology Leaders II is 800 The Safeguard
Building, 435 Devon Park Drive, Wayne, Pennsylvania 19087.
(8) Includes 63,051 shares issuable upon exercise of options, 34,000 shares
held as voting trustee for the benefit of others under a certain Voting
Trust Agreement, which trust shall automatically terminate upon completion
of this offering, at which time 34,000 of the shares held by the trust
will be distributed to beneficiaries of the trust (3,000 of such shares
will be distributed to Stephen Zarrilli as Custodian under the New Jersey
Uniform Gifts to Minors Act for the benefit of certain unrelated minor
children.)
(9) Includes 45,000 shares held as voting trustee for the benefit of others
under a certain Voting Trust Agreement, which trust shall automatically
terminate upon completion of this offering, at which time 45,000 of the
shares held by the trust will be distributed to beneficiaries of the trust
(15,000 of such shares will be distributed to Stephen Zarrilli as
Custodian under certain states' Uniform Transfers to Minors Acts for the
benefit of certain minor children.)
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DESCRIPTION OF CAPITAL STOCK
Our Authorized Capital Stock
o 90 million shares of common stock, par value $0.001 per share
o 15 million shares of preferred stock, par value $0.001 per share
o immediately after the sale of the shares of common stock in this
offering, we will have 18,376,734 shares of common stock outstanding and
no shares of preferred stock outstanding
Common Stock
Voting:
o one vote for each share held of record on all matters submitted to a vote
of stockholders
o no cumulative voting rights
o election of directors by plurality of votes cast
o all other matters by majority of the votes cast
Dividends:
o subject to preferential dividend rights of outstanding shares of
preferred stock, common stockholders are entitled to receive ratably
declared dividends
o the board of directors may only declare dividends out of legally
available funds
Additional Rights:
o subject to the preferential liquidation rights of outstanding shares of
preferred stock, common stockholders are entitled to receive ratably net
assets, available after the payment of all debts and liabilities, upon our
liquidation, dissolution or winding up
o no preemptive rights
o no subscription rights
o no redemption rights
o no sinking fund rights
o no conversion rights
The rights and preferences of common stockholders are subject to the
rights of any series of preferred stock we may issue in the future.
Preferred Stock
We may, by resolution of our board of directors, and without any further
vote or action by our stockholders, authorize and issue, subject to certain
limitations prescribed by law, up to an aggregate of 15 million shares of
preferred stock. The preferred stock may be issued in one or more classes or
series of shares of any class or series. With respect to any classes or series,
the board of directors may determine the designation and the number of shares,
preferences, limitations and special rights, including dividend rights,
conversion rights, voting rights, redemption rights and liquidation
preferences. Because of the rights that may be granted, the
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issuance of preferred stock may delay, defer or prevent a change of control. A
total of 5,341,096 shares of preferred stock is outstanding as of the date of
this prospectus, consisting of 1,384,709 shares of series A preferred stock;
1,021,053 shares of series B preferred stock; 595,706 shares of series C
preferred stock; and 2,339,628 shares of series D preferred stock. All such
outstanding shares of preferred stock will be converted automatically into
shares of common stock on a one-for-one basis concurrently with the closing of
this offering; as a result, there will then be no shares of preferred stock
outstanding. We intend to retire the outstanding series A, B, C and D preferred
stock and presently have no plans to issue any additional shares of preferred
stock. Upon the retirement of the series A, B, C and D preferred stock, we will
have an aggregate of 15 million shares of preferred stock available for
issuance.
Limitation on Liability
Our certificate of incorporation limits or eliminates the liability of our
directors to us or our stockholders for monetary damages to the fullest extent
permitted by the Delaware General Corporation Law. As permitted by the Delaware
General Corporation Law, our certificate of incorporation provides that our
directors shall not be personally liable to us or our stockholders for monetary
damages for a breach of fiduciary duty as a director, except for liability:
o for any breach of such person's duty of loyalty
o for acts or omissions not in good faith or involving intentional
misconduct or a knowing violation of law
o for the payment of unlawful dividends and certain other actions
prohibited by Delaware corporate law
o for any transaction resulting in receipt by such person of an improper
personal benefit
Our certificate of incorporation also contains provisions indemnifying our
directors and officers to the fullest extent permitted by the Delaware General
Corporation Law.
We intend to apply for directors' and officers' liability insurance to
provide our directors and officers with insurance coverage for losses arising
from claims based on breaches of duty, negligence, errors and other wrongful
acts to be effective contemporaneously with the closing of this offering.
Certain Anti-Takeover Provisions
Our certificate of incorporation provides for the division of our board of
directors into three classes. Each class must be as nearly equal in number as
possible. Additionally, each class must serve a three-year term. The terms of
each class are staggered so that each term ends in a different year over a
three-year period. Any director not elected by holders of preferred stock may
be removed only for cause and only by the vote of more than 50% of the shares
entitled to vote for the election of directors.
Our certificate of incorporation also provides that our board of directors
may establish the rights of, and cause us to issue, substantial amounts of
preferred stock without the need for stockholder approval. Further, our board
of directors may determine the terms, conditions, rights, privileges and
preferences of the preferred stock. Our board is required to exercise its
business judgment when making such determinations. Our board of directors' use
of the preferred stock may inhibit the ability of third-parties to acquire U.S.
Interactive. Additionally, our board may use the preferred stock to dilute the
common stock of entities seeking to obtain
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control of U.S. Interactive. The rights of the holders of common stock will be
subject to, and may be adversely affected by, any preferred stock that may be
issued in the future. Our preferred stock provides desirable flexibility in
connection with possible acquisitions, financings and other corporate
transactions. However, it may have the effect of discouraging, delaying or
preventing a change in control of U.S. Interactive. We have no present plans to
issue any shares of preferred stock.
The existence of the foregoing provisions in our certificate of
incorporation could make it more difficult for third parties to acquire or
attempt to acquire control of us or substantial amounts of our common stock.
After this offering is completed, Section 203 of the Delaware General
Corporation Law will apply to U.S. Interactive. Section 203 of the Delaware
General Corporation Law generally prohibits certain "business combinations"
between a Delaware corporation and an "interested stockholder." An "interested
stockholder" is generally defined as a person who, together with any affiliates
or associates of such person, beneficially owns, or within three years did own,
directly or indirectly, 15% or more of the outstanding voting shares of a
Delaware corporation. The statute broadly defines business combinations to
include:
o mergers
o consolidations
o sales or other dispositions of assets having an aggregate value in excess
of 10% of the consolidated assets of the corporation or aggregate market
value of all outstanding stock of the corporation
o certain transactions that would increase the "interested stockholder's"
proportionate share ownership in the corporation
The statute prohibits any such business combination for a period of three
years commencing on the date the "interested stockholder" becomes an
"interested stockholder," unless:
o the business combination is approved by the corporation's board of
directors prior to the date the "interested stockholder" becomes an
"interested stockholder"
o the "interested stockholder" acquired at least 85% of the voting stock of
the corporation (other than stock held by directors who are also officers
or by certain employee stock plans) in the transaction in which it becomes
an "interested stockholder"
o the business combination is approved by a majority of the board of
directors and by the affirmative vote of at least two-thirds of the
outstanding voting stock that is not owned by the "interested stockholder"
The Delaware General Corporation Law contains provisions enabling a
corporation to avoid Section 203's restrictions if stockholders holding a
majority of the corporation's voting stock approve an amendment to the
corporation's certificate of incorporation or by-laws to avoid the
restrictions. We have not and do not currently intend to "elect out" of the
application of Section 203 of the Delaware General Corporation Law.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services, LLC.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to the offering, there has been no public market for our common
stock. Upon completion of the offering, we will have outstanding an aggregate
of 18,376,734 shares of our common stock, assuming no exercise of the
underwriters' over-allotment option and no exercise of outstanding options. Of
these shares, all of the 5,200,000 shares sold in the offering will be freely
tradeable without restriction or further registration under the Securities Act,
unless such shares are purchased by "affiliates" as that term is defined in
Rule 144 under the Securities Act. The remaining 13,176,734 shares of common
stock held by existing stockholders are "restricted securities" as that term is
defined in Rule 144 under the Securities Act. Restricted securities may be sold
in the public market only if registered or if they qualify for an exemption
from registration under Rules 144 or 701 promulgated under the Securities Act,
which rules are summarized below.
As of June 1, 1999, subject to the contractual restrictions described
below, additional shares may be sold without registration under to the
Securities Act as follows:
o 1,583,114 shares of our common stock then outstanding will be eligible
for sale into the public market following the effectiveness of the
registration statement
o 2,656,895 shares of our common stock issuable upon exercise of
outstanding options will be eligible for sale following the effectiveness
of a registration statement on Form S-8 relating to such shares (which we
expect to file shortly after the completion of this offering); 833,569 of
such options were exercisable. There were a total of approximately
3,251,800 shares of our common stock reserved for issuance upon exercise
of options which may be granted in the future under our employee benefit
plans
o 70,000 shares of our common stock issuable upon exercise of a warrant
o 3,962,250 shares of our common stock then outstanding will be eligible
for sale under Rule 144 or Rule 701 beginning 90 days after the date of
this prospectus
o the remainder of the restricted securities will be eligible for sale from
time to time thereafter upon expiration of their respective one-year
holding periods
Lock-Up Agreements
All of our officers and directors and certain of our stockholders have
entered into lock-up agreements under which they agreed not to transfer or
otherwise dispose of, directly or indirectly, without the prior written consent
of Lehman Brothers Inc., any shares of our common stock or any securities
convertible into or exchangeable or exercisable for shares of our common stock
for a period of 180 days following the date of this prospectus.
Transfers or dispositions can be made during the lock-up periods in the
case of gifts for estate planning purposes where the donee signs a lock-up
agreement.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
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o one percent of the number of shares of our common stock then outstanding,
which will equal approximately 183,765 shares immediately after this
offering
o the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to such sale
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, "144(k) shares" may be sold immediately upon the
completion of this offering.
Rule 701
In general, under Rule 701 of the Securities Act as currently in effect,
any of our employees, consultants or advisors who purchase shares from us in
connection with a compensatory stock or option plan or other written agreement
are eligible to resell such shares 90 days after the effective date of this
offering in reliance on Rule 144, but without compliance with some
restrictions, including the holding period, contained in Rule 144.
Registration Rights
Some holders of our common stock, and all holders of shares of our common
stock issuable upon exercise of warrants and preferred stock, have been granted
registration rights under an investors' rights agreement with U.S. Interactive.
A total of 9,491,475 shares of our common stock are covered by these
registration rights. The shares of our common stock owned or that can be
acquired upon conversion are divided into two categories under the investors'
rights agreement -- registrable investors' securities and registrable
individuals' securities. In particular, the holders of 40% of the registrable
investors' securities can demand on two occasions that we register their shares
provided that the shares to be covered by each such demand have an aggregate
price to the public of not less than $5.0 million. The holders of 20% of the
registrable individuals' securities can demand on two occasions that we
register 20% of their shares provided that the shares to be covered by each
such demand have an aggregate price to the public of not less than $5.0
million. In addition, all the holders are entitled under the investors' rights
agreement to piggyback registration rights, subject to reduction at the
discretion of an underwriter. Piggyback registration rights entitle
stockholders to include shares in a registered public offering that has been
initiated by U.S. Interactive. All holders are also entitled under the
investors' rights agreement to an aggregate of four shelf registrations on a
registration statement on Form S-3 provided that the number of shares to be
covered by each shelf registration has an aggregate price to the public of not
less than $2.0 million. Registration of shares of our common stock pursuant to
an exercise of demand registration rights, piggyback registration rights or
shelf registration rights would result in such shares becoming freely tradable
without restriction under the Securities Act of 1933 upon the effectiveness of
such registration and may adversely affect our stock price.
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We intend to seek a waiver of the piggyback registration rights of the
holders described above in connection with this offering.
Stock Options
Shortly after completion of this offering, we plan to file a registration
statement on Form S-8 under the Securities Act covering shares of common stock
reserved for issuance under the three stock option plans and our incentive
plan. June 1, 1999, options to purchase 2,656,895 shares of our common stock
were issued and outstanding, 974,069 of which are vested. This registration
statement is expected to be filed and become effective as soon as practicable
after the date of this prospectus. Accordingly, shares registered under such
registration statement will, subject to lock-up agreements, vesting provisions
and Rule 144 volume limitations applicable to our affiliates, be available for
sale in the open market immediately after the registration statement becomes
effective.
PLAN OF DISTRIBUTION
Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, the underwriters named
below, for whom Lehman Brothers Inc., Hambrecht & Quist LLC and Adams, Harkness
& Hill, Inc. are acting as representatives and have each agreed to purchase
from us the respective number of shares of common stock shown opposite its name
below:
Number of Shares of
Common Stock
Underwriters --------------------
Lehman Brothers Inc. .................
Hambrecht & Quist LLC ................
Adams, Harkness & Hill, Inc. .........
Total ............................
====================
The underwriting agreement provides that the underwriters' obligations to
purchase shares of common stock depend on the satisfaction of the conditions
contained in the underwriting agreement, and that if any of the shares of
common stock are purchased by the underwriters under the underwriting
agreement, then all of the shares of common stock which the underwriters have
agreed to purchase under the underwriting agreement, must be purchased. The
conditions contained in the underwriting agreement include the requirement that
the representations and warranties made by us to the underwriters are true,
that there is no material change in the financial markets and that we deliver
to the underwriters customary closing documents.
The representatives have advised us that the underwriters propose to offer
the shares of common stock directly to the public at the public offering price
set forth on the cover page of this prospectus, and to dealers, who may include
the underwriters, at such public offering price less a selling concession not
in excess of $____ per share. The underwriters may allow, and the dealers may
reallow, a concession not in excess of $_____ per share to brokers and dealers.
After the offering, the underwriters may change the offering price and other
selling terms.
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The following table shows the per share and total public offering price,
underwriting discount to be paid by us to the underwriters and the proceeds
before expenses to us. The underwriting discount was determined through
discussion with our management and by reference to the underwriters' experience
with transactions of this type and companies in similar industries. This
information is presented assuming either no exercise or full exercise by the
underwriters of their over-allotment option.
<TABLE>
<CAPTION>
Without With
Per share Option Option
----------- --------- -------
<S> <C> <C> <C>
Public offering price .................................... $ $ $
Underwriting discount .................................... $ $ $
Proceeds before expenses, to U.S. Interactive ............ $ $ $
Proceeds before expenses to the selling stockholders ..... $ $ $
</TABLE>
The expenses of the offering, exclusive of the underwriting discount, are
estimated at $_______ and are payable by us. The following table details these
expenses. All amounts shown are estimates, with the exception of the Securities
and Exchange Commission registration fee, the NASD filing fee and the Nasdaq
National Market listing fee.
SEC registration fee ....................... $18,070
NASD filing fee ............................ 7,000
Transfer agent and registrar fees ..........
Printing and engraving .....................
Legal fees .................................
Nasdaq National Market listing fee .........
Accounting fees ............................
Miscellaneous ..............................
Total ...................................
We have granted to the underwriters an option to purchase up to an
aggregate of 600,000 additional shares of common stock, exercisable solely to
cover over-allotments, if any, at the public offering price less the
underwriting discounts and commissions shown on the cover page of this
prospectus. The underwriters may exercise this option at any time until 30 days
after the date of the underwriting agreement. If this option is exercised, each
underwriter will be committed, so long as the conditions of the underwriting
agreement are satisfied, to purchase a number of additional shares of common
stock proportionate to the underwriter's initial commitment as indicated in the
preceding table and we will be obligated, under the over-allotment option, to
sell the shares of common stock to the underwriters.
We have agreed that, without the prior consent of Lehman Brothers, we will
not directly or indirectly, offer, sell or otherwise dispose of any shares of
common stock or any securities which may be converted into or exchanged for any
such shares of common stock for a period of 180 days from the date of this
prospectus. All of our executive officers and directors, Safeguard Scientifics,
Inc., Technology Leaders II, Richard J. Masterson, Larry W. Smith and certain
other shareholders, including all of the holders of the preferred stock have
agreed under lock-up agreements that, without the prior written consent of
Lehman Brothers, they will not, directly or indirectly, offer, sell or
otherwise dispose of any shares of common stock or any securities which may be
converted into or exchanged for any such shares for the period ending 180 days
after the date of this prospectus. See "Shares Eligible for Future Sale."
Prior to the offering, there has been no public market for the shares of
common stock. The initial public offering price will be negotiated between the
representatives and us. In
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determining the initial public offering price of the common stock, the
representatives will consider, in addition to prevailing market conditions, our
historical performance and capital structure, estimates of our business
potential and earning prospects, an overall assessment of our management and
the consideration of the above factors in relation to the market valuation of
companies in related businesses.
We have applied for quotation of our common stock on the Nasdaq National
Market under the symbol "USIT."
We have agreed to indemnify the underwriters against liabilities,
including liabilities under the Securities Act and liabilities arising from
breaches of the representations and warranties contained in the underwriting
agreement, and to contribute to payments that the underwriters may be required
to make for these liabilities.
Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters
and selling group members to bid for and purchase shares of common stock. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of the common stock. These transactions
may consist of bids or purchases for the purposes of pegging, fixing or
maintaining the price of the common stock.
The underwriters may create a short position in the common stock in
connection with the offering, which means that they may sell more shares than
are set forth on the cover page of this prospectus. If the underwriters create
a short position, then the representatives may reduce that short position by
purchasing common stock in the open market. The representatives also may elect
to reduce any short position by exercising all or part of the over-allotment
option. The underwriters have informed us that they do not intend to confirm
sales to discretionary accounts that exceed 5% of the total number of shares of
common stock offered by them.
The representatives also may impose a penalty bid on underwriters and
selling group members. This means that if the representatives purchase shares
of common stock in the open market to reduce the underwriters' short position
or to stabilize the price of the common stock, the representatives may reclaim
the amount of the selling concession from the underwriters and selling group
members who sold those shares as part of the offering. In addition, the
representatives reserve the right to reclaim selling concessions from the
underwriters and selling group members if the representatives receive a report
that clients of the underwriters and selling group members have sold the stock
they purchased in this offering generally within 30 days following this
offering. The representatives would reserve this right even if the
representatives do not purchase shares in the open market.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it might to discourage resales of the security by purchasers in
an offering.
Any offers in Canada will be made only under an exemption from the
requirements to file a prospectus in the relevant province of Canada in which
such sale is made.
Purchasers of the shares of common stock offered in this prospectus may be
required to pay stamp taxes and other charges under the laws and practices of
the country of purchase, in addition to the offering price listed on the cover
of this prospectus.
The representatives have informed us that they do not intend to confirm
the sales of shares of common stock offered by this prospectus to any accounts
over which they exercise discretionary authority.
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At our request, the underwriters have reserved up to 200,000 shares of the
common stock offered by this prospectus for sale to our officers, directors,
employees and their family members and to business associates of U.S.
Interactive at the initial public offering price set forth on the cover page of
this prospectus. These persons must commit to purchase no later than the close
of business on the day following the date of this prospectus. The number of
shares available for sale to the general public will be reduced to the extent
these persons purchase the reserved shares.
Directed Shares Subscription Program
As part of this offering, we are offering approximately 1,700,000 shares
of our common stock in a directed share subscription program to shareholders of
Safeguard Scientifics, Inc., one of our principal stockholders. Safeguard's,
shareholders may subscribe for one share of our common stock for every 20
shares of Safeguard common stock held by them, and may not transfer the
opportunity to subscribe to another person except involuntarily by operation of
law. Persons who owned at least 491 shares of Safeguard common stock as of June
24, 1999 are eligible to purchase shares directly from us under the program.
Shareholders of Safeguard who own between 100 and 490 shares of Safeguard
common stock will be eligible to purchase interests in a unit investment trust
that will invest its assets solely in our common stock. The shares offered to
the unit investment trust are included in the 1,700,000 shares. Shareholders
who own less than 100 shares of Safeguard common stock will be ineligible to
participate in the directed share subscription program. If any of the shares
offered by us under the program are not purchased by the shareholders of
Safeguard, then Safeguard or one or more of its designees will purchase these
shares from us. Prior to this offering, Safeguard beneficially owned 16.3% of
our common stock. After this offering, Safeguard Scientifics, Inc. will
beneficially own approximately --- % of our common stock, assuming that all
1,700,000 shares are purchased by shareholders of Safeguard and the unit
investment trust, and will beneficially own approximately of our common
stock assuming that none of the 1,700,000 shares are purchased by the
shareholders of Safeguard or the unit investment trust. The purchase price
under the program, whether paid by Safeguard, its shareholders or the unit
investment trust, will be the same price per share as set forth on the cover
page of this prospectus. For purposes of this prospectus, when we present
financial data that reflects this offering, we have assumed that all 1,700,000
shares offered under the directed share subscription program are sold. Lehman
Brothers will receive a financial advisory fee of $561,000 or equal to 3% of
the aggregate initial offering price of the 1,700,000 shares being sold through
the directed share subscription program.
LEGAL MATTERS
The validity of the shares of our common stock offered hereby will be
passed upon for us by Dilworth Paxson LLP, Philadelphia, Pennsylvania. Stephen
Harmelin, a member of Dilworth Paxson LLP, is the owner of 112,500 shares of
our common stock. Certain other members of Dilworth Paxson LLP have an interest
in these shares. Certain legal matters in connection with this offering are
being passed upon for U.S. Interactive and Safeguard Scientifics, Inc. by
Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania. Certain legal matters
in connection with this offering are being passed upon for the underwriters by
Brobeck, Phleger & Harrison LLP, Washington, D.C.
EXPERTS
Our consolidated financial statements and schedule as of December 31, 1997
and 1998, and for each of the years in the three-year period ended December 31,
1998, have been
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included herein and in the registration statement in reliance upon the reports
of KPMG LLP, independent certified public accountants, appearing herein and
elsewhere in the registration statement upon the authority of said firm as
experts in accounting and auditing.
The financial statements of Digital Evolution as of December 31, 1996 and
1997, and for each of the years in the two-year period ended December 31, 1997,
have been included herein and in the registration statement in reliance upon
the reports of BDO Seidman, LLP, independent certified public accountants,
appearing herein and elsewhere in the registration statement upon the authority
of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission. This prospectus, which forms a part of the registration
statement, does not contain all of the information included in the registration
statement. Certain information is omitted and you should refer to the
registration statement and our exhibits. With respect to references made in
this prospectus to any contract or other document of ours, such references are
not necessarily complete and you should refer to the exhibits attached to the
registration statement for copies of the actual contract or document. You may
review a copy of the registration statement at the Securities and Exchange
Commission's public reference room at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Securities and Exchange
Commission's regional offices in Chicago, Illinois and New York, New York.
Please call the Securities and Exchange Commission at 1-800-SEC-0330 for
further information on the operation of the public reference rooms. Our
Securities and Exchange Commission filings and the Registration Statement can
also be reviewed by accessing the Securities and Exchange Commission's Internet
site at http://www.sec.gov.
64
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Financial Statements Page
- -------------------- -----
<S> <C>
U.S. Interactive, Inc. and Subsidiaries
Independent Auditors' Report .......................................................... F-2
Consolidated Balance Sheets, December 31, 1997 and 1998, and March 31, 1999
(unaudited) .......................................................................... F-3
Consolidated Statements of Operations, Years ended December 31, 1996, 1997 and 1998,
and the three months ended March 31, 1998 and 1999 (unaudited) ....................... F-4
Consolidated Statements of Stockholders' Equity (Deficit), Years ended December 31,
1996, 1997 and 1998, and the three months ended March 31, 1999 (unaudited) ........... F-5
Consolidated Statements of Cash Flows, Years ended December 31, 1996, 1997 and 1998,
and the three months ended March 31, 1998 and 1999 (unaudited) ....................... F-6
Notes to Consolidated Financial Statements ............................................ F-7
Digital Evolution, Inc.
Report of Independent Accountants...................................................... F-25
Balance Sheets, December 31, 1996 and 1997, and June 30, 1998 (unaudited) ............. F-26
Statements of Operations, Years ended December 31, 1996 and 1997, and the six months
ended June 30, 1997 and 1998 (unaudited) ............................................. F-27
Statements of Stockholders' Equity, Years ended December 31, 1996 and 1997, and the six
months ended June 30, 1998 (unaudited) ............................................... F-28
Statements of Cash Flows, Years ended December 31, 1996 and 1997, and the six months
ended June 30, 1997 and 1998 (unaudited) ............................................. F-29
Notes to Financial Statements ......................................................... F-30
Unaudited Pro Forma Financial Statements
Unaudited Pro Forma Financial Information ............................................. F-39
Unaudited Pro Forma Combined Statement of Operations, Year ended December 31, 1998 .... F-40
Unaudited Pro Forma Combined Statement of Operations, Three Months ended March 31,
1998 ................................................................................. F-41
Notes to Unaudited Pro Forma Combined Financial Statements ............................ F-42
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
U.S. Interactive, Inc.
We have audited the accompanying consolidated balance sheets of U.S.
Interactive, Inc. and subsidiaries as of December 31, 1997 and 1998 and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the years in the three-year period ended December
31, 1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of U.S.
Interactive, Inc. and subsidiaries as of December 31, 1997 and 1998 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
KPMG LLP
Philadelphia, Pennsylvania
May 7, 1999
F-2
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31
--------------------- March 31,
1997 1998 1999
--------- ---------- ------------
(unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 786 $ 3,698 $ 2,327
Accounts receivable (net of allowance of $152 in 1997;
$526 in 1998 and $448 in 1999, unaudited) ................... 2,009 3,388 6,991
Fees and expenditures in excess of billings .................. 101 731 698
Prepaid expenses and other current assets .................... 53 305 292
------ -------- ---------
Total current assets ...................................... 2,949 8,122 10,308
Furniture and equipment, net .................................... 560 1,375 1,814
Goodwill and other intangibles, net ............................. 566 12,542 13,150
Other assets .................................................... 47 223 192
------ -------- ---------
Total Assets .................................................... $4,122 $ 22,262 $ 25,464
====== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable ............................................. $ 951 $ 1,334 $ 1,018
Accrued expenses ............................................. 461 2,354 3,721
Notes payable -- bank ........................................ 38 1,706 1,075
Current portion of long-term debt ............................ 167 162 462
Billings in excess of fees and expenditures .................. 631 650 2,436
------ -------- ---------
Total current liabilities ................................. 2,248 6,206 8,712
LONG-TERM DEBT, net of current portion .......................... 79 583 1,113
------ -------- ---------
Total Liabilities ............................................... 2,327 6,789 9,825
Commitments (Notes 9, 16 and 17)
Mandatorily redeemable convertible preferred stock, $.001
par value, 15,000,000 shares authorized, 5,341,096 issued
and outstanding in 1998 including accreted dividends of
$477 at December 31, 1998 and $851 at March 31, 1999
(unaudited) .................................................... -- 17,293 17,667
------ -------- ---------
STOCKHOLDERS' EQUITY (DEFICIT):
Series A convertible preferred stock $1.00 par value
1,000,000 shares authorized issued and outstanding
($1,053,000 liquidation preference) ............................ 966 -- --
Series B convertible preferred stock $1.68 par value 595,706
shares authorized issued and outstanding ($1,000,000
liquidation preference) ........................................ 974 -- --
Common stock - no par value, 9,000,000 shares authorized
in 1997 4,736,842 shares issued and outstanding 1997;
90,000,000 shares authorized in 1998, $.001 par value
9,124,999 shares issued in 1998 and 10,074,699 shares
issued in 1999 (unaudited) ..................................... 243 9 10
Additional paid-in capital ................................... (21) 12,418 16,871
Deferred stock compensation .................................. -- -- (1,346)
Treasury stock, 1,039,311 shares, at cost .................... -- (4,812) (4,812)
Accumulated deficit .......................................... (367) (9,435) (12,751)
------ -------- ----------
Total Stockholders' Equity (Deficit) ......................... 1,795 (1,820) (2,028)
------ -------- ----------
Total Liabilities and Stockholders' Equity (Deficit) ......... $4,122 $ 22,262 $ 25,464
====== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31, Three Months Ended March 31,
---------------------------------------- ----------------------------
1996 1997 1998 1998 1999
----------- ----------- ------------ ------------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
REVENUE ............................ $ 1,950 $ 6,061 $ 13,636 $2,378 $ 6,123
OPERATING COSTS AND
EXPENSES:
Project personnel and related
expenses ........................ 945 2,841 7,405 1,249 3,071
Management and administrative 1,012 2,196 7,876 690 2,683
Marketing and sales ............... 277 1,013 2,054 351 723
Depreciation and amortization ..... 61 269 4,592 91 2,496
------- ------- -------- ------ --------
Total operating expenses ........ 2,295 6,319 21,927 2,381 8,973
------- ------- -------- ------ --------
OPERATING LOSS ..................... (345) (258) (8,291) (3) (2,850)
OTHER INCOME (EXPENSE):
Interest expense .................. (11) (51) (223) (18) (118)
Interest income ................... 21 19 71 1 26
Gain on sale of investment
(note 11) ....................... 225 -- -- -- --
------- ------- -------- ------- --------
LOSS BEFORE INCOME TAX
EXPENSE ........................... (110) (290) (8,443) (20) (2,942)
Income tax expense ................. 19 -- -- -- --
------- ------- -------- ------- --------
NET LOSS ........................... (129) (290) (8,443) (20) (2,942)
Accretion of mandatorily
redeemable preferred stock to
redemption value .................. -- -- (625) -- (374)
------- ------- -------- ------- --------
NET LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS ............... $ (129) $ (290) $ (9,068) $ (20) $ (3,316)
======= ======= ======== ======= ========
BASIC AND DILUTED LOSS PER
COMMON SHARE ...................... $ (.03) $ (.06) $ (1.36) $ -- $ (.40)
======== ======== ======== ======= ========
Weighted average shares
outstanding used in the loss
per common share
calculation:
Basic and diluted ................. 4,486 4,737 6,670 4,737 8,249
======== ======== ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Mandatorily
Redeemable
Convertible
Preferred Stock Preferred Stock Common Stock
-------------------- ------------------------ -------------------
Shares Amount Shares Amount Shares Amount
-------- ---------- ----------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31,
1995 ............................. -- $ -- -- $ -- 3,403 $ 35
Issuance of common stock in
exchange for services ............ -- -- -- -- 1,096 73
Issuance of Series A preferred
stock, net of $34 in costs ....... -- -- 1,000 966 -- --
Issuance of common stock in
connection with acquisition ...... -- -- -- -- 237 135
Distributions to stockholders ..... -- -- -- -- -- --
Subchapter S Corporation
termination ...................... -- -- -- -- -- --
Net loss .......................... -- -- -- -- -- --
----- ------- ----- --------- ----- -------
BALANCES AT DECEMBER 31,
1996 ............................. -- -- 1,000 966 4,736 243
Issuance of Series B preferred
stock, net of $26 in costs ....... -- -- 595 974 -- --
Net loss .......................... -- -- -- -- -- --
----- ------- ----- --------- ----- -------
BALANCES AT DECEMBER 31,
1997 ............................. -- -- 1,595 1,940 4,736 243
Merger with Digital Evolution ..... 1,573 4,490 -- -- 4,385 4
Conversion of no par common
stock to $0.001 par value ........ -- -- -- -- (238)
Issuance of Series D preferred
stock, net of $25 in costs ....... 2,339 10,807 -- -- -- --
Repurchase of common stock ........ -- -- -- -- -- --
Repurchase of preferred stock ..... (220) (569) -- -- -- --
Issuance of warrants in
connection with debt
financing ........................ -- -- -- -- -- --
Exercise of stock options ......... -- -- -- -- 4 --
Accretion of mandatorily
redeemable preferred stock
to redemption value .............. -- 477 -- -- -- --
Conversion of preferred stock
to mandatorily redeemable
preferred stock .................. 1,649 2,088 (1,595) (1,940) -- --
Net loss .......................... -- -- -- -- -- --
----- ------- ------ --------- ----- -------
Balances at December 31, 1998 5,341 17,293 -- -- 9,125 9
Issuance of common stock in
connection with acquisition ...... -- -- -- -- 585 1
Deferred stock compensation ....... -- -- -- -- 275 --
Amortization of deferred stock
compensation ..................... -- -- -- -- -- --
Exercise of stock options ......... -- -- -- -- 90 --
Accretion of mandatorily
redeemable preferred stock
to redemption value .............. -- 374 -- -- -- --
Net loss (unaudited) .............. -- -- -- -- -- --
----- ------- ------ --------- ----- -------
Balances at March 31, 1999
(unaudited) ...................... 5,341 $17,667 -- $ -- 10,075 $ 10
===== ======= ====== ========= ====== =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Deferred Additional Total
Stock Paid-in Treasury Accumulated Stockholders'
Compensation Capital Stock Deficit Equity (Deficit)
-------------- ------------ ------------ --------------- -----------------
<S> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31,
1995 ............................. $ -- $ -- $ -- $ 38 $ 73
Issuance of common stock in
exchange for services ............ -- -- -- -- 73
Issuance of Series A preferred
stock, net of $34 in costs ....... -- -- -- -- 966
Issuance of common stock in
connection with acquisition ...... -- -- -- -- 135
Distributions to stockholders ..... -- -- -- (7) (7)
Subchapter S Corporation
termination ...................... -- (21) -- 21 --
Net loss .......................... -- -- -- (129) (129)
-------- ------- -------- ---------- ---------
BALANCES AT DECEMBER 31,
1996 ............................. -- (21) -- (77) 1,111
Issuance of Series B preferred
stock, net of $26 in costs ....... -- -- -- -- 974
Net loss .......................... -- -- -- (290) (290)
-------- ------- -------- ---------- ---------
BALANCES AT DECEMBER 31,
1997 ............................. -- (21) -- (367) 1,795
Merger with Digital Evolution ..... -- 12,506 -- -- 12,510
Conversion of no par common
stock to $0.001 par value ........ -- 238 -- -- --
Issuance of Series D preferred
stock, net of $25 in costs ....... -- -- -- -- --
Repurchase of common stock ........ -- -- (4,812) -- (4,812)
Repurchase of preferred stock ..... -- (451) -- -- (451)
Issuance of warrants in
connection with debt
financing ........................ -- 140 -- -- 140
Exercise of stock options ......... -- 6 -- -- 6
Accretion of mandatorily
redeemable preferred stock
to redemption value .............. -- -- -- (477) (477)
Conversion of preferred stock
to mandatorily redeemable
preferred stock .................. -- -- -- (148) (2,088)
Net loss .......................... -- -- -- (8,443) (8,443)
-------- ------- -------- ---------- ---------
Balances at December 31, 1998 -- 12,418 (4,812) (9,435) (1,820)
Issuance of common stock in
connection with acquisition ...... -- 2,923 -- -- 2,924
Deferred stock compensation ....... (1,375) 1,375 -- -- --
Amortization of deferred stock
compensation ..................... 29 -- -- -- 29
Exercise of stock options ......... -- 155 -- -- 155
Accretion of mandatorily
redeemable preferred stock
to redemption value .............. -- -- -- (374) (374)
Net loss (unaudited) .............. -- -- -- (2,942) (2,942)
-------- ------- -------- ---------- ---------
Balances at March 31, 1999
(unaudited) ...................... $ (1,346) $16,871 $ (4,812) $(12,751) $(2,028)
======== ======= ======== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31, Three Months Ended March 31,
-------------------------------------------- ----------------------------
1996 1997 1998 1998 1999
------------- ------------- -------------- ----------- --------------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................... $ (129) $ (290) $(8,443) $ (20) $(2,942)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ................... 61 269 4,592 91 2,496
Non-cash charges ................................ 73 -- 89 -- 77
Changes in operating assets and liabilities,
net of effects of acquisitions:
Increase in accounts receivable ................ (445) (1,340) (113) (589) (3,571)
Increase (decrease) in fees and
expenditures in excess of billings ........... (52) (49) (630) (224) 33
Increase (decrease) in prepaid expenses
and other current assets ..................... (38) (9) (163) (133) (27)
Increase in accounts payable and accrued
expenses ..................................... 78 1,025 1,929 513 984
Increase (decrease) in billings in excess of
fees and expenditures ........................ 244 371 (708) (84) 1,787
------ --------- ------- ------ -------
Net cash used in operating activities ............. (208) (23) (3,447) (446) (1,163)
------ --------- ------- ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment ............... (244) (422) (573) (118) (329)
Acquisitions, net of cash acquired ................ -- (166) (4) -- 36
Other ............................................. (11) (24) (72) -- 23
------ --------- ------- ------ -------
Net cash used in investing activities ............. (255) (612) (649) (118) (270)
------ --------- ------- ------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under bank line
of credit ....................................... 45 (45) 1,700 525 (631)
Net proceeds (repayments) from equipment
financing ....................................... 66 (79) (201) (71) 545
Proceeds from term loan ........................... -- -- 600 -- --
Repayment of stockholder loans .................... (40) (23) (24) (7) (7)
Distributions to stockholders ..................... (7) -- -- -- --
Payment of deferred financing fees ................ -- -- (48) -- --
Net proceeds from issuance of preferred stock 966 974 10,807 -- --
Payments to acquire treasury stock ................ -- -- (4,812) -- --
Payments to repurchase preferred stock ............ -- -- (1,020) -- --
Proceeds from exercise of stock options ........... -- -- 6 -- 155
------ --------- ------- ------ -------
Net cash provided by financing activities ......... 1,030 827 7,008 447 62
------ --------- ------- ------ -------
Net increase (decrease) in cash and cash
equivalents ..................................... 567 192 2,912 (117) (1,371)
Cash and cash equivalents, beginning of
period .......................................... 27 594 786 786 3,698
------ --------- ------- ------ -------
Cash and cash equivalents, end of period .......... $ 594 $ 786 $ 3,698 $ 669 $ 2,327
====== ========= ======= ====== =======
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to March 31, 1998 and 1999 is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
US. Interactive, Inc. (the Company) is a provider of Internet professional
services helping companies take advantage of the business opportunities
presented by the Internet. The Company provides integrated Internet strategy
consulting, marketing and technology services that enable clients to align
their people, processes and systems to form an electronic enterprise.
Principles of Consolidation
The accompanying consolidated financial statements include the financial
statements of the Company and its two wholly-owned subsidiaries, Web Access,
Inc., and Digital Bindery, LLC. All significant intercompany balances and
transactions have been eliminated in consolidation. Digital Bindery, LLC had no
meaningful assets or operations during the periods presented.
The Company has sustained significant net losses and negative cash flows
from operations since its inception. The Company's ability to meet its
obligations in the ordinary course of business is dependent upon its ability to
establish profitable operations or raise additional financing through public or
private equity financing, bank financing or other sources of capital. During
1998, the Company sold approximately $10.8 million of its preferred stock.
Management believes that its current funds combined with other available
sources of funding will be sufficient to enable the Company to meet its planned
expenditures through at least December 31, 1999. The Company may require
additional capital to finance its future operations beyond 1999. Additional
financing may not be available when needed and, if such financing is available,
it may not be available on terms favorable to the Company.
Unaudited Interim Financial Information
The interim consolidated financial statements of the Company for the three
months ended March 31, 1998 and 1999, included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission (SEC). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations relating to interim financial statements. In the opinion
of management, the accompanying unaudited interim consolidated financial
statements reflect all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position of the Company
at March 31, 1999, and the results of its operations and its cash flows for the
three months ended March 31, 1998 and 1999.
Cash Equivalents
Cash equivalents consist primarily of money market accounts. The Company
considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
F-7
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
Furniture and Equipment
Furniture, purchased software and equipment are recorded at cost and
depreciated on a straight-line basis over estimated useful lives of two to five
years. Leasehold improvements are recorded at cost and amortized over the
lesser of their useful lives or the remaining term of the related lease.
Goodwill and Other Intangibles
Goodwill and other intangibles are being amortized over two to five years.
Accumulated amortization was $117,000 and $4,287,000 as of December 31, 1997
and 1998, respectively. The Company assesses the recoverability of goodwill, as
well as other long-lived assets, in accordance with Statement of Financial
Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, which requires
the Company to review for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset might not be
recoverable. When such an event occurs, the Company estimates the future cash
flows expected to result from the use of the asset and its eventual
disposition. If the undiscounted expected future cash flows is less than the
carrying amount of the asset, an impairment loss is recognized.
Revenue Recognition
The Company derives its revenues primarily from consulting service
agreements (including retainer fees, fixed-price and time and materials
agreements) and to a lesser extent advertising commissions.
Revenues are recognized over the period of each engagement using primarily
the percentage-of-completion method using labor hours incurred as the measure
of progress towards completion. Provisions for contract adjustments and losses
are recorded in the period such items are identified. Fees and expenditures in
excess of billings represent costs incurred on projects in excess of amounts
billed. Billings in excess of fees and expenditures represent amounts billed in
advance of services being performed.
Commissions earned from advertising placed with media are generally
recorded as revenue at the time the advertising appears or is broadcast.
Commissions earned for production expenditures and fees derived from other
services are recognized as revenue upon performance of the service.
Income Taxes
The Company utilizes the asset and liability method of accounting for
income taxes in accordance with Statement of Financial Accounting Standards
("SFAS") No. 109. Under this method, deferred income tax liabilities and assets
are determined based on the difference between the financial statement and the
tax bases of assets and liabilities using enacted tax rates in effect for the
period in which the differences are expected to reverse. Valuation allowances
are established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
F-8
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
The Company had been treated as an S Corporation for federal tax reporting
purposes up through the date of the issuance of preferred stock in June 1996.
Since that time the Company is taxed as a C Corporation.
Financial Instruments
The Company's financial instruments principally consist of cash and cash
equivalents, accounts receivable, accounts payable and debt. Cash and cash
equivalents, accounts receivable and accounts payable are carried at cost which
approximates fair value because of the short maturity of these instruments. The
Company's debt is carried at cost, which approximates fair value, as the debt
bears interest at rates approximating current market rates.
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 any potential contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Stock-Based Compensation
SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") gives
companies the option to adopt the fair value method for expense recognition of
employee stock options and stock based awards or to continue to account for
such items using the intrinsic value method as outlined under Accounting
Principles Board Opinion No. 25 "Accounting for Stock issued to Employees"
("APB 25") with pro forma disclosures of net income as if the fair value method
had been applied. The Company applies APB 25 for stock options and stock based
awards.
Long-Lived Assets
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," the Company
periodically evaluates the carrying value of long-lived assets when events and
circumstances warrant such review. The carrying value of a long-lived asset is
considered impaired when the anticipated undiscounted cash flow from such asset
is separately identifiable and is less than the carrying value. In that event a
loss is recognized based on the amount by which the carrying value exceeds the
fair market value of the long-lived asset. Fair market value is determined by
using the anticipated cash flows discounted at a rate commensurate with the
risk involved. Measurement of the impairment, if any, will be based upon the
difference between carrying value and the fair value of the asset. The Company
has identified no such impairment losses.
Historical Net Loss Per Share and Pro Forma Net Loss Per Share
The Company computes earnings per share in accordance with SFAS No. 128,
"Earnings per Share" ("SFAS No. 128"). Basic earnings per share is computed
using the weighted average number of common shares outstanding during the
period. Diluted earnings per share is
F-9
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
computed using the weighted-average number of common and common equivalent
shares outstanding during the period. Common equivalent shares are excluded
from the computation if their effect is anti-dilutive. For all loss periods,
the effect of common equivalent shares is anti-dilutive. The pro forma net loss
per share is computed by dividing the net loss by the sum of the weighted
average number of shares of common stock and including the shares issued as a
result of the assumed conversion of all outstanding shares of convertible
preferred stock as if they had been outstanding from the date of their issuance
even if the effect is anti-dilutive. Net loss per share amounts for all periods
have been presented to conform to SFAS No. 128 requirements and the accounting
rules set for the in Staff Accounting Bulletin No. 98 issued by the SEC in
February 1998.
The following table sets forth the computation of loss per share (in
thousands, except per share amounts).
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended March 31,
-------------------------------------- ----------------------------
1996 1997 1998 1998 1999
---------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Numerator: Net loss attributable to to
common stockholders .................... $ (129) $ (290) $ (9,068) $ (20) $ (3,316)
Denominator:
Historical weighted-average shares
outstanding for basic and diluted loss
per common share ..................... 4,486 4,737 6,670 4,737 8,249
Basic and diluted loss per common share $ (.03) $ (.06) $ (1.36) $ -- $ (0.40)
Year Ended December 31, Three Months Ended March 31,
--------------------------------------- ----------------------------
1996 1997 1998 1998 1999
---------- ----------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Numerator: Net loss attributable to to
common stockholders .................... $ (129) $ (290) $ (9,068) $ (20) $ (3,316)
Pro forma denominator:
Historical weighted-average shares
outstanding for basic and diluted loss
per common share ..................... 5,012 6,074 9,634 6,074 13,550
Pro forma basic and diluted loss per
common share ........................... $ (.03) $ (.05) $ (.94) $ -- $ (0.24)
</TABLE>
Recent Accounting Pronouncements
In June 1997 the Financial Accounting Standard Board (FASB) issued
Reporting Comprehensive Income ("SFAS No. 130"), which established standards
for reporting and display of comprehensive income and its components in the
financial statements. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. SFAS No. 130 offers
alternatives for presentation of disclosure required by the standard. The
adoption of SFAS No. 130 had no impact on the Company's results of operations,
financial position or cash flows, as the amount of comprehensive loss is the
same as the net loss for all periods presented.
In June 1997 the FASB issued Disclosures about Segments of an Enterprise
and Related Information ("SFAS No. 131"), which establishes standards for
reporting information about
F-10
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
operating segments in annual financial statements. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997. The adoption of SFAS No. 131 did not have an impact on the
Company's results of operations, financial position or cash flows.
In February 1998 the FASB issued Employers' Disclosures about Pension and
Other Postretirement Benefits ("SFAS No. 132"), which revises employer's
disclosures about pension and other post retirement benefit plans. SFAS No. 132
does not change the measurement or recognition of those plans. SFAS No. 132 is
effective for fiscal years beginning after December 15, 1997. The adoption of
SFAS No. 132 did not have an impact on the Company's results of operations,
financial position or cash flows.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP
98-1, which is effective for fiscal years beginning after December 15, 1998,
provides guidance on accounting for computer software developed or obtained for
internal use including the requirements to capitalize specified costs and
amortization of such costs. The adoption of this standard did not have a
material effect on the Company's capitalization policy.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-up Activities" ("SOP 98-5"). SOP 98-5, which is effective
for fiscal years beginning after December 15, 1998, provides guidance on the
financial reporting of start-up costs and organization costs. It requires costs
of start-up activities and organization costs to be expensed as incurred. The
Company has adopted SOP 98-5. As the Company has expensed these costs
historically, the adoption of this standard did not have a significant impact
on the Company's results of operations, financial position or cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives
and Hedging Activities" ("SFAS 133"), which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. As the Company
does not currently engage in derivative or hedging activities there will be no
impact to the Company's results of operations, financial position or cash flow
upon the adoption of this standard.
F-11
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
2. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Three Months
Ended
Years Ended December 31, March 31,
------------------------- ----------------
1996 1997 1998 1998 1999
------ ------ --------- ------ --------
<S> <C> <C> <C> <C> <C>
Cash paid during the year for (in thousands):
Interest ......................................... $ 8 $ 46 $ 213 $19 $ 110
Supplemental non-cash investing and financing
activities: Acquisition (in thousands): ............
Fair value of assets acquired (including cash
of $1, 1996, $332, 1998 and $135, 1999) ......... $ 59 $ 8 $ 2,064 -- $ 544
Liabilities assumed .............................. 102 485 1,192 -- 359
Fair value of stock issued in connection with
acquisitions (note 3) ........................... 135 -- 17,000 -- 2,924
Issuance of warrants in connection with
bank financing .................................. -- -- 140 -- --
</TABLE>
3. ACQUISITIONS
On August 1, 1996 the Company acquired all of the outstanding shares of
Web Access, Inc. (Web Access), a regional Internet professional services
company, in exchange for 236,842 shares of the Company's common stock, having
an estimated fair market value of $135,000 at the time of the transaction. The
results of Web Access's operations have been combined with those of the Company
since the date of acquisition. The acquisition was accounted for using the
purchase method of accounting. Accordingly, a portion of the purchase price was
allocated to the net assets acquired based on their estimated fair values. The
fair value of the tangible assets acquired and liabilities assumed was $59,000
and $102,000, respectively. The balance of the purchase price of $178,000 was
recorded as excess of costs over net asset acquired (goodwill) and is being
amortized over five years. The results of operations of Web Access were not
material to the Company.
On May 1, 1997, the Company acquired certain assets and assumed certain
liabilities of Mixed Media Works, Inc. (MMW), a regional Internet professional
services firm. The purchase price was approximately $485,000 and was allocated
to the assets acquired and liabilities assumed based on fair values as of the
date of acquisition. The fair value of the assets acquired and liabilities
assumed was $8,000 and $485,000, respectively. The acquisition was accounted
for using the purchase method of accounting and, as such, the excess of the
purchase price over the fair values of the assets acquired of $477,000 was
recorded as goodwill and is being amortized over five years. The results of
operations of MMW were not material to the Company.
On July 2, 1998 the Company completed a merger (the Merger) with Digital
Evolution, Inc. (DE) an Internet professional services firm that provided
development services for Internet, intranet and extranet applications. The
shareholders of DE agreed to exchange their common and preferred shares for
common and preferred shares of the Company.
This resulted in the Company issuing 4,383,954 shares of common stock,
1,573,533 shares of Series A mandatorily redeemable convertible preferred stock
and 1,043,945 options to
F-12
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
purchase Company common stock. The aggregate purchase price was approximately
$17 million. In connection with the Merger, the holders of the Company's
original Series A and B convertible preferred stock exchanged their shares for
Series B and C mandatorily redeemable convertible preferred stock.
The Merger was accounted for under the purchase method of accounting. The
results of operations of DE have been included in the Company's consolidated
financial statements since July 1, 1998.
The excess of the purchase price over the fair value of the net
identifiable assets acquired of $16,128,000 has been recorded as goodwill and
other intangible assets and is amortized on a straight-line basis over its
estimated life of two years.
The purchase price was allocated as follows (in thousands):
Fair value of assets acquired
(Primarily accounts receivable and fixed assets) ......... $ 2,064
Goodwill and related intangible assets .................... 15,283
Assembled workforce ....................................... 845
Fair value of liabilities acquired ........................ (1,192)
--------
$ 17,000
========
The following table reflects unaudited pro forma combined results of
operations of the Company and DE on the basis that the acquisition had taken
place at the beginning of 1997 (in thousands, except per share data).
<TABLE>
<CAPTION>
December 31,
------------------------- March 31,
1997 1998 1998
---------- ------------ ----------
<S> <C> <C> <C>
Revenue .............................................. $ 13,096 $ 16,446 $ 4,178
Net loss attributable to common stockholders ......... (9,183) (15,299) (2,743)
Basic and diluted loss per common share .............. $ (1.01) $ (1.73) $ (.30)
</TABLE>
In management's opinion, the unaudited pro forma combined results of
operations are not indicative of the actual results that would have occurred
had the acquisitions been consummated at the beginning of 1997 or of future
operations of the combined companies under the ownership and management of the
Company.
F-13
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
4. FURNITURE AND EQUIPMENT
Furniture and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
-------------- -------------
<S> <C> <C>
Equipment ............................................... $510 $1,520
Purchased software ...................................... 80 201
Furniture and fixtures .................................. 153 329
Leasehold improvements .................................. 56 331
---- ------
$799 $2,381
Less: accumulated depreciation and amortization ......... 239 1,006
---- ------
Furniture and equipment -- net .......................... $560 $1,375
==== ======
</TABLE>
5. ACCRUED EXPENSES
Accrued expenses consists of the following (in thousands):
December 31,
----------------- March 31,
1997 1998 1999
------ --------- ----------
Accrued personnel related costs ......... $249 $1,016 $1,425
Legal and professional fees ............. 48 370 460
Other ................................... 164 968 1,836
---- ------ ------
$461 $2,354 $3,721
==== ====== ======
6. NOTES PAYABLE -- BANK
Working Capital Loan
On October 1, 1996, the Company obtained a $100,000 working capital loan
with a bank. Borrowings under the line bore interest at the prime rate plus 1%
(9.25% at December 31, 1996) and were collateralized by substantially all
assets of the Company, as well as the personal assets and guarantees of certain
common stockholders. The amount outstanding under this facility at December 31,
1996 was $45,000. On February 18, 1997 the outstanding balance was repaid in
full and the agreement was terminated.
On December 24, 1996, the Company entered into an agreement with a bank
establishing a working capital facility (the Facility) in the amount of
$250,000, which was subsequently increased to $1,000,000 during 1997.
Borrowings under the Facility bear interest at the prime rate plus 1.25% (9.75%
at December 31, 1997), and were collateralized by accounts receivable and
equipment of the Company. Borrowings under the Facility were limited to 75% of
eligible accounts receivable, as defined, and were subject to certain working
capital and tangible net worth covenants. The Facility was terminated in July
1998.
In July 1998, the Company executed a Loan and Security Agreement (the Loan
Agreement) with a commercial bank that provides (i) a Line of Credit (the
"Line") in the amount of the lesser of $3,250,000 or the Borrowing Base
(principally limited to 75% of eligible accounts receivable) and (ii) a Term
Loan (the Loan) in the aggregate amount of $1,200,000. The Line matures on June
30, 1999 and bears interest at the prime rate plus 1.25% (9.0% at December
F-14
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
31, 1998). The Loan is payable in 48 consecutive monthly installments of
$25,000 beginning August 1, 1999 and bears interest at the prime rate plus
1.75% (9.5% at December 31, 1998). The Line and Loan are collateralized by
substantially all of the Company's assets. The Company is required to comply
with certain financial covenants, as defined in the Loan Agreement, which
include cash flow and leverage ratios, working capital and tangible net worth
levels.
As of December 31, 1998 and March 31, 1999, the Company was not in
compliance with certain of the financial covenants under the Loan Agreement. In
May 1999 the Company received a waiver of these covenant violations from the
commercial bank. There was $1,700,000 outstanding under the Line and $600,000
outstanding under the Loan as of December 31, 1998. There was $1,075,000
outstanding under the Line and $1,200,000 outstanding under the Loan as of
March 31, 1999.
In connection with the Loan Agreement, the Company issued a warrant to the
bank to purchase an aggregate of 70,000 shares of the Company's common stock at
an exercise price of $3.50 per share which was the estimated fair market value
of a share of the Company's common stock. At the time the warrant was issued
the warrant may be exercised at any time until the tenth anniversary of the
date of issuance of the original warrant. The estimated fair value of the
warrant was $140,000, which the Company recorded as debt issuance costs in July
1998. The debt issuance costs will be amortized over the term of the Loan
Agreement.
Demand Notes -- Equipment
During 1996 the Company entered into two demand notes with a bank to
finance the purchase of certain equipment. Absent any demand by the lender, the
Company is required to make monthly installments including interest through
April 1998 as further described herein. Note No. 1 (original amount $15,000)
requires monthly installments of $500 and bears interest at the prime rate plus
1% (9.25% at December 31, 1998) on outstanding balances. Note No. 2 (original
amount $59,000) requires monthly installments of $2,200 and bears interest at
8.75%. Amounts outstanding under these notes at December 31, 1997 and 1998 were
$38,000 and $6,000, respectively.
F-15
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
7. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
--------------- ----------
1997 1998 1999
------ ------ ----------
<S> <C> <C> <C>
Unsecured stockholder loan with interest rate of 8.00%
maturing July 1999 ..................................... $ 45 $ 20 $ 13
Term loan with interest rate of 9% maturing April 1999 47 12 6
Capital lease obligations with interest rates of 9% to
10.5% maturing through 2001 ............................ 120 79 324
Term loan with interest rate of 9.5% maturing July
2003 ................................................... -- 600 1,200
Note payable with interest of 6% repaid in 1998 ......... 34 -- --
Term loan with interest rate of 9.343% maturing
November 2001 .......................................... -- 34 32
---- ---- ------
246 745 1,575
Less current portion .................................... 167 162 462
---- ---- ------
$ 79 $583 $1,113
==== ==== ======
</TABLE>
Maturities of long-term debt are as follows (in thousands): 1999 -- $162;
2000 -- $195; 2001 -- $150; 2002 -- $150 and 2003 -- $88.
8. STOCKHOLDERS' EQUITY
Issuance of Common Stock
During 1996, certain stockholders and employees of the Company were issued
a total of 1,096,875 shares of common stock for their services rendered to the
Company. The estimated fair value of the services rendered was $73,000 which
was recorded as compensation expense.
Issuance of Preferred Stock
In June 1996, the Company authorized, issued and sold 1,000,000 shares of
Series A convertible preferred stock at a sale price of $1.00 per share. During
1997 the Company authorized, issued and sold 595,706 shares of Series B
convertible preferred stock at a sale price of $1.68 per share. Proceeds from
the sale of such shares were designated for the use of general working capital,
with the exception that no part of such proceeds could be used to reduce any
outstanding indebtedness. In connection with the Merger discussed in Note 3,
the holders of the Company's original Series A and B convertible preferred
stock exchanged their shares for Series B and C mandatorily redeemable
convertible preferred stock.
The holders of the Company's Series A, B, C and D mandatorily redeemable
convertible preferred stock (the Preferred Stock) are entitled to a per annum
return of 5.65% for the Series A and 10.0% for the Series B, C and D of the
original purchase price only in the event of a redemption of the Preferred
Stock. The holders of the Preferred Stock have demand and piggy back
registration rights, as defined.
F-16
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
Holders of Preferred Stock have the option to convert such shares into
shares of common stock on a 1:1 ratio. The conversion rate on a particular
series of Preferred Stock is subject to an adjustment in the event that any
additional common stock, or other shares convertible into common stock, are
issued for a per share price less than the particular series conversion price.
Mandatory conversion occurs upon the closing of an IPO of the Company's common
stock, as defined. On the fifth anniversary of the issue date of each
respective Series of Preferred Stock and, upon the one-time election of each of
the holders of the shares of each respective Series of Preferred Stock, the
Company shall be required to redeem all shares of each respective Series of
Preferred Stock.
The Preferred Stock votes on an as if converted basis.
Issuance of Series D Mandatorily Redeemable Convertible Preferred Stock
In September 1998 the Company sold 2,339,628 shares of Series D
mandatorily redeemable convertible preferred stock, with the same preferences
described above, to Safeguard Scientifics, Inc. (Safeguard) for $10,832,478. As
part of Safeguard's investment, Safeguard also has the right, under certain
conditions and with the Company's consent, to conduct an offering of the
Company's common stock to Safeguard stockholders.
Preferred Stock consists of the following at December 31, 1997 and 1998
and March 31, 1999 (in thousands, except per share data):
<TABLE>
<CAPTION>
Per Share Issued and Outstanding
Liquidation December 31, March 31,
Value Authorized 1997 1998 1999
------------- ------------ -------- ------- ----------
<S> <C> <C> <C> <C> <C>
Preferred Series
Series A ......... $ 2.83 1,574 -- 1,385 1,385
Series B ......... $ 0.95 1,053 1,000 1,021 1,021
Series C ......... $ 1.68 596 596 596 596
Series D ......... $ 4.63 2,339 -- 2,339 2,339
------ ----- ----- ----- -----
5,562 1,596 5,341 5,341
===== ===== ===== =====
</TABLE>
Reincorporation of the Company
In connection with the Merger in July 1998, the Company amended its
Articles of Incorporation to authorize 20,000,000 shares of Class A Common
Stock ($.001 par value), 2,000,000 shares of Class B Common Stock ($.001 par
value), 5,000,000 shares of Preferred Stock ($.001 par value) of which
2,000,000 shares were designated Series A Preferred Stock, 2,000,000 shares
were designated Series B Preferred Stock, and 1,000,000 shares were designated
Series C Preferred Stock. The Class B Common Stock was identical to the Class A
Common Stock in all respects except that the Class B Common Stock was
non-voting.
In September 1998, the Company was reincorporated in Delaware. In
connection with the reincorporation, the Company is authorized to issue
90,000,000 shares, $.001 par value, of common stock and 15,000,000 shares,
$.001 par value, of preferred stock of which 5,561,499 shares have been
designated as Series A, B, C and D as of December 31, 1998.
F-17
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
Sale of Common Stock by Stockholders
On July 1, 1998, certain officers and principal stockholders of the
Company sold an aggregate of 300,000 shares of their holdings of Company common
stock for $1,050,000, or $3.50 per share, to certain holders of the Company's
mandatorily redeemable convertible preferred stock.
Purchase of Common Stock (Treasury Stock) and Preferred Stock from Stockholders
In September 1998, contemporaneous with the Safeguard investment as
described above, the Company purchased 1,039,311 shares of common stock for
$4,811,994, or $4.63 per share and 188,824 shares of Series A mandatorily
redeemable convertible preferred stock and 31,579 shares of Series B
mandatorily redeemable convertible preferred stock for $1,020,466, or $4.63 per
share from certain officers and principal stockholders of the Company.
9. LEASES
The Company maintains operating and administrative offices in California,
New York, Pennsylvania and Washington D.C. The Company also leases certain
equipment under operating and capital leases. Total rent expense under
operating leases amounted to $103,000, $213,000 and $1,239,000 for the years
ended December 31, 1996, 1997 and 1998, respectively.
Future minimum payments under non-cancelable leases are as follows (in
thousands):
Capital Operating
Year Ending December 31 Leases Leases
- ----------------------- --------- ----------
1999 ........................................... $64 $1,558
2000 ........................................... 23 970
2001 ........................................... -- 811
2002 ........................................... -- 660
2003 ........................................... -- 487
Thereafter ...................................... -- 2,389
--- ------
Total minimum lease payments .................... 87 $6,875
--- ------
Amount representing interest .................... (8)
---
Present value of minimum lease payments ......... $79
---
At December 31, 1998, equipment included assets under capitalized lease
obligations of $72,000 less accumulated amortization of $36,000.
10. INCOME TAXES
The Company utilized the asset and liability method of accounting for
income taxes as set forth in Statement No. 109, Accounting for Income Taxes,
Under the asset and liability method, deferred taxes are determined based on
the differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes. Significant components of the Company's deferred taxes are as follows
(in thousands):
F-18
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1998
--------- -----------
<S> <C> <C>
Deferred Tax Assets:
Book depreciation in excess of tax depreciation ......................... $ -- $ 2
Net operation loss carryforwards ........................................ 53 2,758
Reserves and accruals not currently deductible for tax purposes ......... 60 143
Amortization ............................................................ 37 42
Other ................................................................... -- 5
------ --------
150 2,950
Valuation allowance ..................................................... (150) (2,950)
------ --------
Net deferred tax assets ................................................. $ -- $ --
====== ========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which temporary
differences represent net future deductible amounts become deductible. Due to
the uncertainty of the Company's ability to realize the benefit of the deferred
tax asset, the deferred tax assets are fully offset by a valuation allowance at
December 31, 1997, 1998 and March 31, 1999.
At December 31, 1998, the Company had approximately $7,100,000 of Federal
net operating loss carryforwards available to offset future Federal taxable
income. These Federal net operating loss carryforwards will expire between 2010
and 2018, if not utilized. The Company also has state tax net operating losses
in various states of approximately $5,900,000. These state net operating losses
will expire through the year 2013 if not utilized.
Under the Tax Reform Act of 1986, the utilization of a corporation's net
operating loss carryforward is limited following a greater than 50% change in
ownership. Due to the Company's prior and current equity transactions, the
Company's net operating loss carryforwards may be subject to an annual
limitation. Any unused annual limitation may be carried forward to future years
for the balance of the net operating loss carryforward period. The Company
intends to have a study performed in 1999 to determine the effect, if any, of
the regulations that limit the use of net operating loss carryforwards.
11. OTHER INVESTMENTS
The Company obtained a 30% interest in Network 1.0, LLC (Network 1.0) on
January 1, 1996 (date of inception for Network 1.0). Network 1.0 was created to
provide representation services to companies selling advertising on the
Internet. The Company made no contribution of assets or any other financial
resources to this entity. However, significant management time was devoted in
return for an equity interest. On June 18, 1996 Network 1.0 acquired the
Company's interest for $225,000 which has been recorded as a gain in the
accompanying statement of operations. Network 1.0 had no meaningful operations
in 1996 and due to the temporary nature of the Company's investment, it
accounted for its interest under the cost method of accounting.
F-19
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
During 1997, the Company obtained common stock of an unrelated early stage
company, as consideration primarily for services rendered by the Company, that
gives the Company an approximate 12% ownership interest. The Company accounts
for the investment under the cost method of accounting with no carrying value.
12. EMPLOYEE BENEFIT PLANS
The Company has an employee savings plan, which permits participants to
make contributions by salary reduction pursuant to section 401(k) of the
Internal Revenue Code. The plan provides for discretionary employer
contributions to eligible employees. The Company's contribution to the plan was
$10,000, $29,000 and $50,000 for the years ended December 31, 1996, 1997 and
1998 respectively.
The Company also maintains an employee profit sharing plan pursuant to
section 401(k) of the Internal Revenue Code, under which most full-time
employees may participate after completing one full year of employment. Annual
contributions are based on (in part but not limited to) the profitability of
the Company and are made at the sole discretion of the Board of Directors of
the Company. There were no contributions in the years ended December 31, 1996,
1997 and 1998.
13. STOCK OPTION PLAN
The Company has three stock option plans currently in effect under which
future grants may be issued: the 1998 Stock Option Plan (the "1998 Plan"), the
1997 Stock Option Plan (the "1997 Plan") and the 1996 Stock Option Plan (the
"1996 Plan"), collectively the Plans.
The Company adopted the 1998 Plan effective July 2, 1998 and amended
September 22, 1998. The 1998 Plan authorizes the grants of options to purchase
up to 1,397,236 shares of authorized but unissued common shares. At December
31, 1998 156,850 options under the 1998 Plan have been granted to employees of
the Company at prices ranging between $3.50 and $4.63, the estimated fair value
of the Company's common stock at the date of grant. Of these options 7,500 have
been cancelled and none are currently exercisable. The options will become
exercisable in 1999 through 2002.
The Company adopted the 1997 Plan effective January 1, 1997 and amended on
September 22, 1998. The 1997 Plan authorizes the grants of option to purchase
up to 600,000 shares of authorized but unissued common shares. At December 31,
1997 and 1998, 224,275 and 581,757 options, respectively, have been granted to
employees of the Company at prices ranging between $1.50 and $4.63, the
estimated fair value of the Company's common stock at the date of grant. Of
these options, 4,203 were exercised, 37,392 have expired and been cancelled,
251,169 are currently exercisable and the remaining options will become
exercisable in 1999 through 2001.
As a result of the Company's merger with Digital Evolution, Inc. as
discussed in Note 3, the Company adopted the 1996 Plan effective July 2, 1998
and amended September 22, 1998. Outstanding Digital Evolution stock options
were converted into options to acquire approximately 1,043,945 Company shares
at price of $2.50 to $3.24 per share. The 1996 Plan authorized the grants of
options to purchase up to 1,054,688 shares of authorized but unissued
F-20
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
common shares. At December 31, 1998, 1,043,945 options under the 1996 Plan have
been granted to employees of the Company, none of which have been exercised and
94,984 have expired and have been cancelled. Of these options, none are
currently exercisable and the remaining options will become exercisable in 1999
through 2000. No additional options may be granted under the 1996 Plan.
Stock options are to be granted with an exercise price at least equal to
the stock's fair market value at the date of grant. The Plans permit the
granting of options with exercise periods of no more than 10 years from the date
of grant, with further stipulations that no options may be granted after the
tenth anniversary of the adoption of the Plans. Options granted vest and become
exerciseable equally over four years from the date of grant unless such vesting
period is accelerated by the approval of the Compensation Committee of the Board
of Directors. However, no option may be exercised before the effective date of
either the (i) sale of the Company, as defined to include a material
acquisition, or (ii) consummation of a public offering of securities of the
Company in which gross proceeds to the Company are not less than $10,000,000.
Information with respect to options granted under the Plans is as follows:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
------------- -----------------
<S> <C> <C>
Outstanding at January 1, 1997 .................... -- --
Options granted ................................... 224,275 $ 1.50
Options exercised ................................. -- --
Options cancelled ................................. (2,425) 1.50
------- -------
Outstanding at December 31, 1997 .................. 221,850 $ 1.50
Options granted ................................... 514,332 3.78
Options exercised ................................. (4,203) 1.50
Options canceled .................................. (137,451) 2.69
Converted Digital Evolution Stock Options ......... 1,043,945 2.47
========= =======
Outstanding at December 31, 1998 .................. 1,638,473 $ 2.73
========= =======
</TABLE>
The following summarizes information about the Company's stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------- -------------------------------------
Weighted Average
Number Outstanding Remaining Number Outstanding Weighted
Exercise Price at December 31, Contractual Weighted Average at December 31, Average
Range 1998 Life (in years) Exercise Price 1998 Exercise Price
- ---------------- -------------------- ----------------- ------------------ -------------------- ---------------
<S> <C> <C> <C> <C> <C>
$1.50 to $2.70 865,729 8.65 $ 2.21 118,109 $ 1.50
$3.50 to $4.63 772,744 9.73 $ 3.57 133,060 $ 3.71
------- -------
1,638,473 251,169
========= =======
</TABLE>
The Company applies APB 25 and related interpretations in accounting for
its stock option plans. Had compensation cost been recognized pursuant to SFAS
123, the Company's net loss would have been increased to the pro forma amounts
indicated below (in thousands, except per share data):
F-21
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
<TABLE>
<CAPTION>
1997 1998
----------- -------------
<S> <C> <C> <C>
Net loss attributable to common
stockholders' As reported $(290) $(9,068)
Pro forma (363) (9,507)
Basic and diluted loss per common share As reported $(.06) $ (1.36)
Pro forma (.08) (1.43)
</TABLE>
The per share weighted-average fair value of stock options issued by the
Company during 1997 and 1998 was $.56 and $.85, respectively.
The following range of assumptions were used by the Company to determine
the fair value of stock options granted using the minimum value option-price
model:
1997 1998
----------- -----------
Dividend yield ........................ 0% 0%
Expected volatility ................... 0% 0%
Average expected option life .......... 5 years 5 years
Risk-free interest rate ............... 6.00% 5.25%
14. SEGMENT AND MAJOR CUSTOMER INFORMATION
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which established standards for
reporting information about operating segments in annual financial statements.
The Company operates in a single industry segment, Internet professional
services.
The Company had seven customers representing 62% of accounts receivable at
December 31, 1997, seven customers representing 53% of accounts receivable at
December 31, 1998 and eight customers representing 71% of accounts receivable
at March 31, 1999.
For the years ended December 31, 1996, 1997 and 1998, 40%, 55% and 36%
respectively, of the Company's revenue was generated from its top five
customers. For the three months ended March 31, 1998 and 1999, 52% and 48%,
respectively, of the Company's revenue was generated from its top five
customers. One customer represented 10%, 8%, and 9% of 1996, 1997, and 1998
revenue, respectively. A second customer represented 7% of 1998 revenue and a
third customer represented 11% and 6% of 1997 and 1998 revenue, respectively.
For the three months ended March 31, 1999 two customers accounted for 14% and
13% of revenues.
The Company performs their services primarily in North America,
Asia-Pacific and Europe as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March
Years Ended December 31, 31,
---------------------------------- ---------------------
1996 1997 1998 1998 1999
--------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
North America ......... $1,950 $6,061 $12,535 $2,378 $5,156
Asia-Pacific .......... -- -- 1,001 -- 831
Europe ................ -- -- 100 -- 136
------ ------ ------- ------ ------
$1,950 $6,061 $13,636 $2,378 $6,123
====== ====== ======= ====== ======
</TABLE>
F-22
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
15. RELATED PARTY TRANSACTIONS
The Company and both Juggernaut Partners, LLC (Juggernaut) and Interactive
Video Technologies, Inc. (IVT), are related parties because a common
shareholder holds a substantial ownership interest in the Company, Juggernaut
and IVT. The Company provided professional services to both Juggernaut and IVT
during the year ending December 31, 1998 and the three months ended March 31,
1999. The price of these services were negotiated on an arm's length basis and
amounted to $703,000 for the year ended December 31, 1998 and $777,000 for the
three months ended March 31, 1999. Accounts receivable from these services was
$691,000 at December 31, 1998 and $1,013,000 at March 31, 1999.
In connection with the Safeguard investment in 1998, the Company and
Safeguard entered into an administrative services agreement which requires the
Company to pay Safeguard $50,000 per year. Such services will include
consultation in regard to general management, investor relations, legal
services and tax research and planning.
16. COMMITMENTS
The Company has employment agreements with two employees, each providing
for a minimum annual salary of $100,000. One employment agreement was executed
with an initial term of three years, through July 1999. The other was executed
with an initial term of two years, through April 1999. Additionally, the
Company has an employment agreement with its Chairman which provides for a
yearly base salary of $235,000 through July 2, 1999 which will renew for a
period of one year unless notice is given by the non-renewing party within 30
days. There are no severance provisions for these employment agreements, and
the Company may terminate the employees for cause as defined in the agreements.
17. LITIGATION
The Company is involved in certain claims and legal proceedings
principally relating to the collection of accounts receivable. While it is not
feasible to predict or determine the financial outcome of these proceedings,
management does not believe that they should result in a materially adverse
effect on the Company's financial position, results of operations or liquidity.
18. SUBSEQUENT EVENTS
Options Granted (unaudited)
In January and February 1999, the Company granted 28,100 options, with an
exercise price of $4.63 per share. In March and April 1999, the Company granted
622,633 options, with an exercise price of $5.00 per share. In late April, May
and June 1999, the Company granted 623,950 options, with an exercise price of
$9.25 per share. The exercise prices were equal to the estimated fair market
value of the Company's common stock on the date of grant.
Initial Public Offering (unaudited)
In April 1999, the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission that would
permit the Company to sell shares of the
F-23
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
Company's common stock in connection with a proposed initial public offering
("IPO"). As part of this offering, the Company would offer shares of its common
stock to certain shareholders of Safeguard at the IPO offering price.
Acquisition (unaudited)
In March 1999, the Company acquired certain assets and assumed certain
liabilities of InVenGen LLC, a regional Internet professional service firm, in
exchange for 584,800 shares of the Company's common stock, having an estimated
fair market value of $2,924,000 at the time of the transaction. The acquisition
will be accounted for using the purchase method of accounting. Accordingly, a
portion of the purchase price will be allocated to the net assets acquired and
liabilities assumed. The balance of the purchase price will be recorded as
goodwill and amortized over two years.
The Company also issued 275,200 shares of restricted common stock in
connection with the transaction. The former employees of InVenGen LLC who
became employees of the Company are required to be employed by the Company
during the next two year period in order for the restricted shares to be
released to them. If the employees leave the Company during the two-year period
all unvested shares are forfeited. The Company recorded $1,375,000 of deferred
stock compensation in connection with these restricted shares that will be
amortized over the two year period.
Severance Agreement (unaudited)
In May 1999, the Company's President and Chief Operating Officer resigned
as an officer. The Company will record a charge of approximately $170,000 in
connection with a severance agreement in the second quarter of 1999.
F-24
<PAGE>
Report of Independent Accountants
Board of Directors
Digital Evolution, Inc.
Brentwood, California
We have audited the accompanying balance sheets of Digital Evolution, Inc. as
of December 31, 1996 and 1997, and the related statements of operations,
shareholders' equity and cash flows for each of the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 provides 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 Digital Evolution, Inc. as of
December 31, 1996 and 1997 and the results of its operations and cash flows for
each of the years then ended in conformity with generally accepted accounting
principles.
BDO SEIDMAN, LLP
Los Angeles, California
August 28, 1998
F-25
<PAGE>
Digital Evolution, Inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31, June 30
----------------------------- ---------------
1996 1997 1998
------------- ------------- ---------------
(unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................................... $1,414,827 $1,528,301 $ 332,123
Accounts receivable, net of allowance for doubtful
accounts of $0, $165,400, and $150,000 (unaudited) ......... 159,676 1,827,501 1,388,549
Prepaid expenses and other current assets ................... 21,864 58,738 91,673
---------- ---------- ------------
Total current assets ........................................... 1,596,367 3,414,540 1,812,345
PROPERTY AND EQUIPMENT, NET (Note 2) ........................... 327,064 698,894 665,234
OTHER ASSETS ................................................... 21,699 42,939 44,456
---------- ---------- ------------
$1,945,130 $4,156,373 $ 2,522,035
========== ========== ============
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable and accrued expenses ....................... $ 608,093 $ 585,496 $ 372,670
Deferred revenue ............................................ 700,000 160,220 728,000
Loan from shareholders ...................................... 174,729 -- --
Current portion of long-term debt (Note 3) .................. 9,750 9,053 10,307
Current portion of obligations under capital leases
(Note 7) ................................................... 24,174 30,418 25,674
---------- ---------- ------------
Total current liabilities ...................................... 1,516,746 785,187 1,136,651
Obligations under capital leases (Note 7) ...................... 11,968 28,699 20,221
LONG-TERM DEBT (Note 3) ........................................ 43,248 34,195 28,921
---------- ---------- ------------
Total liabilities .............................................. 1,571,962 848,081 1,185,793
---------- ---------- ------------
Series A Redeemable Preferred stock-no par value, 1,366,666
shares authorized; issued and outstanding 250,000 in 1996
and 1,366,666 in 1997 and 1998 (unaudited), and (liquida-
tion value of $4,100,000) (Note 8) ............................ 694,761 4,044,759 4,044,759
---------- ---------- ------------
COMMITMENTS AND CONTINGENCIES (Notes 7, 8, 9, 10,
and 11)
SHAREHOLDERS' DEFICIENCY (Note 8)
Class A -- no par value, common stock, 38,466,665
shares authorized; 20,299,985 shares issued and out-
standing ................................................... 2,000 2,000 2,000
Class B - no par value, common stock, 6,096,000 shares
authorized; none issued and outstanding .................... -- -- --
Accumulated deficit ......................................... (323,593) (738,467) (2,710,517)
---------- ---------- ------------
Total shareholders' deficiency .............................. (321,593) (736,467) (2,708,517)
---------- ---------- ------------
$1,945,130 $4,156,373 $ 2,522,035
========== ========== ============
</TABLE>
See accompanying notes to financial statements
F-26
<PAGE>
Digital Evolution, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Years Ending December 31, Six Months Ending June 30,
------------------------------- --------------------------------
1996 1997 1997 1998
-------------- -------------- ------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues ....................................... $ 2,504,774 $ 7,034,693 $3,662,182 $ 2,809,866
----------- ----------- ----------- ------------
OPERATING EXPENSES
Project personnel and related expenses ......... 1,378,214 4,330,710 1,720,430 2,560,528
Marketing and sales ............................ 8,845 268,083 110,299 372,167
Management and administration .................. 1,337,140 2,794,925 980,279 1,807,666
Depreciation ................................... 48,628 138,591 61,352 80,120
----------- ----------- ----------- ------------
Operating income (loss) ........................ (268,053) (497,616) 789,822 2,010,615
----------- ----------- ----------- ------------
Interest expense ............................... (34,120) (33,335) (13,919) (8,209)
Interest income ................................ 3,410 154,748 83,829 19,884
Assumed loan balance of related party
(Note 5) ...................................... (101,299) -- -- --
Other (expenses) income, net ................... (20,191) (38,671) (16,018) 26,890
----------- ----------- ----------- ------------
Net income (loss) .............................. $ (420,253) $ (414,874) $ 843,714 $ (1,972,050)
=========== =========== =========== ============
Weighted average number of shares
outstanding:
Basic......................................... 20,299,985 20,299,985 20,299,985 20,299,985
Diluted ...................................... 20,299,985 20,299,985 23,567,873 20,299,985
NET INCOME (LOSS) PER SHARE:
Basic ........................................ $ (.02) $ (.02) $ .04 $ (.10)
Diluted ...................................... $ (.02) $ (.02) $ .03 $ (.10)
=========== =========== =========== ============
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE>
Digital Evolution, Inc.
Statements of Shareholders' Deficiency
<TABLE>
<CAPTION>
Class A Class B Retained
Common Stock Common Stock Earnings/
---------------------- ------------------ Accumulated
Shares Amount Shares Amount (Deficit) Total
------------ -------- -------- -------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 ....... 1,033,078 $2,000 -- $ -- $ 96,660 $ 98,660
Issuance of preferred stock
(Note 8) ........................ -- -- -- -- -- --
Net loss for the year ............ -- -- -- -- (420,253) (420,253)
--------- ------ ---- ---- ------------ ------------
BALANCE AT JANUARY 1, 1997 ....... 1,033,078 $2,000 -- $ -- $ (323,593) $ (321,593)
Stock split 3.93 for 1 ........... 3,026,919 -- -- -- -- --
Stock split 5.00 for 1 ........... 16,239,988 -- -- -- -- --
Net loss for the year ............ -- -- -- -- (414,874) (414,874)
---------- ------ ---- ---- ------------ ------------
BALANCE AT DECEMBER 31, 1997 ..... 20,299,985 $2,000 -- $ -- $ (738,467) $ (736,467)
---------- ------ ---- ---- ------------ ------------
Net loss for the six months
(unaudited) ..................... -- -- -- -- (1,972,050) (1,972,050)
---------- ------ ---- ---- ------------ ------------
BALANCE AT JUNE 30, 1998
(unaudited) ..................... 20,299,985 $2,000 -- -- $ (2,710,517) $ (2,708,517)
========== ====== ==== ==== ============ ============
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE>
Digital Evolution, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ending December 31,
------------------------------ Six Months Ending June 30,
1996 1997 1997 1998
-------------- -------------- --------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ................................... $ (420,253) $ (414,874) $ 843,714 $ (1,972,050)
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating
activities:
Depreciation ..................................... 48,628 138,591 61,352 80,120
Bad debt expense ................................. 71,180 166,314 -- --
Assumed loan from related party .................. 101,299 -- -- --
Changes in assets and liabilities:
Accounts receivable ........................... (113,880) (1,834,139) (1,343,502) 438,952
Prepaid assets and other ...................... (12,165) (36,874) (76,329) (32,540)
Accounts payable and accrued
expenses ..................................... 535,381 (22,676) (304,526) (201,538)
Deferred revenue .............................. 700,000 (539,780) (390,000) 567,780
Other assets and liabilities .................. (14,666) (21,240) (11,083) (1,912)
---------- ------------ ------------ ------------
Net cash (used in) provided by operating activities 895,524 (2,564,678) (1,220,374) (1,121,188)
---------- ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment ................. (236,356) (515,035) (121,508) (57,748)
Disposition of property and equipment ............... -- 4,692 -- --
---------- ------------ ------------ ------------
Net cash used in investing activities .................. (236,356) (510,343) (121,508) (57,748)
---------- ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from loans payable and capital
leases ............................................. 53,707 65,605 -- --
Payments on loans payable and capital leases (50,372) (227,108) (196,046) (17,242)
Proceeds from redeemable preferred stock
issuance ........................................... 694,761 3,349,998 3,349,998 --
---------- ------------ ------------ ------------
Net cash (used in) provided by financing activities 698,096 3,188,495 3,153,952 (17,242)
---------- ------------ ------------ ------------
Net (decrease) increase in cash and cash equiva-
lents ................................................. 1,357,264 113,474 1,812,070 (1,196,178)
Cash and cash equivalents, beginning of year ........... 57,563 1,414,827 1,414,827 1,528,301
---------- ------------ ------------ ------------
Cash and cash equivalents, end of year ................. $1,414,827 $ 1,528,301 $ 3,226,897 $ 332,123
========== ============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes ....................................... $ 800 $ 7,280 $ -- $ 3,156
Interest ........................................... 26,832 40,623 22,901 8,209
========== ============ ============ ============
NON CASH INVESTING AND FINANCING
ACTIVITIES
Purchases of equipment by capital leases ............ $ 23,979 $ 65,604 $ 65,604 $ --
Assumed loan from related party ..................... 101,299 -- -- --
========== ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-29
<PAGE>
DIGITAL EVOLUTION, INC.
NOTES TO FINANCIAL STATEMENTS
(Information with respect to June 30, 1997 and 1998 is unaudited)
NOTE 1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES BUSINESS
Digital Evolution, Inc. (the "Company") was incorporated in California on
May 10, 1994. The Company is a developer of proprietary technologies, with its
principal expertise in large scale inter-and intranet solutions, database and
electronic commerce applications, CD-ROM and interactive kiosk-based networks.
The Company's principal markets are the United States.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with initial
maturities of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method and includes the amortization of capital lease assets.
Equipment is depreciated over a five to seven year useful life. Leasehold
improvements are amortized over the term of the lease or the useful life, if
shorter.
Betterments and major renewals are capitalized and included in property,
plant, and equipment accounts while expenditures for maintenance and repairs
and minor renewals are charged to expense. When assets are retired or otherwise
disposed of, the assets and related allowances for depreciation and
amortization are eliminated from the accounts and any resulting gain or loss is
reflected in income.
Long-Lived Assets
Long-lived assets, such as property and equipment, are evaluated for
impairment when events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable through the estimated undiscounted
future cash flows from the use of these assets. When any such impairment
exists, the related assets will be written down to fair value. No impairment
losses have been recorded through December 31, 1997.
Software Development Costs
Development costs incurred in the research and development of new software
products and enhancements to existing software products are expensed as
incurred until technological feasibility has been established. After
technological feasibility is established, any additional development costs are
capitalized in accordance with Statement of Financial Accounting Standards No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed." Such costs are amortized over the lesser of five years or
the economic life of the related product. No development costs were capitalized
in 1997 and 1996.
Revenue Recognition
Revenues are derived principally from either (a) contracts permitting the
billing of services at amounts equal to actual time and material costs
incurred, or (b) under fixed-fee arrangements. Revenues under fixed fee
arrangements are recognized on the percentage of completion method based on the
ratio of costs incurred to total estimated costs. Fees and
F-30
<PAGE>
DIGITAL EVOLUTION, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information with respect to June 30, 1997 and 1998 is unaudited)
expenditures in excess of billings represent the costs incurred on projects and
anticipated profits earned on projects in excess of amounts billed. Billings in
excess of fees and expenditures represent amounts billed in excess of costs
incurred and estimated profit earned and have been classified as current
liabilities under the caption "deferred revenue."
Taxes on Income
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Statement ("SFAS") No. 109, "Accounting for
Income Taxes." SFAS 109 requires the recognition of deferred tax assets and
liabilities for the expected future income tax consequences of events that have
been recognized in a Company's financial statements or tax return. Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts for income tax purposes using enacted tax rates in effect in the
years in which the temporary differences are expected to reverse.
The Company currently files its federal and state income tax returns as a
cash basis entity.
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 reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
Fair Values of Financial Instruments
The carrying amounts reported in the balance sheet for cash equivalents,
accounts receivables, and accounts payable approximate fair value because of
the immediate or short-term maturity of these financial instruments. The fair
value of long-term debt is estimated based on the current borrowing rates for
similar debt which approximates fair value.
Concentrations of Credit Risk and Major Customer
Financial instruments which potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents and accounts
receivables. Cash and cash equivalents consist of deposits and investments in
short-term government securities placed with various high credit quality
financial institutions. The Company generates revenue principally from
customers located in North America, many of which are large multi-national
organizations. During 1997 and 1996, one customer accounted for 53% and 27%,
respectively, in 1997 and 1996 of total revenues. This same customer accounted
for 55% and 0%, respectively, of accounts receivables, in 1997 and 1996,
respectively. Concentrations of credit risk with respect to receivables are
limited due to the Company's geographically diverse customer base. The Company
maintains an allowance for uncollectible receivables based upon the
collectibility of such receivables.
F-31
<PAGE>
DIGITAL EVOLUTION, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information with respect to June 30, 1997 and 1998 is unaudited)
Computation of Earnings Per Shares
For the year ended December 31, 1997, the Company adopted SFAS No. 128,
which requires the presentation of Basic and Dilutive earnings per share, which
replaces primary and fully diluted earnings per share. Basic net loss per share
is computed using the weighted average number of common shares outstanding
during the period. Dilutive net loss per share is computed using the weighted
average number of common shares outstanding during the period, plus the
dilutive effect of common stock equivalents. Shares outstanding for dilutive
earnings per share include preferred stock and stock options. The dilutive
computations do not include preferred stock and stock options for the years
ended December 31, 1997 and 1996 as their inclusion would be antidilutive.
Stock-Based Compensation
The Company accounts for its stock option awards under the intrinsic value
method of accounting, prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Under the intrinsic value based
method, compensation cost is the excess, if any, of the quoted market price of
the stock at grant date or other measurement date over the amount an employee
must pay to acquire the stock. The Company makes pro forma disclosures of net
income and earnings per share as if the fair value based method of accounting
had been applied as required by SFAS No. 123, "Accounting for Stock-based
Compensation."
Unaudited Interim Financial Information
The interim financial statements of the Company for the six months ended
June 30, 1997 and 1998, included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations relating to interim financial statements. In the opinion
of management, the accompanying unaudited interim financial statements reflect
all adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position of the Company at June 30, 1998, and the
results of its operations and its cash flows for the six months ended June 30,
1997 and 1998.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130), which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is
defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures,
SFAS 130 requires that all items that are required to be recognized under
current accounting standards as components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as other
financial statements.
F-32
<PAGE>
DIGITAL EVOLUTION, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information with respect to June 30, 1997 and 1998 is unaudited)
Also, in June 1997, FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" which supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." SFAS No. 131
establishes standards for the way that public companies report information
about operating segments in annual financial statements and requires reporting
of selected information about operating segments in interim financial
statements issued to the public. It also establishes standards for disclosures
regarding products and services, geographic areas and major customers. SFAS No.
131 defines operating segments as components of a company about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance.
SFAS No. 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997 and requires comparative information for
earlier years to be restated. Because of the recent issuance of the standards,
management has been unable to fully evaluate the impact, if any, the standards
may have on future financial statement disclosures. Results of operations and
financial position, however, will be unaffected by implementation of these
standards.
In October 1997, Statement of Position 97-2, Software Revenue Recognition
(SOP 97-2), was issued. The SOP provides guidance on when revenue should be
recognized and in what amounts licensing, selling, leasing, or otherwise
marketing computer software. SOP 97-2 is effective for transactions entered
into in fiscal years after December 15, 1997. Because of the recent issuance of
the SOP, management has been unable to fully evaluate the impact, if any, the
SOP may have on future financial statement disclosure.
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures
about Pensions and Other Postretirement Benefits" which standardizes the
disclosure requirements for pensions and other postretirement benefits and
requires additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis, SFAS No. 132 is
effective for years beginning after December 15, 1997 and requires comparative
information for earlier years to be restated, unless such information is not
readily available. Management believes the adoption of this statement will have
no material impact on the Company's financial statements.
In June, 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses, depends on the intended use of the derivative and its resulting
designation. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company will adopt SFAS No. 133 by January
1, 2000 and does not expect SFAS No. 133 to have a material impact on its
financial statements.
F-33
<PAGE>
DIGITAL EVOLUTION, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information with respect to June 30, 1997 and 1998 is unaudited)
NOTE 2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, June 30,
--------------------------- ------------
1996 1997 1998
------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
Equipment ................................ $ 364,053 $ 849,455 $907,203
Furniture and fixtures ................... 60,164 71,834 71,834
Leasehold improvements ................... 16,186 29,457 29,457
---------- ---------- ---------
440,403 950,746 1,008,494
Accumulated depreciation and amortization (113,339) (251,852) (343,260)
---------- ---------- ---------
Property and equipment, net .............. $ 327,064 $ 698,894 $665,234
========== ========== =========
</TABLE>
As of December 31, 1997 and 1996, included in equipment is $105,093 and
$39,489 respectively, of equipment with accumulated amortization of $30,024 and
$10,600, respectively, under capital leases.
NOTE 3. LONG-TERM DEBT
Long-term debt consists of the following: erty and equipment consists of
the following:
<TABLE>
<CAPTION>
December 31, June 30,
----------------------- ------------
1996 1997 1998
---------- ---------- ------------
(unaudited)
<S> <C> <C> <C>
Note payable to bank, secured by certain
equipment, monthly payments of $1,128,
interest at 9.34%, matures November 2001 $52,998 $43,248 $39,228
------- ------- -------
52,998 43,248 39,228
Less current maturities ................. 9,750 9,053 10,307
------- ------- -------
$43,248 $34,195 $28,921
======= ======= =======
</TABLE>
NOTE 4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following:
December 31, June 30,
------------------------- ------------
1996 1997 1998
----------- ----------- ------------
(unaudited)
Accounts payable .................. $ 85,954 $162,699 $180,010
Accrued payroll ................... 79,242 214,672 --
Incentive bonus ................... 300,000 -- 75,000
Accrued vacation .................. 16,371 81,062 117,660
Other -- accrued expenses ......... 126,526 127,063 --
-------- -------- --------
$608,093 $585,496 $372,670
======== ======== ========
NOTE 5. LOAN FROM STOCKHOLDER
During 1994, the Company and a related company obtained joint financing
from an affiliated company. The Company granted shares of Class A Common Stock
as compensation, which had no fair market value at the date of grant. The
Company was also a guarantor of the related company financing included in this
agreement. This related company defaulted in 1996 and the Company assumed their
loan in the amount of $101,299. This loan was fully paid down in 1997.
F-34
<PAGE>
DIGITAL EVOLUTION, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information with respect to June 30, 1997 and 1998 is unaudited)
NOTE 6. INCOME TAXES
The components of the income tax benefit are as follows:
December 31,
---------------------------
1996 1997
------------ ------------
Deferred:
Federal ............................... $ 305,000 $ 141,000
State ................................. 54,000 25,000
---------- ----------
359,000 166,000
Increase in valuation allowance ......... (359,000) (166,000)
---------- ----------
$ -- $ --
========== ==========
The difference between the Federal statutory tax rate and the effective
tax rate resulted from the following:
December 31,
-----------------------
1996 1997
---------- ----------
Federal statutory tax benefit rate .............. (34%) (34%)
State income taxes (net of federal benefit) ..... (6%) (6%)
Increase in valuation allowance ................. 40% 40%
--- ---
0% 0%
=== ===
Deferred taxes are recorded based on differences between the financial
statement and tax basis of assets and liabilities. Temporary differences which
give rise to a significant portion of deferred tax assets and liabilities
consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1997
------------ ------------
<S> <C> <C>
Current:
Net operating loss carryforwards ............... $ 470,000 $ 800,000
Cash to accrual conversion differences ......... (87,000) (251,000)
---------- ----------
(383,000) 549,000
Deferred tax asset valuation allowance ........... (383,000) (549,000)
---------- ----------
Net deferred tax asset ........................... $ -- $ --
========== ==========
</TABLE>
Management believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability
of the deferred tax assets such that a full valuation allowance has been
recorded. These factors include the lack of significant history of profits and
that the market in which the Company competes is intensely competitive and
characterized by rapidly changing technology.
At December 31, 1997, the Company has available net operating loss
carryforwards of approximately $2,000,000 for Federal income tax purposes,
which expire in varying amounts through 2012.
F-35
<PAGE>
DIGITAL EVOLUTION, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information with respect to June 30, 1997 and 1998 is unaudited)
NOTE 7. LEASES
As of December 31, 1997, future minimum lease payments related to the
rental of office facilities and equipment are as follows:
Operating Capital
Leases Leases
----------- -----------
1998 ................................. $455,130 $ 40,348
1999 ................................. 62,443 30,796
2000 ................................. -- 1,282
-------- ---------
Total minimum lease payment .......... $517,573 72,426
========
Amount representing interest ......... (13,309)
---------
Present value of net minimum lease
payments ........................... 59,117
Less: current portion ................ (30,418)
---------
$ 28,699
---------
Total rent expense under operating leases amounted to $114,641 and
$275,717 for the year ended December 31, 1996 and 1997, respectively.
NOTE 8. SHAREHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK
In January 1997, the Company effected a 3.93-for-one stock split. In
December 1997, the Company effected a five-for-one stock split. All applicable
share data have been retroactively restated to reflect the stock splits.
In November 1996 and February 1997, the Company sold Series A Preferred
Stock ("Preferred Stock") in a private placement. The Company issued an
aggregate of 1,366,666 shares of its preferred stock in exchange for net
proceeds of $4,044,759. The holders of the preferred stock are entitled to
cumulative dividends at a rate of 6% of the original per share price of $3 (as
adjusted for January 1997 stock split). There are $238,687 in cumulative unpaid
dividends as of December 31, 1997. Upon an one-time election of the holders of
the preferred stock, the Company shall redeem (as defined in the Preferred
Stock Agreement) all of the outstanding shares on the fifth anniversary date of
the original issue at the original purchase price plus any dividends in arrears
at the election of the preferred stockholders. Each share of Preferred Stock
has a liquidation preference of $3. In addition, the preferred shares can be
converted into shares of common stock upon the earlier of (1) agreement of the
holders of two-thirds of the then outstanding shares of preferred stock and (2)
simultaneously with the closing of the Company's public offering registered
under the Securities Act of 1933. The preferred shares shall be converted into
common shares at a per share common stock price equal to $3 (as adjusted for
any stock dividends, combinations or splits with respect to such shares).
F-36
<PAGE>
DIGITAL EVOLUTION, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information with respect to June 30, 1997 and 1998 is unaudited)
NOTE 9. EARNINGS PER SHARE
Basic and diluted net loss per share were computed by dividing income
available to common stockholders by the weighted average number of shares of
common stock outstanding during the year.
<TABLE>
<CAPTION>
Years Ending December 31, Six Months Ending June 30,
------------------------------- --------------------------------
1996 1997 1997 1998
-------------- -------------- ------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net (loss) income ................. $ (420,252) $ (414,874) $ 843,714 $ (1,972,050)
Less: Preferred dividends ......... (45,000) (193,687) (110,000) (123,000)
---------- ---------- ---------- ------------
Income (loss) available to common
stockholder ...................... $ (465,252) $ (608,561) $ 733,714 $ (2,095,050)
========== ========== ========== ============
Weighted average shares
of common stock outstanding....... 20,299,985 20,299,985 20,299,985 20,299,985
Shares of common stock issuable
upon the assumed conversion of
preferred stock and the assumed
exercise of options............... - - 3,267,888 -
---------- ---------- ---------- ----------
Additional shares of common stock
and common stock equivalents
for computation................... 20,299,285 20,299,285 23,567,873 20,299,285
========== ========== ========== ==========
Diluted net income (loss) per
common share...................... $(.02) $(.02) $.04 $(.10)
========== ========== ========== ==========
</TABLE>
NOTE 10. EMPLOYEE RETIREMENT PLANS
The Company has sponsored a defined contribution retirement plan (the
"Plan") which cover all employees meeting minimum service requirements. The
Plan qualifies as a deferred salary arrangement under Section 401(k) of the
Internal Revenue Code. Employee's make contributions from 1% -- 20% of their
eligible compensation. The Company may elect to make matching contributions,
but as of December 31, 1997 has not elected to do so.
NOTE 11. STOCK OPTION PLAN
In November 1996, the Board of Directors adopted and the Company's
shareholders approved the 1996 Stock Option Plan (the "1996 Plan"). The 1996
Plan provides for the grant of options which qualify as incentive stock options
("Incentive Options") under Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"), to officers and employees of the Company and options
which do not so qualify ("Non-Qualified Options") to officers, directors,
employees and consultants of the Company. Under the 1996 Plan, the Company may
grant options to purchase up to 6,096,000 shares of Class B common stock.
Options to purchase 5,642,785 shares of common stock at an exercise price per
share of $.54-$.70 (the estimated fair value of the shares on the date of
grant) were granted to certain employees in 1997. The options granted vest
incrementally from one to five years and are exercisable over a period of five
years.
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals the
fair value of the underlying stock on the date of grant, no compensation
expense is recognized.
Pro forma information regarding net income is required by SFAS No. 123,
and has been determined as if the Company had accounted for its employee stock
options under the fair value method of SFAS No. 123. The fair value of these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted average assumption for 1997; risk-free
interest rates of 6.57%; with no volatility factor; and a weighted average
expected life of the option of 5 years. The absence of a volatility factor in
the pricing model is permitted by SFAS No. 123, for non-public companies.
F-37
<PAGE>
DIGITAL EVOLUTION, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information with respect to June 30, 1997 and 1998 is unaudited)
Under the accounting provisions of SFAS No. 123, the Company's net loss
and basic and diluted net loss per share would have been increased to the pro
forma amounts indicated below:
Year ended
December 31,
1997
-------------
Net loss as reported .................... $ (414,874)
Net loss pro forma ...................... (929,107)
Net loss per share as reported .......... (.02)
Net loss per share as pro forma ......... (.06)
A summary of the Company's stock option plan as of and for the year ended
December 31, 1997 is presented below:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
------------ -----------------
<S> <C> <C>
Outstanding at beginning of year .................... -- --
Granted ............................................. 5,642,785 $ 0.54
Forfeited/canceled .................................. (74,620) $ 0.54
--------- ------
Outstanding at end of year .......................... 5,568,165 $ 0.54
========= ======
Options exercisable at year-end ..................... 1,733,030 $ 0.54
Weighted average fair value of options granted during
the year .......................................... $ 0.15
======
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------ --------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
- ---------------- ------------- ------------- ---------- -------------------- ---------
<S> <C> <C> <C> <C> <C>
$0.54 5,417,200 4.3 Yrs. $ 0.54 1,733,030 $ 0.54
$0.70 150,965 4.8 Yrs. $ 0.70 -- $ 0.70
--------- ---------
5,568,165 1,733,030
========= =========
</TABLE>
NOTE 12. EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain members of
senior management. The agreements have terms from one to three years and
include, among other things, noncompete agreements and salary and benefits
continuation. In some cases, these agreements grant employees equity interest
in ventures which they have largely developed and made viable. In addition,
these agreements generally can be terminated by notice given by the employee or
the Company. Salaries for these employees range from $75,000 to $200,000 per
year. Salary expense for the years ending December 31, 1996 and 1997,
respectively, was $29,444 and $356,140.
NOTE 13. SUBSEQUENT EVENTS
During July 1998, the Company merged with U.S. Interactive Inc.
F-38
<PAGE>
U.S. INTERACTIVE, INC.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
On July 2, 1998, the Company completed a merger with Digital Evolution,
Inc. (DE), a California corporation, which has been accounted for using the
purchase method of accounting. The purchase of DE was completed by the issuance
of 4,383,954 shares of common stock (par value $.001), and the issuance of
1,573,533 Series A mandatorily redeemable convertible preferred stock. The
aggregate purchase price was approximately $17,000,000. The purchase price was
allocated as follows (in thousands):
Fair value of net assets acquired ............... $ 872
Goodwill and related intangibles assets ......... 15,283
Assembled workforce ............................. 845
-------
$17,000
-------
The excess of the purchase price over the fair value of the net
identifiable assets acquired has been recorded as goodwill and other
intangibles and is amortized on a straight-line basis over two years.
The unaudited combined pro forma statements of operations for the year
ended December 31, 1998 and the three months ended March 31, 1998 reflect the
acquisition as if it occurred on January 1, 1998. Since the pro forma financial
statements which follow are based upon the operating results of DE during a
period when it was not under the control or management of the Company the
information presented may not be indicative of the results which would have
actually been obtained had the acquisition been completed on January 1, 1998
nor are they indicative of future financial or operating results. The unaudited
pro forma financial information does not give effect to any synergies that may
occur due to the integration of the Company and DE. The combined pro forma
financial statements should be read in conjunction with the historical audited
consolidated financial statements and the notes thereto of the Company, as well
as the audited historical financial statements and the notes thereto of DE
included elsewhere in this Prospectus.
F-39
<PAGE>
U.S. INTERACTIVE, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the Year ended December 31, 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31, 1998
--------------------------------
Digital Pro Forma Pro Forma
Company (1) Evolution(2) Adjustments Combined
------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenue ............................ $ 13,636 $ 2,810 $ 16,446
Operating costs and expenses:
Project personnel and related
expense ......................... 7,405 2,590 9,995
Management and administrative ..... 7,876 1,777 9,653
Selling and marketing ............. 2,054 338 2,392
Depreciation and amortization ..... 4,592 80 4,032(a) 8,704
-------- -------- ----- --------
Total operating expenses ........ 21,927 4,785 4,032 30,744
-------- -------- ----- --------
Operating loss ..................... (8,291) (1,975) (4,032) (14,298)
Other income (expense) net ......... (152) 3 -- (149)
-------- -------- ------ --------
Net loss ........................... (8,443) (1,972) (4,032) (14,447)
Accretion of mandatorily
redeemable preferred stock to
redemption value .................. (625) -- (227)(b) (852)
-------- -------- ------ --------
Net loss attributable to common
stockholders ...................... $ (9,068) $ (1,972) $(4,259) $(15,299)
======== ======== ======= ========
Pro forma net loss per common
share
Basic and diluted ................. $ (1.36) $ (1.73)
======== ========
Weighted average shares
outstanding ....................... 6,670 8,862(c)
======== ========
</TABLE>
(1) Actual for the year ended December 31, 1998
(2) Actual for the six months ended June 30, 1998
See accompanying notes to Unaudited Pro Forma Combined Financial Statements
F-40
<PAGE>
U.S. INTERACTIVE, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the Three Months ended March 31, 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31, 1998
-----------------------------------
Digital Pro Forma Pro Forma
Company Evolution Adjustments Combined
------------ ----------- --------------- --------------
<S> <C> <C> <C> <C>
Revenue ............................ $2,378 $1,800 $ 4,178
Operating costs and expenses:
Project personnel and related
expense ......................... 1,249 1,407 2,656
Management and administrative ..... 690 817 1,507
Selling and marketing ............. 351 149 500
Depreciation and amortization ..... 91 34 2,016(a) 2,141
----- ------ ----- --------
Total operating expenses ........ 2,381 2,407 2,016 6,804
----- ------ ----- --------
Operating loss ..................... (3) (607) (2,016) (2,626)
Other income (expense) net ......... (17) 3 -- (14)
------ ------ ------ --------
Net loss ........................... (20) (604) (2,016) (2,640)
Accretion of mandatorily
redeemable preferred stock to
redemption value .................. -- -- (103)(b) (103)
------ ------ ------ --------
Net loss attributable to common
stockholders ...................... $ (20) $ (604) $(2,119) $ (2,743)
====== ====== ======= ========
Pro forma net loss per common
share
Basic and diluted ................. $ -- $ (.30)
====== ========
Weighted average shares
outstanding ..................... 4,737 9,121(c)
====== ========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Financial Statements
F-41
<PAGE>
U.S. INTERACTIVE, INC.
Notes to Unaudited Pro Forma Combined Financial Statements
1. Basis of Presentation
The unaudited pro forma combined statements of operations for the year ended
December 31, 1998 and the three months ended March 31, 1998 give effect to
the acquisition as if it occurred on January 1, 1998.
The effects of the acquisition have been presented using the purchase method
of accounting and accordingly the purchase price was allocated to the assets
acquired and liabilities assumed based upon management's best estimate of
their fair value. The pro forma adjustments related to the purchase price
allocation of the acquisition represent management's best estimate of the
effects of the acquisition.
2. The pro forma statements of operations adjustments for the year ended
December 31, 1998 and the three months ended March 31, 1998 consist of:
(a) depreciation and amortization expense has been adjusted to reflect the
amortization of goodwill and other intangibles associated with the
acquisition of DE, which have an estimated life of two years ($16.1
million divided by 24 months equals $.67 million per month or
approximately $4.0 million for six months and approximately $2.0 million
for three months).
(b) adjustment to reflect the accretion to redemption value of the
mandatorily redeemable preferred stock issued in the transaction.
(c) basic and diluted weighted average common shares outstanding and net
loss per share amounts have been adjusted to reflect the issuance of the
4,383,954 shares of the Company's common stock in connection with the
acquisition, as if the shares had been outstanding from January 1, 1998.
(d) no income tax provision is required due to the Company's current tax
loss and the inability of the Company to currently use the benefits of
its tax loss carryforward.
F-42
<PAGE>
Shares
[GRAPHIC OMITTED]
Common Stock
-------------------------
PROSPECTUS
, 1999
-------------------------
LEHMAN BROTHERS
HAMBRECHT & QUIST
ADAMS, HARKNESS & HILL INC.
<PAGE>
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the various expenses, other than
underwriting discounts and commissions, in connection with the issuance and
distribution of the securities being registered. All amounts shown are estimated
except the Securities and Exchange Commission registration fee, the NASD filing
fee and the Nasdaq National Market listing fee.
S.E.C. Registration fee................................. $18,070
NASD filing fee......................................... 7,000
Transfer agent and registrar fees....................... 15,000
Printing and engraving.................................. 200,000
Legal fees.............................................. 500,000
Blue sky fees and expenses.............................. 5,000
Nasdaq National Market listing fee...................... 100,000
Accounting fees......................................... 350,000
Miscellaneous........................................... 123,000
----------
Total......................................... $1,300,000
==========
---------------------
Item 14. Indemnification of Directors and Officers.
Under Section 145 of the Delaware General Corporation Law, as amended (the
"DGCL"), a corporation has the power to indemnify directors and officers under
certain prescribed circumstances and subject to certain limitations against
certain costs and expenses, including attorney's fees actually and reasonably
incurred in connection with any action, suit or proceeding, whether civil,
criminal, administrative or investigative, to which any of them is a party by
reason of being a director or officer of the corporation if it is determined
that the director or officer acted in accordance with the applicable standard of
conduct set forth in such statutory provision. Article IX of U.S. Interactive's
Certificate of Incorporation provides that U.S. Interactive will indemnify any
person who was or is a party or is threatened to be made a party to any action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he, or a person for whom he is the legal representative
is or was a director or officer of U.S. Interactive, or is or was serving at the
request of U.S. Interactive as a director, officer, employee or agent of another
entity, against certain liabilities, costs and expenses.
Item 15. Recent Sales of Unregistered Securities.
During the past three years, U.S. Interactive has issued securities, as set
forth below, which were not registered for sale under the Securities Act:
II-1
<PAGE>
Preferred Stock
On July 2, 1996, U.S. Interactive issued and sold a total of 1,000,000
shares of its series A preferred stock (now the series B preferred stock) to
four venture capital entities, Internet Capital Group, L.L.C., Technology
Leaders II L.P., Technology Leaders II Offshore C.V., and RAF Ventures VIII,
L.P. The total purchase price for such shares was $1,000,000 in cash.
On July 3, 1997, U.S. Interactive issued and sold a total of 446,779
shares of its series B preferred stock (now the series C preferred stock) to
three venture capital entities, Internet Capital Group, L.L.C., Technology
Leaders II L.P., and Technology Leaders II Offshore C.V. The total purchase
price for such shares was $750,000 in cash.
On October 6, 1997, U.S. Interactive issued and sold a total of 148,927
additional shares of its series B preferred stock (now the series C preferred
stock) to two venture capital entities, Technology Leaders II L.P., and
Technology Leaders II Offshore C.V. The total purchase price for such shares was
$250,000 in cash.
On September 22, 1998, U.S. Interactive issued and sold a total of
2,339,628 shares of its series D preferred stock to a venture capital
partnership, Safeguard 98 Capital, L.P. The total purchase price for such shares
was $10,832,478 in cash.
Each of these sales of preferred stock was made in reliance on the
exemption provided by Section 4(2) of the Securities Act, as a transaction not
involving a public offering of securities. No underwriting or selling fees or
commissions were paid by U.S. Interactive to any person in connection with the
sale of any of the preferred stock.
Option Exercises
Commencing in October, 1998, U.S. Interactive issued a total of 93,903
shares of its common stock upon the exercise of options granted to employees
under its 1997 Stock Option Plan at exercise prices ranging from $1.50 to $3.50
per share for an aggregate exercise price of $161,854.50.
Acquisitions
In connection with three acquisitions, U.S. Interactive issued shares
of its common stock, shares of its preferred stock and stock options which were
not registered under the Securities Act in reliance upon the exemption provided
by Section 4(2) of the Securities Act. In each acquisition, the resale or other
transfer of the securities issued was restricted as necessary for the
availability of the Section 4(2) exemption. No underwriters or placement agents
were involved in connection with the issuance and sale of U.S. Interactive's
securities in the acquisitions.
a. Web Access, Inc.
U.S. Interactive acquired Web Access, Inc. pursuant to an Agreement and
Plan of Merger dated as of July 25, 1996. The Web Access merger agreement was
privately negotiated among the parties thereto. In connection with the merger,
which became effective as of July 25, 1996, U.S. Interactive became the holder
of all of the outstanding stock of Web Access and U.S. Interactive issued to the
holder of Web Access common stock an aggregate of 236,842 shares of U.S.
Interactive common stock.
II-2
<PAGE>
b. Digital Evolution, Inc.
U.S. Interactive merged with Digital Evolution pursuant to an agreement
and plan of merger dated as of July 2, 1998 which was privately negotiated among
the parties thereto. In connection with the merger, which became effective as of
July 2, 1998, U.S. Interactive issued to the three holders of Digital Evolution
common stock an aggregate of 4,383,954 shares of U.S. Interactive common stock
and to the three holders of Digital Evolution preferred stock an aggregate of
1,573,533 shares of U.S. Interactive series A preferred stock. In addition, U.S.
Interactive assumed the then outstanding options to purchase class B common
stock of Digital Evolution which were held by a total of approximately 118
persons, which options became options to purchase a total of approximately
1,044,247 shares of U.S. Interactive common stock.
U.S. Interactive intends to file a registration statement on Form S-8
under the Securities Act after the completion of its initial public offering of
common stock with respect to the shares of common stock issuable upon exercise
of the options which U.S. Interactive assumed in the merger with Digital
Evolution.
c. InVenGen LLC
On March 12, 1999, U.S. Interactive acquired the assets of InVenGen
LLC, an internet professional services firm, pursuant to an asset purchase
agreement. We issued 584,000 shares of our common stock in this acquisition,
which was accounted for using the purchase method of accounting. Of the shares
delivered, a total of 361,200 are being held under two escrow agreements.
Under one escrow agreement 275,200 shares are being held pending
satisfaction of certain conditions relating to the continued employment of the
former InVenGen employees with U.S. Interactive during the two-year period
following the closing. Twenty-five percent of the shares are to be released
every six months if the conditions under the agreement are met. Under the second
escrow agreement 86,000 shares are being held to satisfy InVenGen's
indemnification obligations under the asset purchase agreement during the
one-year period following the closing.
Other
In July 1998, U.S. Interactive issued a warrant to purchase 70,000
shares of its common stock at a price of $3.50 per share to a commercial bank in
connection with two credit facilities extended by the bank to U.S. Interactive.
U.S. Interactive issued the warrant in reliance on the exemption provided by
Section 4(2) of the Securities Act as a transaction not involving a public
offering of securities. No underwriting or selling fees or commissions were paid
by U.S. Interactive to any person in connection with the issuance of the
warrant.
II-3
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a)Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
1.1 Form of Underwriting Agreement*
3.1 Amended and Restated Certificate of Incorporation
3.2 Amended and Restated Bylaws+
4.1 See exhibits 3.1 and 3.2 for provisions of the Certificate of Incorporation and Bylaws defining
rights of holders of Common Stock
4.3 Second Amended and Restated Investors' Rights Agreement dated as of July 2, 1998+
5.1 Opinion of Dilworth Paxson LLP*
10.1 1998 Performance Incentive Plan and forms of stock option agreement
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.2 1998 Stock Option Plan and forms of Stock Option Agreement and Stock Purchase Agreement
10.3 1997 Stock Option Plan and forms of Stock Option Agreement and Stock Purchase Agreement
10.4 1996 Stock Option Plan and forms of Stock Option Agreement and Stock Purchase Agreement
10.5 Lease Agreement, dated May 14, 1998, between U.S. Interactive and BET Investments II, L.P.*
10.6 Employment Agreement, dated July 2, 1998, between U.S. Interactive and Eric Pulier+
10.7 Employment Agreement, dated ___ , 1999, between U.S. Interactive and Stephen T. Zarrilli*
10.8 Professional Services and Consulting Agreement, dated as of January 6, 1999, by and between U.S.
Interactive and Juggernaut Partners, LLC+
10.9 Severance Agreement, dated May 18, 1999, between U.S. Interactive and Richard J. Masterson+
10.10 Severance Agreement, dated February 26, 1999, between U.S. Interactive and Larry W. Smith+
23.1 Consent of KPMG LLP, independent public accountants
23.2 Consent of Dilworth Paxson LLP (contained in its opinion in exhibit 5.1)*
23.3 Consent of BDO Seidman, LLP, independent public accountants
24.1 Power of Attorney+
27.1 Financial Data Schedule+
99.1 Form of Letter from U.S. Interactive, Inc. to Safeguard Scientifics, Inc.'s shareholders describing
the Directed Share Subscription Program+
99.2 Form of Letter from Lehman Brothers, Inc. to Safeguard Scientifics, Inc.'s shareholders*
99.3 Form of Letter from U.S. Interactive, Inc. to Brokers describing the Directed Share Subscription Program+
99.4 Form of Subscription Form for Directed Share Subscription Program+
</TABLE>
- -----------
* To be filed by amendment.
+ Previously filed
(b)Financial Statement Schedule.
<TABLE>
<CAPTION>
Charged Balance at
Accounts Receivable - Allowance Balance at to Costs Writeoffs/ End of
for doubtful accounts Beginning of Year and Expenses Deductions Year
- ------------------------------ ----------------- ------------ ---------- -------
<S> <C> <C> <C> <C>
For the year ended
December 31, 1996 $ -- $ 47,000 $ (7,000) $ 40,000
For the year ended
December 31, 1997 40,000 157,539 (45,264) 152,275
For the year ended
December 31, 1998 152,275 606,894 (233,133) 526,036
</TABLE>
II-5
<PAGE>
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of U.S.
Interactive pursuant to the foregoing provisions, or otherwise, U.S. Interactive
has been advised that in the opinion of the 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 U.S. Interactive of expenses incurred or
paid by a director, officer or controlling person of U.S. Interactive 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, U.S. Interactive will, unless in the opinion of its counsel the
matter has 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.
U.S. Interactive hereby undertakes to provide to the underwriters at the
closing specified in the underwriting agreement, certificates in such
denomination and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
U.S. Interactive hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by U.S. Interactive pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
U.S. Interactive has duly caused this Amendment No. 1 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Philadelphia, Commonwealth of Pennsylvania on this
25th day of June, 1999.
U.S. INTERACTIVE, INC.
By: /s/ Stephen T. Zarrilli
--------------------------------------
Stephen T. Zarrilli
Chief Executive Officer and President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Capacity Date
---- -------- ----
<S> <C> <C>
/s/ Stephen T. Zarrilli Director, Chief Executive Officer and President June 25, 1999
- ----------------------------------------- (principal executive officer)
Stephen T. Zarrilli
/s/ Philip L. Calamia Vice President and Chief Financial Officer June 25, 1999
- ----------------------------------------- (principal financial and accounting officer)
Philip L. Calamia
* June 25, 1999
- ----------------------------------------- Director
Eric Pulier
*
- ----------------------------------------- Director June 25, 1999
Robert E. Keith, Jr.
*
- ----------------------------------------- Director June 25, 1999
John Shulman
*
- ----------------------------------------- Director June 25, 1999
E. Michael Forgash
* By power of attorney
/s/ Stephen T. Zarrilli
-------------------
Stephen T. Zarrilli
Attorney-in-fact
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
1.1 Form of Underwriting Agreement*
3.1 Amended and Restated Certificate of Incorporation
3.2 Amended and Restated Bylaws+
4.1 See exhibits 3.1 and 3.2 for provisions of the Certificate of Incorporation and Bylaws defining rights
of holders of Common Stock
4.3 Second Amended and Restated Investors' Rights Agreement dated as of July 2, 1998+
5.1 Opinion of Dilworth Paxson LLP*
10.1 1998 Performance Incentive Plan and forms of stock option agreement
10.2 1998 Stock Option Plan and forms of Stock Option Agreement and Stock Purchase Agreement
10.3 1997 Stock Option Plan and forms of Stock Option Agreement and Stock Purchase Agreement
10.4 1996 Stock Option Plan and forms of Stock Option Agreement and Stock Purchase Agreement
10.5 Lease Agreement, dated May 14, 1998, between U.S. Interactive and BET Investments II, L.P.*
10.6 Employment Agreement, dated July 2, 1998, between U.S. Interactive and Eric Pulier+
10.7 Employment Agreement, dated ___ , 1999, between U.S. Interactive and Stephen T. Zarrilli*
10.8 Professional Services and Consulting Agreement, dated as of January 6, 1999, by and between U.S.
Interactive and Juggernaut Partners, LLC+
10.9 Severance Agreement, dated May 18, 1999, between U.S. Interactive and Richard J. Masterson+
10.10 Severance Agreement, dated February 26, 1999, between U.S. Interactive and Larry W. Smith+
23.1 Consent of KPMG LLP, independent public accountants
23.2 Consent of Dilworth Paxson LLP (contained in its opinion in exhibit 5.1)*
23.3 Consent of BDO Seidman, LLP, independent public accountants
24.1 Power of Attorney+
27.1 Financial Data Schedule+
99.1 Form of Letter from U.S. Interactive, Inc. to Safeguard Scientifics, Inc.'s shareholders describing
the Directed Share Subscription Program+
99.2 Form of Letter from Lehman Brothers, Inc. to Safeguard Scientifics, Inc.'s shareholders*
99.3 Form of Letter from U.S. Interactive, Inc. to Brokers describing the Directed Share Subscription Program+
99.4 Form of Subscription Form for Directed Share Subscription Program+
</TABLE>
- - ----------
* To be filed by amendment.
+ Previously filed.
(b)Financial Statement Schedule.
<PAGE>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
U.S. INTERACTIVE, INC.
(Pursuant to Sections 228, 242 and 245 of the
General Corporation Law of the State of Delaware)
U.S. Interactive, Inc. (the "Corporation"), a corporation organized and
existing under the General Corporation Law of the State of Delaware (the
"General Corporation Law"),
DOES HEREBY CERTIFY:
FIRST: That the Corporation was originally incorporated in Delaware
under the name U.S. Interactive, Inc., and the date of its filing of its
original Certificate of Incorporation with the Secretary of State of Delaware
was September 4, 1998.
SECOND: That the Board of Directors duly adopted resolutions proposing
to amend and restate the Certificate of Incorporation of the Corporation
declaring said amendment and restatement to be advisable and in the best
interests of the Corporation and its stockholders, and authorizing the
appropriate officers of the Corporation to solicit the consent of the
stockholders of the issued and outstanding Common Stock, $0.001 par value, and
Preferred Stock, $0.001 par value, voting as a single class and as separate
classes, all in accordance with the applicable provisions of Sections 228, 242
and 245 of the General Corporation Law.
THIRD: That the resolution setting forth the proposed amendment and
restatement is as follows:
"RESOLVED, that the Certificate of Incorporation of the Corporation be
amended and restated in its entirety as follows:
Article I
Name
The name of the Corporation is U.S. Interactive, Inc.
Article II
Registered Office
The address of its registered office in the State of Delaware is 1013 Centre
Road, in the City of Wilmington, County of New Castle. The name of its
registered agent at such address is Corporation Service Company.
Article III
Purpose
The purpose of the Corporation is to engage in any lawful act or activity for
which corporations may be organized under the General Corporation Law.
Article IV
Capital Stock
The total number of shares of all classes of stock which the
Corporation is authorized to issue is One Hundred Five Million (105,000,000)
shares, consisting of: (i) Ninety Million (90,000,000) shares of Common Stock,
par value $0.001 per share, and (ii) Fifteen Million (15,000,000) shares of
Preferred Stock, par value $.001 per share.
<PAGE>
Effective at the time of the filing with the Secretary of State of the
State of Delaware of this Amended and Restated Certificate of Incorporation, (a)
each share of the Corporation's Class A Common Stock, par value $.001 per share,
issued and outstanding or held in treasury immediately prior to such time shall,
without any action on the part of the respective holders thereof, be
reclassified into one share of Common Stock, par value $.001 per share, and each
stock certificate that, immediately prior to the time of such filing,
represented shares of the Corporation's Class A Common Stock, par value $.001
per share, shall from and after such time and without the necessity of
presenting the same for exchange, represent the number of shares of Common
Stock, $.001 par value, into which the shares of Class A Common Stock, $.001 par
value, were reclassified pursuant hereto; and (b) each share of the
Corporation's Class B Common Stock, $.001 par value per share, issued and
outstanding or held in treasury immediately prior to such time shall, without
any action on the part of the respective holders thereof, be classified into one
share of Common Stock, $.001 par value per share, and each stock certificate
that, immediately prior to the time of such filing, represented shares of the
Corporation's Class B Common Stock, $.001 par value per share, shall from and
after such time, and without the necessity of presenting the same for exchange,
represent the number of shares of Common Stock, $.001 par value, into which the
shares of Class B Common Stock, $.001 par value, were reclassified pursuant
hereto.
Preferred Stock
The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors of the Corporation is authorized, by approving
and causing to be filed with the Secretary of State of the State of Delaware a
resolution with respect to any such series ("Series Resolution"), from time to
time to designate one or more series of Preferred Stock, in addition to any
series designated in this Amended and Restated Certificate of Incorporation, and
to fix the powers, preferences and rights, and relative participating, optional
or other special rights, and qualifications, limitations or restrictions thereof
and to fix or alter the number of shares comprising any such series and the
designation thereof, to the full extent now or hereafter permitted by the laws
of the State of Delaware.
The authority of the Board of Directors shall include, but not be
limited to, the determination or fixing of the following:
(a) the distinctive designation of the series and the number
of shares which shall constitute the series, which number may be increased (but
not above the total authorized number of shares of Preferred Stock) or decreased
(but not below the number of shares of such series then outstanding) from time
to time by action of the Board of Directors;
(b) the dividend rate, if any, on the shares of the series,
whether dividends shall be cumulative, and if so, from what date or dates;
(c) the price or prices at which, and the terms and conditions
on which, the shares of the series may be redeemed at the option of the
Corporation;
<PAGE>
(d) whether or not the shares of the series shall be entitled
to the benefit of a retirement or sinking fund to be applied to the purchase or
redemption of such shares and, if so entitled, the annual amount of such fund
and the terms and provisions relative to the operation thereof;
(e) whether or not the shares of the series shall be
convertible into, or exchangeable for, shares of any other class or classes or
of any other series of the same or any other class or classes of stock of the
Corporation, and, if so convertible or exchangeable, the conversion price or
prices or the rates of exchange and the adjustments thereof, if any, at which
such conversion or exchange may be made, and any other terms and conditions of
such conversion or exchange;
(f) the rights of the shares of the series in the event of
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation;
(g) whether or not the shares of the series shall be entitled
to the benefit of limitations restricting the payment of dividends on, or the
making of other distributions in respect of, stock of any class or series
ranking junior to the shares of the series as to dividends or assets, or
restricting the purchase or redemption of the shares of any such junior class,
and the terms of any such restrictions;
(h) whether the series shall have voting rights in addition to
any voting rights required by law, and, if so, the terms of such voting rights;
and
(i) any other relative rights, preferences and limitations of
that series.
Shares of Preferred Stock consisting of the following Series are
authorized and their respective descriptions and designations are attached
hereto and incorporated by reference:
(a) Series A Preferred Stock Description and Designation of
Series A Preferred Stock
See Exhibit "A" attached hereto
(b) Series B Preferred Stock Description and Designation of
Series B Preferred Stock
See Exhibit "B" attached hereto
(c) Series C Preferred Stock Description and Designation of
Series C Preferred Stock
See Exhibit "C" attached hereto
(d) Series D Preferred Stock Description and Designation of
Series D Preferred Stock
See Exhibit "D" attached hereto
COMMON STOCK
Holders of Common Stock shall be entitled to receive such dividends as
may be declared by the Board of Directors from time to time, except that the
Corporation will not declare, pay or set apart for payment, any dividend on
shares of Common Stock (other than dividends payable in Common Stock), or
directly or indirectly make any distribution on, redeem, purchase or otherwise
acquire any such shares, if, at the time of such action, the Corporation is in
default with respect to any dividend payable on, or any sinking fund or purchase
fund requirement relative to, any shares of Preferred Stock. The number of
authorized shares of Common Stock may be increased or decreased (but not below
the number of shares thereof then outstanding) by the affirmative vote of the
holders of a majority in voting power of the stock of the Corporation entitled
to vote, irrespective of the provisions of Section 242(b)(2) of the General
Corporation Law.
<PAGE>
General
Voting Stock. Except as otherwise required by law or as
otherwise provided in this Amended and Restated Certificate of Incorporation
regarding any series of Preferred Stock, or in the Series Resolution creating
any other series of Preferred Stock, the holders of Common Stock shall
exclusively possess voting power in the election of directors and for all other
purposes, and the holders of any other series of Preferred Stock not
affirmatively granted such voting power shall have no voting power and shall not
be entitled to any notice of any meeting of stockholders.
Article V
Term
The Corporation shall have perpetual existence.
Article VI
Directors
A. Number. The number of directors of the Corporation shall be such
number not less than six (6) nor more than fifteen (15) as shall be set forth
from time to time in a resolution of the Board of Directors, provided that no
action shall be taken to decrease below six (6) or increase above fifteen (15)
the number of directors unless at least 66.67% in voting power of the
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (considered for this purpose as one
class) approve such decrease or increase. Vacancies in the Board of Directors of
the Corporation, however caused, and newly created directorships shall be filled
only by a vote of a majority of the directors then in office, whether or not a
quorum, and any director so chosen shall hold office for a term expiring at the
annual meeting of stockholders at which the term of the class to which the
director has been chosen expires and when the director's successor is elected
and qualified.
B. Classified Board of Directors. The Board of Directors shall be and
is divided into three classes: Class I, Class II and Class III, each of which
shall be as nearly equal in number as possible. Each director shall serve for a
term ending on the date of the third annual meeting of stockholders following
the annual meeting at which the director was elected; provided, however, that
each initial director in Class I shall hold office until the annual meeting of
stockholders in 1999; each initial director in Class II shall hold office until
the annual meeting of stockholders in 2000; and each initial director in Class
III shall hold office until the annual meeting of stockholders in 2001.
Notwithstanding the foregoing provisions of this Article VI, each director shall
serve until his successor is duly elected and qualified or until his death,
resignation or removal.
<PAGE>
Subject to the provisions of this Article VI, should the number of
directors not be equally divisible by three, the excess director or directors
shall be assigned to Classes I or II as follows: (i) if there shall be an excess
of one directorship over a number equally divisible by three, such extra
directorship shall be classified in Class I; and (ii) if there shall be an
excess of two directorships over a number divisible by three, one shall be
classified in Class I and the other in Class II.
In the event of any increase or decrease in the authorized number of
directors, (1) each director then serving as such shall nevertheless continue as
a director of the class of which he is a member until the expiration of his
current term, or his earlier resignation, removal from office or death, and (2)
the newly created or eliminated directorship resulting from such increase or
decrease shall be apportioned by the Board of Directors among the three classes
of directors so as to maintain such classes as nearly equal as possible.
Notwithstanding any other paragraph in this Article VI whenever the
holders of any one or more classes or series of Preferred Stock issued by this
Corporation shall have the right, voting separately by class or series, to elect
directors, the election, term of office, filling of vacancies and other features
of such directorships shall be governed by the terms of any Series Resolution
applicable thereto, and such directors so elected shall not be divided into
classes pursuant to this Article VI unless expressly provided by such terms.
C. Removal of Directors. Notwithstanding any other provisions of this
Amended and Restated Certificate or the By-laws of the Corporation, any director
or the entire Board of Directors of the Corporation may be removed, at any time,
but only for cause and only by the affirmative vote of the holders of a majority
of the voting power of the outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of directors (considered
for this purpose as one class). Notwithstanding the foregoing, whenever the
holders of any one or more series of Preferred Stock of the Corporation shall
have the right, voting separately as a class, to elect one or more directors of
the Corporation, the preceding provisions of
<PAGE>
this Article VI shall not apply with respect to the director or directors
elected by such holders of Preferred Stock.
Article VII
Limitation of Directors' Liability
The directors of the Corporation shall be entitled to the benefits of
all limitations on the liability of the directors generally that are now or
hereafter become available under the General Corporation Law. Without limiting
the foregoing, no director of the Corporation shall be personally liable to the
Corporation or any stockholder of the Corporation for monetary damages for
breach of fiduciary duty as a director provided that the foregoing shall not
eliminate or limit the liability of a director (i) for any breach of the
director's duty or 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, or (iv) for any transaction from which the director derived any improper
personal benefit.
Article VIII
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.
Article IX
Indemnification
A. Right to Indemnification. The Corporation shall indemnify and hold
harmless, to the fullest extent permitted by applicable law as it presently
exists or may hereafter be amended, any person (an "Indemnitee") who was or is
made or is threatened to be made a party or is otherwise involved in any action,
suit or proceeding, whether civil, criminal, administrative or investigative (a
"proceeding"), by reason of the fact that he, or a person for whom he is the
legal representative, is or was a director or officer of the Corporation or,
while a director or officer of the Corporation, is or was serving at the written
request of the Corporation as a director, officer, employee or agent of another
corporation or a partnership, joint venture, trust, enterprise or nonprofit
entity, including service with respect to employee benefit plans, against all
liability and loss suffered and expenses (including attorneys' fees) reasonably
incurred by such Indemnitee. Notwithstanding the preceding sentence, except as
otherwise provided in Article IX.C below, the Corporation shall be required to
indemnify an Indemnitee in connection with a proceeding (or part thereof)
commenced by such Indemnitee only if the commencement of such proceeding (or
part thereof) by the Indemnitee was authorized by the Board of Directors of the
Corporation.
B. Prepayment of Expenses. The Corporation shall pay the expenses
(including reasonable attorneys' fees) incurred by an Indemnitee in defending
any proceeding in advance of its final disposition, provided however, that, to
the extent required by law, such payment of expenses in advance of the final
disposition of the proceeding shall be made only upon receipt of an undertaking
by the Indemnitee to repay all amounts advanced if it should be ultimately
determined that the Indemnitee is not entitled to be indemnified under this
Article IX or otherwise.
<PAGE>
C. Claims. If a claim for indemnification or payment of expenses under
this Article IX is not paid in full within sixty days after a written claim
therefor by the Indemnitee has been received by the Corporation, the Indemnitee
may file suit to recover the unpaid amount of such claim and, if successful in
whole or in part, shall be entitled to be paid the expenses of prosecuting such
claim. In any such action the Corporation shall have the burden of proving that
the Indemnitee is not entitled to the requested indemnification or payment of
expenses under applicable law.
D. Nonexclusivity of Rights. The rights conferred on any Indemnitee by
this Article IX shall not be exclusive of any other rights which such Indemnitee
may have or hereafter acquire under any statute, provision of the Amended and
Restated Certificate of Incorporation, provision of the By-Laws, agreement, vote
of stockholders or disinterested directors, or otherwise.
E. Other Sources. The Corporation's obligation, if any, to indemnify or
to advance expenses to any Indemnitee who was or is serving at its request as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust, enterprise or nonprofit entity shall be reduced by any amount
such Indemnitee may collect as indemnification or advancement of expenses from
such other corporation, partnership, joint venture, trust, enterprise or
nonprofit enterprise.
F. Amendment or Repeal. Any repeal or modification of the foregoing
provisions of this Article IX shall not adversely affect any right or protection
hereunder of any Indemnitee in respect of any act or omission occurring prior to
the time of such repeal or modification.
G. Other Indemnification and Prepayment of Expenses. This Article IX
shall not limit the right of the Corporation, to the extent and in the manner
permitted by law, to indemnify and to advance expenses to persons other than
Indemnitees when and as authorized by appropriate corporate action.
<PAGE>
Article X
No Stockholder Written Consent
Upon the initial Closing of the Corporation's initial public offering
pursuant to a registration statement on Form S-1 under the Securities Act of
1933, as amended, the stockholders of the Corporation may not take any action by
written consent in lieu of a meeting.
Article XI
Amendment of Certificate
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by law, and all rights
conferred upon stockholders herein are granted subject to this reservation.
Notwithstanding the foregoing, the provisions set forth in Articles VI,
VII,VIII, IX, X, XI, and XII, may not be repealed, altered, amended or rescinded
in any respect unless the same is approved by the affirmative vote of the
holders of not less than a majority of the voting power of the outstanding
shares of capital stock of the Corporation entitled to vote generally in the
election of the directors (considered for this purpose as a single class).
Article XII
Amendment of Bylaws
In furtherance and not in limitation of the powers conferred by
statute, the board of directors is expressly authorized to make, alter or repeal
the by-laws of the Corporation.
FOURTH: That this Amended and Restated Certificate of Incorporation was
duly adopted in accordance with the provisions of Section 228, 242 and 245 of
the General Corporation Law.
<PAGE>
IN WITNESS WHEREOF, this Amended and Restated Certificate of
Incorporation has been signed by the undersigned officer of the Corporation this
22nd day of September, 1998.
/s/ Larry W. Smith
-------------------------------
Name: Larry W. Smith
Title: Chief Executive Officer
<PAGE>
DESIGNATION AND DESCRIPTION
OF
SERIES A PREFERRED STOCK
OF
U.S. INTERACTIVE, INC.,
a Delaware corporation
1. Designation and Amount. The shares of the series of Preferred Stock
hereby established shall be designated as "Series A Preferred Stock" and the
number of shares constituting such series shall be 1,573,533. As used herein,
the term "Preferred Stock" used without reference to the Series A Preferred
Stock means the shares of Preferred Stock, without distinction as to series,
except as otherwise expressly provided for herein, or as the context otherwise
requires.
2. Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, the holders of the Series
A Preferred Stock shall be entitled to receive, prior and in preference to any
distribution of any of the assets or surplus funds of the Corporation to the
holders of the Common Stock ("Common Stock") by reason of their ownership
thereof, the amount of $2.83124 per share (as adjusted for any stock dividends,
combinations or splits with respect to such shares) (the "Series A Purchase
Price") plus all accrued or declared but unpaid dividends on such share for each
share of Series A Preferred Stock then held (the "Series A Preferential
Amount"). The holders of the Series A Preferred Stock shall receive the Series A
Preferential Amount pari passu with the amounts due to the holders of Series B
Preferred Stock, the holders of Series C Preferred Stock and the holders of
Series D Preferred Stock under the Designation and Description of Series B
Preferred Stock, the Designation and Description of Series C Preferred Stock and
the Designation and Description of Series D Preferred Stock. Notwithstanding the
foregoing, if in any liquidation, dissolution or winding up of the Corporation,
the rate of return on the Series A Preferred Stock is less than 5.5218109% per
year on the Series A Purchase Price (computed as simple interest from July 2,
1998 (the "Issue Date")), then the holders of the Series A Preferred Stock shall
be entitled to receive, following payment of the Series A Preferential Amount,
an additional amount which operates to provide to the holders of the Series A
Preferred a rate of return on the shares of Series A Preferred Stock of
5.5218109% per year on the Series A Purchase Price (computed as simple interest
from the Issue Date and as adjusted for any stock dividends, combinations, or
splits with respect to such shares). If upon the occurrence of such event, the
assets and funds thus distributed among the holders of the Series A Preferred
Stock, the Series B Preferred Stock, the Series C Preferred Stock and the Series
D Preferred Stock shall be insufficient to permit the payment to such holders of
the fully aforesaid preferential amount, then the entire assets and funds of the
Corporation legally available for distribution shall be distributed ratably to
the holders of the Series A Preferred Stock, the Series B Preferred Stock, the
Series C Preferred Stock and the Series D Preferred Stock in proportion to the
preferential amount each such holder is otherwise entitled to receive.
(b) In the event of any liquidation, dissolution or winding up
of the Corporation, either voluntary or involuntary, and subject to the payment
in full of the liquidation preference with respect to the Series A Preferred
Stock, the Series B Preferred Stock, the Series C Preferred Stock and the Series
D Preferred Stock as provided in subparagraph (a) of this Section 2, and subject
to the rights of any series of Preferred Stock pursuant to a Designation and
Description creating such series, the holders of the Common Stock shall be
entitled to receive the entire remaining assets and funds of the Corporation
legally available for distribution, to be distributed among the holders of the
Common Stock in proportion to the shares of Common Stock then held by them.
(c) For purposes of this Section 2, (i) any acquisition of the
Corporation by means of merger or other form of corporate reorganization in
which outstanding shares of the Corporation are exchanged for less than fifty
percent (50%) of the outstanding voting shares issued, or caused to be issued,
by the acquiring corporation or its subsidiary (other than a mere incorporation
transaction, including without limitation, a transaction pursuant to which the
Corporation merges into a commonly-controlled corporation organized under the
laws of the State of Delaware) or (ii) a sale of all or substantially all of the
assets of the Corporation, shall be treated as a liquidation, dissolution or
winding up of the Corporation and shall entitle the holders of the Series A
Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock and
the Series D Preferred Stock to receive at the closing in cash, securities or
other property (valued as provided in Section 2(d) below) amounts as specified
in Section 2(a) above.
<PAGE>
(d) Whenever the distribution provided for in this Section 2
shall be payable in securities or property other than cash, the value of such
distribution shall be the fair market value of such securities or other property
as determined in good faith by the Board of Directors.
3. Redemption.
(a) On the fifth anniversary of the Issue Date, upon the one
time election of each of the holders of the shares of Series A Preferred Stock
outstanding as of the date of such election, the Corporation shall redeem, from
any source of funds to the extent legally available therefor, all but not less
than all of the shares of the Series A Preferred Stock held by such shareholder
as of the date of such election; provided, however, that if the holders of
greater than 50% of the then outstanding Series A Preferred Stock elect to
require the Corporation to redeem greater than 50% of the then outstanding
shares of the Series A Preferred Stock, the Corporation may elect to redeem all
but not less than all of the then outstanding shares of Series A Preferred
Stock; provided, further, that, except as provided in Section 3(c) below, such
redemption shall be effected no later than sixty (60) days after receipt by the
Corporation of such notice of election (the "Series A Redemption Date"). The
Corporation shall effect such redemption on the Series A Redemption Date by
paying in cash in exchange for the shares of Series A Preferred Stock to be
redeemed a sum equal to $2.83124 per share of Series A Preferred Stock (as
adjusted for any stock dividends, combinations or splits with respect to such
shares) plus a per annum return of 5.5218109% (computed as simple interest from
the Issue Date) (the "Series A Redemption Price").
(b) No later than thirty (30) days after receipt by the
Corporation of the notice of election described in Section 3(a) above, written
notice shall be mailed, first class postage prepaid, to each holder of record
(at the close of business on the business day next preceding the day on which
notice is given) of the Series A Preferred Stock to be redeemed, at the address
last shown on the records of the Corporation for such holder, notifying such
holder of the redemption to be effected, specifying the number of shares to be
redeemed from such holder, the Series A Redemption Date, the Series A Redemption
Price, the place at which payment may be obtained and calling upon such holder
to surrender to the Corporation, in the manner and at the place designated, his,
her or its certificate or certificates representing the shares to be redeemed
(the "Series A Redemption Notice"). Except as provided in Section 3(c), on or
after the Series A Redemption Date, each holder of Series A Preferred Stock to
be redeemed shall surrender to the Corporation the certificate or certificates
representing such shares, in the manner and at the place designated in the
Redemption Notice, and thereupon the Series A Redemption Price of such shares
shall be payable to the order of the person whose name appears on such
certificate or certificates as the owner thereof and each surrendered
certificate shall be canceled. In the event less than all the shares represented
by any such certificate are redeemed, a new certificate shall be issued
representing the unredeemed shares.
(c) From and after the Series A Redemption Date, unless there
shall have been a default in payment of the Series A Redemption Price, all
rights of the holders of shares of Series A Preferred Stock designated for
redemption in the Redemption Notice as holders of Series A Preferred Stock
(except the right to receive the Series A Redemption Price without interest upon
surrender of their certificate or certificates) shall cease with respect to such
shares, and such shares shall not thereafter be transferred on the books of the
Corporation or be deemed to be outstanding for any purpose whatsoever. If the
funds of the Corporation legally available for redemption of shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock, on any Series A Redemption Date are insufficient to redeem the
total number of shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock and Series D Preferred Stock to be redeemed on such
date, those funds which are legally available will be used to redeem the maximum
possible number of such shares ratably among the holders of such shares to be
redeemed based upon the Series A Redemption Price and the redemption prices for
the Series B Preferred Stock, the Series C Preferred Stock and the Series D
Preferred Stock. The shares of Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock and Series D Preferred Stock not redeemed shall
remain outstanding and entitled to all the rights and preferences provided
herein. At any time thereafter when additional funds of the Corporation are
legally available for the redemption of shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock,
such funds will immediately be used to redeem on the same basis the balance of
the shares which the Corporation has become obliged to redeem on any Series A
Redemption Date and redemption date for the Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock, but which it has not redeemed.
<PAGE>
4. Voting Rights.
(a) Each holder of shares of the Preferred Stock shall be
entitled to the number of votes equal to the number of shares of Common Stock
into which such shares of the Preferred Stock could be converted and shall have
voting rights and powers equal to the voting rights and powers of the Common
Stock (except as otherwise expressly provided in the Amended and Restated
Stockholder's Agreement, as amended from time to time, executed by the holders
of the Series A Preferred Stock, the Corporation, and the holders of Common
Stock and of Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock on the date this Amended and Restated Certificate of
Incorporation is filed with the Secretary of State of the State of Delaware, or
in any Certificate of Designation for the Series A Preferred Stock hereafter
filed, or as required by law), voting together with the Common Stock as a single
class, and shall be entitled to notice of any shareholders' meeting in
accordance with the Bylaws of the Corporation. Fractional voting shall not,
however, be permitted and any fractional votes resulting from the above formula
(after aggregating all shares into which shares of the Preferred Stock held by
each holder could be converted) shall be rounded to the nearest whole number
(with one-half being rounded upward)
<PAGE>
5. Restrictions and Limitations.
(a) So long as any shares of Series A Preferred Stock remain
outstanding, the Corporation shall not, without the vote or written consent by
the holders of at least a majority of the then outstanding shares of the Series
A Preferred Stock, voting or acting together as a single class, take any action
which:
(i) materially alters or changes the rights,
preferences or privileges of the Series A Preferred Stock as a class;
(ii) authorizes or issues any additional shares of
Series A Preferred Stock;
(iii) except as set forth in (xii) below creates any
new class or series of Preferred Stock having rights, preferences or privileges
senior to or on parity with the Series A Preferred Stock;
(iv) approves any merger of the Corporation, sale of
all or substantially all of the assets of the Corporation, or other corporate
reorganization or acquisition other than with or to a wholly-owned subsidiary of
the Corporation;
(v) approves the purchase, redemption or other
acquisition of any of the Series A Preferred Stock except as specifically
provided for in Section 3;
(vi) approves the purchase, redemption or other
acquisition of any common stock of the Corporation, other than repurchases
pursuant to stock restriction agreements that grant to the Corporation a right
of repurchase upon termination of the service or employment of any consultant,
director, officer or employee;
(vii) authorizes the payment of a cash dividend to
any holders of any class or series of capital stock of the Corporation other
than in the ordinary course of the Corporation's business;
(viii) amends or repeals the Corporation's Amended
and Restated Certificate of Incorporation or Amended and Restated Bylaws;
(ix) permits any subsidiary of the Corporation to
issue or sell or obligate itself to issue or sell, except to the Corporation or
a wholly-owned subsidiary of the Corporation, any securities of such subsidiary;
(x) approves the liquidation, dissolution or winding
up of the Corporation;
(xi) authorizes any material transaction or series of
transactions between the Corporation and any officer, director, shareholder or
affiliate thereof (defined as any person or entity controlling, controlled by or
under common control with such person) or any individual related by blood,
marriage or adoption to any such person or any entity in which such person owns
a significant beneficial interest except for material transactions which are at
arms-length as determined by a majority vote of the Board of Directors;
(xii) involves any transaction, other than joint
ventures or similar transactions conducted in the ordinary course of the
Corporation's business, pursuant to which equity securities having rights,
preferences or privileges senior to or on parity with the Series A Preferred
Stock are issued by the Corporation;
6. Conversion. The holder of the Series A Preferred Stock shall have
conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Series A Preferred Stock
shall be convertible, at the option of the holder thereof, at any time after the
date of issuance of such share by delivery of the certificate representing such
share to the office of the Corporation or the transfer agent for such stock,
into such number of fully paid and nonassessable shares of the Common Stock as
is determined by dividing $2.83124 by the Series A Conversion Price (as defined
below) applicable to such share and determined as hereinafter provided, in
effect on the date the certificate is surrendered for conversion. The price at
which shares of the Common Stock shall be deliverable upon conversion of shares
of the Series A Preferred Stock (the "Series A Conversion Price") shall
initially be $2.83124 per share of the Common Stock. Such initial Series A
Conversion Price shall be adjusted as hereinafter provided.
<PAGE>
(b) Automatic Conversion. Each share of Series A Preferred
Stock shall automatically be converted into shares of the Common Stock at the
then-effective Series A Conversion Price, upon the earlier of (i) the date
specified by vote, written consent or agreement of holders of not less than a
majority of the then outstanding shares of Series A Preferred Stock (as to
conversion of Series A Preferred Stock), and (ii) simultaneously with the
initial closing of (A) an underwritten, firm commitment public offering pursuant
to an effective registration under the Securities Act of 1933, as amended (the
"Act") covering the offer and sale by the Company of its Common Stock in which
the aggregate gross proceeds to the Company exceed Fifteen Million Dollars
($15,000,000) and in which the price per share to the public of such Common
Stock equals or exceeds $5.00 (subject to equitable adjustment in the event of
any stock split, stock dividend, combination, reorganization, reclassification
or other similar event involving the Common Stock which occurs prior to such
underwritten, firm commitment public offering), or (B) an offering to the
holders of the common stock of Safeguard Scientifics, Inc. ("SSI"), pursuant to
a registration statement, of rights to purchase from the Company such number of
shares of the Common Stock which equals up to 30% (as determined by SSI) of the
sum of (I) all issued shares of Common Stock; (II) all shares of Common Stock
reserved for issuance, and (III) all shares of Common Stock subject to, but not
reserved for, issuance pursuant to options, warrants or other agreements,
instruments or understandings, all as of the effective date of the registration
statement (a "Qualified Public Offering").
(c) Mechanics of Conversion.
(i) Before any holder of Series A Preferred Stock
shall be entitled to convert the same into shares of the Common Stock, he, she
or it shall surrender the certificate or certificates therefor, duly endorsed,
at the office of the Corporation or of any transfer agent for such stock, and
shall give written notice to the Corporation at such office that he, she or it
elects to convert the same and shall state therein the name or names in which he
wishes the certificate or certificates for shares of the Common Stock to be
issued. The Corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Series A Preferred Stock, a certificate
or certificates for the number of shares of the Common Stock to which he, she or
it shall be entitled as aforesaid. Such conversion shall be deemed to have been
made immediately prior to the close of business on the date of surrender of the
shares of Series A Preferred Stock to be converted, and the person or persons
entitled to receive the shares of the Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder or holders of such shares
of the Common Stock on such date.
(ii) If the conversion is in connection with an
underwritten offering of securities pursuant to the
Securities Act, the conversion may, at the option of any holder tendering shares
of Series A Preferred Stock for conversion, be conditioned upon the closing with
the underwriters of the sale of securities pursuant to such offering, in which
event the person(s) entitled to receive the Common Stock upon conversion of the
Series A Preferred Stock shall not be deemed to have converted such Preferred
Stock until immediately prior to the closing of such sale of securities.
(d) Adjustments to Series A Conversion Price for Certain
Diluting Issues.
(i) Special Definitions. For purposes of this Section
6(d), the following definitions apply:
(1) "Options" shall mean rights, options, or warrants
to subscribe for, purchase or otherwise
acquire either Common Stock or Convertible Securities (defined below).
(2) "Convertible Securities" shall mean any evidences
of indebtedness, shares (other than Common Stock or Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock)
or other securities convertible into or exchangeable for Common Stock.
(3) "Additional Shares of Common Stock" shall mean
all shares of Common Stock issued (or, pursuant to Section 6(d)(iii), deemed to
be issued) by the Corporation after the Issue Date, other than shares of Common
Stock issued or issuable:
(A) upon conversion of shares of Series A Preferred
Stock;
(B) upon conversion of shares of Series B Preferred
Stock;
(C) upon conversion of shares of Series C Preferred
Stock;;
(D) upon conversion of shares of Series D Preferred
Stock;
<PAGE>
(E) to officers, directors or employees of, or
consultants to, or other permitted grantee of, the Corporation or any subsidiary
of the Corporation pursuant to stock option or stock purchase plans or
agreements on terms approved by the Board of Directors, but not exceeding
1,397,236 shares of the Common Stock (subject to equitable adjustment in the
event of any stock split stock dividend, combination, reorganization,
reclassification, or other similar event involving the Common Stock which occurs
after the date hereof and prior to the Qualified Public Offering);
(F) as a dividend or distribution on Series A
Preferred Stock, or as a dividend or distribution on Series B Preferred Stock,
Series C Preferred Stock or Series D Preferred Stock;
(G) for which adjustment of the Series A Conversion
Price is made pursuant to Section 6(e); or
(H) upon exercise of any and all of the 70,000
Options issued to Progress Bank prior to the date these designations are filed
with the Secretary of State of Delaware and any Options issued to Progress Bank
or its affiliates pursuant to any transaction after the date these designations
are filed with the Secretary of State of Delaware pursuant to which Progress
Bank lends or makes available to the Corporation funds for working capital
purposes.
(ii) No Adjustment of Conversion Price. Any provision
herein to the contrary notwithstanding, no adjustment in the Conversion Price
for Series A Preferred Stock shall be made in respect of the issuance of
Additional Shares of Common Stock unless the consideration per share (determined
pursuant to Section 6(d)(v) hereof) for an Additional Share of Common Stock
issued or deemed to be issued by the Corporation is less than the Series A
Conversion Price in effect on the date of, and immediately prior to such issue.
(iii) Deemed Issue of Additional Shares of Common
Stock. Except as set forth in 6(d)(i)(3) above, in the event the Corporation at
any time or from time to time after the Issue Date shall issue any Options or
Convertible Securities or shall fix a record date for the determination of
holders of any class of securities then entitled to receive any such Options or
Convertible Securities, then the maximum number of shares (as set forth in the
instrument relating thereto without regard to any provisions contained therein
designed to protect against dilution) of Common Stock issuable upon the exercise
of such Options or, in the case of Convertible Securities and Options therefor,
the conversion or exchange of such Convertible Securities, shall be deemed to be
Additional Shares of Common Stock issued as of the time of such issue or, in
case such a record date shall have been fixed, as of the close of business on
such record date, provided further that in any such case in which Additional
Shares of Common Stock are deemed to be issued:
(1) no further adjustments in the Series A
Conversion Price shall be made upon the subsequent issue of Convertible
Securities or shares of Common Stock upon the exercise of such Options or
conversion or exchange of such Convertible Securities;
<PAGE>
(2) if such Options or Convertible Securities by
their terms provide, with the passage of time or otherwise, for any increase in
the consideration payable to the Corporation, or decrease in the number of
shares of Common Stock issuable, upon the exercise, conversion or exchange
thereof, the Series A Conversion Price computed upon the original issue thereof
(or upon the occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon any such increase or decrease
becoming effective, be recomputed to reflect such increase or decrease insofar
as it affects such Options or the rights of conversion or exchange under such
Convertible Securities (provided, however, that no such adjustment of the Series
A Conversion Price shall effect Common Stock previously issued upon conversion
of the Series A Preferred Stock); or
(3) no readjustment pursuant to clause (2) above
shall have the effect of increasing the Conversion Price of a series to an
amount which exceeds the lower of (a) the Conversion Price of such series on the
original adjustment date and (b) the Conversion Price of such series that would
have resulted from any issuance of Additional Shares of Common Stock between the
original adjustment date and such readjustment date.
(iv) Adj\ustment of Conversion Price Upon Issuance of
Additional Shares of Common Stock. In the event the Corporation, at any time
after the Issue Date shall issue Additional Shares of Common Stock (including
Additional Shares of Common Stock deemed to be issued pursuant to Section
6(d)(iii)) without consideration or for a consideration per share less than the
Series A Conversion Price on the date of and immediately prior to such issue,
then and in such event, except for adjustments governed by Section 6(e) below,
the Series A Conversion Price shall be reduced, concurrently with such issue, to
a price (calculated to the nearest cent) determined by multiplying such
Conversion Price by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to such issue plus the
number of shares of Common Stock which the aggregate consideration received by
the Corporation for the total number of Additional Shares of Common Stock so
issued would purchase at such Conversion Price in effect immediately prior to
such issuance, and the denominator of which shall be the number of shares of
Common Stock outstanding immediately prior to such issue plus the number of such
Additional Shares of Common Stock so issued. For the purpose of the above
calculation, the number of shares of Common Stock outstanding immediately prior
to such issue shall be calculated on a fully diluted basis, as if all shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and
Series D Preferred Stock and all Convertible Securities had been fully converted
into shares of Common Stock and any outstanding Options (whether vested or not
vested, exercisable or not exercisable) had been fully exercised (and the
resulting securities fully converted into shares of Common Stock, if so
convertible) as of such date.
<PAGE>
(v) Determination of Consideration. For purposes of
this Section 6(d), the consideration received by the Corporation for the issue
of any Additional Shares of Common Stock shall be computed as follows:
(1) Cash and Property: Such consideration shall:
(A) insofar as it consists of cash, be computed at
the aggregate amount of cash received by the Corporation excluding amounts paid
or payable for accrued interest or accrued dividends:
(B) insofar as it consists of property other than
cash, be computed at the fair value thereof at the time of such issue, as
determined in good faith by the Board of Directors; and
(C) in the event Additional Shares of Common Stock
are issued together with other shares or securities or other assets of the
Corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (A) and (B) above, as
determined in good faith by the Board.
(2) Options and Convertible Securities. The
consideration per share received by the Corporation for Additional Shares of
Common Stock deemed to have been issued pursuant to Section 6(d)(iii), relating
to Options and Convertible Securities shall be determined by dividing;
(A) the total amount, if any, received
or receivable by the Corporation as consideration for the issue of such Options
or Convertible Securities, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without regard
to any provision contained therein designed to protect against dilution) payable
to the Corporation upon the exercise of such Options or the conversion or
exchange of such Convertible Securities, or in the case of Options for
Convertible Securities, the exercise of such Options for Convertible Securities
and the conversion or exchange of such Convertible Securities by
(B) the maximum number of shares of
Common Stock (as set forth in the instrument relating thereto, without regard to
any provision contained therein designed to protect against the dilution)
issuable upon the exercise of such Options or conversion or exchange of such
Convertible Securities.
(e) Adjustments to Conversion Prices for Stock Dividends and
for Combinations or Subdivisions of Common Stock. In the event that the
Corporation at any time or from time to time after the Issue Date shall declare
or pay, without consideration, any dividend on the Common Stock payable in
Common Stock or in any right to acquire Common Stock for no consideration, or
shall effect a subdivision of the outstanding shares of Common Stock into a
greater number of shares of Common Stock (by stock split, reclassification or
otherwise than by payment of a dividend in Common Stock or in any right to
acquire Common Stock), or in the event the outstanding shares of Common Stock
shall be combined or consolidated, by reclassification or otherwise, into a
lesser number of shares of Common Stock, then the Series A Conversion Price in
effect immediately prior to such event shall, concurrently with the
effectiveness of such event, be proportionately decreased or increased, as
appropriate. In the event that the Corporation shall declare or pay, without
consideration, any dividend on the Common Stock payable in any right to acquire
Common Stock for no consideration then the Corporation shall be deemed to have
made a dividend payable in Common Stock in an amount of shares equal to the
maximum number of shares issuable upon exercise of such rights to acquire Common
Stock.
(f) Adjustments for Reclassification and Reorganization. If
the Common Stock issuable upon conversion of the Series A Preferred Stock shall
be changed into the same or a different number of shares of any other class or
classes of stock, whether by capital reorganization, reclassification or
otherwise (other than a subdivision or combination of shares provided for in
Section 6(e) above or a merger or other reorganization referred to in Section
2(c) above), the Series A Conversion Price then in effect shall, concurrently
with the effectiveness of such reorganization or reclassification, be
proportionately adjusted so that the Series A Preferred Stock shall be
convertible into, in lieu of the number of shares of the Common Stock which the
holders would otherwise have been entitled to receive, a number of shares of
such other class or classes of stock equivalent to the number of shares of the
Common Stock that would have been subject to receipt by the holders upon
conversion of Series A Preferred Stock immediately before that change.
<PAGE>
(g) No Impairment. Without the vote or written consent of the
holders of a majority of the Series A Preferred Stock, voting or acting together
as a single class, the Corporation will not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Corporation, but will at all times in
good faith assist in the carrying out of all the provisions of this Section 6
and in the taking of all such action as may be necessary or appropriate in order
to protect the Conversion Rights of the holders of the Series A Preferred Stock
against impairment.
(h) Certificates as to Adjustments. Upon the occurrence of
each adjustment or readjustment of any Conversion Price pursuant to this Section
6, the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of Series A Preferred Stock a certificate executed by the Corporation's
President or Chief Financial Officer setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series A Preferred Stock, furnish or cause to be furnished
to such holder a like certificate setting forth (i) such adjustments and
readjustments, (ii) the Series A Conversion Price at the time in effect, and
(iii) the number of shares of the Common Stock and the amount, if any, of other
property which at the time would be received upon the conversion of the Series A
Preferred Stock.
(i) Issue Taxes. The Corporation shall pay any and all issue
and other taxes that may be payable in respect of any issue or delivery of
shares of Common Stock on conversion of shares of Series A Preferred Stock
pursuant hereto; provided, however, that the Corporation shall not be obligated
to pay any transfer taxes resulting from any transfer requested by any holder in
connection with any such conversion
(j) Reservation of Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of the Common Stock, solely for the purpose of effecting the
conversion of the shares of Series A Preferred Stock, such number of its shares
of the Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of Series A Preferred Stock; and if at any
time the number of authorized but unissued shares of the Common Stock shall not
be sufficient to effect the conversion of all then outstanding shares of Series
A Preferred Stock, the Corporation will take such corporate action as may, in
the opinion of its counsel, be necessary to increase its authorized but unissued
shares of the Common Stock to such number of shares as shall be sufficient for
such purpose, including, without limitation, engaging in best efforts to obtain
the requisite stockholder approval of any necessary amendment to this
Certificate.
(k) Fractional Shares. No fractional share shall be issued
upon the conversion of any share or shares of Series A Preferred Stock. All
shares of the Common Stock (including fractions thereof) issuable upon
conversion of more than one share of Series A Preferred Stock by a holder
thereof shall be aggregated for purposes of determining whether the conversion
would result in the issuance of any fractional share. If, after the
aforementioned aggregation, the conversion would result in the issuance of a
fraction of a share of the Common Stock, the Corporation shall, in lieu of
issuing any fractional share, pay the holder otherwise entitled to such fraction
a sum in cash equal to the fair market value of such fraction on the date of
conversion (as determined in good faith by the Board of Directors).
(l) Notices. Any notice required by the provisions of this
Section 6 to be given to the holders of shares of Series A Preferred Stock shall
be deemed given if deposited in the United States mail, postage prepaid, and
addressed to each holder of record at his address appearing on the books of the
Corporation.
<PAGE>
7. Preemptive Rights.
(a) Right To Maintain Proportionate Share Ownership. The
holders of outstanding shares of Series A Preferred Stock shall have the right
to subscribe to any or all (i) issuances of shares of capital stock of the
Corporation, (ii) issuances of securities convertible into shares of capital
stock of the Corporation (other than Options to Progress Bank or an affiliate
thereof as contemplated in Section 6(d)(i)(3)(H)), or (iii) grants of options to
purchase shares of capital stock of the Corporation, including, but not limited
to any warrants issued by the Company (other than option grants referred to in
Section 6(d)(i)(3)(E) above) on the same terms of such offerings to the extent
equal to the proportion which the number of shares of Series A Preferred Stock
(on an as-converted basis) held by such holders bears to the Corporation's
fully-diluted capitalization (on an as-converted and as-exercised basis). Such
right is exercisable within ten (10) days after the receipt of written notice
relating to such issuances by the holders of the Series A Preferred Stock. Each
holder of Series A Preferred Stock shall have the right to purchase that
percentage of such issuances available for purchase by all of the holders of
Series A Preferred Stock equal to such holder's percentage of all Series A
Preferred Stock issued and outstanding at such time. The right of holders of the
Series A Preferred Stock to purchase new issues of shares or convertible
securities or options does not extend to shares or securities issued solely in
exchange for property (including securities) other than cash, including any such
shares, convertible securities or options issued in connection with any merger
or reorganization (primarily intended to acquire property or business),
equipment lease or debt financing.
(b) Oversubscription Privilege. In addition to the right to
purchase his, her or its pro rata proportion of the new issue of shares,
convertible securities or options as set forth in 7(a) above, each holder of the
Series A Preferred Stock who has subscribed for the entire number of shares or
units initially allocable to him shall have the additional right to subscribe to
his, her or its proportionate part of any shares or units which have not been
subscribed for by other holders of the Series A Preferred Stock. In case the
total number of shares or units desired to be purchased by holders of the Series
A Preferred Stock exercising this right of oversubscription exceeds the total
number of shares or other units which have not been initially subscribed for by
other holders of the Series A Preferred Stock and are thus available for
purchase, each holder of the Series A Preferred Stock exercising this right of
oversubscription shall be entitled to purchase that percentage of the shares or
units not initially subscribed by the holders of Series A Preferred Stock equal
to the number of shares subscribed by such holder over the total number of
shares for which subscriptions from holders of Series A Preferred Stock have
been received. This procedure shall be repeated, if necessary, until all of the
shares or units not initially subscribed have been allocated. The preemptive
rights held by the holders of the Series A Preferred Stock pursuant to this
Section 7 shall terminate immediately prior to the closing of a Qualified Public
Offering.
8. No Reissuance of the Series A Preferred Stock. No share or shares of
the Series A Preferred Stock acquired by the Corporation by reason of
redemption, purchase, conversion or otherwise shall be reissued as part of that
series. The authorized number of shares of that series shall be automatically
reduced by the number of shares reacquired, and the Board of Directors of the
Corporation shall return those shares to the status of authorized but
undesignated shares of Preferred Stock. The Corporation may from time to time
take such appropriate corporate action as may be necessary to reduce the
authorized number of shares of Series A Preferred Stock accordingly.
<PAGE>
DESIGNATION AND DESCRIPTION
OF
SERIES B PREFERRED STOCK
OF
U.S. INTERACTIVE, INC.,
a Delaware corporation
1. Designation and Amount. The shares of the series of Preferred Stock
hereby established shall be designated as "Series B Preferred Stock" and the
number of shares constituting such series shall be 1,052,632. As used herein,
the term "Preferred Stock" used without reference to the Series B Preferred
Stock means the shares of Preferred Stock, without distinction as to series,
except as otherwise expressly provided for herein, or as the context otherwise
requires.
2. Liquidation Preference.
<PAGE>
(a) In the event of any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, the holders of the Series
B Preferred Stock shall be entitled to receive, prior and in preference to any
distribution of any of the assets or surplus funds of the Corporation to the
holders of the Common Stock ("Common Stock") by reason of their ownership
thereof, the amount of $.94999 per share (as adjusted for any stock dividends,
combinations or splits with respect to such shares) (the "Series B Purchase
Price) plus all accrued or declared but unpaid dividends on such share for each
share of Series B Preferred Stock then held (the "Series B Preferential
Amount"). The holders of the Series B Preferred Stock shall receive the Series B
Preferential Amount pari passu with the amounts due to holders of Series A
Preferred Stock, the holders of Series C Preferred Stock and the holders of the
Series D Preferred Stock under the Designation and Description of Series A
Preferred Stock, the Designation and Description of Series C Preferred Stock and
the Designation and Description of the Series D Preferred Stock. Notwithstanding
the foregoing, if in any liquidation, dissolution or winding up of the
Corporation, the rate of return on the Series B Preferred Stock is less than 10%
per year on the Series B Purchase Price (computed as simple interest from July
2, 1998(the "Issue Date")), then the holders of the Series B Preferred Stock
shall be entitled to receive, following payment of the Series B Preferential
Amount, an additional amount which operates to provide to the holders of the
Series B Preferred a rate of return on the shares of Series B Preferred Stock of
10% per year on the Series B Purchase Price (computed as simple interest from
the Issue Date and as adjusted for any stock dividends, combinations, or splits
with respect to such shares). If upon the occurrence of such event, the assets
and funds thus distributed among the holders of the Series A Preferred Stock,
Series B Preferred Stock, the Series C Preferred Stock and Series D Preferred
Stock shall be insufficient to permit the payment to such holders of the fully
aforesaid preferential amount, then the entire assets and funds of the
Corporation legally available for distribution shall be distributed ratably to
the holders of the Series A Preferred Stock, the Series B Preferred Stock, the
Series C Preferred Stock and the Series D Preferred Stock in proportion to the
preferential amount each such holder is otherwise entitled to receive.
(b) In the event of any liquidation, dissolution or winding up
of the Corporation, either voluntary or involuntary, and subject to the payment
in full of the liquidation preference with respect to the Series A Preferred
Stock, the Series B Preferred Stock, the Series C Preferred Stock and the Series
D Preferred Stock as provided in subparagraph (a) of this Section 2, and subject
to the rights of any series of Preferred Stock pursuant to a Designation and
Description creating such series, the holders of the Common Stock shall be
entitled to receive the entire remaining assets and funds of the Corporation
legally available for distribution, to be distributed among the holders of the
Common Stock in proportion to the shares of Common Stock then held by them.
(c) For purposes of this Section 2, (i) any acquisition of the
Corporation by means of merger or other form of corporate reorganization in
which outstanding shares of the Corporation are exchanged for less than fifty
percent (50%) of the outstanding voting shares issued, or caused to be issued,
by the acquiring corporation or its subsidiary (other than a mere incorporation
transaction, including without limitation, a transaction pursuant to which the
Corporation merges into a commonly-controlled corporation organized under the
laws of the State of Delaware) or (ii) a sale of all or substantially all of the
assets of the Corporation, shall be treated as a liquidation, dissolution or
winding up of the Corporation and shall entitle the holders of Series A
Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock and
the Series D Preferred Stock to receive at the closing in cash, securities or
other property (valued as provided in Section 2(d) below) amounts as specified
in Section 2(a) above.
(d) Whenever the distribution provided for in this Section 2
shall be payable in securities or property other than cash, the value of such
distribution shall be the fair market value of such securities or other property
as determined in good faith by the Board of Directors.
3. Redemption.
(a) On the fifth anniversary of the Issue Date, upon the one
time election of each of the holders of the shares of Series B Preferred Stock
outstanding as of the date of such election, the Corporation shall redeem, from
any source of funds to the extent legally available therefor, all but not less
than all of the shares of the Series B Preferred Stock held by such shareholder
as of the date of such election; provided, however, that if the holders of
greater than 50% of the then outstanding Series B Preferred Stock elect to
require the Corporation to redeem greater than 50% of the then outstanding
shares of the Series B Preferred Stock, the Corporation may elect to redeem all
but not less than all of the then outstanding shares of Series B Preferred
Stock; provided, further, that, except as provided in Section 3(c) below, such
redemption shall be effected no later than sixty (60) days after receipt by the
Corporation of such notice of election (the "Series B Redemption Date"). The
Corporation shall effect such redemption on the Series B Redemption Date by
paying in cash in exchange for the shares of Series B Preferred Stock to be
redeemed a sum equal to $.94999 per share of Series B Preferred Stock (as
adjusted for any stock dividends, combinations or splits with respect to such
shares) plus a per annum return of 10% (computed as simple interest from the
Issue Date) (the "Series B Redemption Price").
<PAGE>
(b) No later than thirty (30) days after receipt by the
Corporation of the notice of election described in Section 3(a) above, written
notice shall be mailed, first class postage prepaid, to each holder of record
(at the close of business on the business day next preceding the day on which
notice is given) of the Series B Preferred Stock to be redeemed, at the address
last shown on the records of the Corporation for such holder, notifying such
holder of the redemption to be effected, specifying the number of shares to be
redeemed from such holder, the Series B Redemption Date, the Series B Redemption
Price, the place at which payment may be obtained and calling upon such holder
to surrender to the Corporation, in the manner and at the place designated, his,
her or its certificate or certificates representing the shares to be redeemed
(the "Series B Redemption Notice"). Except as provided in Section 3(c), on or
after the Series B Redemption Date, each holder of Series B Preferred Stock to
be redeemed shall surrender to the Corporation the certificate or certificates
representing such shares, in the manner and at the place designated in the
Redemption Notice, and thereupon the Series B Redemption Price of such shares
shall be payable to the order of the person whose name appears on such
certificate or certificates as the owner thereof and each surrendered
certificate shall be canceled. In the event less than all the shares represented
by any such certificate are redeemed, a new certificate shall be issued
representing the unredeemed shares.
(c) From and after the Series B Redemption Date, unless there
shall have been a default in payment of the Series B Redemption Price, all
rights of the holders of shares of Series B Preferred Stock designated for
redemption in the Redemption Notice as holders of Series B Preferred Stock
(except the right to receive the Series B Redemption Price without interest upon
surrender of their certificate or certificates) shall cease with respect to such
shares, and such shares shall not thereafter be transferred on the books of the
Corporation or be deemed to be outstanding for any purpose whatsoever. If the
funds of the Corporation legally available for redemption of shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock, on any Series B Redemption Date are insufficient to redeem the
total number of shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock and Series D Preferred Stock to be redeemed on such
date, those funds which are legally available will be used to redeem the maximum
possible number of such shares ratably among the holders of such shares to be
redeemed based upon the Series B Redemption Price and the redemption prices for
the Series A Preferred Stock, Series C Preferred Stock and Series D Preferred
Stock. The shares of Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock and Series D Preferred Stock not redeemed shall remain
outstanding and entitled to all the rights and preferences provided herein. At
any time thereafter when additional funds of the Corporation are legally
available for the redemption of shares of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, such
funds will immediately be used to redeem on the same basis the balance of the
shares which the Corporation has become obliged to redeem on any Series B
Redemption Date and redemption date for the Series A Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock, but which it has not redeemed.
4. Voting Rights.
(a) Each holder of shares of the Preferred Stock shall be
entitled to the number of votes equal to the number of shares of Common Stock
into which such shares of the Preferred Stock could be converted and shall have
voting rights and powers equal to the voting rights and powers of the Common
Stock (except as otherwise expressly provided in the Amended and Restated
Stockholder's Agreement, as amended from time to time, executed by the holders
of the Series B Preferred Stock, the Corporation, and the holders of Common
Stock and of Series A Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock on the date this Amended and Restated Certificate of
Incorporation is filed with the Secretary of State of the State of Delaware, or
in any Certificate of Designation for the Series B Preferred Stock hereafter
filed, or as required by law), voting together with the Common Stock as a single
class, and shall be entitled to notice of any shareholders' meeting in
accordance with the Bylaws of the Corporation. Fractional voting shall not,
however, be permitted and any fractional votes resulting from the above formula
(after aggregating all shares into which shares of the Preferred Stock held by
each holder could be converted) shall be rounded to the nearest whole number
(with one-half being rounded upward).
5. Restrictions and Limitations.
(a) So long as any shares of Series B Preferred Stock remain
outstanding, the Corporation shall not, without the vote or written consent by
the holders of at least a majority of the then outstanding shares of the Series
B Preferred Stock, voting or acting together as a single class, take any action
which:
(i) materially alters or changes the rights,
preferences or privileges of the Series B Preferred Stock as a class;
(ii) authorizes or issues any additional shares of
Series B Preferred Stock;
<PAGE>
(iii) except as set forth in (xii) below creates any
new class or series of Preferred Stock having rights, preferences or privileges
senior to or on parity with the Series B Preferred Stock;
(iv) approves any merger of the Corporation, sale of
all or substantially all of the assets of the Corporation, or other corporate
reorganization or acquisition other than with or to a wholly-owned subsidiary of
the Corporation;
(v) approves the purchase, redemption or other
acquisition of any of the Series B Preferred Stock except as specifically
provided for in Section 3;
(vi) approves the purchase, redemption or other
acquisition of any common stock of the Corporation, other than repurchases
pursuant to stock restriction agreements that grant to the Corporation a right
of repurchase upon termination of the service or employment of any consultant,
director, officer or employee;
(vii) authorizes the payment of a cash dividend to
any holders of any class or series of capital stock of the Corporation other
than in the ordinary course of the Corporation's business;
(viii) amends or repeals the Corporation's Amended
and Restated Certificate of Incorporation or Amended and Restated Bylaws;
(ix) permits any subsidiary of the Corporation to
issue or sell or obligate itself to issue or sell, except to the Corporation or
a wholly-owned subsidiary of the Corporation, any securities of such subsidiary;
(x) approves the liquidation, dissolution or winding
up of the Corporation;
(xi) authorizes any material transaction or series of
transactions between the Corporation and any officer, director, shareholder or
affiliate thereof (defined as any person or entity controlling, controlled by or
under common control with such person) or any individual related by blood,
marriage or adoption to any such person or any entity in which such person owns
a significant beneficial interest except for material transactions which are at
arms-length as determined by a majority vote of the Board of Directors;
(xii) involves any transaction, other than joint
ventures or similar transactions conducted in the
ordinary course of the Corporation's business, pursuant to which equity
securities having rights, preferences or privileges senior to or on parity with
the Series B Preferred Stock are issued by the Corporation;
6. Conversion. The holder of the Series B Preferred Stock shall have
conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Series B Preferred Stock
shall be convertible, at the option of the holder thereof, at any time after the
date of issuance of such share by delivery of the certificate representing such
share to the office of the Corporation or the transfer agent for such stock,
into such number of fully paid and nonassessable shares of the Common Stock as
is determined by dividing $.94999 by the Series B Conversion Price (as defined
below) applicable to such share and determined as hereinafter provided, in
effect on the date the certificate is surrendered for conversion. The price at
which shares of the Common Stock shall be deliverable upon conversion of shares
of the Series B Preferred Stock (the "Series B Conversion Price") shall
initially be $.94999 per share of the Common Stock. Such initial Series B
Conversion Price shall be adjusted as hereinafter provided.
(b) Automatic Conversion. Each share of Series B Preferred
Stock shall automatically be converted into shares of the Common Stock at the
then-effective Series B Conversion Price, upon the earlier of (i) the date
specified by vote, written consent or agreement of holders of not less than a
majority of the then outstanding shares of Series B Preferred Stock (as to
conversion of Series B Preferred Stock), and (ii) simultaneously with the
initial closing of (A) an underwritten, firm commitment public offering pursuant
to an effective registration under the Securities Act of 1933, as amended (the
"Act") covering the offer and sale by the Company of its Common Stock in which
the aggregate gross proceeds to the Company exceed Fifteen Million Dollars
($15,000,000) and in which the price per share to the public of such Common
Stock equals or exceeds $5.00 (such price subject to equitable adjustment in the
event of any stock split, stock dividend, combination, reorganization,
reclassification or other similar event involving the Common Stock which occurs
prior to such underwritten, firm commitment public offering), or (B) an offering
to the holders of the common stock of Safeguard Scientifics, Inc. ("SSI"),
pursuant to an effective registration statement, of rights to purchase from the
Company such number of shares of the Common Stock which equals up to 30% (as
determined by SSI) of the sum of (I) all issued shares of Common Stock; (II) all
shares of Common Stock reserved for issuance, and (III) all shares of Common
Stock subject to, but not reserved for, issuance pursuant to options, warrants
or other agreements, instruments or understandings, all as of the effective date
of the registration statement (either (iii)(A) or (B), respectively, shall mean
a "Qualified Public Offering").
<PAGE>
(c) Mechanics of Conversion.
(i) Before any holder of Series B Preferred Stock
shall be entitled to convert the same into shares of the Common Stock, he, she
or it shall surrender the certificate or certificates therefor, duly endorsed,
at the office of the Corporation or of any transfer agent for such stock, and
shall give written notice to the Corporation at such office that he, she or it
elects to convert the same and shall state therein the name or names in which he
wishes the certificate or certificates for shares of the Common Stock to be
issued. The Corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Series B Preferred Stock, a certificate
or certificates for the number of shares of the Common Stock to which he, she or
it shall be entitled as aforesaid. Such conversion shall be deemed to have been
made immediately prior to the close of business on the date of surrender of the
shares of Series B Preferred Stock to be converted, and the person or persons
entitled to receive the shares of the Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder or holders of such shares
of the Common Stock on such date.
(ii) If the conversion is in connection with an
underwritten offering of securities pursuant to the Securities Act, the
conversion may, at the option of any holder tendering shares of Series B
Preferred Stock for conversion, be conditioned upon the closing with the
underwriters of the sale of securities pursuant to such offering, in which event
the person(s) entitled to receive the Common Stock upon conversion of the Series
B Preferred Stock shall not be deemed to have converted such Preferred Stock
until immediately prior to the closing of such sale of securities.
(d) Adjustments to Series B Conversion Price for Certain
Diluting Issues.
(i) Special Definitions. For purposes of this Section
6(d), the following definitions apply:
(1) "Options" shall mean rights, options, or
warrants to subscribe for, purchase or otherwise acquire either Common Stock or
Convertible Securities (defined below).
(2) "Convertible Securities" shall mean any
evidences of indebtedness, shares (other than Common Stock or Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred
Stock) or other securities convertible into or exchangeable for Common Stock.
(3) "Additional Shares of Common Stock"
shall mean all shares of Common Stock issued (or, pursuant to Section 6(d)(iii),
deemed to be issued) by the Corporation after the Issue Date, other than shares
of Common Stock issued or issuable:
(A) upon conversion of shares of Series A
Preferred Stock;
(B) upon conversion of shares of Series B
Preferred Stock;
(C) upon conversion of shares of Series C
Preferred Stock;
(D) upon conversion of shares of Series C
Preferred Stock;
(E) to officers, directors or employees of,
or consultants to, or other permitted grantee of, the Corporation or any
subsidiary of the Corporation pursuant to stock option or stock purchase plans
or agreements on terms approved by the Board of Directors, but not exceeding
1,397,236 shares of the Common Stock (subject to equitable adjustment in the
event of any stock split, stock dividend, combination, reorganization,
reclassification or other similar event involving the Common Stock which occurs
after the date hereof and prior to the Qualified Public Offering);
(F) as a dividend or distribution on Series
A Preferred Stock, or as a dividend or distribution on Series B Preferred Stock,
Series C Preferred Stock or Series D Preferred Stock; (G) for which adjustment
of the Series B Conversion Price is made pursuant to Section 6(e); or
(H) upon exercise of any and all of the
70,000 Options issued to Progress Bank prior to the date these designations are
filed with the Secretary of State of Delaware and any Options issued to Progress
Bank or its affiliates pursuant to any transaction after the date these
designations are filed with the Secretary of State of Delaware pursuant to which
Progress Bank lends or makes available to the Corporation funds for working
capital purposes.
<PAGE>
(ii) No Adjustment of Conversion Price. Any provision
herein to the contrary notwithstanding, no adjustment in the Conversion Price
for Series B Preferred Stock shall be made in respect of the issuance of
Additional Shares of Common Stock unless the consideration per share (determined
pursuant to Section 6(d)(v) hereof) for an Additional Share of Common Stock
issued or deemed to be issued by the Corporation is less than the Series B
Conversion Price in effect on the date of, and immediately prior to such issue.
(iii) Deemed Issue of Additional Shares of Common
Stock. Except as set forth in 6(d)(i)(3) above, in the event the Corporation at
any time or from time to time after the Issue Date shall issue any Options or
Convertible Securities or shall fix a record date for the determination of
holders of any class of securities then entitled to receive any such Options or
Convertible Securities, then the maximum number of shares (as set forth in the
instrument relating thereto without regard to any provisions contained therein
designed to protect against dilution) of Common Stock issuable upon the exercise
of such Options or, in the case of Convertible Securities and Options therefor,
the conversion or exchange of such Convertible Securities, shall be deemed to be
Additional Shares of Common Stock issued as of the time of such issue or, in
case such a record date shall have been fixed, as of the close of business on
such record date, provided further that in any such case in which Additional
Shares of Common Stock are deemed to be issued:
(1) no further adjustments in the Series B
Conversion Price shall be made upon the subsequent issue of Convertible
Securities or shares of Common Stock upon the exercise of such Options or
conversion or exchange of such Convertible Securities;
(2) if such Options or Convertible
Securities by their terms provide, with the passage of time or otherwise, for
any increase in the consideration payable to the Corporation, or decrease in the
number of shares of Common Stock issuable, upon the exercise, conversion or
exchange thereof, the Series B Conversion Price computed upon the original issue
thereof (or upon the occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon any such increase or decrease
becoming effective, be recomputed to reflect such increase or decrease insofar
as it affects such Options or the rights of conversion or exchange under such
Convertible Securities (provided, however, that no such adjustment of the Series
B Conversion Price shall effect Common Stock previously issued upon conversion
of the Series B Preferred Stock); or
(3) no readjustment pursuant to clause (2)
above shall have the effect of increasing the Conversion Price of a series to an
amount which exceeds the lower of (a) the Conversion Price of such series on the
original adjustment date and (b) the Conversion Price of such series that would
have resulted from any issuance of Additional Shares of Common Stock between the
original adjustment date and such readjustment date.
(iv) Adjustment of Conversion Price Upon Issuance of
Additional Shares of Common Stock. In the event the Corporation, at any time
after the Issue Date shall issue Additional Shares of Common Stock (including
Additional Shares of Common Stock deemed to be issued pursuant to Section
6(d)(iii)) without consideration or for a consideration per share less than the
Series B Conversion Price on the date of and immediately prior to such issue,
then and in such event, except for adjustments governed by Section 6(e) below,
the Series B Conversion Price shall be reduced, concurrently with such issue, to
a price (calculated to the nearest cent) determined by multiplying such
Conversion Price by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to such issue plus the
number of shares of Common Stock which the aggregate consideration received by
the Corporation for the total number of Additional Shares of Common Stock so
issued would purchase at such Conversion Price in effect immediately prior to
such issuance, and the denominator of which shall be the number of shares of
Common Stock outstanding immediately prior to such issue plus the number of such
Additional Shares of Common Stock so issued. For the purpose of the above
calculation, the number of shares of Common Stock outstanding immediately prior
to such issue shall be calculated on a fully diluted basis, as if all shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and
Series D Preferred Stock and all Convertible Securities had been fully converted
into shares of Common Stock and any outstanding Options (whether vested or not
vested, exercisable or not exercisable) had been fully exercised (and the
resulting securities fully converted into shares of Common Stock, if so
convertible) as of such date.
(v) Determination of Consideration. For purposes of
this Section 6(d), the consideration received by the Corporation for the issue
of any Additional Shares of Common Stock shall be computed as follows:
<PAGE>
(1) Cash and Property: Such consideration
shall:
(A) insofar as it consists of cash, be
computed at the aggregate amount of cash received by the Corporation excluding
amounts paid or payable for accrued interest or accrued dividends;
(B) insofar as it consists of property other
than cash, be computed at the fair value thereof at the time of such issue, as
determined in good faith by the Board of Directors; and
(C) in the event Additional Shares of Common
Stock are issued together with other shares or securities or other assets of the
Corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (A) and (B) above, as
determined in good faith by the Board.
(2) Options and Convertible Securities. The
consideration per share received by the Corporation for Additional Shares of
Common Stock deemed to have been issued pursuant to Section 6(d)(iii), relating
to Options and Convertible Securities shall be determined by dividing:
(A) the total amount, if any, received or
receivable by the Corporation as consideration for the issue of such Options or
Convertible Securities, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without regard
to any provision contained therein designed to protect against dilution) payable
to the Corporation upon the exercise of such Options or the conversion or
exchange of such Convertible Securities, or in the case of Options for
Convertible Securities, the exercise of such Options for Convertible Securities
and the conversion or exchange of such Convertible Securities by
(B) the maximum number of shares of Common
Stock (as set forth in the instrument relating thereto, without regard to any
provision contained therein designed to protect against the dilution) issuable
upon the exercise of such Options or conversion or exchange of such Convertible
Securities.
(e) Adjustments to Conversion Prices for Stock Dividends and
for Combinations or Subdivisions of Common Stock. In the event that the
Corporation at any time or from time to time after the Issue Date shall declare
or pay, without consideration, any dividend on the Common Stock payable in
Common Stock or in any right to acquire Common Stock for no consideration, or
shall effect a subdivision of the outstanding shares of Common Stock into a
greater number of shares of Common Stock (by stock split, reclassification or
otherwise than by payment of a dividend in Common Stock or in any right to
acquire Common Stock), or in the event the outstanding shares of Common Stock
shall be combined or consolidated, by reclassification or otherwise, into a
lesser number of shares of Common Stock, then the Series B Conversion Price in
effect immediately prior to such event shall, concurrently with the
effectiveness of such event, be proportionately decreased or increased, as
appropriate. In the event that the Corporation shall declare or pay, without
consideration, any dividend on the Common Stock payable in any right to acquire
Common Stock for no consideration then the Corporation shall be deemed to have
made a dividend payable in Common Stock in an amount of shares equal to the
maximum number of shares issuable upon exercise of such rights to acquire Common
Stock.
(f) Adjustments for Reclassification and Reorganization. If
the Common Stock issuable upon conversion of the Series B Preferred Stock shall
be changed into the same or a different number of shares of any other class or
classes of stock, whether by capital reorganization, reclassification or
otherwise (other than a subdivision or combination of shares provided for in
Section 6(e) above or a merger or other reorganization referred to in Section
2(c) above), the Series B Conversion Price then in effect shall, concurrently
with the effectiveness of such reorganization or reclassification, be
proportionately adjusted so that the Series B Preferred Stock shall be
convertible into, in lieu of the number of shares of the Common Stock which the
holders would otherwise have been entitled to receive, a number of shares of
such other class or classes of stock equivalent to the number of shares of the
Common Stock that would have been subject to receipt by the holders upon
conversion of Series B Preferred Stock immediately before that change.
(g) No Impairment. Without the vote or written consent of the
holders of a majority of the Series B Preferred Stock, voting or acting together
as a single class, the Corporation will not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Corporation, but will at all times in
good faith assist in the carrying out of all the provisions of this Section 6
and in the taking of all such action as may be necessary or appropriate in order
to protect the Conversion Rights of the holders of the Series B Preferred Stock
against impairment.
<PAGE>
(h) Certificates as to Adjustments. Upon the occurrence of
each adjustment or readjustment of any Conversion Price pursuant to this Section
6, the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of Series B Preferred Stock a certificate executed by the Corporation's
President or Chief Financial Officer setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series B Preferred Stock, furnish or cause to be furnished
to such holder a like certificate setting forth (i) such adjustments and
readjustments, (ii) the Series B Conversion Price at the time in effect, and
(iii) the number of shares of the Common Stock and the amount, if any, of other
property which at the time would be received upon the conversion of the Series B
Preferred Stock.
(i) Issue Taxes. The Corporation shall pay any and all issue
and other taxes that may be payable in respect of any issue or delivery of
shares of Common Stock on conversion of shares of Series B Preferred Stock
pursuant hereto; provided, however, that the Corporation shall not be obligated
to pay any transfer taxes resulting from any transfer requested by any holder in
connection with any such conversion
(j) Reservation of Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of the Common Stock, solely for the purpose of effecting the
conversion of the shares of Series B Preferred Stock, such number of its shares
of the Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of Series B Preferred Stock; and if at any
time the number of authorized but unissued shares of the Common Stock shall not
be sufficient to effect the conversion of all then outstanding shares of Series
B Preferred Stock, the Corporation will take such corporate action as may, in
the opinion of its counsel, be necessary to increase its authorized but unissued
shares of the Common Stock to such number of shares as shall be sufficient for
such purpose, including, without limitation, engaging in best efforts to obtain
the requisite stockholder approval of any necessary amendment to this
Certificate.
(k) Fractional Shares. No fractional share shall be issued
upon the conversion of any share or shares of Series B Preferred Stock. All
shares of the Common Stock (including fractions thereof) issuable upon
conversion of more than one share of Series B Preferred Stock by a holder
thereof shall be aggregated for purposes of determining whether the conversion
would result in the issuance of any fractional share. If, after the
aforementioned aggregation, the conversion would result in the issuance of a
fraction of a share of the Common Stock, the Corporation shall, in lieu of
issuing any fractional share, pay the holder otherwise entitled to such fraction
a sum in cash equal to the fair market value of such fraction on the date of
conversion (as determined in good faith by the Board of Directors).
(l) Notices. Any notice required by the provisions of this
Section 6 to be given to the holders of shares of Series B Preferred Stock shall
be deemed given if deposited in the United States mail, postage prepaid, and
addressed to each holder of record at his address appearing on the books of the
Corporation.
7. Preemptive Rights.
(a) Right To Maintain Proportionate Share Ownership. The
holders of outstanding shares of Series B Preferred Stock shall have the right
to subscribe to any or all (i) issuances of shares of capital stock of the
Corporation, (ii) issuances of securities convertible into shares of capital
stock of the Corporation (other than Options to Progress Bank or an affiliate
thereof as contemplated in Section 6(d)(i)(3)(H)), or (iii) grants of options to
purchase shares of capital stock of the Corporation, including, but not limited
to any warrants issued by the Corporation (other than option grants referred to
in Section 6(d)(i)(3)(E) above) on the same terms of such offerings to the
extent equal to the proportion which the number of shares of Series B Preferred
Stock (on an as-converted basis) held by such holders bears to the Corporation's
fully-diluted capitalization (on an as-converted and as-exercised basis). Such
right is exercisable within ten (10) days after the receipt of written notice
relating to such issuances by the holders of the Series B Preferred Stock. Each
holder of Series B Preferred Stock shall have the right to purchase that
percentage of such issuances available for purchase by all of the holders of
Series B Preferred Stock equal to such holder's percentage of all Series B
Preferred Stock issued and outstanding at such time. The right of holders of the
Series B Preferred Stock to purchase new issues of shares or convertible
securities or options does not extend to shares or securities issued solely in
exchange for property (including securities) other than cash, including any such
shares, convertible securities or options issued in connection with any merger
or reorganization (primarily intended to acquire property or business),
equipment lease or debt financing.
<PAGE>
(b) Oversubscription Privilege. In addition to the right to
purchase his, her or its pro rata proportion of the new issue of shares,
convertible securities or options as set forth in 7(a) above, each holder of the
Series B Preferred Stock who has subscribed for the entire number of shares or
units initially allocable to him shall have the additional right to subscribe to
his, her or its proportionate part of any shares or units which have not been
subscribed for by other holders of the Series B Preferred Stock. In case the
total number of shares or units desired to be purchased by holders of the Series
B Preferred Stock exercising this right of oversubscription exceeds the total
number of shares or other units which have not been initially subscribed for by
other holders of the Series B Preferred Stock and are thus available for
purchase, each holder of the Series B Preferred Stock exercising this right of
oversubscription shall be entitled to purchase that percentage of the shares or
units not initially subscribed by the holders of Series B Preferred Stock equal
to the number of shares subscribed by such holder over the total number of
shares for which subscriptions from holders of Series B Preferred Stock have
been received. This procedure shall be repeated, if necessary, until all of the
shares or units not initially subscribed have been allocated. The preemptive
rights held by the holders of the Series B Preferred Stock pursuant to this
Section 7 shall terminate immediately prior to the closing of a Qualified
Initial Public Offering.
8. No Reissuance of the Series B Preferred Stock. No share or shares of
the Series B Preferred Stock acquired by the Corporation by reason of
redemption, purchase, conversion or otherwise shall be reissued as part of that
series. The authorized number of shares of that series shall be automatically
reduced by the number of shares reacquired, and the Board of Directors of the
Corporation shall return those shares to the status of authorized but
undesignated shares of Preferred Stock. The Corporation may from time to time
take such appropriate corporate action as may be necessary to reduce the
authorized number of shares of Series B Preferred Stock accordingly.
<PAGE>
DESIGNATION AND DESCRIPTION
OF
SERIES C PREFERRED STOCK
OF
U.S. INTERACTIVE, INC.,
a Delaware corporation
1. Designation and Amount. The shares of the series of Preferred Stock
hereby established shall be designated as "Series C Preferred Stock" and the
number of shares constituting such series shall be 595,706. As used herein, the
term "Preferred Stock" used without reference to the Series C Preferred Stock
means the shares of Preferred Stock, without distinction as to series, except as
otherwise expressly provided for herein, or as the context otherwise requires.
2. Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, the holders of the Series
C Preferred Stock shall be entitled to receive, prior and in preference to any
distribution of any of the assets or surplus funds of the Corporation to the
holders of the Common Stock ("Common Stock") by reason of their ownership
thereof, the amount of $1.67868 per share (as adjusted for any stock dividends,
combinations or splits with respect to such shares) (the "Series C Purchase
Price") plus all accrued or declared but unpaid dividends on such share for each
share of Series C Preferred Stock then held (the "Series C Preferential
Amount"). The holders of the Series C Preferred Stock shall receive the Series C
Preferential Amount pari passu with the amounts due to holders of Series A
Preferred Stock, holders of Series B Preferred Stock and holders of Series D
Preferred Stock under the Designation and Description of Series A Preferred
Stock, the Designation and Description of Series B Preferred Stock and the
Designation and Description of Series D Preferred Stock. Notwithstanding the
foregoing, if in any liquidation, dissolution or winding up of the Corporation,
the rate of return on the Series C Preferred Stock is less than 10% per year on
the Series C Purchase Price (computed as simple interest from July 2, 1998 (the
"Issue Date")), then the holders of the Series C Preferred Stock shall be
entitled to receive, following payment of the Series C Preferential Amount, an
additional amount which operates to provide to the holders of the Series C
Preferred a rate of return on the shares of Series C Preferred Stock of 10% per
year on the Series C Purchase Price (computed as simple interest from the Issue
Date and as adjusted for any stock dividends, combinations, or splits with
respect to such shares). If upon the occurrence of such event, the assets and
funds thus distributed among the holders of the Series A Preferred Stock, the
Series B Preferred Stock, the Series C Preferred Stock and the Series D
Preferred Stock shall be insufficient to permit the payment to such holders of
the fully aforesaid preferential amount, then the entire assets and funds of the
Corporation legally available for distribution shall be distributed ratably to
the holders of the Series A Preferred Stock, the Series B Preferred Stock, the
Series C Preferred Stock and the Series D Preferred Stock in proportion to the
preferential amount each such holder is otherwise entitled to receive.
(b) In the event of any liquidation, dissolution or winding up
of the Corporation, either voluntary or involuntary, and subject to the payment
in full of the liquidation preference with respect to the Series A Preferred
Stock, the Series B Preferred Stock, the Series C Preferred Stock and the Series
D Preferred Stock as provided in subparagraph (a) of this Section 2, and subject
to the rights of any series of Preferred Stock pursuant to a Designation and
Description creating such series, the holders of the Common Stock shall be
entitled to receive the entire remaining assets and funds of the Corporation
legally available for distribution, to be distributed among the holders of the
Common Stock in proportion to the shares of Common Stock then held by them.
(c) For purposes of this Section 2, (i) any acquisition of the
Corporation by means of merger or other form of corporate reorganization in
which outstanding shares of the Corporation are exchanged for less than fifty
percent (50%) of the outstanding voting shares issued, or caused to be issued,
by the acquiring corporation or its subsidiary (other than a mere incorporation
transaction, including without limitation, a transaction pursuant to which the
Corporation merges into a commonly-controlled corporation organized under the
laws of the State of Delaware) or (ii) a sale of all or substantially all of the
assets of the Corporation, shall be treated as a liquidation, dissolution or
winding up of the Corporation and shall entitle the holders of the Series A
Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock and
the Series D Preferred Stock to receive at the closing in cash, securities or
other property (valued as provided in Section 2(d) below) amounts as specified
in Section 2(a) above.
(d) Whenever the distribution provided for in this Section 2
shall be payable in securities or property other than cash, the value of such
distribution shall be the fair market value of such securities or other property
as determined in good faith by the Board of Directors.
<PAGE>
3. Redemption.
(a) On the fifth anniversary of the Issue Date, upon the one
time election of each of the holders of the shares of Series C Preferred Stock
outstanding as of the date of such election, the Corporation shall redeem, from
any source of funds to the extent legally available therefor, all but not less
than all of the shares of the Series C Preferred Stock held by such shareholder
as of the date of such election; provided, however, that if the holders of
greater than 50% of the then outstanding Series C Preferred Stock elect to
require the Corporation to redeem greater than 50% of the then outstanding
shares of the Series C Preferred Stock, the Corporation may elect to redeem all
but not less than all of the then outstanding shares of Series C Preferred
Stock; provided, further, that, except as provided in Section 3(c) below, such
redemption shall be effected no later than sixty (60) days after receipt by the
Corporation of such notice of election (the "Series C Redemption Date"). The
Corporation shall effect such redemption on the Series C Redemption Date by
paying in cash in exchange for the shares of Series C Preferred Stock to be
redeemed a sum equal to $1.67868 per share of Series C Preferred Stock (as
adjusted for any stock dividends, combinations or splits with respect to such
shares) plus a per annum return of 10% (computed as simple interest from the
Issue Date) (the "Series C Redemption Price").
(b) No later than thirty (30) days after receipt by the
Corporation of the notice of election described in Section 3(a) above, written
notice shall be mailed, first class postage prepaid, to each holder of record
(at the close of business on the business day next preceding the day on which
notice is given) of the Series C Preferred Stock to be redeemed, at the address
last shown on the records of the Corporation for such holder, notifying such
holder of the redemption to be effected, specifying the number of shares to be
redeemed from such holder, the Series C Redemption Date, the Series C Redemption
Price, the place at which payment may be obtained and calling upon such holder
to surrender to the Corporation, in the manner and at the place designated, his,
her or its certificate or certificates representing the shares to be redeemed
(the "Series C Redemption Notice"). Except as provided in Section 3(c), on or
after the Series C Redemption Date, each holder of Series C Preferred Stock to
be redeemed shall surrender to the Corporation the certificate or certificates
representing such shares, in the manner and at the place designated in the
Redemption Notice, and thereupon the Series C Redemption Price of such shares
shall be payable to the order of the person whose name appears on such
certificate or certificates as the owner thereof and each surrendered
certificate shall be canceled. In the event less than all the shares represented
by any such certificate are redeemed, a new certificate shall be issued
representing the unredeemed shares.
(c) From and after the Series C Redemption Date, unless there
shall have been a default in payment of the Series C Redemption Price, all
rights of the holders of shares of Series C Preferred Stock designated for
redemption in the Redemption Notice as holders of Series C Preferred Stock
(except the right to receive the Series C Redemption Price without interest upon
surrender of their certificate or certificates) shall cease with respect to such
shares, and such shares shall not thereafter be transferred on the books of the
Corporation or be deemed to be outstanding for any purpose whatsoever. If the
funds of the Corporation legally available for redemption of shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock, on any Series C Redemption Date are insufficient to redeem the
total number of shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock and Series D Preferred Stock to be redeemed on such
date, those funds which are legally available will be used to redeem the maximum
possible number of such shares ratably among the holders of such shares to be
redeemed based upon the Series C Redemption Price and the redemption prices for
the Series A Preferred Stock, the Series B Preferred Stock and the Series D
Preferred Stock. The shares of Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock and Series D Preferred Stock not redeemed shall
remain outstanding and entitled to all the rights and preferences provided
herein. At any time thereafter when additional funds of the Corporation are
legally available for the redemption of shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock
such funds will immediately be used to redeem on the same basis the balance of
the shares which the Corporation has become obliged to redeem on any Series C
Redemption Date and redemption date for the Series A Preferred Stock, Series B
Preferred Stock and Series D Preferred Stock, but which it has not redeemed.
<PAGE>
4. Voting Rights.
(a) Each holder of shares of the Preferred Stock shall be
entitled to the number of votes equal to the number of shares of Common Stock
into which such shares of the Preferred Stock could be converted and shall have
voting rights and powers equal to the voting rights and powers of the Common
Stock (except as otherwise expressly provided in the Amended and Restated
Stockholder's Agreement, as amended from time to time, executed by the holders
of the Series C Preferred Stock, the Corporation, and the holders of Common
Stock and of Series A Preferred Stock, Series B Preferred Stock and Series D
Preferred Stock on the date this Amended and Restated Certificate of
Incorporation is filed with the Secretary of State of the State of Delaware, or
in any Certificate of Designation for the Series C Preferred Stock hereafter
filed, or as required by law), voting together with the Common Stock as a single
class, and shall be entitled to notice of any shareholders' meeting in
accordance with the Bylaws of the Corporation. Fractional voting shall not,
however, be permitted and any fractional votes resulting from the above formula
(after aggregating all shares into which shares of the Preferred Stock held by
each holder could be converted) shall be rounded to the nearest whole number
(with one-half being rounded upward).
5. Restrictions and Limitations.
(a) So long as any shares of Series C Preferred Stock remain
outstanding, the Corporation shall not, without the vote or written consent by
the holders of at least a majority of the then outstanding shares of the Series
C Preferred Stock, voting or acting together as a single class, take any action
which:
(i) materially alters or changes the rights,
preferences or privileges of the Series C Preferred Stock as a class;
(ii) authorizes or issues any additional shares of
Series C Preferred Stock;
(iii) except as set forth in (xii) below creates any
new class or series of Preferred Stock having rights, preferences or privileges
senior to or on parity with the Series C Preferred Stock;
(iv) approves any merger of the Corporation, sale of
all or substantially all of the assets of the Corporation, or other corporate
reorganization or acquisition other than with or to a wholly-owned subsidiary of
the Corporation; (v) approves the purchase, redemption or other acquisition of
any of the Series C Preferred Stock except as specifically provided for in
Section 3;
(vi) approves the purchase, redemption or other
acquisition of any common stock of the Corporation, other than repurchases
pursuant to stock restriction agreements that grant to the Corporation a right
of repurchase upon termination of the service or employment of any consultant,
director, officer or employee;
(vii) authorizes the payment of a cash dividend to
any holders of any class or series of capital stock of the Corporation other
than in the ordinary course of the Corporation's business;
(viii) amends or repeals the Corporation's Amended
and Restated Certificate of Incorporation or Amended and Restated Bylaws;
(ix) permits any subsidiary of the Corporation to
issue or sell or obligate itself to issue or sell, except to the Corporation or
a wholly-owned subsidiary of the Corporation, any securities of such subsidiary;
(x) approves the liquidation, dissolution or winding
up of the Corporation;
(xi) authorizes any material transaction or series of
transactions between the Corporation and any officer, director, shareholder or
affiliate thereof (defined as any person or entity controlling, controlled by or
under common control with such person) or any individual related by blood,
marriage or adoption to any such person or any entity in which such person owns
a significant beneficial interest except for material transactions which are at
arms-length as determined by a majority vote of the Board of Directors;
(xii) involves any transaction, other than joint
ventures or similar transactions conducted in the ordinary course of the
Corporation's business, pursuant to which equity securities having rights,
preferences or privileges senior to or on parity with the Series C Preferred
Stock are issued by the Corporation;
<PAGE>
6. Conversion. The holder of the Series C Preferred Stock shall have
conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Series C Preferred Stock
shall be convertible, at the option of the holder thereof, at any time after the
date of issuance of such share by delivery of the certificate representing such
share to the office of the Corporation or the transfer agent for such stock,
into such number of fully paid and nonassessable shares of the Common Stock as
is determined by dividing $1.67868 by the Series C Conversion Price (as defined
below) applicable to such share and determined as hereinafter provided, in
effect on the date the certificate is surrendered for conversion. The price at
which shares of the Common Stock shall be deliverable upon conversion of shares
of the Series C Preferred Stock (the "Series C Conversion Price") shall
initially be $1.67868 per share of the Common Stock. Such initial Series C
Conversion Price shall be adjusted as hereinafter provided.
(b) Automatic Conversion. Each share of Series C Preferred
Stock shall automatically be converted into shares of the Common Stock at the
then-effective Series C Conversion Price, upon the earlier of (i) the date
specified by vote, written consent or agreement of holders of not less than a
majority of the then outstanding shares of Series C Preferred Stock (as to
conversion of Series C Preferred Stock), and (ii) simultaneously with the
initial closing of (A) an underwritten, firm commitment public offering pursuant
to an effective registration under the Securities Act of 1933, as amended (the
"Act") covering the offer and sale by the Company of its Common Stock in which
the aggregate gross proceeds to the Company exceed Fifteen Million Dollars
($15,000,000) and in which the price per share to the public of such Common
Stock equals or exceeds $5.00 (such price subject to equitable adjustment in the
event of any stock split, stock dividend, combination, reorganization,
reclassification or other similar event involving the Common Stock which occurs
prior to such underwritten, firm commitment public offering), or (B) an offering
to the holders of the common stock of Safeguard Scientifics, Inc. ("SSI"),
pursuant to an effective registration statement, of rights to purchase from the
Company such number of shares of the Common Stock which equals up to 30% (as
determined by SSI) of the sum of (I) all issued shares of Common Stock; (II) all
shares of Common Stock reserved for issuance, and (III) all shares of Common
Stock subject to, but not reserved for, issuance pursuant to options, warrants
or other agreements, instruments or understandings, all as of the effective date
of the registration statement (either (iii)(A) or (B), respectively, shall mean
a "Qualified Public Offering")
(c) Mechanics of Conversion.
(i) Before any holder of Series C Preferred Stock
shall be entitled to convert the same into shares of the Common Stock, he, she
or it shall surrender the certificate or certificates therefor, duly endorsed,
at the office of the Corporation or of any transfer agent for such stock, and
shall give written notice to the Corporation at such office that he, she or it
elects to convert the same and shall state therein the name or names in which he
wishes the certificate or certificates for shares of the Common Stock to be
issued. The Corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Series C Preferred Stock, a certificate
or certificates for the number of shares of the Common Stock to which he, she or
it shall be entitled as aforesaid. Such conversion shall be deemed to have been
made immediately prior to the close of business on the date of surrender of the
shares of Series C Preferred Stock to be converted, and the person or persons
entitled to receive the shares of the Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder or holders of such shares
of the Common Stock on such date.
(ii) If the conversion is in connection with an
underwritten offering of securities pursuant to the Securities Act, the
conversion may, at the option of any holder tendering shares of Series C
Preferred Stock for conversion, be conditioned upon the closing with the
underwriters of the sale of securities pursuant to such offering, in which event
the person(s) entitled to receive the Common Stock upon conversion of the Series
C Preferred Stock shall not be deemed to have converted such Preferred Stock
until immediately prior to the closing of such sale of securities.
(d) Adjustments to Series C Conversion Price for Certain
Diluting Issues.
<PAGE>
(i) Special Definitions. For purposes of this Section
6(d), the following definitions apply:
(1) "Options" shall mean rights, options, or
warrants to subscribe for, purchase or otherwise acquire either Common Stock or
Convertible Securities (defined below).
(2) "Convertible Securities" shall mean any
evidences of indebtedness, shares (other than Common Stock or Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred
Stock) or other securities convertible into or exchangeable for Common Stock.
(3) "Additional Shares of Common Stock"
shall mean all shares of Common Stock issued (or, pursuant to Section 6(d)(iii),
deemed to be issued) by the Corporation after the Issue Date, other than shares
of Common Stock issued or issuable:
(A) upon conversion of shares of Series A
Preferred Stock;
(B) upon conversion of shares of Series B
Preferred Stock;
(C) upon conversion of shares of Series C
Preferred Stock;
(D) upon conversion of shares of Series D
Preferred Stock;
(E) to officers, directors or employees of,
or consultants to, or other permitted grantee of, the Corporation or any
subsidiary of the Corporation pursuant to stock option or stock purchase plans
or agreements on terms approved by the Board of Directors, but not exceeding
1,397,236 shares of the Common Stock (subject to equitable adjustment in the
event of any stock split, stock dividend, combination, reorganization,
reclassification or other similar event involving the Common Stock which occurs
after the date hereof and prior to the Qualified Public offering);
(F) as a dividend or distribution on Series
A Preferred Stock, or as a dividend or distribution on Series B Preferred Stock
or Series C Preferred Stock;
(G) for which adjustment of the Series C
Conversion Price is made pursuant to Section 6(e); or
(H) upon exercise of any and all of the
70,000 Options issued to Progress Bank prior to the date these designations are
filed with the Secretary of State of Delaware and any Options issued to Progress
Bank or its affiliates pursuant to any transaction after the date these
designations are filed with the Secretary of State of Delaware pursuant to which
Progress Bank lends or makes available to the Corporation funds for working
capital purposes.
(ii) No Adjustment of Conversion Price. Any provision
herein to the contrary notwithstanding, no adjustment in the Conversion Price
for Series C Preferred Stock shall be made in respect of the issuance of
Additional Shares of Common Stock unless the consideration per share (determined
pursuant to Section 6(d)(v) hereof) for an Additional Share of Common Stock
issued or deemed to be issued by the Corporation is less than the Series C
Conversion Price in effect on the date of, and immediately prior to such issue.
(iii) Deemed Issue of Additional Shares of Common
Stock. Except as set forth in 6(d)(i)(3) above, in the event the Corporation at
any time or from time to time after the Issue Date shall issue any Options or
Convertible Securities or shall fix a record date for the determination of
holders of any class of securities then entitled to receive any such Options or
Convertible Securities, then the maximum number of shares (as set forth in the
instrument relating thereto without regard to any provisions contained therein
designed to protect against dilution) of Common Stock issuable upon the exercise
of such Options or, in the case of Convertible Securities and Options therefor,
the conversion or exchange of such Convertible Securities, shall be deemed to be
Additional Shares of Common Stock issued as of the time of such issue or, in
case such a record date shall have been fixed, as of the close of business on
such record date, provided further that in any such case in which Additional
Shares of Common Stock are deemed to be issued:
<PAGE>
(1) no further adjustments in the Series C
Conversion Price shall be made upon the subsequent issue of Convertible
Securities or shares of Common Stock upon the exercise of such Options or
conversion or exchange of such Convertible Securities;
(2) if such Options or Convertible
Securities by their terms provide, with the passage of time or otherwise, for
any increase in the consideration payable to the Corporation, or decrease in the
number of shares of Common Stock issuable, upon the exercise, conversion or
exchange thereof, the Series C Conversion Price computed upon the original issue
thereof (or upon the occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon any such increase or decrease
becoming effective, be recomputed to reflect such increase or decrease insofar
as it affects such Options or the rights of conversion or exchange under such
Convertible Securities (provided, however, that no such adjustment of the Series
C Conversion Price shall effect Common Stock previously issued upon conversion
of the Series C Preferred Stock); or
(3) no readjustment pursuant to clause (2)
above shall have the effect of increasing the Conversion Price of a series to an
amount which exceeds the lower of (a) the Conversion Price of such series on the
original adjustment date and (b) the Conversion Price of such series that would
have resulted from any issuance of Additional Shares of Common Stock between the
original adjustment date and such readjustment date.
(iv) Adjustment of Conversion Price Upon Issuance of
Additional Shares of Common Stock. In the event the Corporation, at any time
after the Issue Date shall issue Additional Shares of Common Stock (including
Additional Shares of Common Stock deemed to be issued pursuant to Section
6(d)(iii)) without consideration or for a consideration per share less than the
Series C Conversion Price on the date of and immediately prior to such issue,
then and in such event, except for adjustments governed by Section 6(e) below,
the Series C Conversion Price shall be reduced, concurrently with such issue, to
a price (calculated to the nearest cent) determined by multiplying such
Conversion Price by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to such issue plus the
number of shares of Common Stock which the aggregate consideration received by
the Corporation for the total number of Additional Shares of Common Stock so
issued would purchase at such Conversion Price in effect immediately prior to
such issuance, and the denominator of which shall be the number of shares of
Common Stock outstanding immediately prior to such issue plus the number of such
Additional Shares of Common Stock so issued. For the purpose of the above
calculation, the number of shares of Common Stock outstanding immediately prior
to such issue shall be calculated on a fully diluted basis, as if all shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and
Series D Preferred Stock and all Convertible Securities had been fully converted
into shares of Common Stock and any outstanding Options (whether vested or not
vested, exercisable or not exercisable) had been fully exercised (and the
resulting securities fully converted into shares of Common Stock, if so
convertible) as of such date.
<PAGE>
(v) Determination of Consideration. For purposes of
this Section 6(d), the consideration received by the Corporation for the issue
of any Additional Shares of Common Stock shall be computed as follows:
(1) Cash and Property: Such consideration
shall:
(A) insofar as it consists of cash, be
computed at the aggregate amount of cash received by the Corporation excluding
amounts paid or payable for accrued interest or accrued dividends;
(B) insofar as it consists of property
other than cash, be computed at the fair value thereof at the time of such
issue, as determined in good faith by the Board of Directors; and
(C) in the event Additional Shares of
Common Stock are issued together with other shares or securities or other assets
of the Corporation for consideration which covers both, be the proportion of
such consideration so received, computed as provided in clauses (A) and (B)
above, as determined in good faith by the Board.
(2) Options and Convertible Securities. The
consideration per share received by the Corporation for Additional Shares of
Common Stock deemed to have been issued pursuant to Section 6(d)(iii), relating
to Options and Convertible Securities shall be determined by dividing:
(A) the total amount, if any, received or
receivable by the Corporation as consideration for the issue of such Options or
Convertible Securities, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without regard
to any provision contained therein designed to protect against dilution) payable
to the Corporation upon the exercise of such Options or the conversion or
exchange of such Convertible Securities, or in the case of Options for
Convertible Securities, the exercise of such Options for Convertible Securities
and the conversion or exchange of such Convertible Securities by (B) the maximum
number of shares of Common Stock (as set forth in the instrument relating
thereto, without regard to any provision contained therein designed to protect
against the dilution) issuable upon the exercise of such Options or conversion
or exchange of such Convertible Securities.
(e) Adjustments to Conversion Prices for Stock Dividends and
for Combinations or Subdivisions of Common Stock. In the event that the
Corporation at any time or from time to time after the Issue Date shall declare
or pay, without consideration, any dividend on the Common Stock payable in
Common Stock or in any right to acquire Common Stock for no consideration, or
shall effect a subdivision of the outstanding shares of Common Stock into a
greater number of shares of Common Stock (by stock split, reclassification or
otherwise than by payment of a dividend in Common Stock or in any right to
acquire Common Stock), or in the event the outstanding shares of Common Stock
shall be combined or consolidated, by reclassification or otherwise, into a
lesser number of shares of Common Stock, then the Series C Conversion Price in
effect immediately prior to such event shall, concurrently with the
effectiveness of such event, be proportionately decreased or increased, as
appropriate. In the event that the Corporation shall declare or pay, without
consideration, any dividend on the Common Stock payable in any right to acquire
Common Stock for no consideration then the Corporation shall be deemed to have
made a dividend payable in Common Stock in an amount of shares equal to the
maximum number of shares issuable upon exercise of such rights to acquire Common
Stock.
<PAGE>
(f) Adjustments for Reclassification and Reorganization. If
the Common Stock issuable upon conversion of the Series C Preferred Stock shall
be changed into the same or a different number of shares of any other class or
classes of stock, whether by capital reorganization, reclassification or
otherwise (other than a subdivision or combination of shares provided for in
Section 6(e) above or a merger or other reorganization referred to in Section
2(c) above), the Series C Conversion Price then in effect shall, concurrently
with the effectiveness of such reorganization or reclassification, be
proportionately adjusted so that the Series C Preferred Stock shall be
convertible into, in lieu of the number of shares of the Common Stock which the
holders would otherwise have been entitled to receive, a number of shares of
such other class or classes of stock equivalent to the number of shares of the
Common Stock that would have been subject to receipt by the holders upon
conversion of Series C Preferred Stock immediately before that change.
(g) No Impairment. Without the vote or written consent of the
holders of a majority of the Series C Preferred Stock, voting or acting together
as a single class, the Corporation will not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Corporation, but will at all times in
good faith assist in the carrying out of all the provisions of this Section 6
and in the taking of all such action as may be necessary or appropriate in order
to protect the Conversion Rights of the holders of the Series C Preferred Stock
against impairment.
(h) Certificates as to Adjustments. Upon the occurrence of
each adjustment or readjustment of any Conversion Price pursuant to this Section
6, the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of Series C Preferred Stock a certificate executed by the Corporation's
President or Chief Financial Officer setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series C Preferred Stock, furnish or cause to be furnished
to such holder a like certificate setting forth (i) such adjustments and
readjustments, (ii) the Series C Conversion Price at the time in effect, and
(iii) the number of shares of the Common Stock and the amount, if any, of other
property which at the time would be received upon the conversion of the Series C
Preferred Stock.
(i) Issue Taxes. The Corporation shall pay any and all issue
and other taxes that may be payable in respect of any issue or delivery of
shares of Common Stock on conversion of shares of Series C Preferred Stock
pursuant hereto; provided, however, that the Corporation shall not be obligated
to pay any transfer taxes resulting from any transfer requested by any holder in
connection with any such conversion
(j) Reservation of Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of the Common Stock, solely for the purpose of effecting the
conversion of the shares of Series C Preferred Stock, such number of its shares
of the Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of Series C Preferred Stock; and if at any
time the number of authorized but unissued shares of the Common Stock shall not
be sufficient to effect the conversion of all then outstanding shares of Series
C Preferred Stock, the Corporation will take such corporate action as may, in
the opinion of its counsel, be necessary to increase its authorized but unissued
shares of the Common Stock to such number of shares as shall be sufficient for
such purpose, including, without limitation, engaging in best efforts to obtain
the requisite stockholder approval of any necessary amendment to this
Certificate.
(k) Fractional Shares. No fractional share shall be issued
upon the conversion of any share or shares of Series C Preferred Stock. All
shares of the Common Stock (including fractions thereof) issuable upon
conversion of more than one share of Series C Preferred Stock by a holder
thereof shall be aggregated for purposes of determining whether the conversion
would result in the issuance of any fractional share. If, after the
aforementioned aggregation, the conversion would result in the issuance of a
fraction of a share of the Common Stock, the Corporation shall, in lieu of
issuing any fractional share, pay the holder otherwise entitled to such fraction
a sum in cash equal to the fair market value of such fraction on the date of
conversion (as determined in good faith by the Board of Directors).
(l) Notices. Any notice required by the provisions of this
Section 7 to be given to the holders of shares of Series C Preferred Stock shall
be deemed given if deposited in the United States mail, postage prepaid, and
addressed to each holder of record at his address appearing on the books of the
Corporation.
<PAGE>
7. Preemptive Rights.
(a) Right To Maintain Proportionate Share Ownership. The
holders of outstanding shares of Series C Preferred Stock shall have the right
to subscribe to any or all (i) issuances of shares of capital stock of the
Corporation, (ii) issuances of securities convertible into shares of capital
stock of the Corporation (other than options to Progress Bank or an affiliate
thereof as contemplated in Section 6(d)(i)(3)(H)), or (iii) grants of options to
purchase shares of capital stock of the Corporation including, but not limited
to any warrants issued by the Corporation (other than option grants referred to
in Section 6(d)(i)(3)(E) above) on the same terms of such offerings to the
extent equal to the proportion which the number of shares of Series C Preferred
Stock (on an as-converted basis) held by such holders bears to the Corporation's
fully-diluted capitalization (on an as-converted and as-exercised basis). Such
right is exercisable within ten (10) days after the receipt of written notice
relating to such issuances by the holders of the Series C Preferred Stock. Each
holder of Series C Preferred Stock shall have the right to purchase that
percentage of such issuances available for purchase by all of the holders of
Series C Preferred Stock equal to such holder's percentage of all Series C
Preferred Stock issued and outstanding at such time. The right of holders of the
Series C Preferred Stock to purchase new issues of shares or convertible
securities or options does not extend to shares or securities issued solely in
exchange for property (including securities) other than cash, including any such
shares, convertible securities or options issued in connection with any merger
or reorganization (primarily intended to acquire property or business),
equipment lease or debt financing.
(b) Oversubscription Privilege. In addition to the right to
purchase his, her or its pro rata proportion of the new issue of shares,
convertible securities or options as set forth in 7(a) above, each holder of the
Series C Preferred Stock who has subscribed for the entire number of shares or
units initially allocable to him shall have the additional right to subscribe to
his, her or its proportionate part of any shares or units which have not been
subscribed for by other holders of the Series C Preferred Stock. In case the
total number of shares or units desired to be purchased by holders of the Series
C Preferred Stock exercising this right of oversubscription exceeds the total
number of shares or other units which have not been initially subscribed for by
other holders of the Series C Preferred Stock and are thus available for
purchase, each holder of the Series C Preferred Stock exercising this right of
oversubscription shall be entitled to purchase that percentage of the shares or
units not initially subscribed by the holders of Series C Preferred Stock equal
to the number of shares subscribed by such holder over the total number of
shares for which subscriptions from holders of Series C Preferred Stock have
been received. This procedure shall be repeated, if necessary, until all of the
shares or units not initially subscribed have been allocated. The preemptive
rights held by the holders of the Series C Preferred Stock pursuant to this
Section 7 shall terminate immediately prior to the closing of a Qualified Public
Offering.
8. No Reissuance of the Series C Preferred Stock. No share or shares of
the Series C Preferred Stock acquired by the Corporation by reason of
redemption, purchase, conversion or otherwise shall be reissued as part of that
series. The authorized number of shares of that series shall be automatically
reduced by the number of shares reacquired, and the Board of Directors of the
Corporation shall return those shares to the status of authorized but
undesignated shares of Preferred Stock. The Corporation may from time to time
take such appropriate corporate action as may be necessary to reduce the
authorized number of shares of Series C Preferred Stock accordingly.
<PAGE>
DESIGNATION AND DESCRIPTION
OF
SERIES D PREFERRED STOCK
OF
U.S. INTERACTIVE, INC.,
a Delaware corporation
1. Designation and Amount. The shares of the series of Preferred Stock
hereby established shall be designated as "Series D Preferred Stock" and the
number of shares constituting such series shall be 2,339,628. As used herein,
the term "Preferred Stock" used without reference to the Series D Preferred
Stock means the shares of Preferred Stock, without distinction as to series,
except as otherwise expressly provided for herein, or as the context otherwise
requires.
2. Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, the holders of the Series
D Preferred Stock shall be entitled to receive, prior and in preference to any
distribution of any of the assets or surplus funds of the Corporation to the
holders of the Common Stock ("Common Stock") by reason of their ownership
thereof, the amount of $4.63 per share (as adjusted for any stock dividends,
combinations or splits with respect to such shares) (the "Series D Purchase
Price") plus all accrued or declared but unpaid dividends on such share for each
share of Series D Preferred Stock then held (the "Series D Preferential
Amount"). The holders of the Series D Preferred Stock shall receive the Series D
Preferential Amount pari passu with the amounts due to holders of Series A
Preferred Stock, holders of Series B Preferred Stock and holders of Series C
Preferred Stock under the Designation and Description of Series A Preferred
Stock, the Designation and Description of Series B Preferred Stock and the
Designation and Description of Series C Preferred Stock. Notwithstanding the
foregoing, if in any liquidation, dissolution or winding up of the Corporation,
the rate of return on the Series D Preferred Stock is less than 10% per year on
the Series D Purchase Price (computed as simple interest from the date of the
filing of this Amended and Restated Certificate of Incorporation with the
Secretary of State of the State of Delaware (the "Issue Date")), then the
holders of the Series D Preferred Stock shall be entitled to receive, following
payment of the Series D Preferential Amount, an additional amount which operates
to provide to the holders of the Series D Preferred a rate of return on the
shares of Series D Preferred Stock of 10% per year on the Series D Purchase
Price (computed as simple interest from the Issue Date and as adjusted for any
stock dividends, combinations, or splits with respect to such shares). If upon
the occurrence of such event, the assets and funds thus distributed among the
holders of the Series A Preferred Stock, the Series B Preferred Stock, the
Series C Preferred Stock and the Series D Preferred Stock shall be insufficient
to permit the payment to such holders of the fully aforesaid preferential
amount, then the entire assets and funds of the Corporation legally available
for distribution shall be distributed ratably to the holders of the Series A
Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock and
the Series D Preferred Stock in proportion to the preferential amount each such
holder is otherwise entitled to receive.
<PAGE>
(b) In the event of any liquidation, dissolution or winding up
of the Corporation, either voluntary or involuntary, and subject to the payment
in full of the liquidation preference with respect to the Series A Preferred
Stock, the Series B Preferred Stock, the Series C Preferred Stock and the Series
D Preferred Stock as provided in subparagraph (a) of this Section 2, and subject
to the rights of any series of Preferred Stock pursuant to a Designation and
Description creating such series, the holders of the Common Stock shall be
entitled to receive the entire remaining assets and funds of the Corporation
legally available for distribution, to be distributed among the holders of the
Common Stock in proportion to the shares of Common Stock then held by them.
(c) For purposes of this Section 2, (i) any acquisition of the
Corporation by means of merger or other form of corporate reorganization in
which outstanding shares of the Corporation are exchanged for less than fifty
percent (50%) of the outstanding voting shares issued, or caused to be issued,
by the acquiring corporation or its subsidiary (other than a mere incorporation
transaction, including, without limitation, a transaction pursuant to which the
Corporation merges into a commonly-controlled corporation organized under the
laws of the State of Delaware) or (ii) a sale of all or substantially all of the
assets of the Corporation, shall be treated as a liquidation, dissolution or
winding up of the Corporation and shall entitle the holders of the Series A
Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock and
the Series D Preferred Stock to receive at the closing in cash, securities or
other property (valued as provided in Section 2(d) below) amounts as specified
in Section 2(a) above.
<PAGE>
(d) Whenever the distribution provided for in this Section 2
shall be payable in securities or property other than cash, the value of such
distribution shall be the fair market value of such securities or other property
as determined in good faith by the Board of Directors.
3. Redemption.
(a) On the fifth anniversary of July 2, 1998, upon the one
time election of each of the holders of the shares of Series D Preferred Stock
outstanding as of the date of such election, the Corporation shall redeem, from
any source of funds to the extent legally available therefor, all but not less
than all of the shares of the Series D Preferred Stock held by such shareholder
as of the date of such election; provided, however, that if the holders of
greater than 50% of the then outstanding Series D Preferred Stock elect to
require the Corporation to redeem greater than 50% of the then outstanding
shares of the Series D Preferred Stock, the Corporation may elect to redeem all
but not less than all of the then outstanding shares of Series D Preferred
Stock; provided, further, that, except as provided in Section 3(c) below, such
redemption shall be effected no later than sixty (60) days after receipt by the
Corporation of such notice of election (the "Series D Redemption Date"). The
Corporation shall effect such redemption on the Series D Redemption Date by
paying in cash in exchange for the shares of Series D Preferred Stock to be
redeemed a sum equal to $4.63 per share of Series D Preferred Stock (as adjusted
for any stock dividends, combinations or splits with respect to such shares)
plus a per annum return of 10% (computed as simple interest from the Issue Date)
(the "Series D Redemption Price").
(b) No later than thirty (30) days after receipt by the
Corporation of the notice of election described in Section 3(a) above, written
notice shall be mailed, first class postage prepaid, to each holder of record
(at the close of business on the business day next preceding the day on which
notice is given) of the Series D Preferred Stock to be redeemed, at the address
last shown on the records of the Corporation for such holder, notifying such
holder of the redemption to be effected, specifying the number of shares to be
redeemed from such holder, the Series D Redemption Date, the Series D Redemption
Price, the place at which payment may be obtained and calling upon such holder
to surrender to the Corporation, in the manner and at the place designated, his,
her or its certificate or certificates representing the shares to be redeemed
(the "Series D Redemption Notice"). Except as provided in Section 3(c), on or
after the Series D Redemption Date, each holder of Series D Preferred Stock to
be redeemed shall surrender to the Corporation the certificate or certificates
representing such shares, in the manner and at the place designated in the
Redemption Notice, and thereupon the Series D Redemption Price of such shares
shall be payable to the order of the person whose name appears on such
certificate or certificates as the owner thereof and each surrendered
certificate shall be canceled. In the event less than all the shares represented
by any such certificate are redeemed, a new certificate shall be issued
representing the unredeemed shares.
<PAGE>
(c) From and after the Series D Redemption Date, unless there
shall have been a default in payment of the Series D Redemption Price, all
rights of the holders of shares of Series D Preferred Stock designated for
redemption in the Redemption Notice as holders of Series D Preferred Stock
(except the right to receive the Series D Redemption Price without interest upon
surrender of their certificate or certificates) shall cease with respect to such
shares, and such shares shall not thereafter be transferred on the books of the
Corporation or be deemed to be outstanding for any purpose whatsoever. If the
funds of the Corporation legally available for redemption of shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock, on any Series D Redemption Date are insufficient to redeem the
total number of shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, and Series D Preferred Stock to be redeemed on such
date, those funds which are legally available will be used to redeem the maximum
possible number of such shares ratably among the holders of such shares to be
redeemed based upon the Series D Redemption Price and the redemption prices for
the Series A Preferred Stock, the Series B Preferred Stock and the Series C
Preferred Stock. The shares of Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, and Series D Preferred Stock not redeemed shall
remain outstanding and entitled to all the rights and preferences provided
herein. At any time thereafter when additional funds of the Corporation are
legally available for the redemption of shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock,
such funds will immediately be used to redeem on the same basis the balance of
the shares which the Corporation has become obliged to redeem on any Series D
Redemption Date and redemption date for the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock but which it has not redeemed.
<PAGE>
4. Voting Rights.
(a) Each holder of shares of the Preferred Stock shall be
entitled to the number of votes equal to the number of shares of Common Stock
into which such shares of the Preferred Stock could be converted and shall have
voting rights and powers equal to the voting rights and powers of the Common
Stock (except as otherwise expressly provided in the Amended and Restated
Stockholder's Agreement, as amended from time to time, executed by the holders
of the Series D Preferred Stock, the Corporation, and the holders of Common
Stock and of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock on the date this Amended and Restated Certificate of
Incorporation is filed with the Secretary of State of the State of Delaware, or
in any Certificate of Designation for the Series D Preferred Stock hereafter
filed, or as required by law), voting together with the Common Stock as a single
class, and shall be entitled to notice of any shareholders' meeting in
accordance with the Bylaws of the Corporation. Fractional voting shall not,
however, be permitted and any fractional votes resulting from the above formula
(after aggregating all shares into which shares of the Preferred Stock held by
each holder could be converted) shall be rounded to the nearest whole number
(with one-half being rounded upward).
5. Restrictions and Limitations.
(a) So long as any shares of Series D Preferred Stock remain
outstanding, the Corporation shall not, without the vote or written consent by
the holders of at least a majority of the then outstanding shares of the Series
D Preferred Stock, voting or acting together as a single class, take any action
which:
(i) materially alters or changes the rights,
preferences or privileges of the Series D Preferred Stock as a class;
(ii) authorizes or issues any additional shares of
Series D Preferred Stock;
(iii) except as set forth in (xii) below creates any
new class or series of Preferred Stock having rights, preferences or privileges
senior to or on parity with the Series D Preferred Stock;
(iv) approves any merger of the Corporation, sale of
all or substantially all of the assets of the Corporation, or other corporate
reorganization or acquisition other than with or to a wholly-owned subsidiary of
the Corporation;
<PAGE>
(v) approves the purchase, redemption or other
acquisition of any of the Series D Preferred Stock except as specifically
provided for in Section 3;
(vi) approves the purchase, redemption or other
acquisition of any common stock of the Corporation, other than repurchases
pursuant to stock restriction agreements that grant to the Corporation a right
of repurchase upon termination of the service or employment of any consultant,
director, officer or employee;
(vii) authorizes the payment of a cash dividend to
any holders of any class or series of capital stock of the Corporation other
than in the ordinary course of the Corporation's business;
(viii) amends or repeals the Corporation's Amended
and Restated Certificate of Incorporation or Amended and Restated Bylaws;
(ix) permits any subsidiary of the Corporation to
issue or sell or obligate itself to issue or sell, except to the Corporation or
a wholly-owned subsidiary of the Corporation, any securities of such subsidiary;
(x) approves the liquidation, dissolution or winding
up of the Corporation;
(xi) authorizes any material transaction or series of
transactions between the Corporation and any officer, director, shareholder or
affiliate thereof (defined as any person or entity controlling, controlled by or
under common control with such person) or any individual related by blood,
marriage or adoption to any such person or any entity in which such person owns
a significant beneficial interest except for material transactions which are at
arms-length as determined by a majority vote of the Board of Directors;
(xii) involves any transaction, other than joint
ventures or similar transactions conducted in the ordinary course of the
Corporation's business, pursuant to which equity securities having rights,
preferences or privileges senior to or on parity with the Series D Preferred
Stock are issued by the Corporation;
6. Conversion. The holder of the Series D Preferred Stock shall have
conversion rights as follows (the "Conversion Rights"):
<PAGE>
(a) Right to Convert. Each share of Series D Preferred Stock
shall be convertible, at the option of the holder thereof, at any time after the
date of issuance of such share by delivery of the certificate representing such
share to the office of the Corporation or the transfer agent for such stock,
into such number of fully paid and nonassessable shares of the Common Stock as
is determined by dividing $4.63 by the Series D Conversion Price (as defined
below) applicable to such share and determined as hereinafter provided, in
effect on the date the certificate is surrendered for conversion. The price at
which shares of the Common Stock shall be deliverable upon conversion of shares
of the Series D Preferred Stock (the "Series D Conversion Price") shall
initially be $4.63 per share of the Common Stock. Such initial Series D
Conversion Price shall be adjusted as hereinafter provided.
(b) Automatic Conversion. Each share of Series D Preferred
Stock shall automatically be converted into shares of the Common Stock at the
then-effective Series D Conversion Price, upon the earlier of (i) the date
specified by vote, written consent or agreement of holders of not less than a
majority of the then outstanding shares of Series D Preferred Stock (as to
conversion of Series D Preferred Stock), and (ii) simultaneously with the
initial closing of (A) an underwritten, firm commitment public offering pursuant
to an effective registration under the Securities Act of 1933, as amended (the
"Act") covering the offer and sale by the Company of its Common Stock in which
the aggregate gross proceeds to the Company exceed Fifteen Million Dollars
($15,000,000) and in which the price per share to the public of such Common
Stock equals or exceeds $5.00 (such price subject to equitable adjustment in the
event of any stock split, stock dividend, combination, reorganization,
reclassification or other similar event involving the Common Stock which occurs
prior to such underwritten, firm commitment public offering), or (B) an offering
to the holders of the common stock of Safeguard Scientifics, Inc. ("SSI"),
pursuant to an effective registration statement, of rights to purchase from the
Company such number of shares of the Common Stock which equals up to 30% (as
determined by SSI) of the sum of (I) all issued shares of Common Stock; (II) all
shares of Common Stock reserved for issuance, and (III) all shares of Common
Stock subject to, but not reserved for, issuance pursuant to options, warrants
or other agreements, instruments or understandings, all as of the effective date
of the registration statement (either (iii)(A) or (B), respectively, shall mean
a "Qualified Public Offering").
<PAGE>
(c) Mechanics of Conversion.
(i) Before any holder of Series D Preferred Stock
shall be entitled to convert the same into shares of the Common Stock, he, she
or it shall surrender the certificate or certificates therefor, duly endorsed,
at the office of the Corporation or of any transfer agent for such stock, and
shall give written notice to the Corporation at such office that he, she or it
elects to convert the same and shall state therein the name or names in which he
wishes the certificate or certificates for shares of the Common Stock to be
issued. The Corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Series D Preferred Stock, a certificate
or certificates for the number of shares of the Common Stock to which he, she or
it shall be entitled as aforesaid. Such conversion shall be deemed to have been
made immediately prior to the close of business on the date of surrender of the
shares of Series D Preferred Stock to be converted, and the person or persons
entitled to receive the shares of the Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder or holders of such shares
of the Common Stock on such date.
(ii) If the conversion is in connection with an
underwritten offering of securities pursuant to the Securities Act, the
conversion may, at the option of any holder tendering shares of Series D
Preferred Stock for conversion, be conditioned upon the closing with the
underwriters of the sale of securities pursuant to such offering, in which event
the person(s) entitled to receive the Common Stock upon conversion of the Series
D Preferred Stock shall not be deemed to have converted such Preferred Stock
until immediately prior to the closing of such sale of securities.
(d) Adjustments to Series D Conversion Price for Certain
Diluting Issues.
(i) Special Definitions. For purposes of this Section
6(d), the following definitions apply:
(1) "Options" shall mean rights, options, or
warrants to subscribe for, purchase or otherwise acquire either Common Stock or
Convertible Securities (defined below).
(2) "Convertible Securities" shall mean any
evidences of indebtedness, shares (other than Common Stock or Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, and Series D
Preferred Stock) or other securities convertible into or exchangeable for Common
Stock.
(3) "Additional Shares of Common Stock"
shall mean all shares of Common Stock issued (or, pursuant to Section 6(d)(iii),
deemed to be issued) by the Corporation after the Issue Date, other than shares
of Common Stock issued or issuable:
<PAGE>
(A) upon conversion of shares of Series A
Preferred Stock;
(B) upon conversion of shares of Series B
Preferred Stock;
(C) upon conversion of shares of Series C
Preferred Stock;
(D) upon conversion of shares of Series D
Preferred Stock;
(E) to officers, directors or employees of,
or consultants to, or other permitted grantee of, the Corporation or any
subsidiary of the Corporation pursuant to stock option or stock purchase plans
or agreements on terms approved by the Board of Directors, but not exceeding
1,397,236 shares of the Common Stock (subject to equitable adjustment in the
event of any stock split, stock dividend, combination, reorganization,
reclassification or other similar event involving the Common Stock which occurs
after the date hereof and prior to the Qualified Public Offering);
(F) as a dividend or distribution on Series
A Preferred Stock, or as a dividend or distribution on Series B Preferred Stock,
Series C Preferred Stock or Series D Preferred Stock;
(G) for which adjustment of the Series D
Conversion Price is made pursuant to Section 6(e); or
(H) upon exercise of any and all of the
70,000 Options issued to Progress Bank prior to the date these designations are
filed with the Secretary of State of Delaware and any Options issued to Progress
Bank or its affiliates pursuant to any transaction after the date these
designations are filed with the Secretary of State of Delaware pursuant to which
Progress Bank lends or makes available to the Corporation funds for working
capital purposes.
(ii) No Adjustment of Conversion Price. Any provision
herein to the contrary notwithstanding, no adjustment in the Conversion Price
for Series D Preferred Stock shall be made in respect of the issuance of
Additional Shares of Common Stock unless the consideration per share (determined
pursuant to Section 6(d)(v) hereof) for an Additional Share of Common Stock
issued or deemed to be issued by the Corporation is less than the Series D
Conversion Price in effect on the date of, and immediately prior to such issue.
<PAGE>
(iii) Deemed Issue of Additional Shares of Common
Stock. Except as set forth in 6(d)(i)(3) above, in the event the Corporation at
any time or from time to time after the Issue Date shall issue any Options or
Convertible Securities or shall fix a record date for the determination of
holders of any class of securities then entitled to receive any such Options or
Convertible Securities, then the maximum number of shares (as set forth in the
instrument relating thereto without regard to any provisions contained therein
designed to protect against dilution) of Common Stock issuable upon the exercise
of such Options or, in the case of Convertible Securities and Options therefor,
the conversion or exchange of such Convertible Securities, shall be deemed to be
Additional Shares of Common Stock issued as of the time of such issue or, in
case such a record date shall have been fixed, as of the close of business on
such record date, provided further that in any such case in which Additional
Shares of Common Stock are deemed to be issued:
(1) no further adjustments in the Series D
Conversion Price shall be made upon the subsequent issue of Convertible
Securities or shares of Common Stock upon the exercise of such Options or
conversion or exchange of such Convertible Securities;
(2) if such Options or Convertible
Securities by their terms provide, with the passage of time or otherwise, for
any increase in the consideration payable to the Corporation, or decrease in the
number of shares of Common Stock issuable, upon the exercise, conversion or
exchange thereof, the Series D Conversion Price computed upon the original issue
thereof (or upon the occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon any such increase or decrease
becoming effective, be recomputed to reflect such increase or decrease insofar
as it affects such Options or the rights of conversion or exchange under such
Convertible Securities (provided, however, that no such adjustment of the Series
D Conversion Price shall effect Common Stock previously issued upon conversion
of the Series D Preferred Stock); or
(3) no readjustment pursuant to clause (2)
above shall have the effect of increasing the Conversion Price of a series to an
amount which exceeds the lower of (a) the Conversion Price of such series on the
original adjustment date and (b) the Conversion Price of such series that would
have resulted from any issuance of Additional Shares of Common Stock between the
original adjustment date and such readjustment date.
<PAGE>
(iv) Adjustment of Conversion Price Upon Issuance of
Additional Shares of Common Stock. In the event the Corporation, at any time
after the Issue Date shall issue Additional Shares of Common Stock (including
Additional Shares of Common Stock deemed to be issued pursuant to Section
6(d)(iii)) without consideration or for a consideration per share less than the
Series D Conversion Price on the date of and immediately prior to such issue,
then and in such event, except for adjustments governed by Section 6(e) below,
the Series D Conversion Price shall be reduced, concurrently with such issue, to
a price (calculated to the nearest cent) determined by multiplying such
Conversion Price by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to such issue plus the
number of shares of Common Stock which the aggregate consideration received by
the Corporation for the total number of Additional Shares of Common Stock so
issued would purchase at such Conversion Price in effect immediately prior to
such issuance, and the denominator of which shall be the number of shares of
Common Stock outstanding immediately prior to such issue plus the number of such
Additional Shares of Common Stock so issued. For the purpose of the above
calculation, the number of shares of Common Stock outstanding immediately prior
to such issue shall be calculated on a fully diluted basis, as if all shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
and Series D Preferred Stock and all Convertible Securities had been fully
converted into shares of Common Stock and any outstanding Options (whether
vested or not vested, exercisable or not exercisable) had been fully exercised
(and the resulting securities fully converted into shares of Common Stock, if so
convertible) as of such date.
(v) Determination of Consideration. For purposes of
this Section 6(d), the consideration received by the Corporation for the issue
of any Additional Shares of Common Stock shall be computed as follows:
(1) Cash and Property: Such consideration
shall:
(A) insofar as it consists of cash, be
computed at the aggregate amount of cash received by the Corporation excluding
amounts paid or payable for accrued interest or accrued dividends;
(B) insofar as it consists of property other
than cash, be computed at the fair value thereof at the time of such issue, as
determined in good faith by the Board of Directors; and
<PAGE>
(C) in the event Additional Shares of Common
Stock are issued together with other shares or securities or other assets of the
Corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (A) and (B) above, as
determined in good faith by the Board.
(2) Options and Convertible Securities. The
consideration per share received by the Corporation for Additional Shares of
Common Stock deemed to have been issued pursuant to Section 6(d)(iii), relating
to Options and Convertible Securities shall be determined by dividing:
(A) the total amount, if any, received or
receivable by the Corporation as consideration for the issue of such Options or
Convertible Securities, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without regard
to any provision contained therein designed to protect against dilution) payable
to the Corporation upon the exercise of such Options or the conversion or
exchange of such Convertible Securities, or in the case of Options for
Convertible Securities, the exercise of such Options for Convertible Securities
and the conversion or exchange of such Convertible Securities by
(B) the maximum number of shares of Common
Stock (as set forth in the instrument relating thereto, without regard to any
provision contained therein designed to protect against the dilution) issuable
upon the exercise of such Options or conversion or exchange of such Convertible
Securities.
(e) Adjustments to Conversion Prices for Stock Dividends and
for Combinations or Subdivisions of Common Stock. In the event that the
Corporation at any time or from time to time after the Issue Date shall declare
or pay, without consideration, any dividend on the Common Stock payable in
Common Stock or in any right to acquire Common Stock for no consideration, or
shall effect a subdivision of the outstanding shares of Common Stock into a
greater number of shares of Common Stock (by stock split, reclassification or
otherwise than by payment of a dividend in Common Stock or in any right to
acquire Common Stock), or in the event the outstanding shares of Common Stock
shall be combined or consolidated, by reclassification or otherwise, into a
lesser number of shares of Common Stock, then the Series D Conversion Price in
effect immediately prior to such event shall, concurrently with the
effectiveness of such event, be proportionately decreased or increased, as
appropriate. In the event that the Corporation shall declare or pay, without
consideration, any dividend on the Common Stock payable in any right to acquire
Common Stock for no consideration then the Corporation shall be deemed to have
made a dividend payable in Common Stock in an amount of shares equal to the
maximum number of shares issuable upon exercise of such rights to acquire Common
Stock.
<PAGE>
(f) Adjustments for Reclassification and Reorganization. If
the Common Stock issuable upon conversion of the Series D Preferred Stock shall
be changed into the same or a different number of shares of any other class or
classes of stock, whether by capital reorganization, reclassification or
otherwise (other than a subdivision or combination of shares provided for in
Section 6(e) above or a merger or other reorganization referred to in Section
2(c) above), the Series D Conversion Price then in effect shall, concurrently
with the effectiveness of such reorganization or reclassification, be
proportionately adjusted so that the Series D Preferred Stock shall be
convertible into, in lieu of the number of shares of the Common Stock which the
holders would otherwise have been entitled to receive, a number of shares of
such other class or classes of stock equivalent to the number of shares of the
Common Stock that would have been subject to receipt by the holders upon
conversion of Series D Preferred Stock immediately before that change.
(g) No Impairment. Without the vote or written consent of the
holders of a majority of the Series D Preferred Stock, voting or acting together
as a single class, the Corporation will not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Corporation, but will at all times in
good faith assist in the carrying out of all the provisions of this Section 6
and in the taking of all such action as may be necessary or appropriate in order
to protect the Conversion Rights of the holders of the Series D Preferred Stock
against impairment.
(h) Certificates as to Adjustments. Upon the occurrence of
each adjustment or readjustment of any Conversion Price pursuant to this Section
6, the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of Series D Preferred Stock a certificate executed by the Corporation's
President or Chief Financial Officer setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series D Preferred Stock, furnish or cause to be furnished
to such holder a like certificate setting forth (i) such adjustments and
readjustments, (ii) the Series D Conversion Price at the time in effect, and
(iii) the number of shares of the Common Stock and the amount, if any, of other
property which at the time would be received upon the conversion of the Series D
Preferred Stock.
<PAGE>
(i) Issue Taxes. The Corporation shall pay any and all issue
and other taxes that may be payable in respect of any issue or delivery of
shares of Common Stock on conversion of shares of Series D Preferred Stock
pursuant hereto; provided, however, that the Corporation shall not be obligated
to pay any transfer taxes resulting from any transfer requested by any holder in
connection with any such conversion
(j) Reservation of Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of the Common Stock, solely for the purpose of effecting the
conversion of the shares of Series D Preferred Stock, such number of its shares
of the Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of Series D Preferred Stock; and if at any
time the number of authorized but unissued shares of the Common Stock shall not
be sufficient to effect the conversion of all then outstanding shares of Series
D Preferred Stock, the Corporation will take such corporate action as may, in
the opinion of its counsel, be necessary to increase its authorized but unissued
shares of the Common Stock to such number of shares as shall be sufficient for
such purpose, including, without limitation, engaging in best efforts to obtain
the requisite stockholder approval of any necessary amendment to this
Certificate.
(k) Fractional Shares. No fractional share shall be issued
upon the conversion of any share or shares of D Preferred Stock. All shares of
the Common Stock (including fractions thereof) issuable upon conversion of more
than one share of Series D Preferred Stock by a holder thereof shall be
aggregated for purposes of determining whether the conversion would result in
the issuance of any fractional share. If, after the aforementioned aggregation,
the conversion would result in the issuance of a fraction of a share of the
Common Stock, the Corporation shall, in lieu of issuing any fractional share,
pay the holder otherwise entitled to such fraction a sum in cash equal to the
fair market value of such fraction on the date of conversion (as determined in
good faith by the Board of Directors).
(l) Notices. Any notice required by the provisions of this
Section 6 to be given to the holders of shares of Series D Preferred Stock shall
be deemed given if deposited in the United States mail, postage prepaid, and
addressed to each holder of record at his address appearing on the books of the
Corporation.
<PAGE>
7. Preemptive Rights.
(a) Right To Maintain Proportionate Share Ownership. The
holders of outstanding shares of Series D Preferred Stock shall have the right
to subscribe to any or all (i) issuances of shares of capital stock of the
Corporation, (ii) issuances of securities convertible into shares of capital
stock of the Corporation (other than options to Progress Bank or an affiliate
thereof as contemplated in Section 6(d)(i)(3)(H)), or (iii) grants of options to
purchase shares of capital stock of the Corporation including, but not limited
to any warrants issued by the Corporation (other than option grants referred to
in Section 6(d)(i)(3)(E) above) on the same terms of such offerings to the
extent equal to the proportion which the number of shares of Series D Preferred
Stock (on an as-converted basis) held by such holders bears to the Corporation's
fully-diluted capitalization (on an as-converted and as-exercised basis). Such
right is exercisable within ten (10) days after the receipt of written notice
relating to such issuances by the holders of the Series D Preferred Stock. Each
holder of Series D Preferred Stock shall have the right to purchase that
percentage of such issuances available for purchase by all of the holders of
Series D Preferred Stock equal to such holder's percentage of all Series D
Preferred Stock issued and outstanding at such time. The right of holders of the
Series D Preferred Stock to purchase new issues of shares or convertible
securities or options does not extend to shares or securities issued solely in
exchange for property (including securities) other than cash, including any such
shares, convertible securities or options issued in connection with any merger
or reorganization (primarily intended to acquire property or business),
equipment lease or debt financing.
(b) Oversubscription Privilege. In addition to the right to
purchase his, her or its pro rata proportion of the new issue of shares,
convertible securities or options as set forth in 7(a) above, each holder of the
Series D Preferred Stock who has subscribed for the entire number of shares or
units initially allocable to him shall have the additional right to subscribe to
his, her or its proportionate part of any shares or units which have not been
subscribed for by other holders of the Series D Preferred Stock. In case the
total number of shares or units desired to be purchased by holders of the Series
D Preferred Stock exercising this right of oversubscription exceeds the total
number of shares or other units which have not been initially subscribed for by
other holders of the Series D Preferred Stock and are thus available for
purchase, each holder of the Series D Preferred Stock exercising this right of
oversubscription shall be entitled to purchase that percentage of the shares or
units not initially subscribed by the holders of Series D Preferred Stock equal
to the number of shares subscribed by such holder over the total number of
shares for which subscriptions from holders of Series D Preferred Stock have
been received. This procedure shall be repeated, if necessary, until all of the
shares or units not initially subscribed have been allocated. The preemptive
rights held by the holders of the Series D Preferred Stock pursuant to this
Section 7 shall terminate immediately prior to the closing of a Qualified Public
Offering.
<PAGE>
8. No Reissuance of the Series D Preferred Stock. No share or shares of
the Series D Preferred Stock acquired by the Corporation by reason of
redemption, purchase, conversion or otherwise shall be reissued as part of that
series. The authorized number of shares of that series shall be automatically
reduced by the number of shares reacquired, and the Board of Directors of the
Corporation shall return those shares to the status of authorized but
undesignated shares of Preferred Stock. The Corporation may from time to time
take such appropriate corporate action as may be necessary to reduce the
authorized number of shares of Series D Preferred Stock accordingly.
<PAGE>
CERTIFICATE OF RETIREMENT
OF A PORTION OF
THE SERIES A PREFERRED STOCK
OF
U.S. INTERACTIVE, INC.
Pursuant to Section 243(b) of the
General Corporation Law of the State of Delaware
U.S. Interactive, Inc., a corporation organized and existing under the
laws of the State of Delaware (the "Corporation"), HEREBY CERTIFIES as follows:
1. The Board of Directors of the Corporation has duly adopted resolutions
providing for the purchase and retirement of 188,824 shares of the Corporation's
Series A Preferred Stock, par value $.001 per share (the "Series A Preferred
Stock").
2. 188,824 outstanding shares of the Series A Preferred Stock have been
purchased as aforesaid and retired.
3. The Amended and Restated Certificate of Incorporation of the Corporation
filed with the Secretary of State of the State of Delaware on September 22, 1998
prohibits the reissuance of shares of said Series A Preferred Stock as shares of
said series and requires the retirement of the aforesaid shares of Series A
Preferred Stock.
4. Accordingly, pursuant to the provisions of Section 243(b) of the General
Corporation Law of the State of Delaware, upon the filing of this Certificate of
Retirement, the Amended and Restated Certificate of Incorporation of the
Corporation shall be amended so as to reduce the authorized number of shares of
the Series A Preferred Stock by 188,824 to 1,384,709 but not to reduce the total
authorized number of shares of Preferred Stock of the Corporation.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Retirement to be executed and attested and its corporate seal to be affixed
hereto this 11th day of May, 1999.
U.S. Interactive, Inc.
By: /s/ Philip L. Calamia
------------------------------
Name: Philip L. Calamia
------------------------------
Title: Chief Financial Officer
------------------------------
<PAGE>
CERTIFICATE OF RETIREMENT
OF A PORTION OF
THE SERIES B PREFERRED STOCK
OF
U.S. INTERACTIVE, INC.
Pursuant to Section 243(b) of the
General Corporation Law of the State of Delaware
U.S. Interactive, Inc., a corporation organized and existing under the
laws of the State of Delaware (the "Corporation"), HEREBY CERTIFIES as follows:
1. The Board of Directors of the Corporation has duly adopted resolutions
providing for the purchase and retirement of 188,824 shares of the Corporation's
Series A Preferred Stock, par value $.001 per share (the "Series A Preferred
Stock").
2. 188,824 outstanding shares of the Series A Preferred Stock have been
purchased as aforesaid and retired.
3. The Amended and Restated Certificate of Incorporation of the Corporation
filed with the Secretary of State of the State of Delaware on September 22, 1998
prohibits the reissuance of shares of said Series A Preferred Stock as shares of
said series and requires the retirement of the aforesaid shares of Series A
Preferred Stock.
4. Accordingly, pursuant to the provisions of Section 243(b) of the General
Corporation Law of the State of Delaware, upon the filing of this Certificate of
Retirement, the Amended and Restated Certificate of Incorporation of the
Corporation shall be amended so as to reduce the authorized number of shares of
the Series A Preferred Stock by 188,824 to 1,384,709 but not to reduce the total
authorized number of shares of Preferred Stock of the Corporation.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Retirement to be executed and attested and its corporate seal to be affixed
hereto this 11th day of May, 1999.
U.S. Interactive, Inc.
By: /s/ Philip L. Calamia
------------------------------
Name: Philip L. Calamia
------------------------------
Title: Chief Financial Officer
------------------------------
<PAGE>
1998 Performance Incentive Plan
Of U.S. Interactive, Inc.
1. PURPOSE.
The purposes of the 1998 Performance Incentive Plan (the "Plan") of U.S.
Interactive, Inc. (the "Company") are to advance the interests of the Company
and its shareholders by strengthening the ability of the Company to attract,
retain and reward highly qualified officers and other employees, to motivate
officers and other selected employees to achieve business objectives established
to promote the long-term growth, profitability and success of the Company, and
to encourage ownership of the Common Stock of the Company by participating
officers and other selected employees. The Plan authorizes performance-based
stock and cash incentive compensation in the form of stock options, stock
appreciation rights, restricted stock, performance grants and awards, and other
stock-based grants and awards. The Board of Directors may also be awarded
Non-Qualified Stock Options.
2. DEFINITIONS.
For the purposes of the Plan, the following terms shall have the following
meanings:
(a) "ADJUSTED NET INCOME" means, with respect to any calendar or other fiscal
year of the Company, the amount reported as "Net Income" in the audited
Consolidated Income Statement of the Company and Subsidiaries for such year (as
set forth in the Company's Annual Report to Shareholders for such year),
adjusted to exclude any of the following items: (i) extraordinary items (as
described in Accounting Principles Board Opinion No. 30); (ii) gains or losses
on the disposition of discontinued operations; (iii) the cumulative effects of
changes in accounting principles; (iv) the writedown of any asset; and (v)
charges for restructuring and rationalization programs.
(b) "ANNUAL NET INCOME PER SHARE" means, with respect to any calendar or other
fiscal year of the Company in respect of which a determination thereof is being
or to be made, the Adjusted Net Income for such year divided by the average
number of shares of Common Stock outstanding during such year.
(c) "AWARD" means any payment or settlement in respect of a grant made pursuant
to the Plan, whether in the form of shares of Common Stock or in cash, or in any
combination thereof.
(d) "BOARD OF DIRECTORS" means the Board of Directors of the Company.
<PAGE>
18
(e) "CAUSE", unless otherwise determined by the Committee, means (i) a
Participant's action or failure to act which (a) would materially adversely
affect the reputation, operations or financial condition of the Company or any
of its Subsidiaries; (ii) a willful failure by the Participant to perform such
Participant's duties, except as a result of the Disability or death of the
Participant; or (iii) a Participant's theft, embezzlement, perpetration of
fraud, or misappropriation of any tangible or intangible assets or property of
the Company or any of its Subsidiaries or attempted theft, embezzlement,
perpetration of fraud, or misappropriation of any tangible or intangible assets
or property of the Company or any of its Subsidiaries. In addition, and without
limiting any of the foregoing, "Cause" for purposes of this Plan shall also mean
"Cause" as that term is defined in a Participant's employment agreement, if any,
with the Company or a Subsidiary.
(f) "CODE" means the Internal Revenue Code of 1986, as amended and in effect
from time to time, or any successor statute thereto, together with the published
rulings, regulations and interpretations duly promulgated thereunder.
(g) "COMMITTEE" means the committee of the Board of Directors established and
constituted as provided in Section 5 of the Plan.
(h) "COMMON STOCK" means the common stock, $.001 par value, of the Company, or
any security issued by the Company in substitution or exchange therefore or in
lieu thereof.
(i) "COMMON STOCK EQUIVALENT" means a Unit (or fraction thereof, if authorized
by the Committee) substantially equivalent to a hypothetical share of Common
Stock, credited to a Participant and having a value at any time equal to the
Fair Market Value of a share of Common Stock (or such fraction thereof) at such
time.
(j) "COMPANY" means U.S. Interactive, Inc. a New Jersey corporation, or any
successor corporation.
(k) "COVERED EMPLOYEE" means any person who is a "covered employee" within the
meaning of Section 162(m) of the Code.
(l) "CUMULATIVE NET INCOME" means, in respect of any Performance Period, the
aggregate cumulative amount of the Adjusted Net Income for the calendar or other
fiscal years of the Company during such Performance Period.
(m) "CUMULATIVE NET INCOME PER SHARE" means, in respect of any Performance
Period, the aggregate cumulative amount of the Annual Net Income Per Share for
the calendar or other fiscal years of the Company during such Performance
Period.
<PAGE>
(n) "DISABILITY" shall mean permanent and total disability, as defined in
Section 22(e) of the Code.
(o) "DIVIDEND EQUIVALENT" means, in respect of a Common Stock Equivalent and
with respect to each dividend payment date for the Common Stock, an amount equal
to the cash dividend on one share of Common Stock payable on such dividend
payment date.
(p) "EMPLOYEE" means any individual, including any officer of the Company, who
is on the active payroll of the Company or a Subsidiary at the relevant time.
(q) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended and in
effect from time to time, including all rules and regulations promulgated
thereunder.
(r) "FAIR MARKET VALUE" means, in respect of any date on or as of which a
determination thereof is being or to be made, the average of the high and low
per share sale prices of the Common Stock reported on the exchange on which such
shares are traded on such date (if the grant date is not a business trading day,
the determination shall be made based upon the relevant data for the next
preceding trading day), or, if the Common Stock was not traded on such date, the
average of the highest bid and the lowest ask per share price reported for such
date on the exchange on which such shares of Common Stock are traded. If the
Common Stock is not traded on an exchange, the Fair Market Value shall be that
determined by the Committee in good faith based on such factors as the members
thereof, in the exercise of their business judgment, consider relevant.
(s) "INCENTIVE STOCK OPTION" means any option to purchase shares of Common Stock
granted pursuant to the provisions of Section 6 of the Plan that is intended to
be and is specifically designated as an "incentive stock option" within the
meaning of Section 422 of the Code.
(t) "NON-QUALIFIED STOCK OPTION" means any option to purchase shares of Common
Stock granted pursuant to the provisions of Section 6 of the Plan that is not an
Incentive Stock Option.
(u) "OPTION AGREEMENT" has the meaning ascribed thereto in Section 6(a) of the
Plan.
(v) "PARTICIPANT" means any Employee of the Company or a Subsidiary who receives
a grant or Award under the Plan.
<PAGE>
(w) "PERFORMANCE GRANT" means a grant made pursuant to Section 9 of the Plan,
the Award of which is contingent on the achievement of specific Performance
Goals during a Performance Period, determined using a specific Performance
Measure, all as specified in the grant agreement relating thereto.
(x) "PERFORMANCE GOALS" mean, with respect to any applicable grant made pursuant
to the Plan, the one or more targets, goals or levels of attainment required to
be achieved in terms of the specified Performance Measure during the specified
Performance Period, all as set forth in the related grant agreement.
(y) "PERFORMANCE MEASURE" means, with respect to any applicable grant made
pursuant to the Plan, one or more of the criteria identified at Section 9(c) of
the Plan selected by the Committee for the purpose of establishing, and
measuring attainment of, Performance Goals for a Performance Period in respect
of such grant, as provided in the related grant agreement.
(z) "PERFORMANCE PERIOD" means, with respect to any applicable grant made
pursuant to the Plan, the one or more periods of time, which may be of varying
and overlapping durations, as the Committee may select during which the
attainment of one or more Performance Goals will be measured to determine
whether, and the extent to which, a Participant is entitled to receive payment
of an Award pursuant to such grant.
(aa) "PLAN" means this 1998 Performance Incentive Plan of the Company, as set
forth herein and as hereafter amended from time to time in accordance with the
terms hereof.
(bb) "RESTRICTED STOCK" means shares of Common Stock issued pursuant to a
Restricted Stock Grant under Section 8 of the Plan so long as such shares remain
subject to the restrictions and conditions specified in the grant agreement
pursuant to which such Restricted Stock Grant is made.
(cc) "RESTRICTED STOCK GRANT" means a grant made pursuant to the provisions of
Section 8 of the Plan.
(dd) "STOCK APPRECIATION RIGHT" means a grant in the form of a right to benefit
from the appreciation of the Common Stock made pursuant to Section 7 of the
Plan.
(ee) "STOCK OPTION" means and includes any Non-Qualified Stock Option and any
Incentive Stock Option granted pursuant to Section 6 of the Plan.
(ff) "SUBSIDIARY" means any corporation or entity in which the Company directly
or indirectly owns or controls 50% or more of the equity securities issued by
such corporation or entity having the power to vote for the election of
directors.
<PAGE>
(gg) "UNIT" means a bookkeeping entry used by the Company to record and account
for the grant, settlement or, if applicable, deferral of an Award until such
time as such Award is paid, cancelled, forfeited or terminated, as the case may
be, which, except as otherwise specified by the Committee, shall be equal to one
Common Stock Equivalent.
3. EFFECTIVE DATE; TERM.
(a) EFFECTIVE DATE. The Plan shall be effective upon approval by the
shareholders and directors of the Company.
(b) TERM. The Plan shall remain in effect until December 31, 2017, unless sooner
terminated by the Board of Directors. Termination of the Plan shall not affect
grants and Awards then outstanding.
4. SHARES OF COMMON STOCK SUBJECT TO PLAN.
(a) MAXIMUM NUMBER OF SHARES AVAILABLE FOR ISSUANCE UNDER THE PLAN. The maximum
aggregate number of shares of Common Stock which may be issued pursuant to the
Plan, subject to adjustment as provided in Section 4(b) of the Plan, shall be
three million, plus (i) any shares of Common Stock issued under the Plan that
are forfeited back to the Company or are cancelled, and (ii) any shares of
Common Stock that are tendered, whether by physical delivery or by attestation,
to the Company by a Participant as full or partial payment of the exercise price
of any Stock Option granted pursuant to the Plan, in connection with the payment
or settlement of any other grant or Award made pursuant to the Plan, or in
payment of any applicable withholding for federal, state, city, local or foreign
income, payroll or other taxes incurred in connection with the exercise of any
Stock Option or Stock Appreciation Right granted under the Plan or the receipt
or settlement of any other grant or Award under the Plan. The shares of Common
Stock which may be issued under the Plan may be authorized and unissued shares
or issued shares which have been reacquired by the Company. No fractional share
of the Common Stock shall be issued under the Plan. Awards of fractional shares
of the Common Stock, if any, shall be settled in cash.
<PAGE>
(b) ADJUSTMENTS UPON CHANGES IN CAPITAL STRUCTURE. In the event of any change in
the capital structure, capitalization or Common Stock of the Company such as a
stock dividend, stock split, recapitalization, merger, consolidation, split-up,
combination or exchange of shares or other form of reorganization, or any other
change affecting the Common Stock, such proportionate adjustments, if any, as
the Board of Directors in its discretion may deem appropriate to reflect such
change shall be made with respect to: (i) the maximum number of shares of Common
Stock which may be (1) issued pursuant to the Plan, (2) the subject of any type
of grant or Award under the Plan, and (3) granted, Awarded or issued to any
Participant pursuant to any provision of the Plan; (ii) the number of shares of
Common Stock subject to any outstanding Stock Option, Stock Appreciation Right
or other grant or Award made to any Participant under the Plan; (iii) the per
share exercise price in respect of any outstanding Stock Options and Stock
Appreciation Rights; (iv) the number of shares of Common Stock and the number of
Units or the value of such Units, as the case may be, which are the subject of
grants and Awards then outstanding under the Plan; and (v) any other term or
condition of any grant affected by any such change.
5. ADMINISTRATION.
(a) THE COMMITTEE. The Plan shall be administered by the Committee to be
appointed from time to time by the Board of Directors and, except as provided
herein, comprised of not less than two of the then members of the Board of
Directors who qualify as "non-employee directors" within the meaning of Rule
16b-3 promulgated under the Exchange Act and as "outside directors" within the
meaning of Section 162(m) of the Code. Prior to the time when the securities of
the Company are traded on an exchange, the Committee may be comprised of any two
or more directors. Members of the Committee shall serve at the pleasure of the
Board of Directors. The Board of Directors may from time to time remove members
from, or add members to, the Committee. A majority of the members of the
Committee shall constitute a quorum for the transaction of business and the acts
of a majority of the members present at any meeting at which a quorum is present
shall be the acts of the Committee. Any one or more members of the Committee may
participate in a meeting by conference telephone or similar means where all
persons participating in the meeting can hear and speak to each other, which
participation shall constitute presence in person at such meeting. Action
approved in writing by a majority of the members of the Committee then serving
shall be fully as effective as if the action had been taken by unanimous vote at
a meeting duly called and held. The Company shall make grants and effect Awards
under the Plan in accordance with the terms and conditions specified by the
Committee, which terms and conditions shall be set forth in grant agreements
and/or other instruments in such forms as the Committee shall approve.
<PAGE>
(b) COMMITTEE POWERS. The Committee shall have full power and authority to
operate and administer the Plan in accordance with its terms. The powers of the
Committee include, but are not limited to, the power to: (i) select Participants
from among the Employees of the Company and Subsidiaries; (ii) establish the
types of, and the terms and conditions of, all grants and Awards made under the
Plan, subject to any applicable limitations set forth in, and consistent with
the express terms of, the Plan; (iii) make grants and pay or otherwise effect
Awards subject to, and consistent with, the express provisions of the Plan; (iv)
establish Performance Goals, Performance Measures and Performance Periods,
subject to, and consistent with, the express provisions of the Plan; (v) reduce
the amount of any grant or Award; (vi) prescribe the form or forms of grant
agreements and other instruments evidencing grants and Awards under the Plan;
(vii) pay and to defer payment of Awards on such terms and conditions, not
inconsistent with the express terms of the Plan, as the Committee shall
determine; (viii) direct the Company to make conversions, accruals and payments
pursuant to the Plan; (ix) construe and interpret the Plan and make any
determination of fact incident to the operation of the Plan; (x) promulgate,
amend and rescind rules and regulations relating to the implementation,
operation and administration of the Plan; (xi) adopt such modifications,
procedures and subplans as may be necessary or appropriate to comply with the
laws of other countries with respect to Participants or prospective Participants
employed in such other countries; (xii) delegate to other persons the
responsibility for performing administrative or ministerial acts in furtherance
of the Plan; (xiii) engage the services of persons and firms, including banks,
consultants and insurance companies, in furtherance of the Plan's activities;
and (xiv) make all other determinations and take all other actions as the
Committee may deem necessary or advisable for the administration and operation
of the Plan. In making these determinations, the Committee shall take into
account any limitations on the issuance of grants and Awards that may exist as a
result of agreements entered into by the Company.
(c) COMMITTEE's DECISIONS FINAL. Any determination, decision or action of the
Committee in connection with the construction, interpretation, administration or
application of the Plan, and of any grant agreement, shall be final, conclusive
and binding upon all participants, and all persons claiming through
Participants, affected thereby.
(d) ADMINISTRATIVE ACCOUNTS. For the purpose of accounting for Awards deferred
as to payment, the Company shall establish bookkeeping accounts expressed in
Units bearing the name of each Participant receiving such Awards. Each account
shall be unfunded, unless otherwise determined by the Committee in accordance
with Section 15(d) of the Plan.
(e) CERTIFICATIONS. In respect of each grant under the Plan to a Covered Person
which the Committee intends to be "performance based compensation" under Section
162(m) of the Code, the provisions of the Plan and the related grant agreement
shall be construed to confirm such intent, and to conform to the requirements of
Section 162(m) of the Code, and the Committee shall certify in writing (which
writing may include approved minutes of a meeting of the Committee) that the
applicable Performance Goal(s), determined using the Performance Measure
specified in the related grant agreement, was attained during the relevant
Performance Period at a level that equaled or exceeded the level required for
the payment of such Award in the amount proposed to be paid and that such Award
does not exceed any applicable Plan limitation.
6. STOCK OPTIONS.
<PAGE>
(a) IN GENERAL. Options to purchase shares of Common Stock may be granted under
the Plan and may be Incentive Stock Options or Non-Qualified Stock Options. All
Stock Options shall be subject to the terms and conditions of this Section 6 and
shall contain such additional terms and conditions, not inconsistent with the
express provisions of the Plan, as the Committee shall determine. Each Option
granted hereunder to a Participant shall be embodied in a written option
agreement ("Option Agreement"), signed by the Participant and by a duly
authorized officer of the Company. Stock Options may be granted in addition to,
or in tandem with or independent of Stock Appreciation Rights or other grants
and Awards under the Plan. The Committee may grant Stock Options that provide
for the automatic grant of a replacement Stock Option if payment of the exercise
price and/or any related withholding taxes is made by tendering (whether by
physical delivery or by attestation) shares of Common Stock or by having shares
of Common Stock withheld by the Company. The replacement Stock Option would
cover the number of shares of Common Stock tendered or withheld, would have a
per share exercise price equal to at least 100% of the Fair Market Value of a
share of Common Stock on the date of the exercise of the original Stock Option,
and would have such other terms and conditions as may be specified by the
Committee and set forth in the related grant agreement.
(b) ELIGIBILITY AND LIMITATIONS. Any officer of the Company and any other
Employee of the Company or a Subsidiary may be granted Stock Options. The Board
of Directors may be granted Non-Qualified Stock Options only. The Committee
shall determine, in its discretion, the Employees or Directors to whom Stock
Options will be granted, the timing of such grants, and the number of shares of
Common Stock subject to each Stock Option granted; provided, that (i) the
maximum aggregate number of shares of Common Stock which may be issued and
delivered upon the exercise of Non-Qualified Stock Options granted under the
Plan shall be three million, (ii) the maximum aggregate number of shares of
Common Stock which may be issued and delivered upon the exercise of Incentive
Stock Options shall be three million, (iii) the maximum number of shares of
Common Stock in respect of which Stock Options may be granted to any Employee or
Director during any calendar year shall be 200,000, and (iv) in respect of
Incentive Stock Options, the aggregate Fair Market Value (determined as of the
date the Incentive Stock Option is granted) of the shares of Common Stock with
respect to which an Incentive Stock Option becomes exercisable for the first
time by a Participant during any calendar year shall not exceed $100,000, or
such other limit as may be required by the Code, except that, if authorized by
the Committee and provided for in the related grant agreement, any portion of
any Incentive Stock Option that cannot be exercised as such because of this
limitation may be converted into and exercised as a Non-Qualified Stock Option.
In no event shall any Stock Option or Stock Appreciation Right be granted to a
Participant in exchange for the Participant's agreement to the cancellation of
one or more Stock Options or Stock Appreciation Rights then held by such
Participant if the exercise price of the new grant is lower than the exercise
price of the grant to be cancelled and in no event shall any Stock Option or
Stock Appreciation Right be amended to reduce the option price, except as
contemplated by Section 4(b) of the Plan.
<PAGE>
(c) OPTION EXERCISE PRICE. The per share exercise price of each Stock Option
granted under the Plan shall be determined by the Committee prior to or at the
time of grant, but in no event shall the per share exercise price of any Stock
Option be less than 100% of the Fair Market Value of the Common Stock on the
date of the grant of such Stock Option. The exercise price of an Incentive Stock
Option issued to any Employee owning more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company shall be 110% of
the Fair Market Value of the Common Stock on the date of the grant of such Stock
Option.
(d) OPTION TERM. The term of each Stock Option shall be fixed by the Committee;
except that in no event shall the term of any Incentive Stock Option exceed ten
years after the date such Incentive Stock Option is granted, or five years in
the case of an Employee owning more than ten percent (10%) of the total combined
voting power of all classes of stock of the Company. Any Option granted more
than 10 years from the effective date of the Plan will be a Non-Qualified Stock
Option.
(e) EXERCISABILITY. A Stock Option shall be exercisable at such time or times
and subject to such terms and conditions as shall be determined by the Committee
at the date of grant; provided, however, that no Stock Option shall be
exercisable during the first six months after the date such Stock Option is
granted. Unless the Committee specifies otherwise in the Option Agreement, every
Option granted pursuant to this Plan will vest and become exercisable with
respect to 25% of the Common Stock issuable upon exercise thereof (rounded to
the nearest whole share; rounded up in the event of a half-share) on each of the
first, second and third anniversaries of the date of grant and the remainder
shall vest on the fourth anniversary of the date of grant.
(f) EARLY EXPIRATION UPON TERMINATION OF EMPLOYMENT. Except as otherwise
provided in the applicable Option Agreement, upon termination of a Participant's
employment with the Company or its Subsidiaries for death, Disability or
termination without Cause by the Company or a Subsidiary, all Options or
portions thereof held by such Participant that are not vested and exercisable on
the date of such termination shall expire and be forfeited as of such date and
all vested Options held by such Participant shall expire to the extent not
theretofore exercised at the end of third month (one year if termination is
caused by Participant's death or Disability) following the date of such
termination. Upon voluntary termination of a Participant's employment or
termination for Cause of a Participant's employment by the Company or a
Subsidiary, all unexercised Options, whether or not vested, shall terminate
immediately upon the earlier to occur of the date the Participant receives
notice of the termination or the actual date of termination.
<PAGE>
(g) METHOD OF EXERCISE. A Stock Option may be exercised, in whole or in part, by
giving written notice of exercise to the Company specifying the number of shares
of Common Stock to be purchased. Such notice shall be accompanied by payment in
full of the purchase price, plus any required withholding taxes, in cash or, if
permitted by the terms of the related grant agreement or otherwise approved in
advance by the Committee, in shares of Common Stock already owned by the
Participant valued at the Fair Market Value of the Common Stock on the date of
exercise. The Committee may also permit Participants, either on a selective or
aggregate basis, to simultaneously exercise Stock Options and sell the shares of
Common Stock thereby acquired pursuant to a brokerage or similar arrangement
approved in advance by the Committee and to use the proceeds from such sale to
pay the exercise price and withholding taxes.
7. STOCK APPRECIATION RIGHTS.
(a) IN GENERAL. Stock Appreciation Rights in respect of shares of Common Stock
may be granted under the Plan alone, in tandem with, in addition to or
independent of a Stock Option or other grant or Award under the Plan. A Stock
Appreciation Right entitles a Participant to receive an amount equal to the
excess of the Fair Market Value of a share of Common Stock on the date of
exercise over the Fair Market Value of a share of Common Stock on the date of
grant of the Stock Appreciation Right, or such other higher price as may be set
by the Committee, multiplied by the number of shares of Common Stock with
respect to which the Stock Appreciation Right shall have been exercised.
(b) ELIGIBILITY AND LIMITATIONS. Any officer of the Company and any other
Employee of the Company or a Subsidiary selected by the Committee may be granted
Stock Appreciation Rights. The Committee shall determine, in its discretion, the
Employees to whom Stock Appreciation Rights will be granted, the timing of such
grants and the number of shares of Common Stock in respect of which each Stock
Appreciation Right is granted; provided that (i) the maximum aggregate number of
shares of Common Stock in respect of which Stock Appreciation Rights may be
granted shall be one million, (ii) the maximum aggregate number of shares of
Common Stock which may be issued and delivered in payment or settlement of Stock
Appreciation Rights shall be 500,000, and (iii) the maximum number of shares of
Common Stock in respect of which Stock Appreciation Rights may be granted to any
Employee during any calendar year shall be 100,000.
<PAGE>
(c) EXERCISABILITY; EXERCISE; FORM OF PAYMENT. A Stock Appreciation Right may be
exercised by a participant at such time or times and in such manner as shall be
authorized by the Committee and set forth in the related grant agreement, except
that in no event shall a Stock Appreciation Right be exercisable within the
first six months after the date of grant. The Committee may provide that a Stock
Appreciation Right shall be automatically exercised on one or more specified
dates. No Stock Appreciation Right may be exercised unless the holder thereof is
at the time of exercise an Employee and has been continuously an Employee since
the date the Stock Appreciation Right was granted, except that the Committee may
permit the exercise of any Stock Appreciation Right for any period following the
Participant's termination of employment not in excess of ninety (90) days on
such terms and conditions as it shall deem appropriate and specify in the
related grant agreement. A Stock Appreciation Right may be exercised, in whole
or in part, by giving the Company a written notice specifying the number of
shares of Common Stock in respect of which the Stock Appreciation Right is to be
exercised. Stock Appreciation Rights may be paid upon exercise in cash, in
shares of Common Stock, or in any combination of cash and shares of Common Stock
as determined by the Committee.
8. RESTRICTED STOCK GRANTS AND AWARDS.
(a) IN GENERAL. A Restricted Stock Grant is the issuance of shares of Common
Stock in the name of an Employee, which issuance is subject to such terms and
conditions as the Committee shall deem appropriate, including, without
limitation, restrictions on the sale, assignment, transfer or other disposition
of such shares and the requirement that the Employee forfeit such shares back to
the Company (i) upon termination of employment for specified reasons within a
specified period of time, or (ii) if any specified Performance Goals are not
achieved during a specified Performance Period, or (iii) if such other
conditions as the Committee may specify are not satisfied.
(b) ELIGIBILITY AND LIMITATIONS. Any officer of the Company and any other key
Employee of the Company or a Subsidiary selected by the Committee may receive a
Restricted Stock Grant. The Committee, in its sole discretion, shall determine
whether a Restricted Stock Grant shall be made, the Employee to receive the
Restricted Stock Grant, and the conditions and restrictions imposed on the
Restricted Stock Grant. The maximum number of shares of Common Stock which may
be issued as Restricted Stock under the Plan shall be one million. The maximum
number of shares of Common Stock which may be issued to any Employee as
Restricted Stock during any calendar year shall not exceed 50,000. The maximum
amount any Employee may receive as a Restricted Stock Grant in any calendar year
shall not exceed $500,000, determined using the Fair Market Value of such
Restricted Stock Grant as at the date of the grant thereof.
<PAGE>
(c) RESTRICTION PERIOD. Restricted Stock Grants shall provide that in order for
a Participant to receive shares of Common Stock free of restrictions, the
Participant must remain in the employment of the Company or its Subsidiaries,
subject to such exceptions as the Committee shall deem appropriate and specify
in the related grant agreement, for a period of not less than four years
commencing on the date of the grant and ending on such later date or dates as
the Committee may designate at the time of the grant (the "Restriction Period").
The Committee, in its sole discretion, may provide for the lapse of restrictions
in installments during the Restriction Period. The Committee may also establish
one or more Performance Goals that are required to be achieved during one or
more Performance Periods within the Restriction Period as a condition to the
lapse of the restrictions.
(d) RESTRICTIONS. The following restrictions and conditions shall apply to each
Restricted Stock Grant during the Restriction Period: (i) the Participant shall
not be entitled to delivery of the shares of the Common Stock; (ii) the
Participant may not sell, assign, transfer, pledge, hypothecate, encumber or
otherwise dispose of or realize on the shares of Common Stock subject to the
Restricted Stock Grant; and (iii) the shares of the Common Stock issued as
Restricted Stock shall be forfeited to the Company if the Participant for any
reason ceases to be an Employee prior to the end of the Restriction Period,
except due to circumstances specified in the related grant agreement or
otherwise approved by the Committee. The Committee may in, its sole discretion,
include such other restrictions and conditions as it may deem appropriate.
(e) PAYMENT. Upon expiration of the Restriction Period and if all conditions
have been satisfied and any applicable Performance Goals attained, the shares of
the Restricted Stock will be made available to the Participant, subject to
satisfaction of applicable withholding tax requirements, free of all
restrictions except as may be required to comply with federal and state
securities laws, as determined by the Committee in its sole discretion;
provided, that the Committee may, in its discretion, require (i) that the
Restricted Stock be retained by the Company, and (ii) that the Participant
receive a cash payment in lieu of unrestricted shares of Common Stock.
(f) RIGHTS AS A SHAREHOLDER. A Participant shall have, with respect to shares of
Restricted Stock, all of the rights of a shareholder of the Company, including
the right to vote the shares and receive any cash dividends paid thereon. Stock
dividends distributed with respect to shares of Restricted Stock shall be
treated as additional shares under the Restricted Stock Grant and shall be
subject to the restrictions and other terms and conditions set forth therein.
9. PERFORMANCE GRANTS AND AWARDS.
<PAGE>
(a) ELIGIBILITY AND TERMS. The Committee may grant to officers of the Company
and other key Employees of the Company and its Subsidiaries the prospective
contingent right, expressed in Units, to receive payments of shares of Common
Stock, cash or any combination thereof, with each Unit equivalent in value to
one share of Common Stock, or equivalent to such other value or monetary amount
as may be designated or established by the Committee ("Performance Grants"),
based upon Company performance over a specified Performance Period. The
Committee shall, in its sole discretion, determine the officers of the Company
and other key Employees eligible to receive Performance Grants. At the time each
Performance Grant is made, the Committee shall establish the Performance Period,
the Performance Measure and the targets to be attained relative to such
Performance Measure (the "Performance Goals") in respect of such Performance
Grant. The number of shares of Common Stock and/or the amount of cash earned and
payable in settlement of a Performance Grant shall be determined at the end of
the Performance Period (a "Performance Award").
(b) LIMITATIONS ON GRANTS AND AWARDS. The maximum number of shares of Common
Stock which may be issued pursuant to Performance Grants shall be 500,000. The
maximum number of shares which may be the subject of Performance Grants made to
any Participant in respect of any Performance Period or during any calendar year
shall be 50,000. The maximum amount any Participant may receive during any
calendar year as Performance Awards pursuant to Performance Grants shall not
exceed $1 million, determined using the Fair Market Value of such Performance
Awards as of the last day of the applicable Performance Period or Periods or as
of the date or dates of the payment thereof, whichever is higher.
(c) PERFORMANCE GOALS, PERFORMANCE MEASURES AND PERFORMANCE PERIODS. Each
Performance Grant shall provide that, in order for a Participant to receive an
Award of all or a portion of the Units subject to such Performance Grant, the
Company must achieve certain Performance Goals over a designated Performance
Period having a minimum duration of one year, with attainment of the Performance
Goals determined using a specific Performance Measure. The Performance Goals and
Performance Period shall be established by the Committee in its sole discretion.
The Committee shall establish a Performance Measure for each Performance Period
for determining the portion of the Performance Grant which will be earned or
forfeited based on the extent to which the Performance Goals are achieved or
exceeded. In setting Performance Goals, the Committee may use a Performance
Measure based on any one, or on any combination, of the following Company
performance factors as the Committee deems appropriate: (i) Cumulative Net
Income Per Share; (ii) Cumulative Net Income; (iii) return on sales; (iv) total
shareholder return; (v) return on assets; (vi) economic value added; (vii) cash
flow, (viii) return on equity; and (ix) cumulative operating income (which shall
equal consolidated sales minus cost of goods sold and selling, administrative
and general expense). Performance Goals may include minimum, maximum and target
levels of performance, with the size of Performance Award based on the level
attained. Once established by the Committee and specified in the grant
agreement, and if and to the extent provided in or required by the grant
agreement, the Performance Goals and the Performance Measure in respect of any
Performance Grant (or any Restricted Stock Grant or Stock-Based Grant that
requires the attainment of Performance Goals as a condition to the Award) shall
not be changed. The Committee may, in its discretion, eliminate or reduce (but
not increase) the amount of any Performance Award (or Restricted Stock or
Stock-Based Award) that otherwise would be payable to a Participant upon
attainment of the Performance Goal(s).
<PAGE>
(d) FORM OF GRANTS. Performance Grants may be made on such terms and conditions
not inconsistent with the Plan, and in such form or forms, as the Committee may
from time to time approve. Performance Grants may be made alone, in addition to
in tandem with, or independent of other grants and Awards under the Plan.
Subject to the terms of the Plan, the Committee shall, in its discretion,
determine the number of Units subject to each Performance Grant made to a
Participant and the Committee may impose different terms and conditions on any
particular Performance Grant made to any Participant. The Performance Goals, the
Performance Period or Periods, and the Performance Measure applicable to a
Performance Grant shall be set forth in the relevant grant agreement.
(e) PAYMENT OF AWARDS. Each Participant shall be entitled to receive payment in
an amount equal to the aggregate Fair Market Value (if the Unit is equivalent to
a share of Common Stock), or such other value as the Committee shall specify, of
the Units earned in respect of such Performance Award. Payment in settlement of
a Performance Award may be made in shares of Common Stock, in cash, or in any
combination of Common Stock and cash, and at such time or times, as the
Committee, in its discretion, shall determine.
10. OTHER STOCK-BASED GRANTS AND AWARDS.
(a) IN GENERAL. The Committee may make other grants and Awards pursuant to which
Common Stock is, or in the future may be, acquired by Participants, and other
grants and Awards to Participants denominated in Common Stock Equivalents or
other Units ("Stock-Based Grants"). Such Stock-Based Grants may be granted alone
or in addition to, in tandem with, or independent of any other grant made or
Award effected under the Plan.
(b) ELIGIBILITY AND TERMS. The Committee may make Stock-Based Grants to officers
of the Company and other key Employees of the Company and its Subsidiaries.
Subject to the provisions of the Plan, the Committee shall have authority to
determine the Employees to whom, and the time or times at which, Stock-Based
Grants will be made, the number of shares of Common Stock, if any, to be subject
to or covered by each Stock-Based Grant, and any and all other terms and
conditions of each Stock-Based Grant.
(c) LIMITATIONS. The aggregate number of shares of Common Stock Issued to
Participants pursuant to Stock-Based Grants made and Awards effected pursuant to
this Section 10 shall not exceed 500,000. No Participant shall receive more than
50,000 shares of Common Stock in settlement of Stock-Based Awards during any
calendar year. The maximum amount any Participant may receive in Stock-Based
Awards during any calendar year shall not exceed $1 million, determined using
the Fair Market Value of any shares of Common Stock delivered in payment of the
Stock-Based Awards on the date or dates of the payment thereof.
<PAGE>
(d) FORM OF GRANTS; PAYMENT OF AWARDS. Stock-Based Grants may be made in such
form or forms and on such terms and conditions, including the attainment of
specific Performance Goals, as the Committee, in its discretion, shall approve.
Payment of Stock-Based Awards may be made in cash, in shares of Common Stock, or
in any combination of cash and shares of Common Stock, and at such time or
times, as the Committee shall determine.
11. WITHHOLDING.
The Committee may, in its discretion, and subject to its prior approval in the
case of any Participant required to file reports pursuant to Section 16(a) of
the Exchange Act, at any time a distribution is made under the Plan, whether in
cash or in shares, or at the time any Option is exercised, withhold from such
distribution or shares issuable upon the exercise of an Option, any amount
necessary to satisfy federal, foreign, state and local withholding requirements
with respect to such distribution or exercise of such Option. Such withholding
may be satisfied at the Committee's option either by cash or withholding of
shares. To the extent that any such withholding requirements are not satisfied,
each Participant shall pay to the Company any federal, foreign, state or local
taxes of any kind required by law to be withheld with respect to a distribution
under the Plan.
12. DEFERRALS.
The Committee may, whether at the time of grant or at anytime thereafter prior
to payment or settlement, require a Participant to defer, or permit (subject to
such conditions as the Committee may from time to time establish) a Participant
to elect to defer, receipt of all or any portion of any payment of cash or
shares of Common Stock that would otherwise be due to such Participant in
payment or settlement of any Award under the Plan, other than Incentive Stock
Options. If any such deferral is required by the Committee (or is elected by the
Participant with the permission of the Committee), the Committee shall establish
rules and procedures for such payment deferrals. The Committee may provide for
the payment or crediting of interest, at such rate or rates as it shall in its
discretion deem appropriate, on such deferred amounts credited in cash and the
payment or crediting of dividend equivalents in respect of deferred amounts
credited in Common Stock Equivalents. Deferred amounts may be paid in a lump sum
or in installments in the matter and to the extent permitted, and in accordance
with rules and procedures established, by the Committee.
13. NON-TRANSFERABILITY OF GRANTS AND AWARDS.
<PAGE>
No grant or Award under the Plan, and no right or interest therein, shall be (i)
assignable, alienable or transferable by a Participant, except by will or the
laws of descent and distribution, or (ii) subject to any obligation, or the lien
or claims of any creditor, of any Participant, or (iii) subject to any lien,
encumbrance or claim of any party made in respect of or through any Participant,
however arising. During the lifetime of a Participant, Stock Options and Stock
Appreciation Rights are exercisable only by, and shares of Common Stock issued
upon the exercise of Stock Options and Stock Appreciation Rights or in
settlement of other Awards will be issued only to, and other payments in
settlement of any Award will be payable only to, the Participant or his or her
legal representative. The Committee may, in its sole discretion, authorize
written designations of beneficiaries and authorize Participants to designate
beneficiaries with the authority to exercise Stock Options and Stock
Appreciation Rights granted to a Participant in the event of his or her death.
Notwithstanding the foregoing, the Committee may, in its sole discretion and on
and subject to such terms and conditions as it shall deem appropriate, which
terms and conditions shall be set forth in the related grant agreement: (i)
authorize a Participant to transfer all or a portion of any Non-Qualified Stock
Option or Stock Appreciation Right, as the case may be, granted to such
Participant; provided, that in no event shall any transfer be made to any person
or persons other than such Participant's spouse, children or grandchildren, or a
trust for the exclusive benefit of one or more such persons, which transfer must
be made as a gift and without any considerations; and (ii) provide for the
transferability of a particular grant or Award pursuant to a qualified domestic
relations order. All other transfers and any retransfer by any permitted
transferee are prohibited and any such purported transfer shall be null and
void. Each Stock Option or Stock Appreciation Right which becomes the subject of
permitted transfer (and the Participant to whom it was granted by the Company)
shall continue to be subject to the same terms and conditions as were in effect
immediately prior to such permitted transfer. The Participant shall remain
responsible to the Company for the payment of all withholding taxes incurred as
a result of any exercise of such Stock Option or Stock Appreciation Right. In no
event shall any permitted transfer of a Stock Option or Stock Appreciation Right
create any right in any party in respect of any Stock Option, Stock Appreciation
Right or other grant or Award, other than the rights of the qualified transferee
in respect of such Stock Option or Stock Appreciation Right specified in the
related grant agreement.
14. CHANGE IN CONTROL.
(a) EFFECT ON GRANTS. In the event of a Change in Control (as defined below) of
the Company, the Board of Directors, in its sole discretion, may provide for
accelerated exercise and/or vesting of Stock Options, Stock Appreciation Rights
and Restricted Stock Grants, for removal of transfer restrictions, and/or that
Performance Grants and other Stock-Based Grants shall be deemed to have been
fully earned, at the maximum amount of the award opportunity specified in the
grant agreement, as of the date of the Change in Control.
<PAGE>
(b) CHANGE IN CONTROL DEFINED. A "Change in Control" of the Company shall occur
when: (i) any Acquiring Person (other than the Company, any Subsidiary, any
employee benefit plan of the Company or of any Subsidiary, or any person or
entity organized, appointed or established by the Company or a Subsidiary for or
pursuant to the terms of any such plans), alone, or together with its Affiliates
and Associates, shall become the beneficial owner of twenty-five percent (25%)
or more of the shares of Common Stock then outstanding (except pursuant to an
offer for all outstanding shares of Common Stock at a price and upon such terms
and conditions as a majority of the Continuing Directors determines to be in the
best interest of the Company and its shareholders); or (ii) the shareholders of
the Company approve a definitive agreement for a merger or consolidation
involving the Company which would result in the Common Stock outstanding
immediately prior to such merger or consolidation continuing to represent
(whether by remaining outstanding or by being converted into voting securities
of the surviving entity) less than fifty percent of the combined voting power of
the Company and such other entity outstanding immediately after such merger or
consolidation; or (iii) the shareholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or other
disposition of all or substantially all of the assets of the Company; or (iv)
the Continuing Directors no longer constitute a majority of the Board of
Directors. "Acquiring Person" means any person (any individual, firm,
corporation or other entity) who or which, together with all its Affiliates and
Associates, shall be the beneficial owner of a substantial block of Common
Stock. "Affiliate" and "Associate" shall have the respective meanings ascribed
to such terms in Rule 12b-2 under the Exchange Act. "Continuing Director" means
any individual who is a member of the Board of Directors, while such individual
is a member of the Board of Directors, who is not an Acquiring Person, or an
Affiliate or Associate of an Acquiring Person, or a representative or nominee of
an Acquiring Person or of any such Affiliate or Associate, and was a member of
the Board of Directors prior to the occurrence of a Change in Control, and any
successor of a Continuing Director, while such successor is a member of the
Board of Directors, who is not an Acquiring Person, or an Affiliate or Associate
of an Acquiring Person, or representative or nominee of an Acquiring Person or
of any such Affiliate or Associate, and is recommended or elected to succeed the
Continuing Director by a majority of the Continuing Directors.
15. AMENDMENT, SUSPENSION AND TERMINATION.
The Board or the Committee may suspend or terminate the Plan or any portion
thereof at any time and may amend it from time to time in such respects as the
Board or the Committee may deem advisable; provided, however, that no such
amendment shall be made without stockholder approval to the extent such approval
is required by law, agreement or the rules of any exchange upon which the Common
Stock is listed, and no such amendment, suspension or termination shall impair
the rights of Participants under outstanding Options without the consent of the
Participants affected thereby, except as otherwise provided herein.
<PAGE>
This document constitutes part
of a prospectus covering securities
that have been registered under
the Securities Act of 1933.
AGREEMENT EVIDENCING A GRANT OF AN INCENTIVE STOCK OPTION
AND NON-QUALIFIED STOCR OPTION UNDER THE 1998 PERFORNANCE
INCENTIVE PLAN OF U.S. INTERACTIVE, INC.
Agreement (this "Agreement") made as of __________ (the "Grant Date"),
between U.S. Interactive, Inc. (the "Company"), and _____________ ("Grantee").
1. Grant of Option. Pursuant to the 1998 Performance Incentive Plan of
the Company (the "Plan"), the Company hereby grants to Grantee, as of the Grant
Date, an incentive stock option to the extent all or any portion of this Option
qualifies as an "incentive stock option" under Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code") and to the extent that all or any
portion of this Option does not so qualify as an "incentive stock option" under
the Code, a non-qualified stock option (together, the "Option"), to purchase an
aggregate of _________ shares (the "Option Shares") of the Common Stock of the
Company (the "Common Stock") at a price of $________ per share of Common Stock,
subject to adjustment and the other terms and conditions set forth herein and in
the Plan. Capitalized terms herein shall have the meaning set forth in the Plan
unless otherwise defined herein.
2. Grantee Bound by Plan. Enclosed is a copy of the Plan which is
incorporated herein by reference and made a part hereof. The Plan shall govern
all aspects of this Agreement except as otherwise specifically stated herein.
Grantee hereby acknowledges receipt of a copy of the Plan and agrees to be bound
by all the terms and provisions thereof. Unless otherwise defined herein,
capitalized terms used but not defined herein shall have the meanings ascribed
to them in the Plan. The Plan should be carefully examined before any decision
is made to exercise this Option. In accordance with the terms of the Plan,
except as expressly set forth in this Agreement, both vested and unvested
options are subject to expiration and forfeiture upon termination of the
Grantee's employment with the Company or a Subsidiary, death or disability. The
date on which the expiration and forfeiture will occur is set forth more fully
in the Plan.
3. Exercise of Option. Subject to the earlier expiration on termination
of the Option as provided herein or in the Plan, the Option with respect to any
Option Shares may be exercised upon such shares becoming vested, although no
Option may be exercised within 6 months of the date of this Agreement, by
written notice to the Company at any time and from time to time thereafter, but
except as otherwise provided below, such Option shall not be exercisable for
more than the number of shares which are then vested. Subject to the foregoing,
this Option shall vest with respect to 100% of the Option Shares over a four (4)
year period, with 25% of the Option Shares (rounded to the
<PAGE>
nearest whole share) vesting on each of the first, second and third
anniversaries of the Grant Date; and the remainder shall vest on the fourth
anniversary of the Grant Date.
This Option shall not be exercisable in any event after the tenth
anniversary [fifth anniversary in the case of a 10% shareholder] of the Grant
Date. This Option may not be exercised for a fraction of a share of Common
Stock. Unvested Options are subject to cancellation as provided in the Plan.
4. Conditions to Exercise. This Option may not be exercised by Grantee
unless the following conditions are met:
(a) legal counsel for the Company must be satisfied at the
time of exercise that the issuance of Option Shares upon exercise will be in
compliance with the Securities Act of 1933, as amended (the "Securities Act")
and applicable United States federal, state and local laws and foreign laws; and
(b) Grantee must pay at the time of exercise the full purchase
price for the shares of Common Stock being acquired hereunder (i) in cash or by
certified check or (ii) by delivery of shares of Common Stock already owned by
the Participant valued at the Fair Market Value of the Common Stock on the date
of exercise, or (iii) by "cashless exercise" as provided in the Plan or (iv)
through a combination thereof. In the case of the exercise of a Non-Qualified
Stock Option or a cashless exercise, the Grantee must also remit the appropriate
withholding taxes due upon exercise, in cash or in such other manner approved by
the Committee. Please refer to the Plan for a complete description of method of
delivery of Option Shares pursuant to this Section 4(b).
(c) The Grantee is employed by the Company or one of its
Subsidiaries, except as otherwise provided in the Plan.
(d) The Grantee (and any permitted transferree) shall have
fully complied with such further conditions to exercise as the Committee, in its
sole discretion, shall deem necessary or desirable to fully comply with all
federal and applicable state securities and tax laws relating to the exercise of
the Option.
5. Transferability. Except as otherwise provided below, this Option may
not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed
of by Grantee, except by will or the laws of descent and distribution (in which
case, such transferee shall succeed to the rights and obligations of Grantee
hereunder) and is exercisable during Grantee's lifetime only by Grantee. If
Grantee or anyone claiming under or through Grantee attempts to violate this
Paragraph 5, such attempted violation shall be null and void and without effect,
and the Company's obligation hereunder shall terminate. If at the time of
Grantee's death this Option has not been fully exercised, Grantee's estate or
any person who acquires the right to exercise this Option by bequest or
inheritance or by reason of Grantee's death may, at any time within one year
after the date of Grantee's death (but in no event after the expiration of ten
years from the Grant Date), exercise this Option with respect to the number of
shares, determined under
2
<PAGE>
Section 3 above, as to which Grantee could have exercised the Option at the time
of Grantee's death. The applicable requirements of paragraph 4 above must be
satisfied in full at the time of such exercise. If this Option is a
Non-Qualified Option, it may be assigned, in whole or in part to Grantee's
spouse, children or grandchildren, or a trust for the exclusive benefit of one
or more of such persons, provided that (i) such assignment is made as a gift and
without any considerations, and (ii) that the transferee acknowledges and agrees
in writing that (x) unless such transferee is a director, officer or employee of
the company, any shares acquired upon exercise of any such Option shall
constitute restricted shares within the meaning of Rule 144 under the Securities
Exchange Act of 1934, (y) any restricted shares so acquired may not be
transferred unless registered under the Securities Act of 1933 and applicable
state securities laws or the transferee provides to the Company an opinion
acceptable to the Company that an exemption from such registration is available,
and (z) that any certificates representing such shares shall be prominently
marked with a legend to that effect. The Grantee, upon any such permitted
transfer, shall remain responsible to the Company for the payment of all
withholding taxes incurred as a result of any exercise of any such Option. Any
Option transferred hereunder by the Grantee shall continue to be governed by and
subject to the terms and conditions of this Agreement and may not be
subsequently transferred except by will or the laws of descent and distribution.
6. Administration. Any action taken or decision made by the Board or
the Committee or its delegates arising out of or in connection with the
construction, administration, interpretation or effect of the Plan or this
Agreement shall lie within its sole and absolute discretion, as the case may be,
and shall be final, conclusive and binding on Grantee and all persons claiming
under or through Grantee. By accepting this grant or other benefit under the
Plan, Grantee and each person claiming under or through Grantee shall be
conclusively deemed to have indicated acceptance and ratification of, and
consent to, any action taken under the Plan by the Board or the Committee or its
delegates.
7. No Rights as Stockholder. Unless and until a certificate or
certificates representing such shares of Common Stock shall have been issued to
Grantee (or any person acting under Paragraph 5 above), Grantee shall not be or
have any of the rights or privileges of a stockholder of the Company with
respect to shares of Common Stock acquirable upon exercise of the Option.
8. Disqualifying Disposition of Shares. In the event that Grantee
exercises an Incentive Stock Option, and subsequently agrees to sell or dispose
of the Option Shares acquired upon exercise before either (i) the expiration of
two (2) years from the Grant Date, or (ii) the expiration of one (1) year from
the date of exercise, the Grantee must notify the Company of such disposition
and the terms thereof and, if required by law, make arrangements to pay the
Company in cash the amount of any withholding taxes due upon such disposition,
as determined by the Company, and the transfer of such shares on the Company's
records shall be conditioned on the payment of any such taxes.
3
<PAGE>
9. Investment Representation. Grantee hereby acknowledges that the
shares of Common Stock which Grantee may acquire by exercising the Option shall
be acquired for investment without a view to distribution, within the meaning of
the Securities Act, and shall not be sold, transferred, assigned, pledged or
hypothecated in the absence of an effective registration statement for the
shares of Common Stock under the Securities Act and applicable state securities
laws or an applicable exemption from the registration requirements of the Act
and any applicable state securities laws. Grantee also agrees that the shares of
Common Stock which Grantee may acquire by exercising the Option will not be sold
or otherwise disposed of in any manner which would constitute a violation of any
applicable securities laws, whether federal or state.
10. Listing and Registration of Common Stock. The Company, in its
discretion, may postpone the issuance and/or delivery of shares of Common Stock
upon any exercise of this Option until completion of such stock exchange
listing, or registration, or other qualification of such shares under any state
and/or federal law, rule or regulation as the Company may reasonably in good
faith consider appropriate.
11. Notices. Any notice hereunder to the Company shall be addressed to
the Company, Attention: Corporate Secretary, and any notice hereunder to Grantee
shall be addressed to Grantee at Grantee's last address on the records of the
Company, subject to the right of either party to designate at any time hereafter
in writing some other address. Any notice shall be deemed to have been duly
given when delivered personally, one day following dispatch if sent by
nationally recognized overnight courier, fees prepaid, or three days following
mailing if sent by registered mail, return receipt requested, postage prepaid
and addressed as set forth above.
12. Binding Effect. This Agreement shall be binding upon and inure to
the benefit of any successors to the Company and all persons lawfully claiming
under Grantee.
13. Governing Law. The validity, construction, interpretation,
administration and effect of the Plan, and of its rules and regulations, and
rights relating to the Plan and to this Agreement, shall be governed by the
substantive laws, but not the choice of law rules, of the state of incorporation
of the Company at the time of the determination.
14. Grantee Acknowledgments.
GRANTEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO
THE OPTION IS EARNED ONLY BY CONTINUING EMPLOYMENT AT THE WILL OF THE COMPANY
(NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING
SHARES HEREUNDER). GRANTEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS
AGREEMENT, NOR IN THE COMPANY'S STOCK OPTION PLAN WHICH IS INCORPORATED HEREIN
BY REFERENCE, SHALL CONFER UPON GRANTEE ANY RIGHT WITH RESPECT TO CONTINUATION
OF EMPLOYMENT BY THE COMPANY, NOR SHALL IT INTERFERE IN ANY WAY
4
<PAGE>
WITH HIS RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OR MODIFY HIS EMPLOYMENT AT
ANY TIME, WITH OR WITHOUT CAUSE.
Grantee acknowledges receipt of a copy of the Plan and represents that
he is familiar with the terms and provisions thereof, and hereby accepts this
Option subject to all of the terms and provisions thereof except as otherwise
specifically stated in this Option Agreement. Grantee has reviewed the Plan and
this Option Agreement in their entirety, has had an opportunity to obtain the
advice of counsel prior to executing this Option Agreement and fully understands
all provisions of this Option Agreement. Grantee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the Board upon
any questions arising under the Plan.
IN WITNESS WHEREOF, the Company and Grantee have executed this
Agreement as of the date first above written.
U.S. INTERACTIVE, INC.
By:
----------------------------------
Name:
Title:
GRANTEE
-------------------------------------
Employee's Signature
Name of Employee (Print)
<PAGE>
AMENDED AND RESTATED
1998
U.S. INTERACTIVE, INC.
STOCK OPTION PLAN
ARTICLE I
Purpose of Plan
The Stock Option Plan (the "Plan") of U.S. Interactive, Inc. (the
"Company"), adopted by the Board of Directors and stockholders of the Company
effective immediately after the merger of Digital Evolution, Inc. into the
Company ("Merger") is intended to advance the best interests of the Company by
providing executives and other employees of the Company or any Subsidiary who
have substantial responsibility for the management and growth of the Company or
any Subsidiary with additional incentives by allowing such executives and other
employees to acquire an ownership interest in the Company. The Plan is a
compensatory benefit plan within the meaning of Rule 701 under the Securities
Act of 1933, as amended (the "Securities Act"), and, unless and until the Common
Stock is publicly traded, the issuance of options and Common Stock pursuant to
the Plan is intended to qualify for the exemption from registration under the
Securities Act provided by Rule 701.
ARTICLE II
Definitions
For purposes of the Plan, except as otherwise provided in the
applicable Option Agreement, the following terms have the indicated meanings:
"Affiliate" of any specified Person means any other Person which
directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person.
"Board" means the Board of Directors of the Company.
"Cause", unless otherwise determined by the Committee, means (i) a
Participant's action or failure to act which (a) would materially adversely
affect the reputation, operations or financial condition of the Company or any
of its Subsidiaries; (ii) a willful failure by the Participant to perform such
Participant's duties, except as a result of the Disability or death of the
Participant; or (iii) a Participant's theft, embezzlement, perpetration of
fraud, or misappropriation of any tangible or intangible assets or property of
the Company or any of its Subsidiaries or attempted theft, embezzlement,
perpetration of fraud, or misappropriation of any tangible or intangible assets
or property of the Company or any of its Subsidiaries. In addition, and without
limiting any of the foregoing "Cause" for purposes of this Plan shall also mean
"Cause" as that term is defined in a Participant's employment agreement, if any,
with the Company or a Subsidiary.
<PAGE>
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the Compensation Committee or such other committee of
the Board as the Board may designate to administer the Plan or, if for any
reason the Board has not designated such a committee, the Board. The Committee,
if other than the Board, shall be comprised of not less than two of the then
members of the Board of Directors who qualify as "non-employee directors" within
the meaning of Rule 16b-3 promulgated under the Exchange Act and as "outside
directors" within the meaning of Section 162(m) of the Code.
"Common Stock" means the authorized but unissued Common Stock, with
$.001 par value per share, of the Company.
"Company" has the meaning ascribed thereto in the first paragraph
hereof.
"Disability" shall mean permanent and total disability, as defined in
Section 22(e) of the Code.
"Fair Market Value" per share on any given date means the average of
the closing prices of the sales of the Common Stock on all securities exchanges
on which such stock may at the time be listed, or, if there have been no sales
on any such exchange on any day, the average of the highest bid and lowest asked
prices on all such exchanges at the end of such day, or, if on any day such
stock is not so listed, the average of the representative bid and asked prices
quoted on the Nasdaq Stock Market as of 4:00 P.M., New York time, or, if on any
day such stock is not quoted on the Nasdaq Stock Market, the average of the
highest bid and lowest asked prices on such day in the domestic over-the-counter
market as reported by the National Quotation Bureau, Incorporated, or any
similar successor organization. If at any time the Common Stock is not listed or
quoted, the Fair Market Value per share shall be determined by the Committee in
good faith based on such factors as the members thereof, in the exercise of
their business judgment, consider relevant.
"Incentive Stock Option" shall mean any Option intended to qualify as
an incentive stock option within the meaning of Section 422 of the Code or any
successor provision.
"Option Agreement" has the meaning ascribed thereto in Section 5.1.
"Options" has the meaning ascribed thereto in Article IV.
"Option Share mean (i) all shares of Common Stock issued or issuable
upon the exercise of an Option and (ii) all shares of Common Stock issued with
respect to the Common Stock referred to in clause (i) above by way of stock
dividend or stock split or in connection with any conversion; merger,
consolidation or recapitalization or other reorganization affecting the Common
Stock. Except as provided otherwise herein or in the applicable Option
Agreement, Option Shares will continue to be Option Shares in the hands of any
holder other than the Participant (except for the Company), and each such
transferee thereof will succeed to the rights and obligations of a holder of
Option Shares hereunder.
"Participant" means any executive or other employee of the Company or
any Subsidiary who has been selected to participate in the Plan by the
Committee.
<PAGE>
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or any
other legal entity.
"Plan" has the meaning ascribed thereto in the first paragraph hereof.
"Public Offering" means the sale, in an underwritten public offering,
of shares of Common Stock registered under the Securities Act, except any public
offering on a registration statement on Form S-3 or S-8 or similar form.
"Sale of the Company" means a Change in Control of the Company or a
sale of all or substantially all (more than 50%) of the assets of the Company in
a single transaction or a series of related transactions; provided however, the
Merger shall not be deemed to be a Change of Control for purposes of this Plan.
For purposes hereof, a "Change of Control" of the Company shall mean an event of
a nature that: (i) would be required to be reported in response to Item l(a) of
the current report on Form 8-K pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act") if the Company were (or is) required
to file reports pursuant to the Exchange Act.
"Securities Act" has the meaning ascribed thereto in the first
paragraph hereof.
"Subsidiary" means any subsidiary corporation (as such term is defined
in Section 424(f) of the Code) of the Company, whether now existing or hereafter
created.
"Ten Percent Shareholder" shall mean any person to whom an Option is
granted under this Plan who, at the time an Option is granted, owns directly or
indirectly (within the meaning of Section 424(d) of the Code) stock possessing
more than ten percent (10%) of the total combined voting power of all classes of
stock of the Company or a Subsidiary.
"Trigger Event" shall mean a Sale of the Company or the consummation of
a public offering of securities of the Company in which the gross proceeds to
the Company are not less than $10,000,000.
<PAGE>
ARTICLE III
Administration
The Plan shall be administered by the Committee. Subject to the
limitations of the Plan, the Committee shall have the sole and complete
authority to: (i) select Participants, (ii) grant Options to Participants in
such forms and amounts as it shall determine, (iii) impose such limitations,
restrictions and conditions upon each Option as it shall deem appropriate (which
need not be identical), including but not limited to the vesting schedule for
each Option granted, and modify or amend the terms of each outstanding Option
(subject to the provisions of Section 6.6 hereof), (iv) interpret the Plan and
adopt, amend and rescind administrative guidelines and other rules and
regulations relating to the Plan, (v) correct any defect or omission or
reconcile any inconsistency in the Plan or in any Options granted under the
Plan, (vi) reduce the exercise price per share of outstanding and unexercised
Options, (vii) accelerate or defer the exercise price per share or the time of
exercise of any outstanding Option, (viii) authorize any person to execute on
behalf of the Company any instrument required to effectuate the grant of an
Option previously granted by the Committee, and (ix) make all other
determinations and take all other actions necessary or advisable for the
implementation and administration of the Plan. The Committee's determinations on
matters within its authority shall be final, conclusive and binding upon the
Participants, the Company and all other persons. All expenses associated with
the administration of the Plan shall be borne by the Company. The Committee may,
as approved by the Board and to the extent permissible by law, delegate any of
its authority hereunder to such person or entities as it deems appropriate. No
member of either the Committee or the Board of Directors shall participate in a
decision to grant an option to such member.
ARTICLE IV
Limitation on Aggregate Shares
The number of shares of Common Stock with respect to which stock
purchase options ("Options") may be granted under the Plan shall not exceed, in
the aggregate 1,397,236 subject to adjustment in accordance with Section 6.3. To
the extent any Options (i) expire unexercised, (ii) are cancelled, terminated or
forfeited in any manner without the issuance of Common Stock thereunder, or
(iii) are tendered, whether by physical delivery or attestation, to the Company
by a Participant as full or partial payment of the exercise price of any Option
granted pursuant to the Plan, or in payment of any applicable withholding for
federal, state, local or foreign income, payroll or other taxes incurred in
connection with the exercise of any Option granted under the Plan, such shares
shall again be available under the Plan. The shares of Common Stock available
under the Plan may consist of authorized and unissued shares, treasury shares or
a combination thereof, as the Committee shall determine.
<PAGE>
ARTICLE V
Awards
5.1 Grant of Options. The Committee may grant Options to Participants
from time to time in accordance with this Article V. Each Option granted
hereunder to a Participant shall be embodied in a written Option Agreement (the
"Option Agreement") which shall be signed by the Participant and by a duly
authorized officer of the Company for and in the name and on behalf of the
Company and shall be subject to the terms and conditions prescribed herein and
to any other terms and conditions which the committee shall deem necessary and
desirable in its sole discretion. Options granted under the Plan may be
non-qualified stock options or Incentive Stock Options as specified by the
Committee. The exercise price per share of Common Stock under each Option shall
be fixed by the Committee at the time of grant of the Option and shall equal at
least 100% of the Fair Market Value of a share of Common Stock on the date of
grant (and at least 110% of the Fair Market Value in the case of an Incentive
Stock Option granted to a Ten Percent Shareholder)(as adjusted pursuant to
Section 6.3). Subject to Section 5.5 below, Options shall be exercisable at such
time or times as the Committee shall determine; provided, however, that to the
extent that the aggregate Fair Market Value of the Common Stock (determined as
of the date of Option grant) with respect to which Incentive Stock Options (but
not non-qualified options) are exercisable for the first time by a Participant
during any calendar year (under all stock option plans of the Company) shall
exceed $100,000 or such higher amount as may be permitted from time to time
under the Code, such Options shall be treated as non-qualified. The Committee
shall determine the exercise period for each Option, which period shall not
exceed ten years from the date of grant of the Option. In addition, no Options
shall be granted hereunder after the tenth anniversary of the adoption of the
Plan.
5.2 Exercise Procedure. Options shall be exercisable by written notice
to the Company (to the attention of the Company's Secretary) accompanied by
payment in full of the applicable exercise price in cash, certified check, bank
draft or money order or such other method as the Committee may agree. The
Committee, in its sole discretion, and subject to such conditions as the
Committee may determine, may permit the exercise of an Option by delivery of a
promissory note.
5.3 Exchange of Previously Acquired Stock. The Committee, in its sole
discretion and subject to such conditions as the Committee may determine, may
permit the exercise price for the shares being acquired upon the exercise of an
Option to be paid, in full or in part, by the delivery to the Company of a
number of shares of Common Stock having an aggregate Fair Market Value as of the
date of exercise equal to part or all of such exercise price.
<PAGE>
5.4 Withholding Tax Requirements. It shall be a condition of the
exercise of any Option that the Participant exercising the Option make
appropriate payment or other provision acceptable to the Company with respect to
any withholding tax requirement arising from such exercise. The amount of
withholding tax required, if any, with respect to any Option exercise (the
"Withholding Amount") shall be determined by the Treasurer or other appropriate
officer of the Company, and the Participant shall furnish such information and
make such representations as such officer requires to make such determination.
If the Company determines that withholding tax is required with respect to any
Option exercise, the Company shall notify the Participant of the Withholding
Amount, and the Participant shall pay to the Company an amount not less than the
Withholding Amount. In lieu of making such payment, the Participant may elect to
pay the Withholding Amount by either (i) surrendering to the Company a number of
shares of Common Stock having an aggregate Fair Market Value as of the
"measurement date" (as defined below)not less than the Withholding Amount or
(ii) directing the Company to withhold (and not to deliver or issue to the
Participant) a number of shares of Common Stock otherwise issuable upon the
exercise of the Option having an aggregate Fair Market Value as of the
measurement date not less than the Withholding Amount. In addition, if the
Committee approves, a Participant may elect pursuant to the immediately
preceding sentence to deliver or direct the withholding of shares of Common
Stock having an aggregate Fair Market Value in excess of the minimum Withholding
Amount but not in excess of the Participant's tax liability in connection with
the Option exercise based on the highest applicable marginal combined federal
income and state income tax rate, as estimated in good faith by such
Participant. Any fractional share interests resulting from the delivery or
withholding of shares of Common Stock to meet withholding tax requirements shall
be settled in cash. All amounts paid to or withheld by the Company and the value
of all shares of Common Stock delivered to or withheld by the Company pursuant
to this Section 5.4 shall be deposited in accordance with applicable law by the
Company as withholding tax for the Participant's account. If the Treasurer or
other appropriate officer of the Company determines that no withholding tax is
required with respect to the exercise of any Option (because such Option is an
Incentive Stock Option or otherwise), but subsequently it is determined that the
exercise resulted in taxable income as to which withholding is required (as a
result of a disposition of shares or otherwise), the Participant shall promptly,
upon being notified of the withholding requirement, pay to the Company by means
acceptable to the Company the amount required to be withheld; and at its
election the Company may condition any transfer of shares issued upon exercise
of an Incentive Stock Option upon receipt of such payment. The term "measurement
date" as used in this Section 5.4 shall mean the date on which any taxable
income resulting from the exercise of an Option is determined under applicable
federal income tax law.
<PAGE>
5.5 Conditions and Limitation on Exercise. At the sole discretion of
the Committee, Options may be made exercisable, in one or more installments,
upon (i) the happening of certain events, (ii) the passage of a specified period
of time, (iii) the fulfillment of certain conditions and/or (iv) the achievement
by the Company or a Subsidiary, as the case may be, of certain performance
goals. Notwithstanding anything to the contrary in this Plan or any Option
Agreement, no Option shall be exercisable, whether or not vested, before the
effective date of any Trigger Event. Subject to the preceding sentence, unless
the Committee specifies otherwise in the Option Agreement, every Option granted
pursuant to this Plan will vest and become exercisable with respect to 25% of
the Common Stock issuable upon exercise thereof (rounded to the nearest whole
share; rounded up in the event of a half-share for Options granted after the
adoption of this Amended and Restated 1998 U.S. Interactive, Inc. Stock Option
Plan) on each of the first, second and third anniversaries of the date of grant
and the remainder shall vest on the fourth anniversary of the date of grant. In
the event of a Sale of the Company the Committee may provide, in its sole
discretion, that the outstanding Options which are immediately exercisable shall
terminate if not exercised as of the date of the Sale of the Company or any
other designated date or that such Options shall thereafter represent only the
right to receive the excess of the consideration per share of Common Stock
offered in such Sale of the Company over the exercise price of such Options.
Upon a Trigger Event, the Committee may accelerate the vesting of any unvested
Options.
5.6 Expiration of Options.
(a) Normal Expiration. In no event shall any part of any Option be
exercisable after the stated date of expiration thereof.
(b) Early Expiration Upon Termination of Employment. Except as
otherwise provided in the applicable Option Agreement, upon termination of a
Participant's employment with the Company or its Subsidiaries for death,
Disability or termination without cause by the Company or a Subsidiary, all
Options or portions thereof held by such Participant that are not vested and
exercisable on the date of such termination shall expire and be forfeited as of
such date and all vested Options held by such Participant shall expire to the
extent not theretofore exercised on the ninetieth (90th) day (one year if
termination is caused by Participant's death or Disability) following the date
of such termination. Upon voluntary termination of a Participant's employment or
termination for Cause of a Participant's employment by the Company or a
Subsidiary, all unexercised Options, whether or not vested, shall terminate
immediately upon the earlier to occur of the date the Participant receives
notice of the termination or the actual date of termination.
<PAGE>
ARTICLE VI
General Provisions
6.1 Listing, Registration and Legal Compliance. If at anytime the
Committee determines, in its discretion, that the listing, registration or
qualification of the shares subject to Options upon any securities exchange or
under any state or federal securities or other law or regulation, or the consent
or approval of any governmental regulatory body, is necessary or desirable as a
condition to or in connection with the granting of Options or the purchase or
issuance of shares thereunder, no Options may be granted or exercised, in whole
or in part, unless such listing, registration, qualification, consent or
approval shall have been effected or obtained free of any conditions not
acceptable to the Committee. The holders of such Options will supply the Company
with such certificates, representations and information as the Company shall
request and shall otherwise cooperate with the Company in obtaining such
listing, registration, qualification, consent or approval. If the Company, as
part of an offering of securities or otherwise, finds it desirable because of
federal or state regulatory requirements to reduce the period during which any
Options may be exercised, the Committee may, in its discretion and without the
Participant's consent, so reduce such period on not less than 15 days' written
notice to the holders thereof.
6.2 Options Not Transferable. No grant under the Plan, and no right or
interest therein, shall be (a) assignable, alienable or transferable by a
Participant, except by will or the laws of descent and distribution, or (b)
subject to any obligation, or the lien or claims of any creditor, of any
Participant, or (c) subject to any lien, encumbrance or claim of any party made
in respect of or through any Participant, however arising. During the lifetime
of a Participant, Options are exercisable only by, and shares of Common Stock
issued upon the exercise of Options will be issued only to the Participant or
his or her legal representative. The Committee may, in its sole discretion,
authorize written designations of beneficiaries and authorize Participants to
designate beneficiaries with the authority to exercise Options granted to a
Participant in the event of his or her death. Notwithstanding the foregoing, the
Committee may, in its sole discretion and on and subject to such terms and
conditions as it shall deem appropriate, which terms and conditions shall be set
forth in the related grant agreement: (i) authorize a Participant to transfer
all or a portion of any Non-Qualified Option granted to such Participant;
provided, that in no event shall any transfer be made to any person or persons
other than such Participant's parents, spouse, children or grandchildren,
siblings, or children of siblings, or a trust for the exclusive benefit of one
or more such persons, which transfer must be made a gift and without any
consideration; and (ii) provide for the transferability of a particular grant
pursuant to a qualified domestic relations order. All other transfers and any
retransfer by any permitted transferee are prohibited and any such purported
transfer shall be null and void. Each Option which becomes the subject of a
permitted transfer (and the Participant to whom it was granted by the Company)
shall continue to be subject to the same terms and conditions as were in effect
immediately prior to such permitted transfer. The Participant shall remain
responsible to the Company for the payment of all withholding taxes incurred as
a result of any exercise of such Option. In no event shall any permitted
transfer of an Option create any right in any party in respect of any Option,
other than the rights of the qualified transferee in respect of such Option
specified in the related grant agreement.
6.3 Adjustments. In the event of a reorganization, recapitalization,
stock dividend or stock split, or combination or other change in the shares of
Common Stock, the Board or the Committee shall, in order to prevent the dilution
or enlargement of rights under the Plan or outstanding Options, adjust the
number and type of shares as to which options may be granted under the Plan, the
number and type of shares covered by outstanding Options, the exercise prices
specified therein and other provisions of this Plan which specify a number of
shares, all as such Board or Committee determines to be appropriate and
equitable.
6.4 Rights of Participation. Nothing in the Plan shall interfere with
or limit in any way the right of the Company or any Subsidiary to terminate or
modify any Participant's employment at any time (with or without Cause), or
confer upon any Participant any right to continue in the employ of the Company
or any Subsidiary for any period of time or to continue to receive such
Participant's current (or other) rate of compensation. No employee shall have a
right to be selected as a Participant or, having been so selected, to be
selected again as a Participant.
6.5 Amendment, Suspension and Termination of Plan. The Board or the
Committee may suspend or terminate the Plan or any portion thereof at any time
and may amend it from time to time in such respects as the Board or the
Committee may deem advisable; provided, however, that no such amendment shall be
made without stockholder approval to the extent such approval is required by
law, agreement or the rules of any exchange upon which the Common Stock is
listed, and no such amendment, suspension or termination shall impair the rights
of Participants under outstanding Options without the consent of the
Participants affected thereby, except as otherwise provided herein. No Options
shall be granted hereunder after the tenth anniversary of the approval of the
Plan by the stockholders of the Company.
<PAGE>
6.6 Amendment of Outstanding Options. The Committee may amend or modify
the terms of any Option Agreement in any manner to the extent that the Committee
would have the authority under the Plan initially to grant an Option with such
amended terms; provided that, except as expressly contemplated elsewhere herein
or in the Option Agreement no such amendment or modification shall impair the
rights of any Participant under any outstanding Option without the consent of
such Participant.
6.7 Indemnification. In addition to such other rights of
indemnification as they may have as members of the Board or the Committee, the
members of the Committee shall be indemnified by the Company against all costs
and expenses reasonably incurred by them in connection with any action, suit or
proceeding to which they or any of them may be party by reason of any action
taken or failure to act under or in connection with the Plan or any Option
granted under the Plan, and against all amounts paid by them in settlement
thereof (provided such settlement is approved by independent legal counsel
selected by the Company) or paid by them in satisfaction of a judgment in any
such action, suit or proceeding; provided, however, that any such Committee
member shall be entitled to the indemnification rights set forth in this Section
6.7 only if such member has acted in good faith and in a manner that such member
reasonably believed to be in or not opposed to the best interests of the Company
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe that such conduct was unlawful, and further provided that upon the
institution of any such action, suit or proceeding a Committee member shall give
the Company written notice thereof and an opportunity to handle and defend the
same before such Committee member undertakes to handle and defend it on his own
behalf.
6.8 Restricted Securities. All Common Stock issued pursuant to the
terms of this Plan shall constitute "restricted securities," as that term is
defined in Rule 144 promulgated pursuant to the Securities Act, and may not be
transferred except in compliance with the registration requirements of the
Securities Act or an exemption therefrom.
6.9 Governing Law. The validity, construction, interpretation,
administration and effect of the Plan, and of its rules and regulations, and
rights relating to the Plan, shall be governed by the substantive laws, but not
the choice of law rules, of the state of incorporation of the Company at the
time of the determination.
6.10 No Restriction on Corporate Actions. No provision of this Plan or
any Option shall be construed to prevent the Company from taking any corporate
action deemed by the Company to be appropriate or in its best interest, whether
or not such action could have an adverse effect on the Plan or any Options
granted hereunder, and no Option holder or Option holder's estate, personal
representative or beneficiary shall have any claim against the Company as a
result of taking such action. The adoption of the Plan shall not affect any
other stock option or incentive or other compensation plans in effect for the
Company, nor shall the Plan preclude the Company from establishing any other
forms of incentive or other compensation for employees or directors of, or
consultants to, the Company.
* * * *
<PAGE>
$100,000 Limitation Grant
AGREEMENT EVIDENCING A GRANT OF AN INCENTIVE STOCK OPTION AND
NON-QUALIFIED STOCK OPTION UNDER THE AMENDED AND RESTATED
1998 U.S. INTERACTIVE, INC. STOCK OPTION PLAN
Agreement (this "Agreement") made as of March 1, 1999 (the
"Grant Date"), between U.S. Interactive, Inc. (the "Company"), and Stephen T.
Zarrilli ("Grantee").
1. Grant of Option. Pursuant to the Amended and Restated 1998
Stock Option Plan of the Company (the "Plan"), the Company hereby grants to
Grantee, as of the Grant Date, an incentive stock option to the extent all or
any portion of this Option qualifies as an "incentive stock option" under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") and to
the extent that all or any portion of this Option does not so qualify as an
"incentive stock option" under the Code, a non-qualified stock option (together,
the "Option"), to purchase an aggregate of 100,000 shares (the "Option Shares")
of the Common Stock of the Company (the "Common Stock") at a price of $5.00 per
share of Common Stock, subject to adjustment and the other terms and conditions
set forth herein and in the Plan. Capitalized terms herein shall have the
meaning set forth in the Plan unless otherwise defined herein.
2. Grantee Bound by Plan. Enclosed is a copy of the Plan which
is incorporated herein by reference and made a part hereof. The Plan shall
govern all aspects of this Agreement except as otherwise specifically stated
herein. Grantee hereby acknowledges receipt of a copy of the Plan and agrees to
be bound by all the terms and provisions thereof. Unless otherwise defined
herein, capitalized terms used but not defined herein shall have the meanings
ascribed to them in the Plan. The Plan should be carefully examined before any
decision is made to exercise this Option. In accordance with the terms of the
Plan, except as expressly set forth in this Agreement, both vested and unvested
options are subject to expiration and forfeiture upon termination of the
Grantee's employment with the Company or a Subsidiary, death or disability. The
date on which the expiration and forfeiture will occur is set forth more fully
in the Plan.
3. Exercise of Option. Subject to the earlier termination of
the Option as provided herein and in the Plan, the Option shall vest with
respect to 100% of the Option Shares over a four (4) year period, with 25% of
the Option Shares (rounded up in the event of a half-share) vesting on each of
the first, second and third anniversaries of the Grant Date; and the remainder
shall vest on the fourth anniversary of the Grant Date. Subject to the
foregoing, and only to the extent of the number of Option Shares which are then
vested, the Option may be exercised only after a Trigger Event by written notice
to the Company; provided however, if the Option otherwise qualifies as an
Incentive Stock Option, the Option may be exercised only for that number of
Option Shares which have a Fair Market Value at the Grant Date (when combined
with the Fair Market Value of any other incentive stock options (as of the grant
date of such options) exercisable for the first time in the same calendar year
under any option plan of the Company) equal to or less than $100,000 (or such
higher amount as permitted from time to time under the Code). Subject to the
earlier termination of the Option as provided herein and in the Plan, any
portion of the Option otherwise exercisable with respect to Option Shares then
vested but not exercisable due to the immediately preceding sentence shall not
be exercisable until the earlier of (a) such time that such portion of the
Option can be exercised without exceeding the $100,000 limitation set forth
above; or (b) nine years eleven months after the Grant Date.
<PAGE>
This Option shall not be exercisable in any event after the tenth
anniversary [fifth anniversary in the case of a Ten Percent Shareholder] of the
Grant Date. This Option may not be exercised for a fraction of a share of Common
Stock. Unvested Options are subject to cancellation as provided in the Plan.
To the extent the aggregate Fair Market Value of the Common Stock
(determined as of the date of the Option grant) with respect to which Incentive
Stock Options (but not non-qualified options) are exercisable for the first time
by a Participant during any calendar year (under all stock option plans of the
Company) shall exceed $100,000 or such higher amount as may be permitted from
time to time under the Code, such Options shall be treated as non-qualified.
4. Conditions to Exercise. This Option may not be exercised by
Grantee unless the following conditions are met:
(a) legal counsel for the Company must be satisfied
at the time of exercise that the issuance of Option Shares upon exercise will be
in compliance with the Securities Act of 1933, as amended (the "Securities Act")
and applicable United States federal, state and local laws and foreign laws; and
(b) Grantee must pay at the time of exercise the full
purchase price for the shares of Common Stock
being acquired hereunder (i) in cash or by certified check or (ii) by delivery
of other shares of Common Stock which have an aggregate Fair Market Value equal
to the full exercise price in accordance with Section 1 for such Option shares
being purchased upon such exercise, or (iii) by surrendering a portion of this
Option which entitles the Grantee to purchase Option Shares which have vested
and have an aggregate Fair Market Value equal to the full exercise price in
accordance with Section 1 for such Option shares being purchased upon such
exercise or (iv) through a combination thereof. In the event of the exercise of
a non-qualified stock option, the Grantee must also remit the appropriate
withholding taxes due upon exercise, in cash or in such other manner approved by
the Committee. Please refer to the Plan for a complete description of method of
delivery of Option shares pursuant to this Section 4(b).
5. Transferability. This Option may not be sold, assigned,
transferred, pledged, hypothecated or otherwise disposed of by Grantee, except
by will or the laws of descent and distribution (in which case, such transferee
shall succeed to the rights and obligations of Grantee hereunder) and is
exercisable during Grantee's lifetime only by Grantee. If Grantee or anyone
claiming under or through Grantee attempts to violate this Paragraph 5, such
attempted violation shall be null and void and without effect, and the Company's
obligation hereunder shall terminate. If at the time of Grantee's death this
Option has not been fully exercised, Grantee's estate or any person who acquires
the right to exercise this Option by bequest or inheritance or by reason of
Grantee's death may, at any time within one year after the date of Grantee's
death (but in no event after the expiration of ten years from the Grant Date),
exercise this Option with respect to the number of shares, determined under
Section 3 above, as to which Grantee could have exercised the Option at the time
of Grantee's death. The applicable requirements of paragraph 4 above must be
satisfied in full at the time of such exercise.
<PAGE>
6. Administration. Any action taken or decision made by the
Company, the Board or the Committee or its delegates arising out of or in
connection with the construction, administration, interpretation or effect of
the Plan or this Agreement shall lie within its sole and absolute discretion, as
the case may be, and shall be final, conclusive and binding on Grantee and all
persons claiming under or through Grantee. By accepting this grant or other
benefit under the Plan, Grantee and each person claiming under or through
Grantee shall be conclusively deemed to have indicated acceptance and
ratification of, and consent to, any action taken under the Plan by the Company,
the Board or the Committee or its delegates.
7. No Rights as Stockholder. Unless and until a certificate or
certificates representing such shares of Common Stock shall have been issued to
Grantee (or any person acting under Paragraph 5 above), Grantee shall not be or
have any of the rights or privileges of a stockholder of the Company with
respect to shares of Common Stock acquirable upon exercise of the Option.
8. Disqualifying Disposition of Shares. In the event that
Grantee exercises an Incentive Stock Option, and subsequently agrees to sell or
dispose of the Option Shares acquired upon exercise before either (1) the
expiration of two (2) years from the Grant Date, or (ii) the expiration of one
(1) year from the date of exercise, the Grantee must notify the Company of such
disposition and the terms thereof and make arrangements to pay the Company in
cash the amount of the withholding taxes, if any, due upon such disposition, as
determined by the Company, and the transfer of such shares on the Company's
records shall be conditioned on the payment of such taxes.
9. Investment Representation. Grantee hereby acknowledges that
the shares of Common Stock which Grantee may acquire by exercising the Option
shall be acquired for investment without a view to distribution, within the
meaning of the Securities Act, and shall not be sold, transferred, assigned,
pledged or hypothecated in the absence of an effective registration statement
for the shares of Common Stock under the Securities Act and applicable state
securities laws or an applicable exemption from the registration requirements of
the Act and any applicable state securities laws. Grantee also agrees that the
shares of Common Stock which Grantee may acquire by exercising the Option will
not be sold or otherwise disposed of in any manner which would constitute a
violation of any applicable securities laws, whether federal or state.
<PAGE>
10. Listing and Registration of Common Stock. The Company, in
its discretion, may postpone the issuance and/or delivery of shares of Common
Stock upon any exercise of this Option until completion of such stock exchange
listing, or registration, or other qualification of such shares under any state
and/or federal law, rule or regulation as the Company may reasonably in good
faith consider appropriate.
11. Notices. Any notice hereunder to the Company shall be
addressed to the Company, Attention: Corporate Secretary, and any notice
hereunder to Grantee shall be addressed to Grantee at Grantee's last address on
the records of the Company, subject to the right of either party to designate at
any time hereafter in writing some other address. Any notice shall be deemed to
have been duly given when delivered personally, one day following dispatch if
sent by nationally recognized overnight courier, fees prepaid, or three days
following mailing if sent by registered mail, return receipt requested, postage
prepaid and addressed as set forth above.
12. Binding Effect. This Agreement shall be binding upon and
inure to the benefit of any successors to the Company and all persons lawfully
claiming under Grantee.
13. Governing Law. The validity, construction, interpretation,
administration and effect of the Plan, and of its rules and regulations, and
rights relating to the Plan and to this Agreement, shall be governed by the
substantive laws, but not the choice of law rules, of the State of Delaware.
IN WITNESS WHEREOF, the Company and Grantee have executed this
Agreement as of the date first above written.
U.S. INTERACTIVE, INC.
By: /s/
Name: E. Michael Forgash
Title:
<PAGE>
GRANTEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO
THE OPTION IS EARNED ONLY BY CONTINUING EMPLOYMENT AT THE WILL OF THE
COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION
OR ACQUIRING SHARES HEREUNDER). GRANTEE FURTHER ACKNOWLEDGES AND AGREES
THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S STOCK OPTION PLAN
WHICH IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON GRANTEE
ANY RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT BY THE COMPANY,
NOR SHALL IT INTERFERE IN ANY WAY WITH GRANTEE'S RIGHT OR THE COMPANY'S
RIGHT TO TERMINATE OR MODIFY GRANTEE'S EMPLOYMENT AT ANY TIME, WITH OR
WITHOUT CAUSE.
Grantee acknowledges receipt of a copy of the Plan and
represents that Grantee is familiar with the terms and provisions thereof, and
hereby accepts this Option subject to all of the terms and provisions thereof
except as otherwise specifically stated in this Option Agreement. Grantee has
reviewed the Plan and this Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option
Agreement and fully understands all provisions of this Option Agreement. Grantee
hereby agrees to accept as binding, conclusive and final all decisions or
interpretations of the Board upon any questions arising under the Plan.
GRANTEE
/s/
------------------------------
Employee's Signature
Stephen Zarrilli
------------------------------
Name of Employee (Print)
<PAGE>
$100,000 Limitation Grant
AGREEMENT EVIDENCING A GRANT OF AN INCENTIVE STOCK OPTION AND
NON-QUALIFIED STOCK OPTION UNDER THE AMENDED AND RESTATED
1998 U.S. INTERACTIVE, INC. STOCK OPTION PLAN
Agreement (this "Agreement") made as of March 12, 1999 (the
"Grant Date"), between U.S. Interactive, Inc. (the "Company"), and Philip L.
Calamia ("Grantee").
1. Grant of Option. Pursuant to the Amended and Restated 1998
Stock Option Plan of the Company (the "Plan"), the Company hereby grants to
Grantee, as of the Grant Date, an incentive stock option to the extent all or
any portion of this Option qualifies as an "incentive stock option" under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") and to
the extent that all or any portion of this Option does not so qualify as an
"incentive stock option" under the Code, a non-qualified stock option (together,
the "Option"), to purchase an aggregate of 50,000 shares (the "Option Shares")
of the Common Stock of the Company (the "Common Stock") at a price of $5.00 per
share of Common Stock, subject to adjustment and the other terms and conditions
set forth herein and in the Plan. Capitalized terms herein shall have the
meaning set forth in the Plan unless otherwise defined herein.
2. Grantee Bound by Plan. Enclosed is a copy of the Plan which
is incorporated herein by reference and made a part hereof. The Plan shall
govern all aspects of this Agreement except as otherwise specifically stated
herein. Grantee hereby acknowledges receipt of a copy of the Plan and agrees to
be bound by all the terms and provisions thereof. Unless otherwise defined
herein, capitalized terms used but not defined herein shall have the meanings
ascribed to them in the Plan. The Plan should be carefully examined before any
decision is made to exercise this Option. In accordance with the terms of the
Plan, except as expressly set forth in this Agreement, both vested and unvested
options are subject to expiration and forfeiture upon termination of the
Grantee's employment with the Company or a Subsidiary, death or disability. The
date on which the expiration and forfeiture will occur is set forth more fully
in the Plan.
3. Exercise of Option. Subject to the earlier termination of
the Option as provided herein and in the Plan, the Option shall vest with
respect to 50% of the Option Shares upon Grant Date and with respect to the
balance of the Option Shares over a four (4) year period, with 25% of the Option
Shares (rounded up in the event of a half-share) vesting on each of the first,
second and third anniversaries of the Grant Date; and the remainder shall vest
on the fourth anniversary of the Grant Date. Subject to the foregoing, and only
to the extent of the number of Option Shares which are then vested, the Option
may be exercised only after a Trigger Event by written notice to the Company;
provided however, if the Option otherwise qualifies as an Incentive Stock
Option, the Option may be exercised only for that number of Option Shares which
have a Fair Market Value at the Grant Date (when combined with the Fair Market
Value of any other incentive stock options (as of the grant date of such
options) exercisable for the first time in the same calendar year under any
option plan of the Company) equal to or less than $100,000 (or such higher
amount as permitted from time to time under the Code). Subject to the earlier
termination of the Option as provided herein and in the Plan, any portion of the
Option otherwise exercisable with respect to Option Shares then vested but not
exercisable due to the immediately preceding sentence shall not be exercisable
until the earlier of (a) such time that such portion of the Option can be
exercised without exceeding the $100,000 limitation set forth above; or (b) nine
years eleven months after the Grant Date.
<PAGE>
This Option shall not be exercisable in any event after the tenth
anniversary [fifth anniversary in the case of a Ten Percent Shareholder] of the
Grant Date. This Option may not be exercised for a fraction of a share of Common
Stock. Unvested Options are subject to cancellation as provided in the Plan.
To the extent the aggregate Fair Market Value of the Common Stock
(determined as of the date of the Option grant) with respect to which Incentive
Stock Options (but not non-qualified options) are exercisable for the first time
by a Participant during any calendar year (under all stock option plans of the
Company) shall exceed $100,000 or such higher amount as may be permitted from
time to time under the Code, such Options shall be treated as non-qualified.
4. Conditions to Exercise. This Option may not be exercised by
Grantee unless the following conditions are met:
(a) legal counsel for the Company must be satisfied
at the time of exercise that the issuance of Option Shares upon exercise will be
in compliance with the Securities Act of 1933, as amended (the "Securities Act")
and applicable United States federal, state and local laws and foreign laws; and
(b) Grantee must pay at the time of exercise the full
purchase price for the shares of Common Stock being acquired hereunder (i) in
cash or by certified check or (ii) by delivery of other shares of Common Stock
which have an aggregate Fair Market Value equal to the full exercise price in
accordance with Section 1 for such Option shares being purchased upon such
exercise, or (iii) by surrendering a portion of this Option which entitles the
Grantee to purchase Option Shares which have vested and have an aggregate Fair
Market Value equal to the full exercise price in accordance with Section 1 for
such Option shares being purchased upon such exercise or (iv) through a
combination thereof. In the event of the exercise of a non-qualified stock
option, the Grantee must also remit the appropriate withholding taxes due upon
exercise, in cash or in such other manner approved by the Committee. Please
refer to the Plan for a complete description of method of delivery of Option
shares pursuant to this Section 4(b).
5. Transferability. This Option may not be sold, assigned,
transferred, pledged, hypothecated or otherwise disposed of by Grantee, except
by will or the laws of descent and distribution (in which case, such transferee
shall succeed to the rights and obligations of Grantee hereunder) and is
exercisable during Grantee's lifetime only by Grantee. If Grantee or anyone
claiming under or through Grantee attempts to violate this Paragraph 5, such
attempted violation shall be null and void and without effect, and the Company's
obligation hereunder shall terminate. If at the time of Grantee's death this
Option has not been fully exercised, Grantee's estate or any person who acquires
the right to exercise this Option by bequest or inheritance or by reason of
Grantee's death may, at any time within one year after the date of Grantee's
death (but in no event after the expiration of ten years from the Grant Date),
exercise this Option with respect to the number of shares, determined under
Section 3 above, as to which Grantee could have exercised the Option at the time
of Grantee's death. The applicable requirements of paragraph 4 above must be
satisfied in full at the time of such exercise.
<PAGE>
6. Administration. Any action taken or decision made by the
Company, the Board or the Committee or its delegates arising out of or in
connection with the construction, administration, interpretation or effect of
the Plan or this Agreement shall lie within its sole and absolute discretion, as
the case may be, and shall be final, conclusive and binding on Grantee and all
persons claiming under or through Grantee. By accepting this grant or other
benefit under the Plan, Grantee and each person claiming under or through
Grantee shall be conclusively deemed to have indicated acceptance and
ratification of, and consent to, any action taken under the Plan by the Company,
the Board or the Committee or its delegates.
7. No Rights as Stockholder. Unless and until a certificate or
certificates representing such shares of Common Stock shall have been issued to
Grantee (or any person acting under Paragraph 5 above), Grantee shall not be or
have any of the rights or privileges of a stockholder of the Company with
respect to shares of Common Stock acquirable upon exercise of the Option.
8. Disqualifying Disposition of Shares. In the event that
Grantee exercises an Incentive Stock Option, and subsequently agrees to sell or
dispose of the Option Shares acquired upon exercise before either (1) the
expiration of two (2) years from the Grant Date, or (ii) the expiration of one
(1) year from the date of exercise, the Grantee must notify the Company of such
disposition and the terms thereof and make arrangements to pay the Company in
cash the amount of the withholding taxes, if any, due upon such disposition, as
determined by the Company, and the transfer of such shares on the Company's
records shall be conditioned on the payment of such taxes.
9. Investment Representation. Grantee hereby acknowledges that
the shares of Common Stock which Grantee may acquire by exercising the Option
shall be acquired for investment without a view to distribution, within the
meaning of the Securities Act, and shall not be sold, transferred, assigned,
pledged or hypothecated in the absence of an effective registration statement
for the shares of Common Stock under the Securities Act and applicable state
securities laws or an applicable exemption from the registration requirements of
the Act and any applicable state securities laws. Grantee also agrees that the
shares of Common Stock which Grantee may acquire by exercising the Option will
not be sold or otherwise disposed of in any manner which would constitute a
violation of any applicable securities laws, whether federal or state.
10. Listing and Registration of Common Stock. The Company, in
its discretion, may postpone the issuance and/or delivery of shares of Common
Stock upon any exercise of this Option until completion of such stock exchange
listing, or registration, or other qualification of such shares under any state
and/or federal law, rule or regulation as the Company may reasonably in good
faith consider appropriate.
11. Notices. Any notice hereunder to the Company shall be
addressed to the Company, Attention: Corporate Secretary, and any notice
hereunder to Grantee shall be addressed to Grantee at Grantee's last address on
the records of the Company, subject to the right of either party to designate at
any time hereafter in writing some other address. Any notice shall be deemed to
have been duly given when delivered personally, one day following dispatch if
sent by nationally recognized overnight courier, fees prepaid, or three days
following mailing if sent by registered mail, return receipt requested, postage
prepaid and addressed as set forth above.
12. Binding Effect. This Agreement shall be binding upon and
inure to the benefit of any successors to the Company and all persons lawfully
claiming under Grantee.
13. Governing Law. The validity, construction, interpretation,
administration and effect of the Plan, and of its rules and regulations, and
rights relating to the Plan and to this Agreement, shall be governed by the
substantive laws, but not the choice of law rules, of the State of Delaware.
IN WITNESS WHEREOF, the Company and Grantee have executed this
Agreement as of the date first above written.
U.S. INTERACTIVE, INC.
By: /s/
------------------------------
Name: Stephen T. Zarrilli
Title: CEO
<PAGE>
GRANTEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO
THE OPTION IS EARNED ONLY BY CONTINUING EMPLOYMENT AT THE WILL OF THE
COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION
OR ACQUIRING SHARES HEREUNDER). GRANTEE FURTHER ACKNOWLEDGES AND AGREES
THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S STOCK OPTION PLAN
WHICH IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON GRANTEE
ANY RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT BY THE COMPANY,
NOR SHALL IT INTERFERE IN ANY WAY WITH GRANTEE'S RIGHT OR THE COMPANY'S
RIGHT TO TERMINATE OR MODIFY GRANTEE'S EMPLOYMENT AT ANY TIME, WITH OR
WITHOUT CAUSE.
Grantee acknowledges receipt of a copy of the Plan and
represents that Grantee is familiar with the terms and provisions thereof, and
hereby accepts this Option subject to all of the terms and provisions thereof
except as otherwise specifically stated in this Option Agreement. Grantee has
reviewed the Plan and this Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option
Agreement and fully understands all provisions of this Option Agreement. Grantee
hereby agrees to accept as binding, conclusive and final all decisions or
interpretations of the Board upon any questions arising under the Plan.
GRANTEE
/s/
------------------------------
Employee's Signature
Philp L. Calamia
------------------------------
Name of Employee (Print)
<PAGE>
$100,000 Limitation Grant
AGREEMENT EVIDENCING A GRANT OF AN INCENTIVE STOCK OPTION AND
NON-QUALIFIED STOCK OPTION UNDER THE AMENDED AND RESTATED
1998 U.S. INTERACTIVE, INC. STOCK OPTION PLAN
Agreement (this "Agreement") made as of March 12, 1999 (the
"Grant Date"), between U.S. Interactive, Inc. (the "Company"), and Michael M.
Carter ("Grantee").
1. Grant of Option. Pursuant to the Amended and Restated 1998
Stock Option Plan of the Company (the "Plan"), the Company hereby grants to
Grantee, as of the Grant Date, an incentive stock option to the extent all or
any portion of this Option qualifies as an "incentive stock option" under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") and to
the extent that all or any portion of this Option does not so qualify as an
"incentive stock option" under the Code, a non-qualified stock option (together,
the "Option"), to purchase an aggregate of 30,000 shares (the "Option Shares")
of the Common Stock of the Company (the "Common Stock") at a price of $5.00 per
share of Common Stock, subject to adjustment and the other terms and conditions
set forth herein and in the Plan. Capitalized terms herein shall have the
meaning set forth in the Plan unless otherwise defined herein.
2. Grantee Bound by Plan. Enclosed is a copy of the Plan which
is incorporated herein by reference and made a part hereof. The Plan shall
govern all aspects of this Agreement except as otherwise specifically stated
herein. Grantee hereby acknowledges receipt of a copy of the Plan and agrees to
be bound by all the terms and provisions thereof. Unless otherwise defined
herein, capitalized terms used but not defined herein shall have the meanings
ascribed to them in the Plan. The Plan should be carefully examined before any
decision is made to exercise this Option. In accordance with the terms of the
Plan, except as expressly set forth in this Agreement, both vested and unvested
options are subject to expiration and forfeiture upon termination of the
Grantee's employment with the Company or a Subsidiary, death or disability. The
date on which the expiration and forfeiture will occur is set forth more fully
in the Plan.
3. Exercise of Option. Subject to the earlier termination of
the Option as provided herein and in the Plan, the Option shall vest with
respect to 50% of the Option Shares upon Grant Date and with respect to the
balance of the Option Shares over a four (4) year period, with 25% of the Option
Shares (rounded up in the event of a half-share) vesting on each of the first,
second and third anniversaries of the Grant Date; and the remainder shall vest
on the fourth anniversary of the Grant Date. Subject to the foregoing, and only
to the extent of the number of Option Shares which are then vested, the Option
may be exercised only after a Trigger Event by written notice to the Company;
provided however, if the Option otherwise qualifies as an Incentive Stock
Option, the Option may be exercised only for that number of Option Shares which
have a Fair Market Value at the Grant Date (when combined with the Fair Market
Value of any other incentive stock options (as of the grant date of such
options) exercisable for the first time in the same calendar year under any
option plan of the Company) equal to or less than $100,000 (or such higher
amount as permitted from time to time under the Code). Subject to the earlier
termination of the Option as provided herein and in the Plan, any portion of the
Option otherwise exercisable with respect to Option Shares then vested but not
exercisable due to the immediately preceding sentence shall not be exercisable
until the earlier of (a) such time that such portion of the Option can be
exercised without exceeding the $100,000 limitation set forth above; or (b) nine
years eleven months after the Grant Date.
<PAGE>
This Option shall not be exercisable in any event after the tenth
anniversary [fifth anniversary in the case of a Ten Percent Shareholder] of the
Grant Date. This Option may not be exercised for a fraction of a share of Common
Stock. Unvested Options are subject to cancellation as provided in the Plan.
To the extent the aggregate Fair Market Value of the Common Stock
(determined as of the date of the Option grant) with respect to which Incentive
Stock Options (but not non-qualified options) are exercisable for the first time
by a Participant during any calendar year (under all stock option plans of the
Company) shall exceed $100,000 or such higher amount as may be permitted from
time to time under the Code, such Options shall be treated as non-qualified.
4. Conditions to Exercise. This Option may not be exercised by
Grantee unless the following conditions are met:
(a) legal counsel for the Company must be satisfied
at the time of exercise that the issuance of Option Shares upon exercise will be
in compliance with the Securities Act of 1933, as amended (the "Securities Act")
and applicable United States federal, state and local laws and foreign laws; and
(b) Grantee must pay at the time of exercise the full
purchase price for the shares of Common Stock being acquired hereunder (i) in
cash or by certified check or (ii) by delivery of other shares of Common Stock
which have an aggregate Fair Market Value equal to the full exercise price in
accordance with Section 1 for such Option shares being purchased upon such
exercise, or (iii) by surrendering a portion of this Option which entitles the
Grantee to purchase Option Shares which have vested and have an aggregate Fair
Market Value equal to the full exercise price in accordance with Section 1 for
such Option shares being purchased upon such exercise or (iv) through a
combination thereof. In the event of the exercise of a non-qualified stock
option, the Grantee must also remit the appropriate withholding taxes due upon
exercise, in cash or in such other manner approved by the Committee. Please
refer to the Plan for a complete description of method of delivery of Option
shares pursuant to this Section 4(b).
5. Transferability. This Option may not be sold, assigned,
transferred, pledged, hypothecated or otherwise disposed of by Grantee, except
by will or the laws of descent and distribution (in which case, such transferee
shall succeed to the rights and obligations of Grantee hereunder) and is
exercisable during Grantee's lifetime only by Grantee. If Grantee or anyone
claiming under or through Grantee attempts to violate this Paragraph 5, such
attempted violation shall be null and void and without effect, and the Company's
obligation hereunder shall terminate. If at the time of Grantee's death this
Option has not been fully exercised, Grantee's estate or any person who acquires
the right to exercise this Option by bequest or inheritance or by reason of
Grantee's death may, at any time within one year after the date of Grantee's
death (but in no event after the expiration of ten years from the Grant Date),
exercise this Option with respect to the number of shares, determined under
Section 3 above, as to which Grantee could have exercised the Option at the time
of Grantee's death. The applicable requirements of paragraph 4 above must be
satisfied in full at the time of such exercise.
<PAGE>
6. Administration. Any action taken or decision made by the
Company, the Board or the Committee or its delegates arising out of or in
connection with the construction, administration, interpretation or effect of
the Plan or this Agreement shall lie within its sole and absolute discretion, as
the case may be, and shall be final, conclusive and binding on Grantee and all
persons claiming under or through Grantee. By accepting this grant or other
benefit under the Plan, Grantee and each person claiming under or through
Grantee shall be conclusively deemed to have indicated acceptance and
ratification of, and consent to, any action taken under the Plan by the Company,
the Board or the Committee or its delegates.
7. No Rights as Stockholder. Unless and until a certificate or
certificates representing such shares of Common Stock shall have been issued to
Grantee (or any person acting under Paragraph 5 above), Grantee shall not be or
have any of the rights or privileges of a stockholder of the Company with
respect to shares of Common Stock acquirable upon exercise of the Option.
8. Disqualifying Disposition of Shares. In the event that
Grantee exercises an Incentive Stock Option, and subsequently agrees to sell or
dispose of the Option Shares acquired upon exercise before either (1) the
expiration of two (2) years from the Grant Date, or (ii) the expiration of one
(1) year from the date of exercise, the Grantee must notify the Company of such
disposition and the terms thereof and make arrangements to pay the Company in
cash the amount of the withholding taxes, if any, due upon such disposition, as
determined by the Company, and the transfer of such shares on the Company's
records shall be conditioned on the payment of such taxes.
9. Investment Representation. Grantee hereby acknowledges that
the shares of Common Stock which Grantee may acquire by exercising the Option
shall be acquired for investment without a view to distribution, within the
meaning of the Securities Act, and shall not be sold, transferred, assigned,
pledged or hypothecated in the absence of an effective registration statement
for the shares of Common Stock under the Securities Act and applicable state
securities laws or an applicable exemption from the registration requirements of
the Act and any applicable state securities laws. Grantee also agrees that the
shares of Common Stock which Grantee may acquire by exercising the Option will
not be sold or otherwise disposed of in any manner which would constitute a
violation of any applicable securities laws, whether federal or state.
<PAGE>
10. Listing and Registration of Common Stock. The Company, in
its discretion, may postpone the issuance and/or delivery of shares of Common
Stock upon any exercise of this Option until completion of such stock exchange
listing, or registration, or other qualification of such shares under any state
and/or federal law, rule or regulation as the Company may reasonably in good
faith consider appropriate.
11. Notices. Any notice hereunder to the Company shall be
addressed to the Company, Attention: Corporate Secretary, and any notice
hereunder to Grantee shall be addressed to Grantee at Grantee's last address on
the records of the Company, subject to the right of either party to designate at
any time hereafter in writing some other address. Any notice shall be deemed to
have been duly given when delivered personally, one day following dispatch if
sent by nationally recognized overnight courier, fees prepaid, or three days
following mailing if sent by registered mail, return receipt requested, postage
prepaid and addressed as set forth above.
12. Binding Effect. This Agreement shall be binding upon and
inure to the benefit of any successors to the Company and all persons lawfully
claiming under Grantee.
13. Governing Law. The validity, construction, interpretation,
administration and effect of the Plan, and of its rules and regulations, and
rights relating to the Plan and to this Agreement, shall be governed by the
substantive laws, but not the choice of law rules, of the State of Delaware.
IN WITNESS WHEREOF, the Company and Grantee have executed this
Agreement as of the date first above written.
U.S. INTERACTIVE, INC.
By: /s/
------------------------------
Name: Stephen T. Zarrilli
Title: CEO
<PAGE>
GRANTEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO
THE OPTION IS EARNED ONLY BY CONTINUING EMPLOYMENT AT THE WILL OF THE
COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION
OR ACQUIRING SHARES HEREUNDER). GRANTEE FURTHER ACKNOWLEDGES AND AGREES
THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S STOCK OPTION PLAN
WHICH IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON GRANTEE
ANY RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT BY THE COMPANY,
NOR SHALL IT INTERFERE IN ANY WAY WITH GRANTEE'S RIGHT OR THE COMPANY'S
RIGHT TO TERMINATE OR MODIFY GRANTEE'S EMPLOYMENT AT ANY TIME, WITH OR
WITHOUT CAUSE.
Grantee acknowledges receipt of a copy of the Plan and
represents that Grantee is familiar with the terms and provisions thereof, and
hereby accepts this Option subject to all of the terms and provisions thereof
except as otherwise specifically stated in this Option Agreement. Grantee has
reviewed the Plan and this Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option
Agreement and fully understands all provisions of this Option Agreement. Grantee
hereby agrees to accept as binding, conclusive and final all decisions or
interpretations of the Board upon any questions arising under the Plan.
GRANTEE
/s/
------------------------------
Employee's Signature
Michael M. Carter
-----------------------------
Name of Employee (Print)
<PAGE>
$100,000 Limitation Grant
AGREEMENT EVIDENCING A GRANT OF AN INCENTIVE STOCK OPTION AND
NON-QUALIFIED STOCK OPTION UNDER THE AMENDED AND RESTATED
1998 U.S. INTERACTIVE, INC. STOCK OPTION PLAN
Agreement (this "Agreement") made as of May 24, 1999 (the
"Grant Date"), between U.S. Interactive, Inc. (the "Company"), and Philip L.
Calamia ("Grantee").
1. Grant of Option. Pursuant to the Amended and Restated 1998
Stock Option Plan of the Company (the "Plan"), the Company hereby grants to
Grantee, as of the Grant Date, an incentive stock option to the extent all or
any portion of this Option qualifies as an "incentive stock option" under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") and to
the extent that all or any portion of this Option does not so qualify as an
"incentive stock option" under the Code, a non-qualified stock option (together,
the "Option"), to purchase an aggregate of 60,000 shares (the "Option Shares")
of the Common Stock of the Company (the "Common Stock") at a price of $9.25 per
share of Common Stock, subject to adjustment and the other terms and conditions
set forth herein and in the Plan. Capitalized terms herein shall have the
meaning set forth in the Plan unless otherwise defined herein.
2. Grantee Bound by Plan. Enclosed is a copy of the Plan which
is incorporated herein by reference and made a part hereof. The Plan shall
govern all aspects of this Agreement except as otherwise specifically stated
herein. Grantee hereby acknowledges receipt of a copy of the Plan and agrees to
be bound by all the terms and provisions thereof. Unless otherwise defined
herein, capitalized terms used but not defined herein shall have the meanings
ascribed to them in the Plan. The Plan should be carefully examined before any
decision is made to exercise this Option. In accordance with the terms of the
Plan, except as expressly set forth in this Agreement, both vested and unvested
options are subject to expiration and forfeiture upon termination of the
Grantee's employment with the Company or a Subsidiary, death or disability. The
date on which the expiration and forfeiture will occur is set forth more fully
in the Plan.
3. Exercise of Option. Subject to the earlier termination of
the Option as provided herein and in the Plan, the Option shall vest with
respect to 100% of the Option Shares over a four (4) year period, with 25% of
the Option Shares (rounded up in the event of a half-share) vesting on each of
the first, second and third anniversaries of the Grant Date; and the remainder
shall vest on the fourth anniversary of the Grant Date. Subject to the
foregoing, and only to the extent of the number of Option Shares which are then
vested, the Option may be exercised only after a Trigger Event by written notice
to the Company; provided however, if the Option otherwise qualifies as an
Incentive Stock Option, the Option may be exercised only for that number of
Option Shares which have a Fair Market Value at the Grant Date (when combined
with the Fair Market Value of any other incentive stock options (as of the grant
date of such options) exercisable for the first time in the same calendar year
under any option plan of the Company) equal to or less than $100,000 (or such
higher amount as permitted from time to time under the Code). Subject to the
earlier termination of the Option as provided herein and in the Plan, any
portion of the Option otherwise exercisable with respect to Option Shares then
vested but not exercisable due to the immediately preceding sentence shall not
be exercisable until the earlier of (a) such time that such portion of the
Option can be exercised without exceeding the $100,000 limitation set forth
above; or (b) nine years eleven months after the Grant Date.
<PAGE>
This Option shall not be exercisable in any event after the tenth
anniversary [fifth anniversary in the case of a Ten Percent Shareholder] of the
Grant Date. This Option may not be exercised for a fraction of a share of Common
Stock. Unvested Options are subject to cancellation as provided in the Plan.
To the extent the aggregate Fair Market Value of the Common Stock
(determined as of the date of the Option grant) with respect to which Incentive
Stock Options (but not non-qualified options) are exercisable for the first time
by a Participant during any calendar year (under all stock option plans of the
Company) shall exceed $100,000 or such higher amount as may be permitted from
time to time under the Code, such Options shall be treated as non-qualified.
4. Conditions to Exercise. This Option may not be exercised by
Grantee unless the following conditions are met:
(a) legal counsel for the Company must be satisfied
at the time of exercise that the issuance of Option Shares upon exercise will be
in compliance with the Securities Act of 1933, as amended (the "Securities Act")
and applicable United States federal, state and local laws and foreign laws; and
(b) Grantee must pay at the time of exercise the full
purchase price for the shares of Common Stock
being acquired hereunder (i) in cash or by certified check or (ii) by delivery
of other shares of Common Stock which have an aggregate Fair Market Value equal
to the full exercise price in accordance with Section 1 for such Option shares
being purchased upon such exercise, or (iii) by surrendering a portion of this
Option which entitles the Grantee to purchase Option Shares which have vested
and have an aggregate Fair Market Value equal to the full exercise price in
accordance with Section 1 for such Option shares being purchased upon such
exercise or (iv) through a combination thereof. In the event of the exercise of
a non-qualified stock option, the Grantee must also remit the appropriate
withholding taxes due upon exercise, in cash or in such other manner approved by
the Committee. Please refer to the Plan for a complete description of method of
delivery of Option shares pursuant to this Section 4(b).
5. Transferability. This Option may not be sold, assigned,
transferred, pledged, hypothecated or otherwise disposed of by Grantee, except
by will or the laws of descent and distribution (in which case, such transferee
shall succeed to the rights and obligations of Grantee hereunder) and is
exercisable during Grantee's lifetime only by Grantee. If Grantee or anyone
claiming under or through Grantee attempts to violate this Paragraph 5, such
attempted violation shall be null and void and without effect, and the Company's
obligation hereunder shall terminate. If at the time of Grantee's death this
Option has not been fully exercised, Grantee's estate or any person who acquires
the right to exercise this Option by bequest or inheritance or by reason of
Grantee's death may, at any time within one year after the date of Grantee's
death (but in no event after the expiration of ten years from the Grant Date),
exercise this Option with respect to the number of shares, determined under
Section 3 above, as to which Grantee could have exercised the Option at the time
of Grantee's death. The applicable requirements of paragraph 4 above must be
satisfied in full at the time of such exercise.
<PAGE>
6. Administration. Any action taken or decision made by the
Company, the Board or the Committee or its delegates arising out of or in
connection with the construction, administration, interpretation or effect of
the Plan or this Agreement shall lie within its sole and absolute discretion, as
the case may be, and shall be final, conclusive and binding on Grantee and all
persons claiming under or through Grantee. By accepting this grant or other
benefit under the Plan, Grantee and each person claiming under or through
Grantee shall be conclusively deemed to have indicated acceptance and
ratification of, and consent to, any action taken under the Plan by the Company,
the Board or the Committee or its delegates.
7. No Rights as Stockholder. Unless and until a certificate or
certificates representing such shares of Common Stock shall have been issued to
Grantee (or any person acting under Paragraph 5 above), Grantee shall not be or
have any of the rights or privileges of a stockholder of the Company with
respect to shares of Common Stock acquirable upon exercise of the Option.
8. Disqualifying Disposition of Shares. In the event that
Grantee exercises an Incentive Stock Option, and subsequently agrees to sell or
dispose of the Option Shares acquired upon exercise before either (1) the
expiration of two (2) years from the Grant Date, or (ii) the expiration of one
(1) year from the date of exercise, the Grantee must notify the Company of such
disposition and the terms thereof and make arrangements to pay the Company in
cash the amount of the withholding taxes, if any, due upon such disposition, as
determined by the Company, and the transfer of such shares on the Company's
records shall be conditioned on the payment of such taxes.
9. Investment Representation. Grantee hereby acknowledges that
the shares of Common Stock which Grantee may acquire by exercising the Option
shall be acquired for investment without a view to distribution, within the
meaning of the Securities Act, and shall not be sold, transferred, assigned,
pledged or hypothecated in the absence of an effective registration statement
for the shares of Common Stock under the Securities Act and applicable state
securities laws or an applicable exemption from the registration requirements of
the Act and any applicable state securities laws. Grantee also agrees that the
shares of Common Stock which Grantee may acquire by exercising the Option will
not be sold or otherwise disposed of in any manner which would constitute a
violation of any applicable securities laws, whether federal or state.
<PAGE>
10. Listing and Registration of Common Stock. The Company, in
its discretion, may postpone the issuance and/or delivery of shares of Common
Stock upon any exercise of this Option until completion of such stock exchange
listing, or registration, or other qualification of such shares under any state
and/or federal law, rule or regulation as the Company may reasonably in good
faith consider appropriate.
11. Notices. Any notice hereunder to the Company shall be
addressed to the Company, Attention: Corporate Secretary, and any notice
hereunder to Grantee shall be addressed to Grantee at Grantee's last address on
the records of the Company, subject to the right of either party to designate at
any time hereafter in writing some other address. Any notice shall be deemed to
have been duly given when delivered personally, one day following dispatch if
sent by nationally recognized overnight courier, fees prepaid, or three days
following mailing if sent by registered mail, return receipt requested, postage
prepaid and addressed as set forth above.
12. Binding Effect. This Agreement shall be binding upon and
inure to the benefit of any successors to the Company and all persons lawfully
claiming under Grantee.
13. Governing Law. The validity, construction, interpretation,
administration and effect of the Plan, and of its rules and regulations, and
rights relating to the Plan and to this Agreement, shall be governed by the
substantive laws, but not the choice of law rules, of the State of Delaware.
IN WITNESS WHEREOF, the Company and Grantee have executed this
Agreement as of the date first above written.
U.S. INTERACTIVE, INC.
By: /s/
Name: Stephen T. Zarrilli
Title: CEO
<PAGE>
GRANTEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO
THE OPTION IS EARNED ONLY BY CONTINUING EMPLOYMENT AT THE WILL OF THE
COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION
OR ACQUIRING SHARES HEREUNDER). GRANTEE FURTHER ACKNOWLEDGES AND AGREES
THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S STOCK OPTION PLAN
WHICH IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON GRANTEE
ANY RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT BY THE COMPANY,
NOR SHALL IT INTERFERE IN ANY WAY WITH GRANTEE'S RIGHT OR THE COMPANY'S
RIGHT TO TERMINATE OR MODIFY GRANTEE'S EMPLOYMENT AT ANY TIME, WITH OR
WITHOUT CAUSE.
Grantee acknowledges receipt of a copy of the Plan and
represents that Grantee is familiar with the terms and provisions thereof, and
hereby accepts this Option subject to all of the terms and provisions thereof
except as otherwise specifically stated in this Option Agreement. Grantee has
reviewed the Plan and this Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option
Agreement and fully understands all provisions of this Option Agreement. Grantee
hereby agrees to accept as binding, conclusive and final all decisions or
interpretations of the Board upon any questions arising under the Plan.
GRANTEE
/s/
------------------------------
Employee's Signature
Philip L. Calamia
------------------------------
Name of Employee (Print)
<PAGE>
$100,000 Limitation Grant
AGREEMENT EVIDENCING A GRANT OF AN INCENTIVE STOCK OPTION AND
NON-QUALIFIED STOCK OPTION UNDER THE AMENDED AND RESTATED
1998 U.S. INTERACTIVE, INC. STOCK OPTION PLAN
Agreement (this "Agreement") made as of May 24, 1999 (the
"Grant Date"), between U.S. Interactive, Inc. (the "Company"), and Michael M.
Carter ("Grantee").
1. Grant of Option. Pursuant to the Amended and Restated 1998
Stock Option Plan of the Company (the "Plan"), the Company hereby grants to
Grantee, as of the Grant Date, an incentive stock option to the extent all or
any portion of this Option qualifies as an "incentive stock option" under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") and to
the extent that all or any portion of this Option does not so qualify as an
"incentive stock option" under the Code, a non-qualified stock option (together,
the "Option"), to purchase an aggregate of 50,000 shares (the "Option Shares")
of the Common Stock of the Company (the "Common Stock") at a price of $9.25 per
share of Common Stock, subject to adjustment and the other terms and conditions
set forth herein and in the Plan. Capitalized terms herein shall have the
meaning set forth in the Plan unless otherwise defined herein.
2. Grantee Bound by Plan. Enclosed is a copy of the Plan which
is incorporated herein by reference and made a part hereof. The Plan shall
govern all aspects of this Agreement except as otherwise specifically stated
herein. Grantee hereby acknowledges receipt of a copy of the Plan and agrees to
be bound by all the terms and provisions thereof. Unless otherwise defined
herein, capitalized terms used but not defined herein shall have the meanings
ascribed to them in the Plan. The Plan should be carefully examined before any
decision is made to exercise this Option. In accordance with the terms of the
Plan, except as expressly set forth in this Agreement, both vested and unvested
options are subject to expiration and forfeiture upon termination of the
Grantee's employment with the Company or a Subsidiary, death or disability. The
date on which the expiration and forfeiture will occur is set forth more fully
in the Plan.
3. Exercise of Option. Subject to the earlier termination of
the Option as provided herein and in the Plan, the Option shall vest with
respect to 100% of the Option Shares over a four (4) year period, with 25% of
the Option Shares (rounded up in the event of a half-share) vesting on each of
the first, second and third anniversaries of the Grant Date; and the remainder
shall vest on the fourth anniversary of the Grant Date. Subject to the
foregoing, and only to the extent of the number of Option Shares which are then
vested, the Option may be exercised only after a Trigger Event by written notice
to the Company; provided however, if the Option otherwise qualifies as an
Incentive Stock Option, the Option may be exercised only for that number of
Option Shares which have a Fair Market Value at the Grant Date (when combined
with the Fair Market Value of any other incentive stock options (as of the grant
date of such options) exercisable for the first time in the same calendar year
under any option plan of the Company) equal to or less than $100,000 (or such
higher amount as permitted from time to time under the Code). Subject to the
earlier termination of the Option as provided herein and in the Plan, any
portion of the Option otherwise exercisable with respect to Option Shares then
vested but not exercisable due to the immediately preceding sentence shall not
be exercisable until the earlier of (a) such time that such portion of the
Option can be exercised without exceeding the $100,000 limitation set forth
above; or (b) nine years eleven months after the Grant Date.
<PAGE>
This Option shall not be exercisable in any event after the tenth
anniversary [fifth anniversary in the case of a Ten Percent Shareholder] of the
Grant Date. This Option may not be exercised for a fraction of a share of Common
Stock. Unvested Options are subject to cancellation as provided in the Plan.
To the extent the aggregate Fair Market Value of the Common Stock
(determined as of the date of the Option grant) with respect to which Incentive
Stock Options (but not non-qualified options) are exercisable for the first time
by a Participant during any calendar year (under all stock option plans of the
Company) shall exceed $100,000 or such higher amount as may be permitted from
time to time under the Code, such Options shall be treated as non-qualified.
4. Conditions to Exercise. This Option may not be exercised by
Grantee unless the following conditions are met:
(a) legal counsel for the Company must be satisfied
at the time of exercise that the issuance of Option Shares upon exercise will be
in compliance with the Securities Act of 1933, as amended (the "Securities Act")
and applicable United States federal, state and local laws and foreign laws; and
(b) Grantee must pay at the time of exercise the full
purchase price for the shares of Common Stock
being acquired hereunder (i) in cash or by certified check or (ii) by delivery
of other shares of Common Stock which have an aggregate Fair Market Value equal
to the full exercise price in accordance with Section 1 for such Option shares
being purchased upon such exercise, or (iii) by surrendering a portion of this
Option which entitles the Grantee to purchase Option Shares which have vested
and have an aggregate Fair Market Value equal to the full exercise price in
accordance with Section 1 for such Option shares being purchased upon such
exercise or (iv) through a combination thereof. In the event of the exercise of
a non-qualified stock option, the Grantee must also remit the appropriate
withholding taxes due upon exercise, in cash or in such other manner approved by
the Committee. Please refer to the Plan for a complete description of method of
delivery of Option shares pursuant to this Section 4(b).
5. Transferability. This Option may not be sold, assigned,
transferred, pledged, hypothecated or otherwise disposed of by Grantee, except
by will or the laws of descent and distribution (in which case, such transferee
shall succeed to the rights and obligations of Grantee hereunder) and is
exercisable during Grantee's lifetime only by Grantee. If Grantee or anyone
claiming under or through Grantee attempts to violate this Paragraph 5, such
attempted violation shall be null and void and without effect, and the Company's
obligation hereunder shall terminate. If at the time of Grantee's death this
Option has not been fully exercised, Grantee's estate or any person who acquires
the right to exercise this Option by bequest or inheritance or by reason of
Grantee's death may, at any time within one year after the date of Grantee's
death (but in no event after the expiration of ten years from the Grant Date),
exercise this Option with respect to the number of shares, determined under
Section 3 above, as to which Grantee could have exercised the Option at the time
of Grantee's death. The applicable requirements of paragraph 4 above must be
satisfied in full at the time of such exercise.
<PAGE>
6. Administration. Any action taken or decision made by the
Company, the Board or the Committee or its delegates arising out of or in
connection with the construction, administration, interpretation or effect of
the Plan or this Agreement shall lie within its sole and absolute discretion, as
the case may be, and shall be final, conclusive and binding on Grantee and all
persons claiming under or through Grantee. By accepting this grant or other
benefit under the Plan, Grantee and each person claiming under or through
Grantee shall be conclusively deemed to have indicated acceptance and
ratification of, and consent to, any action taken under the Plan by the Company,
the Board or the Committee or its delegates.
7. No Rights as Stockholder. Unless and until a certificate or
certificates representing such shares of Common Stock shall have been issued to
Grantee (or any person acting under Paragraph 5 above), Grantee shall not be or
have any of the rights or privileges of a stockholder of the Company with
respect to shares of Common Stock acquirable upon exercise of the Option.
8. Disqualifying Disposition of Shares. In the event that
Grantee exercises an Incentive Stock Option, and subsequently agrees to sell or
dispose of the Option Shares acquired upon exercise before either (1) the
expiration of two (2) years from the Grant Date, or (ii) the expiration of one
(1) year from the date of exercise, the Grantee must notify the Company of such
disposition and the terms thereof and make arrangements to pay the Company in
cash the amount of the withholding taxes, if any, due upon such disposition, as
determined by the Company, and the transfer of such shares on the Company's
records shall be conditioned on the payment of such taxes.
9. Investment Representation. Grantee hereby acknowledges that
the shares of Common Stock which Grantee may acquire by exercising the Option
shall be acquired for investment without a view to distribution, within the
meaning of the Securities Act, and shall not be sold, transferred, assigned,
pledged or hypothecated in the absence of an effective registration statement
for the shares of Common Stock under the Securities Act and applicable state
securities laws or an applicable exemption from the registration requirements of
the Act and any applicable state securities laws. Grantee also agrees that the
shares of Common Stock which Grantee may acquire by exercising the Option will
not be sold or otherwise disposed of in any manner which would constitute a
violation of any applicable securities laws, whether federal or state.
10. Listing and Registration of Common Stock. The Company, in
its discretion, may postpone the issuance and/or delivery of shares of Common
Stock upon any exercise of this Option until completion of such stock exchange
listing, or registration, or other qualification of such shares under any state
and/or federal law, rule or regulation as the Company may reasonably in good
faith consider appropriate.
<PAGE>
11. Notices. Any notice hereunder to the Company shall be
addressed to the Company, Attention: Corporate Secretary, and any notice
hereunder to Grantee shall be addressed to Grantee at Grantee's last address on
the records of the Company, subject to the right of either party to designate at
any time hereafter in writing some other address. Any notice shall be deemed to
have been duly given when delivered personally, one day following dispatch if
sent by nationally recognized overnight courier, fees prepaid, or three days
following mailing if sent by registered mail, return receipt requested, postage
prepaid and addressed as set forth above.
12. Binding Effect. This Agreement shall be binding upon and
inure to the benefit of any successors to the Company and all persons lawfully
claiming under Grantee.
13. Governing Law. The validity, construction, interpretation,
administration and effect of the Plan, and of its rules and regulations, and
rights relating to the Plan and to this Agreement, shall be governed by the
substantive laws, but not the choice of law rules, of the State of Delaware.
IN WITNESS WHEREOF, the Company and Grantee have executed this
Agreement as of the date first above written.
U.S. INTERACTIVE, INC.
By: /s/
------------------------------
Name: Stephen T. Zarrilli
Title: CEO
<PAGE>
GRANTEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO
THE OPTION IS EARNED ONLY BY CONTINUING EMPLOYMENT AT THE WILL OF THE
COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION
OR ACQUIRING SHARES HEREUNDER). GRANTEE FURTHER ACKNOWLEDGES AND AGREES
THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S STOCK OPTION PLAN
WHICH IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON GRANTEE
ANY RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT BY THE COMPANY,
NOR SHALL IT INTERFERE IN ANY WAY WITH GRANTEE'S RIGHT OR THE COMPANY'S
RIGHT TO TERMINATE OR MODIFY GRANTEE'S EMPLOYMENT AT ANY TIME, WITH OR
WITHOUT CAUSE.
Grantee acknowledges receipt of a copy of the Plan and
represents that Grantee is familiar with the terms and provisions thereof, and
hereby accepts this Option subject to all of the terms and provisions thereof
except as otherwise specifically stated in this Option Agreement. Grantee has
reviewed the Plan and this Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option
Agreement and fully understands all provisions of this Option Agreement. Grantee
hereby agrees to accept as binding, conclusive and final all decisions or
interpretations of the Board upon any questions arising under the Plan.
GRANTEE
/s/
------------------------------
Employee's Signature
Michael M. Carter
Name of Employee (Print)
<PAGE>
AMENDED AND RESTATED 1997
U.S. INTERACTIVE, INC.
STOCK OPTION PLAN
ARTICLE I
Purpose of Plan
The Stock Option Plan (the "Plan") of U.S. Interactive, Inc., a New
Jersey corporation (the "Company"), adopted by the Board of Directors and
stockholders of the Company effective as of January 1, 1997 is intended to
advance the best interests of the Company by providing executives and other key
employees of the Company or any Subsidiary who have substantial responsibility
for the management and growth of the Company or any Subsidiary with additional
incentives by allowing such executives and other key employees to acquire an
ownership interest in the Company. The Plan is a compensatory benefit plan
within the meaning of Rule 701 under the Securities Act of 1933, as amended (the
"Securities Act"), and, unless and until the Common Stock is publicly traded,
the issuance of options and Common Stock pursuant to the Plan is intended to
qualify for the exemption from registration under the Securities Act provided by
Rule 701.
ARTICLE II
Definitions
For purposes of the Plan, except as otherwise provided in the
applicable Option Agreement, the following terms have the indicated meanings:
"Affiliate" of any specified Person means any other Person which
directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person.
"Board" means the Board of Directors of the Company.
"Cause", unless otherwise determined by the Committee, means (i) a
Participant's action or failure to act which (a) would materially adversely
affect the reputation, operations or financial condition of the Company or any
of its Subsidiaries; (ii) a willful failure by the Participant to perform such
Participant's duties, except as a result of the Disability or death of the
Participant; or (iii) a Participant's theft, embezzlement, perpetration of
fraud, or misappropriation of any tangible or intangible assets or property of
the Company or any of its Subsidiaries or attempted theft, embezzlement,
perpetration of fraud, or misappropriation of any tangible or intangible assets
or property of the Company or any of its Subsidiaries.
<PAGE>
"Code" means the Internal Revenue Code of 1986, as amended
"Committee" means the Compensation Committee or such other committee of
the Board as the Board may designate to administer the Plan or, if for any
reason the Board has not designated such a committee, the Board. The Committee,
if other than the Board, shall be comprised of not less than two of the then
members of the Board of Directors who qualify as "non-employee directors" within
the meaning of Rule 16b-3 promulgated under the Exchange Act and as "outside
directors" within the meaning of Section 162(m) of the Code.
"Common Stock" means the authorized but unissued Common Stock, $.001
par value per share, of the Company.
"Company" has the meaning ascribed thereto in the first paragraph
hereof.
"Disability" shall mean permanent and total disability, as defined in
Section 22(e) of the Code.
"Fair Market Value" per share on any given date means the average of
the closing prices of the sales of the Common Stock on all securities exchanges
on which such stock may at the time be listed, or, if there have been no sales
on any such exchange on any day, the average of the highest bid and lowest asked
prices on all such exchanges at the end of such day, or, if on any day such
stock is not so listed, the average of the representative bid and asked prices
quoted on the Nasdaq Stock Market as of 4:00 P.M., New York time, or, if on any
day such stock is not quoted on the Nasdaq Stock Market, the average of the
highest bid and lowest asked prices on such day in the domestic over-the-counter
market as reported by the National Quotation Bureau, Incorporated, or any
similar successor organization. If at any time the Common Stock is not listed or
quoted, the Fair Market Value per share shall be determined by the Committee in
good faith based on such factors as the members thereof, in the exercise of
their business judgment, consider relevant.
"Incentive Stock Option" shall mean any Option intended to qualify as
an incentive stock option within the meaning of Section 422 of the Code or any
successor provision.
"Option Agreement" has the meaning ascribed thereto in Section 5.1.
"Options" has the meaning ascribed thereto in Article IV.
"Option Shares" mean (i) all shares of Common Stock issued or issuable
upon the exercise of an Option and (ii) all shares of Common Stock issued with
respect to the Common Stock referred to in clause (i) above by way of stock
dividend or stick split or in connection with any conversion; merger,
consolidation or recapitalization or other reorganization affecting the Common
Stock. Except as provided otherwise herein or in the applicable
Option-Agreement, Option Shares will continue to be Option Shares in the hands
of any holder other than the Participant (except for the Company), and each such
transferee thereof will succeed to the rights and obligations of a holder of
Option Shares hereunder.
"Participant" means any executive or other key employee of the Company
or any Subsidiary who has been selected to participate in the Plan by the
Committee.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or any
other legal entity.
"Plan" has the meaning ascribed thereto in the first paragraph hereof.
"Public Offering" means the sale, in an underwritten public offering,
of shares of Common Stock registered under the Securities Act, except any public
offering on a registration statement on Form S-3 or S-n or similar form.
"Sale of the Company" means a Change in Control of the Company or a
sale of all or substantially all (more than 50%) of the assets of the Company in
a single transaction or a series of related transactions. For purposes hereof, a
"Change of Control" of the Company shall mean an event of a nature that: (i)
would be required to be reported in response to Item l(a) of the current report
on Form 8-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 (the "Exchange Act") if the Company were (or is) required to file reports
pursuant to the Exchange Act.
<PAGE>
"Securities Act" has the meaning ascribed thereto in the first
paragraph hereof.
"Subsidiary" means any subsidiary corporation (as such term is defined
in Section 424(f) of the Code) of the Company, whether now existing or hereafter
created.
"Ten Percent Shareholder" shall mean any person to whom an Option is
granted under this Plan who, at the time an Option is granted, owns directly or
indirectly (within the meaning of Section 424(d) of the Code) stock possessing
more than ten percent (10%) of the total combined voting power of all classes of
stock of the Company or a Subsidiary.
"Trigger Event" shall mean a Sale of the Company or the consummation of
a public offering of securities of the Company in which the gross proceeds to
the Company are not less than $10,000 000.
<PAGE>
ARTICLE III
Administration
The Plan shall be administered by the Committee. Subject to the
limitations of the Plan, the Committee shall have the sole and complete
authority to: (i) select Participants, (ii) grant options to Participants in
such forms and amounts as it shall determine, (iii) impose such limitations,
restrictions and conditions upon each Option as it shall deem appropriate (which
need not be identical), including but not limited to the vesting schedule for
each Option granted, and modify or amend the terms of each outstanding Option
(subject to the provisions of Section 6.6 hereof), (iv) interpret the Plan and
adopt, amend and rescind administrative guidelines and other rules and
regulations relating to the Plan, (v) correct any defect or omission or
reconcile any inconsistency in the Plan or in any Options granted under the
Plan, (vi) reduce the exercise price per share of outstanding and unexercised
Options, (vii) accelerate or defer the exercise price per share or the time of
exercise of any outstanding Option, (viii) authorize any person to execute on
behalf of the Company any instrument required to effectuate the grant of an
option previously granted by the Committee, and (ix) make all other
determinations and take all other actions necessary or advisable for the
implementation and administration of the Plan. The Committee's determinations on
matters within its authority shall be final, conclusive and binding upon the
Participants, the Company and all other persons. All expenses associated with
the administration of the Plan shall be borne by the Company. The Committee may,
as approved by the Board and to the extent permissible by law, delegate any of
its authority hereunder to such person or entities as it deems appropriate. No
member of either the Committee or the Board of Directors shall participate in a
decision to grant an option to such member.
ARTICLE IV
Limitation on Aggregate Shares
The number of shares of Common Stock with respect to which stock
purchase options ("Options") may be granted under the Plan shall not exceed, in
the aggregate 600,000 subject to adjustment in accordance with Section 6.3. To
the extent any Options expire unexercised or are cancelled, terminated or
forfeited in any manner without the issuance of Common Stock thereunder, such
shares shall again be available under the Plan. The shares of Common Stock
available under the Plan may consist of authorized and unissued shares, treasury
shares or a combination thereof, as the Committee shall determine.
ARTICLE V
Awards
5.1 Grant of Options. The Committee may grant Options to Participants
from time to time in accordance with this Article V. Each Option granted
hereunder to a Participant shall be embodied in a written Option Agreement (the
"Option Agreement") which shall be signed by the Participant and by a duly
authorized officer of the Company for and in the name and on behalf of the
Company and shall be subject to the terms and conditions prescribed herein and
to any other terms and conditions which the committee shall deem necessary and
desirable in its sole discretion. Options granted under the Plan may be
non-qualified stock options or Incentive Stock Options as specified by the
Committee. The exercise price per share of Common Stock under each Option shall
be fixed by the Committee at the time of grant of the Option and shall equal at
least 100% of the Fair Market Value of a share of Common Stock on the date of
grant (and at least 110% of the Fair Market Value in the case of an Incentive
Stock Option granted to a Ten Percent Shareholder) (as adjusted pursuant to
Section 6.3). Subject to Section 5.5 below, Options shall be exercisable at such
time or times as the Committee shall determine; provided, however, that to the
extent that the aggregate Fair Market Value of the Common Stock (determined as
of the date of Option grant) with respect to which Incentive Stock Options (but
not non-qualified options) are exercisable for the first time by a Participant
during any calendar year (under all stock option plans of the Company) shall
exceed $100,000 or such higher amount as may be permitted from time to time
under the Code, such options shall be treated as nonqualified. The Committee
shall determine the exercise period for each Option, which period shall not
exceed ten years from the date of grant of the option. In addition, no Options
shall be granted hereunder after the tenth anniversary of the adoption of the
Plan.
<PAGE>
5.2 Exercise Procedure. Options shall be exercisable by written notice
to the Company (to the attention of the Company's Secretary) accompanied by
payment in full of the applicable exercise price in cash, certified check, bank
draft or money order or such other method as the Committee may agree. The
Committee, in its sole discretion, and subject to such conditions as the
Committee may determine, may permit the exercise of an Option by delivery of a
promissory note.
5.3 Exchange of Previously Acquired Stock. The Committee, in its sole
discretion and subject to such conditions as the Committee may determine, may
permit the exercise price for the shares being acquired upon the exercise of an
Options to be paid, in full or in part, by the delivery to the Company of a
number of shares of Common Stock having an aggregate Fair Market Value as of the
date of exercise equal to part or all of such exercise vice.
5.4 Withholding Tax Requirements. It shall be a condition of the
exercise of any Option that the Participant exercising the Option make
appropriate payment or other provision acceptable to the Company with respect to
any withholding tax requirement arising from such exercise. The amount of
withholding tax required, if any, with respect to any Option exercise (the
"Withholding Amount") shall be determined by the Treasurer or other appropriate
officer of the Company, and the Participant shall furnish such information and
make such representations as such officer requires to make such determination.
If the Company determines that withholding tax is required with respect to any
Option exercise, the Company shall notify the Participant of the Withholding
Amount, and the Participant shall pay to the Company an amount not less than the
Withholding Amount. In lieu of making such payment, the Participant may elect to
pay the Withholding Amount by either (i) surrendering to the Company a number of
shares of Common Stock having an aggregate Fair Market Value as of the
"measurement date (as defined below)not less than the Withholding Amount or (ii)
directing the Company to withhold (and not to deliver or issue to the
Participant) a number of shares of Common Stock otherwise issuable upon the
exercise of the option having an aggregate Fair Market Value as of the
measurement date not less than the Withholding Amount. In addition, if the
Committee approves, a Participant may elect pursuant to the immediately
preceding sentence to deliver or direct the withholding of shares of Common
Stock having an aggregate Fair Market Value in excess of the minimum Withholding
Amount but not in excess of the Participant's tax liability in connection with
the Option exercise based on the highest applicable marginal combined federal
income and state income tax rate, as estimated in good faith by such
Participant. Any fractional share interests resulting from the delivery or
withholding of shares of Common Stock to meet withholding tax requirements shall
be settled in cash. All amounts paid to or withheld by the Company and the value
of all shares of Common Stock delivered to or withheld by the Company pursuant
to this Section 5.4 shall be deposited in accordance with applicable law by the
Company as withholding tax for the Participant's account. If the Treasurer or
other appropriate officer of the Company determines that no withholding tax is
required with respect to the exercise of any Option (because such Option is an
Incentive Stock Option or otherwise), but subsequently it is determined that the
exercise resulted in taxable income as to which withholding is required (as a
result of a disposition of shares or otherwise), the Participant shall promptly,
upon being notified of the withholding requirement, pay to the Company by means
acceptable to the Company the amount required to be withheld; and at its
election the Company may condition any transfer of shares issued upon exercise
of an Incentive Stock Option upon receipt of such payment. The term "measurement
date" as used in this Section 5.4 shall mean the date on which any taxable
income resulting from the exercise of an Option is determined under applicable
federal income tax law.
<PAGE>
5.5 Conditions and Limitations on Exercise. At the sole discretion of
the Committee, Options may be made exercisable, in one or more installments,
upon (i) the happening of certain events, (ii) the passage of a specified period
of time, (iii) the fulfillment of certain conditions and/or (iv) the achievement
by the Company or a Subsidiary, as the case may be, of certain performance
goals. Notwithstanding anything to the contrary in this Plan or any Option
Agreement, no Option shall be exercisable, whether or not vested, before the
effective date of any Trigger Event. Subject to the preceding sentence, unless
the Committee specifies otherwise in the Option Agreement, every Option granted
pursuant to this Plan will vest and become exercisable with respect to 25% of
the Common Stock issuable upon exercise thereof (rounded to the nearest whole
share; rounded up in the event of a half-share for Options granted after the
adoption of this Amended and Restated 1997 U.S. Interactive, Inc. Stock Option
Plan) on each of the first, second-and third anniversaries of the date of grant
and the remainder shall vest on the fourth anniversary of the date of grant. In
the event of a Sale of the Company the Committee may provide, in its sole
discretion, that the outstanding Options which are immediately exercisable shall
terminate if not exercised as of the date of the Sale of the Company or any
other designated date or that such Options shall thereafter represent only the
right to receive the excess of the consideration per share of Common Stock
offered in such Sale of the Company over the exercise price of such Options.
Upon a Trigger Event, the Committee may accelerate the vesting of any unvested
Options.
5.6 Expiration of Options.
(a) Normal Expiration. In no event shall any part of any Option be
exercisable after the stated date of expiration thereof.
(b) Early Expiration Upon Termination of Employment. Except as
otherwise provided in the applicable Option Agreement, upon termination of a
Participant's employment with the Company or its Subsidiaries for death,
Disability or termination without cause by the Company or a Subsidiary, all
Options or portions thereof held by such Participant that are not vested and
exercisable on the date of such termination shall expire and be forfeited as of
such date and all vested Options held by such Participant shall expire to the
extent not theretofore exercised on the ninetieth (90th) day (one year if
termination is caused by Participant's death or Disability) following the date
of such termination. Upon voluntary termination of a Participant's employment or
termination for Cause of a Participant's employment by the Company or a
Subsidiary, all unexercised Options, whether or not vested, shall terminate
immediately upon the earlier to occur of the date the Participant receives
notice of the termination or the actual date of termination.
<PAGE>
ARTICLE VI
General Provisions
6.1 Listing, Registration and Legal Compliance. If at any time the
Committee determines, in its discretion, that the listing, registration or
qualification of the shares subject to Options upon any securities exchange or
under any state or federal securities or other law or regulation, or the consent
or approval of any governmental regulatory body, is necessary or desirable as a
condition to or in connection with the granting of Options or the purchase or
issuance of shares thereunder, no Options may be granted or exercised, in whole
or in part, unless such listing, registration, qualification, consent or
approval shall have been effected or obtained free of any conditions not
acceptable to the Committee. The holders of such Options will supply the Company
with such certificates, representations and information as the Company shall
request and shall otherwise cooperate with the Company in obtaining such
listing, registration, qualification, consent or approval. If the Company, as
part of an offering of securities or otherwise, finds it desirable because of
federal or state regulatory requirements to reduce the period during which any
Options may be exercised, the Committee may, in its discretion and without the
Participant's consent, so reduce such period on not less than 15 days' written
notice to the holders thereof.
6.2 Options Not Transferable. Options may not be transferred other than
by will or the laws of descent and distribution and, during the lifetime of the
Participant to whom they were granted, may be exercised only by such Participant
(or his or her legal guardian or legal representative). In the event of the
death of a Participant, exercise of Options granted hereunder to such
Participant which are vested as of the date of death may be made only by the
executor or administrator of such Participant's estate or the person or persons
to whom such Participant's rights under the Options pass by will or the laws of
descent and distribution.
6.3 Adjustments. In the event of a reorganization, recapitalization,
stock dividend or stock split, or combination or other change in the shares of
Common Stock, the Board or the Committee shall, in order to prevent the dilution
or enlargement of rights under the Plan or outstanding Options, adjust the
number and type of shares as to which options may be granted under the Plan, the
number and type of shares covered by outstanding Options, the exercise prices
specified therein and other provisions of this Plan which specify a number of
shares, all as such Board or Committee determines to be appropriate and
equitable.
6.4 Rights of Participants. Nothing in the Plan shall interfere with or
limit in any way the right of the Company or any Subsidiary to terminate or
modify any Participant's employment at any time (with or without Cause), or
confer upon any Participant any right to continue in the employ of the Company
or any Subsidiary for any period of time or to continue to receive such
Participant's current (or other) rate of compensation. No employee shall have a
right to be selected as a Participant or, having been so selected, to be
selected again as a Participant.
<PAGE>
6.5 Amendment, Suspension and Termination of Plan. The Board or the
Committee may suspend or terminate the Plan or any portion thereof at any time
and may amend it from time to time in such respects as the Board or the
Committee may deem advisable; provided, however, that no such amendment shall be
made without stockholder approval to the extent such approval is required by
law, agreement or the rules of any exchange upon which the Common Stock is
listed, and no such amendment, suspension or termination shall impair the rights
of Participants under outstanding Options without the consent of the
Participants affected thereby, except as otherwise provided herein. No Options
shall be granted hereunder after the tenth anniversary of the approval of the
Plan by the stockholders of the Company.
6.6 Amendment of Outstanding Options. The Committee may amend or modify
the terms of any option Agreement in any manner to the extent that the Committee
would have the authority under the Plan initially to grant an option with such
amended terms; provided that, except as expressly contemplated elsewhere herein
or in the Option Agreement no such amendment or modification shall impair the
rights of any Participant under any outstanding Option without the consent of
such Participant.
6.7 Indemnification. In addition to such other rights of
indemnification as they may have as members of the Board or the Committee, the
members of the Committee shall be indemnified by the Company against all costs
and expenses reasonably incurred by them in connection with any action, suit or
proceeding to which they or any of them may be party by reason of any action
taken or failure to act under or in connection with the Plan or any Option
granted under the Plan, and against all amounts paid by them in settlement
thereof (provided such settlement is approved by independent legal counsel
selected by the Company) or paid by them in satisfaction of a judgment in any
such action, suit or proceeding; provided, however, that any such Committee
member shall be entitled to the indemnification rights set forth in this Section
6.7 only if such member has acted in good faith and in a manner that such member
reasonably believed to be in or not opposed to the best interests of the Company
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe that such conduct was unlawful, and further provided that upon the
institution of any such action, suit or proceeding a Committee member shall give
the Company written notice thereof and an opportunity to handle and defend the
same before such Committee member undertakes to handle and defend it on his own
behalf.
6.8 Restricted Securities. All Common Stock issued pursuant to the
terms of this Plan shall constitute "restricted securities," as that term is
defined in Rule 144 promulgated pursuant to the Securities Act, and may not be
transferred except in compliance with the registration requirements of the
Securities Act or an exemption therefrom.
<PAGE>
AGREEMENT EVIDENCING A GRANT OF AN INCENTIVE STOCK OPTION
AND NON-QUALIFIED STOCK OPTION UNDER STOCK OPTION PLAN
This Agreement (the "Agreement") is made as of June 30, 1998 the
("Grant Date"), between U.S. Interactive, Inc., a Pennsylvania corporation (the
"Company"), and Michael M. Carter ("Grantee").
1. Grant of Option. Pursuant to the Stock Option Plan of the Company
(the "Plan"), the Company hereby grants to Grantee, as of the Grant Date, an
incentive stock option to the extent all or any portion of this Option qualifies
as an "incentive stock option" under Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), and to the extent that all or any portion of this
Option does not so qualify as an "incentive stock option" under the Code, a
non-qualified stock option (together, the "Option"), to purchase an aggregate of
3,500 shares (the "Option Shares") of the Common Stock of the Company (the
"Common Stock") at a price of $3.50 per share, subject to adjustment and the
other terms and conditions set forth herein and in the Plan. Capitalized terms
herein shall have the meaning set forth in the Plan unless otherwise defined
herein.
2. Grantee Bound by Plan. Enclosed is a copy of the Plan, which is
incorporated herein by reference and made a part hereof. The Plan shall govern
all aspects of this Agreement except as otherwise specifically stated herein.
Grantee hereby acknowledges receipt of a copy of the Plan, and agrees to be
bound by all the terms and provisions thereof.
3. Exercise of Option. Subject to the earlier termination of the Option
as provided herein and in the Plan, the Option may be exercised after a Trigger
Event has occurred by written notice to the Company at any time and from time to
time thereafter. But except as otherwise provided below, such Option shall not
be exercisable for more than the number of shares that are then vested. Subject
to the foregoing, this Option shall vest over a four (4) year period; 25% of the
balance of the Option Shares (rounded to the nearest whole share) vesting on the
first, second and third anniversaries of the Grant Date, and the remainder
vesting on the fourth anniversary of the Grant Date.
This option shall not be exercisable in any event after the tenth
anniversary (fifth anniversary in the case of a 10% shareholder) of the Grant
Date. This Option may not be exercised for a fraction of a share of Common
Stock. Unvested Options are subject to cancellation as provided in the Plan.
4. Conditions to Exercise. This Option may not be exercised by Grantee
unless the following conditions are met:
(a) Legal counsel for the Company must be satisfied at the time of
exercise that the issuance of Option Shares upon exercise will be in compliance
with the Securities Act of 1933, as amended (the "Securities Act"), and
applicable United States federal, state and local laws and foreign laws; and
(b) Grantee must pay at the time of exercise the full purchase price
for the shares of Common Stock being acquired hereunder: (i) in cash or by
certified check; (ii) by delivery of other shares of Common Stock; (iii) by
surrendering a portion of this Option which entitles the Grantee to purchase
Option Shares that have vested and have an aggregate Fair Market Value equal to
the full exercise price in accordance with Section 1 for such Option shares
being purchased upon such exercise; or (iv) through a combination thereof.
Please refer to the Plan for a complete description of method of delivery of
Option Shares pursuant to this Section 4(b).
5. Transferability. This Option may not be sold, assigned, transferred,
pledged, hypothecated or otherwise disposed of by Grantee, except by will or the
laws of descent and distribution (in which case, such transferee shall succeed
to the rights and obligations of Grantee hereunder), and is exercisable during
Grantee's lifetime only by Grantee. If Grantee or anyone claiming under or
through Grantee attempts to violate this Paragraph 5, such attempted violation
shall be null and void and without effect, and the Company's obligation
hereunder shall terminate. If at the time of Grantee's death this Option has not
been fully exercised, Grantee's estate or any person who acquires the right to
exercise this Option by bequest or inheritance by the date of Grantee's death
(but in no event after the expiration of ten years from the Grant Date), may
exercise this Option with respect to the number of shares, determined under
Section 3 above, as to which Grantee could have exercised the Option at the time
of Grantee's death. The applicable requirements of paragraph 4 above must be
satisfied in full at the time of such exercise.
<PAGE>
6. Administration. Any action taken or decision made by the Company,
the Board, or the Committee or its delegates arising out of or in connection
with the construction, administration, interpretation or effect of the Plan or
this Agreement shall lie within its sole and absolute discretion, as the case
may be, and shall be final, conclusive and binding on Grantee and all persons
claiming under or through Grantee. By accepting this grant or other benefit
under the Plan, Grantee and each person claiming under or through Grantee shall
be conclusively deemed to have indicated acceptance and ratification of, and
consent to, any action taken under the Plan by the Company, the Board, or the
Committee or its delegates.
7. No Rights as Stockholder. Unless and until a certificate or
certificates representing such shares of Common Stock shall have been issued to
Grantee (or any person acting under Paragraph 5 above), Grantee shall not be,
nor have any of the rights or privileges of, a stockholder of the Company with
respect to shares of Common Stock acquirable upon exercise of the Option.
8. Investment Representation. Grantee hereby acknowledges that the
shares of Common Stock which Grantee may acquire by exercising the Option shall
be acquired for investment without a view to distribution, within the meaning of
the Securities Act, and shall not be sold, transferred, assigned, pledged or
hypothecated in the absence of an effective registration statement for the
shares of Common Stock under the Securities Act, and applicable state securities
laws or an applicable exemption from the registration requirements of the Act
and any applicable state securities laws. Grantee also agrees that the shares of
Common Stock which Grantee may acquire by exercising the Option will not be sold
or otherwise disposed of in any manner which would constitute a violation of any
applicable securities laws, whether federal or state.
9. Listing and Registration of Common Stock. The Company, in its
discretion, may postpone the issuance and/or delivery of shares of Common Stock
upon any exercise of this option until completion of such shares under any state
and/or federal law, rule or regulation as the Company may reasonably in good
faith consider appropriate.
10. Notices. Any notice hereunder to the Company shall be addressed to
the Company, Attention: Secretary, and any notice hereunder to Grantee shall be
addressed to Grantee at Grantee's last address on the records of the Company,
subject to the right of either party to designate at any time hereafter in
writing some other address. Any notice shall be deemed to have been duly given
when delivered personally, one day following dispatch if sent by nationally
recognized overnight courier, fees prepaid, or three days following mailing if
sent by registered mail, return receipt requested, postage prepaid and addressed
as set forth above.
11. Binding Effect. This Agreement shall be binding upon and inure to
the benefit of any successors to the Company and all persons lawfully claiming
under Grantee.
12. Governing Law. The validity, construction, interpretation,
administration and effect of the Plan, and of its rules and regulations, and
rights relating to the Plan and to this Agreement, shall be governed by the
substantive laws, but not the choice of law rules, of the Commonwealth of
Pennsylvania.
<PAGE>
IN WITNESS WHEREOF, the Company and Grantee have executed this Agreement as of
the date first above written.
U.S. INTERACTIVE, INC.
By: /s/
------------------------------
Stephen T. Zarrilli
Executive Vice President
Finance and Operations
<PAGE>
GRANTEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE
OPTION IS EARNED ONLY BY CONTINUING EMPLOYMENT AT THE WILL OF THE COMPANY (NOT
THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES
HEREUNDER). GRANTEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS
AGREEMENT, NOR IN THE COMPANY'S STOCK OPTION PLAN, IS INCORPORATED HEREIN BY
REFERENCE, NOR SHALL CONFER UPON GRANTEE ANY RIGHT WITH RESPECT TO CONTINUATION
OF EMPLOYMENT BY THE COMPANY, AND SHALL NOT INTERFERE IN ANY WAY WITH HIS RIGHT
OR THE COMPANY'S RIGHT TO TERMINATE OR MODIFY HIS EMPLOYMENT AT ANY TIME, WITH
OR WITHOUT CAUSE.
Grantee acknowledges receipt of a copy of the Plan and represents that
he is familiar with the terms and provisions thereof, and hereby accepts this
Option subject to all of the terms and provisions thereof, except as otherwise
specifically stated in this Option Agreement. Grantee has reviewed the Plan and
this Option Agreement in their entirety, and has had an opportunity to obtain
the advice of counsel prior to executing this Option Agreement. Grantee hereby
agrees to accept as binding, conclusive and final all decisions or
interpretations of the Board upon any questions arising under the Plan.
GRANTEE
By: /s/
------------------------------
Employee Signature
Michael M. Carter
------------------------------
Employee Name (Print)
<PAGE>
AGREEMENT EVIDENCING A GRANT OF AN INCENTIVE STOCK OPTION
AND NON-QUALIFIED STOCK OPTION UNDER STOCK OPTION PLAN
This Agreement (the "Agreement") is made as of June 15, 1998 the
("Grant Date"), between U.S. Interactive, Inc., a Pennsylvania corporation (the
"Company"), and Stephen Zarrilli ("Grantee").
1. Grant of Option. Pursuant to the Stock Option Plan of the Company
(the "Plan"), the Company hereby grants to Grantee, as of the Grant Date, an
incentive stock option to the extent all or any portion of this Option qualifies
as an "incentive stock option" under Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), and to the extent that all or any portion of this
Option does not so qualify as an "incentive stock option" under the Code, a
non-qualified stock option (together, the "Option"), to purchase an aggregate of
31,525 shares (the "Option Shares") of the Common Stock of the Company (the
"Common Stock") at a price of $3.85 per share, subject to adjustment and the
other terms and conditions set forth herein and in the Plan. Capitalized terms
herein shall have the meaning set forth in the Plan unless otherwise defined
herein.
2. Grantee Bound by Plan. Enclosed is a copy of the Plan, which is
incorporated herein by reference and made a part hereof. The Plan shall govern
all aspects of this Agreement except as otherwise specifically stated herein.
Grantee hereby acknowledges receipt of a copy of the Plan, and agrees to be
bound by all the terms and provisions thereof.
3. Exercise of Option. Subject to the earlier termination of the Option
as provided herein and in the Plan, the Option may be exercised after a Trigger
Event has occurred by written notice to the Company at any time and from time to
time thereafter. But except as otherwise provided below, such Option shall not
be exercisable for more than the number of shares that are then vested. Subject
to the foregoing, this Option shall vest with respect to 100% of the Option
Shares on the Grant Date hereof, and shall be exercisable only as follows: (a)
25,974 Option Shares shall be exercisable on and after a Trigger Event has
occurred, (b) 5,551 Option Shares shall be exercisable on and after January 1 of
the calendar year immediately following the calendar year in which a Trigger
Event occurs.
This option shall not be exercisable in any event after the tenth
anniversary (fifth anniversary in the case of a 10% shareholder) of the Grant
Date. This Option may not be exercised for a fraction of a share of Common
Stock. Unvested Options are subject to cancellation as provided in the Plan.
4. Conditions to Exercise. This Option may not be exercised by Grantee
unless the following conditions are met:
(a) Legal counsel for the Company must be satisfied at the time of
exercise that the issuance of Option Shares upon exercise will be in compliance
with the Securities Act of 1933, as amended (the "Securities Act"), and
applicable United States federal, state and local laws and foreign laws; and
(b) Grantee must pay at the time of exercise the full purchase price
for the shares of Common Stock being acquired hereunder: (i) in cash or by
certified check; (ii) by delivery of other shares of Common Stock; (iii) by
surrendering a portion of this Option which entitles the Grantee to purchase
Option Shares that have vested and have an aggregate Fair Market Value equal to
the full exercise price in accordance with Section 1 for such Option shares
being purchased upon such exercise; or (iv) through a combination thereof.
Please refer to the Plan for a complete description of method of delivery of
Option Shares pursuant to this Section 4(b).
5. Transferability. This Option may not be sold, assigned, transferred,
pledged, hypothecated or otherwise disposed of by Grantee, except by will or the
laws of descent and distribution (in which case, such transferee shall succeed
to the rights and obligations of Grantee hereunder), and is exercisable during
Grantee's lifetime only by Grantee. If Grantee or anyone claiming under or
through Grantee attempts to violate this Paragraph 5, such attempted violation
shall be null and void and without effect, and the Company's obligation
hereunder shall terminate. If at the time of Grantee's death this Option has not
been fully exercised, Grantee's estate or any person who acquires the right to
exercise this Option by bequest or inheritance by the date of Grantee's death
(but in no event after the expiration of ten years from the Grant Date), may
exercise this Option with respect to the number of shares, determined under
Section 3 above, as to which Grantee could have exercised the Option at the time
of Grantee's death. The applicable requirements of paragraph 4 above must be
satisfied in full at the time of such exercise.
<PAGE>
6. Administration. Any action taken or decision made by the Company,
the Board, or the Committee or its delegates arising out of or in connection
with the construction, administration, interpretation or effect of the Plan or
this Agreement shall lie within its sole and absolute discretion, as the case
may be, and shall be final, conclusive and binding on Grantee and all persons
claiming under or through Grantee. By accepting this grant or other benefit
under the Plan, Grantee and each person claiming under or through Grantee shall
be conclusively deemed to have indicated acceptance and ratification of, and
consent to, any action taken under the Plan by the Company, the Board, or the
Committee or its delegates.
7. No Rights as Stockholder. Unless and until a certificate or
certificates representing such shares of Common Stock shall have been issued to
Grantee (or any person acting under Paragraph 5 above), Grantee shall not be,
nor have any of the rights or privileges of, a stockholder of the Company with
respect to shares of Common Stock acquirable upon exercise of the Option.
8. Investment Representation. Grantee hereby acknowledges that the
shares of Common Stock which Grantee may acquire by exercising the Option shall
be acquired for investment without a view to distribution, within the meaning of
the Securities Act, and shall not be sold, transferred, assigned, pledged or
hypothecated in the absence of an effective registration statement for the
shares of Common Stock under the Securities Act, and applicable state securities
laws or an applicable exemption from the registration requirements of the Act
and any applicable state securities laws. Grantee also agrees that the shares of
Common Stock which Grantee may acquire by exercising the Option will not be sold
or otherwise disposed of in any manner which would constitute a violation of any
applicable securities laws, whether federal or state.
9. Listing and Registration of Common Stock. The Company, in its
discretion, may postpone the issuance and/or delivery of shares of Common Stock
upon any exercise of this option until completion of such shares under any state
and/or federal law, rule or regulation as the Company may reasonably in good
faith consider appropriate.
10. Notices. Any notice hereunder to the Company shall be addressed to
the Company, Attention: Secretary, and any notice hereunder to Grantee shall be
addressed to Grantee at Grantee's last address on the records of the Company,
subject to the right of either party to designate at any time hereafter in
writing some other address. Any notice shall be deemed to have been duly given
when delivered personally, one day following dispatch if sent by nationally
recognized overnight courier, fees prepaid, or three days following mailing if
sent by registered mail, return receipt requested, postage prepaid and addressed
as set forth above.
11. Binding Effect. This Agreement shall be binding upon and inure to
the benefit of any successors to the Company and all persons lawfully claiming
under Grantee.
12. Governing Law. The validity, construction, interpretation,
administration and effect of the Plan, and of its rules and regulations, and
rights relating to the Plan and to this Agreement, shall be governed by the
substantive laws, but not the choice of law rules, of the Commonwealth of
Pennsylvania.
<PAGE>
IN WITNESS WHEREOF, the Company and Grantee have executed this Agreement as of
the date first above written.
U.S. INTERACTIVE, INC.
By: /s/
------------------------------
Richard J. Masterson
President and CEO
<PAGE>
GRANTEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE
OPTION IS EARNED ONLY BY CONTINUING EMPLOYMENT AT THE WILL OF THE COMPANY (NOT
THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES
HEREUNDER). GRANTEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS
AGREEMENT, NOR IN THE COMPANY'S STOCK OPTION PLAN, IS INCORPORATED HEREIN BY
REFERENCE, NOR SHALL CONFER UPON GRANTEE ANY RIGHT WITH RESPECT TO CONTINUATION
OF EMPLOYMENT BY THE COMPANY, AND SHALL NOT INTERFERE IN ANY WAY WITH HIS RIGHT
OR THE COMPANY'S RIGHT TO TERMINATE OR MODIFY HIS EMPLOYMENT AT ANY TIME, WITH
OR WITHOUT CAUSE.
Grantee acknowledges receipt of a copy of the Plan and represents that
he is familiar with the terms and provisions thereof, and hereby accepts this
Option subject to all of the terms and provisions thereof, except as otherwise
specifically stated in this Option Agreement. Grantee has reviewed the Plan and
this Option Agreement in their entirety, and has had an opportunity to obtain
the advice of counsel prior to executing this Option Agreement. Grantee hereby
agrees to accept as binding, conclusive and final all decisions or
interpretations of the Board upon any questions arising under the Plan.
GRANTEE
By: /s/
------------------------------
Employee Signature
Stephen T. Zarrilli
------------------------------
Employee Name (Print)
<PAGE>
AGREEMENT EVIDENCING A GRANT OF AN INCENTIVE STOCK OPTION
AND NON-QUALIFIED STOCK OPTION UNDER STOCK OPTION PLAN
This Agreement (the "Agreement") is made as of June 15, 1998 the
("Grant Date"), between U.S. Interactive, Inc., a Pennsylvania corporation (the
"Company"), and Phil Calamia ("Grantee").
1. Grant of Option. Pursuant to the Stock Option Plan of the Company
(the "Plan"), the Company hereby grants to Grantee, as of the Grant Date, an
incentive stock option to the extent all or any portion of this Option qualifies
as an "incentive stock option" under Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), and to the extent that all or any portion of this
Option does not so qualify as an "incentive stock option" under the Code, a
non-qualified stock option (together, the "Option"), to purchase an aggregate of
6,000 shares (the "Option Shares") of the Common Stock of the Company (the
"Common Stock") at a price of $3.50 per share, subject to adjustment and the
other terms and conditions set forth herein and in the Plan. Capitalized terms
herein shall have the meaning set forth in the Plan unless otherwise defined
herein.
2. Grantee Bound by Plan. Enclosed is a copy of the Plan, which is
incorporated herein by reference and made a part hereof. The Plan shall govern
all aspects of this Agreement except as otherwise specifically stated herein.
Grantee hereby acknowledges receipt of a copy of the Plan, and agrees to be
bound by all the terms and provisions thereof.
3. Exercise of Option. Subject to the earlier termination of the Option
as provided herein and in the Plan, the Option may be exercised after a Trigger
Event has occurred by written notice to the Company at any time and from time to
time thereafter. But except as otherwise provided below, such Option shall not
be exercisable for more than the number of shares that are then vested. Subject
to the foregoing, this Option shall vest over a four (4) year period; 25% of the
balance of the Option Shares (rounded to the nearest whole share) vesting on the
first, second and third anniversaries of the Grant Date, and the remainder
vesting on the fourth anniversary of the Grant Date.
This option shall not be exercisable in any event after the tenth
anniversary (fifth anniversary in the case of a 10% shareholder) of the Grant
Date. This Option may not be exercised for a fraction of a share of Common
Stock. Unvested Options are subject to cancellation as provided in the Plan.
4. Conditions to Exercise. This Option may not be exercised by Grantee
unless the following conditions are met:
(a) Legal counsel for the Company must be satisfied at the time of
exercise that the issuance of Option Shares upon exercise will be in compliance
with the Securities Act of 1933, as amended (the "Securities Act"), and
applicable United States federal, state and local laws and foreign laws; and
(b) Grantee must pay at the time of exercise the full purchase price
for the shares of Common Stock being acquired hereunder: (i) in cash or by
certified check; (ii) by delivery of other shares of Common Stock; (iii) by
surrendering a portion of this Option which entitles the Grantee to purchase
Option Shares that have vested and have an aggregate Fair Market Value equal to
the full exercise price in accordance with Section 1 for such Option shares
being purchased upon such exercise; or (iv) through a combination thereof.
Please refer to the Plan for a complete description of method of delivery of
Option Shares pursuant to this Section 4(b).
5. Transferability. This Option may not be sold, assigned, transferred,
pledged, hypothecated or otherwise disposed of by Grantee, except by will or the
laws of descent and distribution (in which case, such transferee shall succeed
to the rights and obligations of Grantee hereunder), and is exercisable during
Grantee's lifetime only by Grantee. If Grantee or anyone claiming under or
through Grantee attempts to violate this Paragraph 5, such attempted violation
shall be null and void and without effect, and the Company's obligation
hereunder shall terminate. If at the time of Grantee's death this Option has not
been fully exercised, Grantee's estate or any person who acquires the right to
exercise this Option by bequest or inheritance by the date of Grantee's death
(but in no event after the expiration of ten years from the Grant Date), may
exercise this Option with respect to the number of shares, determined under
Section 3 above, as to which Grantee could have exercised the Option at the time
of Grantee's death. The applicable requirements of paragraph 4 above must be
satisfied in full at the time of such exercise.
<PAGE>
6. Administration. Any action taken or decision made by the Company,
the Board, or the Committee or its delegates arising out of or in connection
with the construction, administration, interpretation or effect of the Plan or
this Agreement shall lie within its sole and absolute discretion, as the case
may be, and shall be final, conclusive and binding on Grantee and all persons
claiming under or through Grantee. By accepting this grant or other benefit
under the Plan, Grantee and each person claiming under or through Grantee shall
be conclusively deemed to have indicated acceptance and ratification of, and
consent to, any action taken under the Plan by the Company, the Board, or the
Committee or its delegates.
7. No Rights as Stockholder. Unless and until a certificate or
certificates representing such shares of Common Stock shall have been issued to
Grantee (or any person acting under Paragraph 5 above), Grantee shall not be,
nor have any of the rights or privileges of, a stockholder of the Company with
respect to shares of Common Stock acquirable upon exercise of the Option.
8. Investment Representation. Grantee hereby acknowledges that the
shares of Common Stock which Grantee may acquire by exercising the Option shall
be acquired for investment without a view to distribution, within the meaning of
the Securities Act, and shall not be sold, transferred, assigned, pledged or
hypothecated in the absence of an effective registration statement for the
shares of Common Stock under the Securities Act, and applicable state securities
laws or an applicable exemption from the registration requirements of the Act
and any applicable state securities laws. Grantee also agrees that the shares of
Common Stock which Grantee may acquire by exercising the Option will not be sold
or otherwise disposed of in any manner which would constitute a violation of any
applicable securities laws, whether federal or state.
9. Listing and Registration of Common Stock. The Company, in its
discretion, may postpone the issuance and/or delivery of shares of Common Stock
upon any exercise of this option until completion of such shares under any state
and/or federal law, rule or regulation as the Company may reasonably in good
faith consider appropriate.
10. Notices. Any notice hereunder to the Company shall be addressed to
the Company, Attention: Secretary, and any notice hereunder to Grantee shall be
addressed to Grantee at Grantee's last address on the records of the Company,
subject to the right of either party to designate at any time hereafter in
writing some other address. Any notice shall be deemed to have been duly given
when delivered personally, one day following dispatch if sent by nationally
recognized overnight courier, fees prepaid, or three days following mailing if
sent by registered mail, return receipt requested, postage prepaid and addressed
as set forth above.
11. Binding Effect. This Agreement shall be binding upon and inure to
the benefit of any successors to the Company and all persons lawfully claiming
under Grantee.
12. Governing Law. The validity, construction, interpretation,
administration and effect of the Plan, and of its rules and regulations, and
rights relating to the Plan and to this Agreement, shall be governed by the
substantive laws, but not the choice of law rules, of the Commonwealth of
Pennsylvania.
<PAGE>
IN WITNESS WHEREOF, the Company and Grantee have executed this Agreement as of
the date first above written.
U.S. INTERACTIVE, INC.
By: /s/
------------------------------
Stephen T. Zarrilli
Executive Vice President
Finance and Operations
<PAGE>
GRANTEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE
OPTION IS EARNED ONLY BY CONTINUING EMPLOYMENT AT THE WILL OF THE COMPANY (NOT
THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES
HEREUNDER). GRANTEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS
AGREEMENT, NOR IN THE COMPANY'S STOCK OPTION PLAN, IS INCORPORATED HEREIN BY
REFERENCE, NOR SHALL CONFER UPON GRANTEE ANY RIGHT WITH RESPECT TO CONTINUATION
OF EMPLOYMENT BY THE COMPANY, AND SHALL NOT INTERFERE IN ANY WAY WITH HIS RIGHT
OR THE COMPANY'S RIGHT TO TERMINATE OR MODIFY HIS EMPLOYMENT AT ANY TIME, WITH
OR WITHOUT CAUSE.
Grantee acknowledges receipt of a copy of the Plan and represents that
he is familiar with the terms and provisions thereof, and hereby accepts this
Option subject to all of the terms and provisions thereof, except as otherwise
specifically stated in this Option Agreement. Grantee has reviewed the Plan and
this Option Agreement in their entirety, and has had an opportunity to obtain
the advice of counsel prior to executing this Option Agreement. Grantee hereby
agrees to accept as binding, conclusive and final all decisions or
interpretations of the Board upon any questions arising under the Plan.
GRANTEE
By: /s/
------------------------------
Employee Signature
Philip L. Calamia
------------------------------
Employee Name (Print)
<PAGE>
AGREEMENT EVIDENCING A GRANT OF AN INCENTIVE STOCK OPTION
AND NON-QUALIFIED STOCK OPTION UNDER STOCK OPTION PLAN
Agreement (this "Agreement") made as of May 13, 1997 (the "Grant
Date"), between U.S. Interactive, Inc,., a Pennsylvania corporation (the
"Company"), and Phil Calamia ("Grantee").
1. Grant of Option. Pursuant to the Stock Option Plan of the Company (the
"Plan"), the Company hereby grants to Grantee, as of the Grant Date, an
incentive stock option to the extent all or any portion of this Option qualifies
as an "incentive stock option" under Section 422 of the Internal Revenue Code of
1986, as amended (the "Code") and to the extent that all or any portion of this
Option does not so qualify as an "incentive stock option" under the Code, a
non-qualified stock option (together, the "Option"), to purchase an aggregate of
10,000 shares (the "Option Shares") of the Common Stock of the Company (the
"Common Stock") at a price of $1.50 per share of Common Stock, subject to
adjustment and the other terms and conditions set forth herein and in the Plan.
Capitalized terms herein shall have the meaning set forth in the Plan unless
otherwise defined herein.
2. Grantee Bound by Plan. Enclosed is a copy of the Plan which is incorporated
herein by reference and made a part hereof. The Plan shall govern all aspects of
this Agreement except as otherwise specifically stated herein. Grantee hereby
acknowledges receipt of a copy of the Plan and agrees to be bound by all the
terms and provisions thereof. Unless otherwise defined herein, capitalized terms
used but not defined herein shall have the meanings ascribed to them in the
Plan. The Plan should be carefully examined before any decision is made to
exercise this Option.
3. Exercise of Option. Subject to the earlier termination of the Option as
provided herein and in the Plan, the Option may be exercised after a Trigger
Event has occurred, by written notice to the Company at any time and from time
to time thereafter, but except as otherwise provided below, such Option shall
not be exercisable for more than the number of shares which are then vested.
Subject to the foregoing, this Option shall vest with respect to 50% of the
Option Shares upon the Grant Date and with respect to the balance of the Option
Shares over a four (4) year period, 25% of the balance of the Option Shares
(rounded to the nearest whole share) vesting on each of the first, second and
third anniversaries of the Grant Date; and the remainder shall vest on the
fourth anniversary of the Grant Date.
This Option shall not be exercisable in any event after the tenth
anniversary [fifth anniversary in the case of a 10% shareholder] of the Grant
Date. This Option may not be exercised for a fraction of a share of Common
Stock. Unvested Options are subject to cancellation as provided in the Plan.
4. Conditions to Exercise. This Option may not be exercised by Grantee unless
the following conditions are met:
<PAGE>
(a) legal counsel for the Company must be satisfied at the time of exercise that
the issuance of Option Shares upon exercise will be in compliance with the
Securities Act of 1933, as amended (the "Securities Act") and applicable United
States federal, state and local laws and foreign laws; and
(b) Grantee must pay at the time of exercise the full purchase price for the
shares of Common Stock being acquired hereunder (i) in cash or by certified
check or (ii) by delivery of other shares of Common Stock, or (iii) by
surrendering a portion of this Option which entitles the Grantee to purchase
Option Shares which have vested and have an aggregate Fair Market Value equal to
the full exercise price in accordance with Section for such Option shares being
purchase upon such exercise or (iv) through a combination thereof. Please refer
to the Plan for a complete description of method of delivery of Option shares
pursuant to this Section 4 (b).
5. Transferability. This Option may not be sold, assigned, transferred, pledged,
hypothecated or otherwise disposed of by Grantee, except by will or the laws of
descent and distribution (in which case, such transferee shall succeed to the
rights and obligations of Grantee hereunder) and is exercisable during Grantee's
lifetime only by Grantee. If Grantee or anyone claiming under or through Grantee
attempts to violate this Paragraph 5, such attempted violation shall be null and
void and without effect, and the Company's obligation hereunder shall terminate.
If at the time of Grantee's death this Option had not been fully exercise,
Grantee's estate or any person who acquires the right to exercise this Option by
bequest or inheritance or by the date of Grantee's death (but in no event after
the expiration of ten years from the Grant Date), exercise this Option with
respect to the number of shares, determined under Section 3 above, as to which
Grantee could have exercised the Option at the time of Grantee's death. The
applicable requirements of paragraph 4 above, must be satisfied in full at the
time of such exercise.
6. Administration. Any action taken or decision made by the Company, the board
or the Committee or its delegates arising out of or in connection with the
construction, administration, interpretation or effect of the Plan or this
Agreement shall lie within its sole and absolute discretion, as the case may be,
and shall be final, conclusive and binding on Grantee and all persons claiming
under or through Grantee. By accepting this grant or other benefit under the
plan, Grantee and each person claiming under or through Grantee shall be
conclusively deemed to have indicated acceptance and ratification of, and
consent to, any action taken under the Plan by the Company, the Board or the
committee or its delegates.
7. No Rights as Stockholder. Unless and until a certificate or certificates
representing such shares of Common Stock shall have been issued to Grantee (or
any person acting under Paragraph 5 above), Grantee shall not be or have any of
the rights or privileges of a stockholder of the Company with respect to shares
of Common Stock acquirable upon exercise of the Option.
8. Investment Representation. Grantee hereby acknowledges that the shares of
Common Stock which Grantee may acquire by exercising the Option shall be
acquired for investment without a view to distribution, within the meaning of
the Securities Act, and shall not be sold, transferred, assigned, pledged or
hypothecated in the absence of an effective registration statement for the
shares of Common Stock under the Securities Act and applicable state securities
laws or an applicable exemption from the registration requirements of the Act
and any applicable state securities laws. Grantee also agrees that the shares of
Common Stock which Grantee may acquire by exercising the Option will not be sold
or otherwise disposed of in any manner which would constitute a violation of any
applicable securities laws, whether federal or state.
<PAGE>
9. Listing and Registration of Common Stock. The Company, in its discretion, may
postpone the issuance and/or delivery of shares of Common Stock upon any
exercise of this option until completion of such shares under any state and/or
federal law, rule or regulation as the Company may reasonably in good faith
consider appropriate.
10. Notices. Any notice hereunder to the company shall be addressed to the
Company, Attention: Secretary, and any notice hereunder to Grantee shall be
addressed to Grantee at Grantee's last address on the records of the Company,
subject to the right of either party to designate at any time hereafter in
writing some other address. Any notice shall be deemed to have been duly given
when delivered personally, one day following dispatch if sent by nationally
recognized overnight courier, fees prepaid, or three days following mailing if
sent by registered mail, return receipt requested, postage prepaid and addressed
as set forth above.
11. Binding Effect. This Agreement shall be binding upon and inure to the
benefit of any successors to the Company and all persons lawfully claiming under
Grantee.
12. Governing Law. The validity, construction, interpretation, administration
and effect of the Plan, and of its rules and regulations, and rights relating to
the Plan and to this Agreement, shall be governed by the substantive laws, but
not the choice of law rules, of the commonwealth of Pennsylvania.
IN WITNESS WHEREOF, the Company and Grantee have executed this
Agreement as of the date first above written.
U.S. INTERACTIVE, INC.
By: /s/
------------------------------
Name: Stephen T. Zarrilli
Title: EVP Finance & Admin.
<PAGE>
GRANTEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE
OPTION IS EARNED ONLY BY CONTINUING EMPLOYMENT AT THE WILL OF THE COMPANY (NOT
THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES
HEREUNDER). GRANTEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS
AGREEMENT, NOR IN THE COMPANY'S STOCK OPTION PLAN WITH IS INCORPORATED HEREIN BY
REFERENCE, SHALL CONFER UPON GRANTEE ANY RIGHT WITH RESPECT TO CONTINUATION OF
EMPLOYMENT BY THE COMPANY, NOR SHALL NOT INTERFERE IN ANY WAY WITH HIS RIGHT OR
THE COMPANY'S RIGHT TO TERMINATE OR MODIFY HIS EMPLOYMENT AT ANY TIME, WITH OR
WITHOUT CAUSE.
Grantee acknowledges receipt of a copy of the Plan and represents that
he is familiar with the terms and provisions thereof, and hereby accepts this
Option subject to all of the terms and provisions thereof except as otherwise
specifically stated in this Option Agreement. Grantee has reviewed the Plan and
this Option Agreement in their entirety, has had an opportunity to obtain the
advice of counsel prior to exciting this Option Agreement. Grantee hereby agrees
to accept as binding, conclusive and final all decisions or interpretations of
the Board upon any questions arising under the,
GRANTEE
/s/
------------------------------
Employee's Signature
Name of Employee (Print)
Philip L. Calamia
<PAGE>
AMENDED AND RESTATED 1996
U.S. INTERACTIVE, INC. (FORMERLY
DIGITAL EVOLUTION, INC.)
STOCK OPTION PLAN
1. Purpose
This Stock Option Plan for U.S. Interactive, Inc., successor by Merger
to Digital Evolution, Inc. (the "Company") is intended to provide incentive to
directors, officers and key employees of the Company and its Subsidiaries by
providing those persons with opportunities to purchase shares of the Company's
Common Stock under (a) Incentive Stock Options and (b) other stock options.
2. Definitions
Except as otherwise expressly provided herein or unless the context
otherwise requires, as used in this Plan, the following words and phrases shall
have the meanings set forth in this Section 2.
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(c) "Common Stock" shall mean .9901 of a share of the
authorized but unissued Common Stock, $.001 par value per
share, of the Company.
(d) "Company" shall mean U.S. Interactive, Inc. (successor by
merger to Digital Evolution, Inc.), the employer which has
established this Plan.
(e) "Fair Market Value" per share as of a particular date
shall mean (i) the closing sales price per share of Common
Stock on the principal national securities exchange, if any,
on which the Common Stock shall then be listed for the last
preceding date on which there was a sale of such Common Stock
on such exchange, or (ii) if the Common Stock is not then
listed on a national securities exchange, the last sales price
per share of Common Stock entered on a national inter-dealer
quotation system for the last preceding date on which there
was a sale of such Common Stock on such national inter-dealer
quotation system, or (iii) if no closing or last sales price
per share of Common Stock is entered on a national
inter-dealer quotation system, the average of the closing bid
and asked prices for the Common Stock in the over-the-counter
market for the last preceding date on which there was a
quotation for such Common Stock in such market or (iv) if no
price can be determined under the preceding alternatives, then
the price per share as determined by the Committee in good
faith.
<PAGE>
(f) "Incentive Stock Option" shall mean one or more options to
purchase Common Stock which, at the time such options are
granted under this Plan or any other such plan of the Company,
qualify as incentive stock options under Section 422 of the
Code.
(g) "IPO" shall mean the initial public offering of the
Company's Common Stock.
(h) "Non-Incentive Stock Option" shall mean any option or
options that are not Incentive Stock Options.
(i) "Option" shall mean any option, including any SAR,
Incentive Stock Option or other option issued pursuant to this
Plan.
(j) "Optionee" shall mean any person to whom an Option is
granted under this Plan.
(k) "Parent" shall mean any corporation (other than the
Company) in an unbroken chain of corporations ending with the
Company if, at the time of granting an Option, each of the
corporations other than the Company owns stock possessing
fifty percent (50%) or more of the total combined voting power
of all classes of stock in one of the other corporations in
such chain.
(l) "Plan" shall mean this Stock Option Plan.
(m) "Reliance Period Termination Date" shall mean the date
that is the earlier of:
(1) The date of expiration or termination of the
Plan:
(2) The date of any material modification of the
Plan, within the meaning of Treasury Regulation
section 1.162-27(h)(1)(iii) that occurs on or after
the date of the IPO;
(3) The first date as of which all Options provided
for under the Plan have been issued; and
(4) The date of the first meeting of shareholders of
the Company at which Directors are to be elected that
occurs after the close of the third calendar year
following the calendar year in which the IPO occurs.
<PAGE>
(n) "Stock Appreciation Right" or "SAR" shall mean a right
included in an award under this Plan to receive upon exercise
of the SAR a payment equal to the amount of the appreciation
in the Fair Market Value of a share of Common Stock above the
exercise price which is set forth in the SAR, provided that
the exercise price is not less than the Fair Market Value of a
share of Common Stock on the date the SAR is granted. Payment
upon exercise of an SAR may be awarded separately or in
combination with other awards and Options under this Plan.
(o) "Subsidiary" shall mean any corporation (other than the
Company) in an unbroken chain of corporations beginning with
the Company if, at the time of granting an Option, each of the
corporations other than the last corporation in the unbroken
chain owns stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of
the other corporations in such chain.
(p) "Ten Percent Shareholder" shall mean an Optionee who, at
the time an Option is granted, owns directly or indirectly
(within the meaning of Section 424(d) of the Code) stock
possessing more than ten percent (10%) of the total combined
voting power of all classes of stock of the Company, its
Parent or a Subsidiary.
3. General Administration
(a) The Plan shall be administered by the Compensation
Committee (the "Committee"), consisting of not less than two
of the then members of the Board of Directors who qualify as
"non-employee directors" within the meaning of Rule 16b-3
promulgated under the Exchange Act and as "outside directors"
within the meaning of Section 162(m) of the Code.
(b) The Committee shall have the authority in its discretion,
subject to the terms and conditions hereof, to administer this
Plan and to exercise all the powers and authorities either
specifically granted to it hereunder or that are necessary or
that are advisable in the administration of the Plan,
including, without limitation, the authority to grant Options;
to determine the purchase price of shares of Common Stock
covered by each Option (the "Option Price"); to determine the
persons to whom, and the time or times at which, Options shall
be granted; to determine the number of shares of Common Stock
to be covered by each Option; to interpret the Plan; to
prescribe, amend and rescind rules and regulations relating to
the Plan; and to determine the terms and provisions of the
Option agreements (which need not be identical) entered into
in connection with Options granted under the Plan ("Option
Agreements").
<PAGE>
(c) The Board shall fill all vacancies, however caused, in
the Committee. The Board may from time to time appoint
additional members to the Committee and may at any time, under
the terms and conditions of the Company's Bylaws, remove one
or more Committee members and substitute others.
(d) No member of the Board or Committee shall be liable for
any action taken or determination made in good faith with
respect to this Plan or any Option granted hereunder.
4. Granting of Options.
Options may be granted under this Plan at any time prior to
November 5, 2006.
5. Eligibility.
(a) Options may be granted to any director, officer or key
employee of the Company or any Parent or Subsidiary. In
determining from time to time the officers and employees to
whom Options shall be granted and the number of shares of
Common Stock to be covered by each Option, the Committee shall
consider the duties of the respective officers and employees,
their present and potential contributions to the success of
the Company and its Parent or Subsidiaries and such other
factors as the Committee shall deem relevant in connection
with accomplishing the purposes of the Plan.
(b) At the time each Option is granted under the Plan the
Committee shall determine whether such Option is to be
designated as an Incentive Stock Option. Incentive Stock
Options shall not be granted to a director who is not an
employee of the Company.
(c) An Option designated an Incentive Stock Option can, prior
to its exercise, be changed to a non-incentive Option if the
Optionee consents to amend his Option Agreement to provide
that the exercise period of such Option will be governed by
Section 7(f)(2) hereof.
<PAGE>
6. Stock
(a) The stock subject to the Options shall be shares of Common
Stock. Such shares may, in whole or in part, be authorized but
unissued shares contributed directly by the Company or shares
which shall have been or which may be acquired by the Company.
The aggregate number of shares of Common Stock for which
Options may be granted from time to time under this Plan shall
be 1,054,688 shares (determined after the July 2, 1998 merger
of Digital Evolution, Inc. with and into the Company), subject
to adjustment as provided in Section 7(h) hereof. The maximum
number of shares that may be granted in any calendar year to
an employee shall be 1,054,688 shares (determined after the
July 2, 1998 merger of Digital Evolution, inc. with and into
the Company), subject to adjustment as provided in Section
7(h) hereof.
(b) If any outstanding Option under the Plan for any reason
expires or is terminated without having been exercised in
full, the shares of Common Stock allocable to the unexercised
portion of such Option shall (unless this Plan shall have been
terminated) become available for subsequent grants of Options
hereunder.
<PAGE>
7. Terms and Conditions of Options
Each Option granted pursuant to this Plan shall be evidenced by one or
more Option Agreements in such forms as the Committee may from time to time
approve. Options shall comply with and be subject to the following terms and
conditions:
(a) Incentive Stock Option Price. Each Incentive Stock Option
shall state the Option Price, which, shall be not less than
one hundred percent (100%) of the Fair Market Value of the
shares of Common Stock on the date of grant of the Option;
provided, however, in the case of an Incentive Stock Option
granted to a Ten Percent Shareholder, the Option Price shall
not be less than one hundred ten percent (110%) of such Fair
Market Value. The Option Price shall be subject to adjustment
as provided in Section 7(h) hereof. The date on which the
Committee adopts a resolution expressly granting an Option
shall be considered the day on which such Option is granted.
(b) Non-Incentive Stock Option Price. Each Option that is not
an Incentive Stock Option shall state the Option Price. In the
case of Non-Incentive Stock Options granted before the date of
the IPO, or on or after the date of the IPO but on or before
the Reliance Period Termination Date, the Option Price shall
not be less than fifty percent (50%) of the Fair Market Value
of the shares of Common Stock on the date of grant of the
Option. In the case of Non-Incentive Stock Options granted
after the date of the IPO and after the Reliance Period
Termination Date, the Option Price shall not be less than one
hundred percent (100%) of the Fair Market Value of the shares
of Common Stock on the date of grant of the Option. The Option
Price shall be subject to adjustment as provided in Section
7(h) hereof. The date on which the Committee adopts a
resolution expressly granting an Option shall be considered
the day on which such Option is granted.
(c) Restrictions. Any Common Stock issued under this Plan may
contain restrictions and limitations including, but not
limited to, limitations on transferability that may constitute
substantial risks of forfeiture, as the Committee may
determine.
(d) Value of Shares. Options may be granted to any eligible
person for shares of Common Stock of any value, provided that
the aggregate Fair Market Value (determined at the time the
Option is granted) of the Common Stock with respect to which
Incentive Stock Options are exercisable for the first time by
the Optionee during any calendar year (under all the plans of
the Company, its Parent and its Subsidiaries) shall not exceed
$100,000.
(e) Medium and Time of Payment. The Option Price shall become
immediately due upon exercise of the option and shall be
payable in one or more of the forms specified below:
<PAGE>
(1) cash; or,
(2) with the approval of the Committee, in shares of
Common Stock having a Fair Market Value in the
aggregate equal to such Option Price or in a
combination of cash and such shares; or
(3) to the extent the Option is exercised for vested
shares, through a special sale and remittance
procedure pursuant to which the Optionee shall
concurrently provide irrevocable written instructions
to (a) a Company-designated brokerage firm to effect
the immediate sale of the purchased shares of Common
Stock and remit to the Company, out of the sale
proceeds available on the settlement date, sufficient
funds to cover the aggregate exercise price payable
for the purchased shares of Common Stock plus all
applicable federal, state and local income and
employment taxes required to be withheld by the
Company by reason of such exercise and (b) the
Company to deliver the certificates for the purchased
shares of Common Stock directly to such brokerage
firm in order to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the Option Price must be made in full, at the time of exercise.
(f) Term and Exercise of Options.
(1) Incentive Stock Options. Incentive Stock Options
shall be exercisable over the exercise period
specified by the Committee in an Option Agreement,
but in no event shall such period exceed ten (10)
years from the date of the grant of each such
Incentive Stock Option; provided, however, that in
the case of an Incentive Stock Option granted to a
Ten Percent Shareholder, the exercise period shall
not exceed five (5) years from the date such Option
is granted. An Incentive Stock Option may be
exercised, as to any or all full shares of Common
Stock as to which the Incentive Stock Option has
become exercisable, by giving written notice of such
exercise to the Committee; provided, that an
Incentive Stock Option may not be exercised at any
one (1) time for less than one hundred (100) shares
of Common Stock (or such number of shares as to which
the Incentive Stock Option is then exercisable if
such number of shares is less than 100).
(2) Non-Incentive Stock Options. Options which have
not been designated by the Committee as Incentive
Stock Options shall be exercisable for a period of
ten (10) years after the date of grant.
<PAGE>
(g) NonTransferability of Options. Options granted under this
Plan are not transferable other than by will or by the laws of
descent and distribution, and, during Optionee's lifetime,
Options may be exercised only by the Optionee.
(h) Effect of Certain Changes.
(1) If there is any change in the number of shares of
Common Stock through the declaration of stock
dividends, recapitalization resulting in stock
splits, or combinations or exchanges of such shares,
then the number of shares of Common Stock available
for Options, the number of such shares covered by
outstanding Options, and the Option Price of such
Options shall be proportionately adjusted to reflect
any increase or decrease in the number of issued
shares of Common Stock; provided, however, that any
fractional shares resulting from such adjustment
shall be eliminated.
(2) In the event of a proposed dissolution or
liquidation of the Company, each Option granted under
this Plan shall terminate as of a date to be fixed by
the Committee, provided, however, that each Optionee
shall have the right, immediately prior to such
termination, to exercise the Options as to all or any
part of the shares of Common Stock covered thereby,
including shares as to which such Options would not
otherwise be exercisable.
(3) In the event of any merger, consolidation or
reorganization of the Company, the Committee shall
promptly make an appropriate adjustment to the number
and class of shares of Common Stock available for
Options, and to the amount and kind of shares or
other securities or property receivable upon exercise
of any outstanding Options after the effective date
of such transaction, and the price thereof (subject
to the limitations of Section 424 of the Code), to
preserve each Optionee's proportionate interest
therein and to preserve unchanged the aggregate
Option Price.
<PAGE>
(4) In the event of a change in the Common Stock as
presently constituted, which is limited to a change
of all of its authorized shares without par value
into the same number of shares with a par value or,
if such shares have a par value, then with a
different par value, the shares resulting from any
such change shall be deemed to be Common Stock within
the meaning of the Plan.
(5) To the extent that the foregoing adjustments
relate to stock or securities of the Company, such
adjustments shall be made by the Committee, whose
determination in that respect shall be final, binding
and conclusive, provided that each Option granted
pursuant to this Plan and designated an Incentive
Stock Option shall not be adjusted in a manner that
causes the Option to fail to continue to qualify as
an Incentive Stock Option within the meaning of
Section 422 of the Code.
(6) Except as expressly provided in this Section
7(h), the Optionee shall have no rights by reason of
any subdivision or consolidation of shares of stock
of any class or the payment of any stock dividend or
any other increase or decrease in the number of
shares of stock of any class or by reason of any
dissolution, liquidation, merger, or consolidation,
and any issue by the Company of shares of stock of
any class, or securities convertible into or
exchangeable for shares of stock of any class, shall
not affect, and no adjustment by reason thereof shall
be made with respect to, the number or Option Price
of shares of Common Stock subject to an Option. The
grant of an Option pursuant to this Plan shall not
affect in any way the right or power of the Company
to make adjustments, reclassifications,
reorganizations or changes of its capital or business
structure or to merge, consolidate, or dissolve,
liquidate, sell or transfer all or any part of its
business or assets.
<PAGE>
(i) Rights as a Shareholder. An Optionee or a transferee of an
Option shall have no rights as a shareholder with respect to
any shares covered by an Option until the date of the issuance
of a stock certificate to such Optionee for such shares. No
adjustments shall be made for dividends (ordinary or
extraordinary, whether in cash, securities or other property)
or distributions or other rights for which the record date is
prior to the date such stock certificate is issued, except as
expressly provided in Section 7(h) hereof.
(j) Standoff Provision. The Option Agreements shall contain a
provision stating that Optionee shall not sell any of the
Common Stock received under this Plan for a period of at least
one hundred eighty (180) days after the effective date of an
IPO.
(k) Other Provisions. The Option Agreements authorized under
this Plan shall contain such other provisions, including,
without limitation, (i) the imposition of restrictions upon
the exercise of an Option and (ii) the inclusion of any
condition not inconsistent with such Option qualifying as an
Incentive Stock Option, as the Committee shall deem advisable,
including provisions with respect to compliance with federal
and applicable state securities laws.
8. Agreement by Optionee Regarding Withholding Taxes
(a) No later than the date of exercise of any Option granted
hereunder, the Optionee will pay to the Company or make
arrangements satisfactory to the Committee regarding payment
of any federal, state and/or local taxes of any kind required
by law to be withheld upon the exercise of such Option, and
(b) The Company shall, to the extent permitted or required by
law, have the right to deduct from any payment of any kind
otherwise due to the Optionee any federal, state and/or local
taxes of any kind required by law to be withheld upon the
exercise of such Option.
9. Term of Plan
Options may be granted pursuant to this Plan from time to time within a
period of ten (10) years from the date on which this Plan is adopted by the
Board, provided that no Options granted under this Plan shall become exercisable
unless and until this Plan shall have been approved by the Company's
shareholders.
<PAGE>
10. Savings Clause
Notwithstanding any other provision hereof, this Plan is intended to
qualify as a plan pursuant to which Incentive Stock Options may be issued under
Section 422 of the Code. If this Plan or any provision of this Plan shall be
held to be invalid or to fail to meet the requirements of Section 422 of the
Code or the regulations promulgated thereunder, such invalidity or failure shall
not affect the remaining parts of this Plan, but rather it shall be construed
and enforced as if the Plan or the affected provision thereof, as the case may
be, complied in all respects with the requirements of Section 422 of the Code.
11. Amendment and Termination of the Plan
The Committee may at any time and from time to time suspend, terminate, modify
or amend this Plan, provided that any amendment that would increase the
aggregate number of shares of Common Stock as to which Options may be granted
under this Plan or the maximum number that may be granted to any individual
person shall be subject to the approval of the holders of a majority of the
Common Stock issued and outstanding, except that any such increase or
modification that may result from adjustments authorized by Section 7(h) hereof
shall not require such approval. Except as provided in Section 7 hereof, no
suspension, termination, modification or amendment of this Plan may adversely
affect any Option previously granted unless the written consent of the Optionee
is obtained.
<PAGE>
DIGITAL EVOLUTION, INC.
OPTION AGREEMENT
Date of Grant: March 10, 1998
This Agreement (the "Agreement") dated as of the date of grant first
stated above (the "Date of Grant"), is entered into between Digital Evolution,
Inc., a California corporation ("Digital"), and Eric Pulier (the "Optionee"),
who is an employee of Digital.
WHEREAS, the Board of Directors of Digital (the "Board") on November 5,
1996, adopted, and the Shareholders approved, the Digital Evolution, Inc. 1996
Stock Option Plan (the "Plan");
WHEREAS, the plan provides for the granting of stock options by Digital
to employees of Digital or any subsidiaries to purchase, or to exercise certain
rights with respect to, shares of Class B Common Stock, no par value, of Digital
(the "Stock"), in accordance with the terms and provisions thereof;
WHEREAS, the Board considers the Optionee to be a person who is
eligible for a grant of Incentive Stock Options under the Plan, and has
determined that it would be in the best interests of Digital to grant the
options documented herein; and
WHEREAS, capitalized terms used but not defined herein have the
meanings ascribed thereto in the Plan.
NOW, THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Grant of Option.
a. Subject to the terms and conditions of the Plan or hereinafter set forth
Digital, with the approval and at the direction of the Board, hereby grants to
the Optionee, as of the Date of Grant, an Option to purchase up to 58,950 shares
of Stock at an Option Price of $2.97 per share (the "Option Price"). Such option
is hereinafter referred to as the "Option" and the shares of stock purchasable
upon exercise of the Option are hereinafter sometimes referred to as the "Option
Shares."
b. Subject to any earlier vesting pursuant to Section 7(b) of that certain
employment agreement dated November 14,1996 by and between Digital and the
Optionee (as amended from time to time, the "Employment Agreement"), this Option
shall vest and become exercisable on December 31, 1999, if and only if the
Employment Agreement had not been terminated to Section 7(a) thereof prior to
such date.
<PAGE>
2. Termination of Option.
a. The Option and all rights with respect thereto, to the extent such rights
shall not have been exercised, shall terminate and become null and void after
the expiration of five (5) years from the vesting date (the "Option Term").
b. Subject to any contrary provisions of the Employment Agreement, including,
without limitation, Sections 6(c), (d), (e) and (f) thereof, if the Optionee
voluntarily or involuntarily ceases to be employed by the Employer prior to the
date of vesting of any of the Options, any unvested Options shall terminate
immediately upon such termination of the Optionee's employment and such unvested
Options shall become null and void.
c. In the event of the death of the Optionee, the Option may be exercised by the
Optionee's estate or by a person who acquires the right to exercise such Option
by bequest or inheritance or by reason of the death of the Optionee, provided
that such exercise occurs within the sooner of the remaining Option Term of the
Option and one year after the Optionee's death.
3. Exercise of Options.
a. The Optionee may exercise the Option with respect to all or any part of the
number of Option Shares then exercisable hereunder by giving the Secretary of
Digital written notice of intent to exercise. The notice of exercise shall
specify the number of Option Shares as to which the Optionee is exercising and
the date of exercise thereof, which date shall be at least five (5) days after
the giving of such notice unless an earlier time shall have been mutually agreed
upon.
b. Full payment (in U.S. dollars) by the Optionee of the Option Price for the
Option Shares purchased shall be made on or before the exercise date specified
in the notice of exercise in cash, or, with the prior written consent of the
Board, which may be granted or withheld in the Board's sole discretion, in whole
or in part through the surrender of previously acquired shares of Stock at the
Fair Market Value thereof on the exercise date.
On the exercise date specified in the Optionee's notice or as soon
thereafter as is practicable, Digital shall cause to be delivered to the
Optionee, a certificate or certificates for the Option Shares then being
purchased (out of theretofore authorized and unissued Stock or Treasury Stock,
as Digital may elect) upon full payment for such Option Shares in accordance
with the terms of the Plan and this Agreement. The obligation of Digital to
deliver Stock shall, however, be subject to the condition that if at any time
the Board shall determine in its discretion that the listing, registration or
qualification of the Option or the Option Shares upon any securities exchange or
under any state or Federal law, or the consent or approval of any governmental
or regulatory body, or an agreement by the Optionee with respect to the
disposition of Option Shares, is necessary or desirable as a condition of, or in
connection with, the Option or the issuance or purchase of Stock thereunder, the
Option may not be exercised in whole or in part until such listing,
registration, qualification, consent, approval or agreement shall have been
effected or obtained free of any conditions not acceptable to the Board, and, if
it would otherwise expire, the term of the Option shall be extended until thirty
(30) days after receipt by Optionee of the foregoing.
<PAGE>
c. If the Optionee fails to pay for any of the Option Shares specified in such
notice or fails to accept delivery thereof, the Optionee's right to purchase
such Option Shares may be terminated by Digital. The date specified in the
Optionee's notice as the date of exercise shall be deemed the date of exercise
of the Option, provided that payment in full for the Option Shares to be
purchased upon such exercise shall have been received by such date.
d. The Optionee shall not sell any of the Common Stock received under this
Option Agreement during the period from the closing of an initial public
offering of the Company's Common Stock through the day that is one hundred
eighty (180) days from such date.
4. Non-Assignability of Option.
The Option is not assignable or transferable by the Optionee except by
will or by the laws of descent and distribution. During the life of the
Optionee, the Option is exercisable only by the Optionee or by the Optionee's
guardian or legal representative.
5. Employment Not Affected.
Nothing in the Plan or this Agreement shall confer upon the Optionee
the right to continue in the employment of Digital or affect any right which
Digital has to terminate the employment of the Optionee.
6. Stock for Investment.
The Optionee shall upon each exercise of a part or all of the Option
represent and warrant that his purchase of Stock pursuant to such Option is for
investment only, for the Optionee's account only and not with a view to any
distribution thereof.
7. Rights as a Shareholder.
The Optionee shall have no rights as a shareholder of Digital unless
and until certificates for shares of Stock are issued to him.
8. Notice.
Any notice to Digital provided for in this instrument shall be
addressed to it in care of its Secretary at its executive offices at 11911 San
Vicente Blvd., Suite 225, Los Angeles, CA 90048, and any notice to the Optionee
shall be addressed to the Optionee at the current address shown on the payroll
records of the Employer. Any notice shall be deemed to be duly given if and when
properly addressed and posted by registered or certified mail, postage prepaid.
<PAGE>
9. Incorporation of Plan by Reference.
The Option is granted pursuant to the terms of the Plan, the terms of
which are incorporated herein by reference, and the Option shall in all respects
be interpreted in accordance with the Plan.
10. Governing Law.
The validity, construction, interpretation and effect of this
instrument shall exclusively be governed by and determined in accordance with
the law of the State of California, except to the extent preempted by federal
law, which shall to the extent govern.
IN WITNESS WHEREOF, Digital has caused its duly authorized officers to
execute and attest this Agreement, and to apply the corporate seal hereto, and
the Optionee has placed his or her signature hereon, effective as of the Date of
Grant.
Attest: DIGITAL EVOLUTION, INC.
[illegible signature] By: /s/
Eric Pulier
President
[illegible signature] /s/
Eric Pulier
<PAGE>
DIGITAL EVOLUTION, INC.
OPTION AGREEMENT
Date of Grant. April 1, 1998
This Agreement (the "Agreement") dated as of the date of grant first
stated above (the "Date of Grant"), is entered into between Digital Evolution,
Inc., a California corporation ("Digital"), and John Shulman (the "Optionee"),
who is a member of the Board of Directors of Digital.
WHEREAS, the Board of Directors of Digital (the "Board") on November 5,
1996, adopted, and the Shareholders approved, the Digital Evolution, Inc. 1996
Stock Option Plan (the "Plan");
WHEREAS, the plan provides for the granting of stock options by Digital
to directors of Digital or any subsidiaries to purchase, or to exercise certain
rights with respect to, shares of Class B Common Stock, no par value, of Digital
(the "Stock"), in accordance with the terms and provisions thereof;
WHEREAS, the Board considers the Optionee to be a person who is
eligible for a grant of Non-Incentive Stock Options under the Plan, and has
determined that it would be in the best interests of Digital to grant the
options documented herein; and
WHEREAS, capitalized terms used but not defined herein have the
meanings ascribed thereto in the Plan.
NOW, THEREFORE, the parties hereto, intending to be legally bound
hereby agree as follows
1. Grant of Option.
a. Subject to the terms and conditions of the Plan or hereinafter set forth,
Digital, with the approval and at the direction of the Board, hereby grants to
the Optionee, as of the Date of Grant, an Option to purchase up to 50,000 shares
of Stock at an Option Price of $.70 per share (the "Option Price"). Such option
is hereinafter referred to as the "Option" and the shares of stock purchasable
upon exercise of the Option are hereinafter sometimes referred to as the "Option
Shares."
b. This Option shall vest and become exercisable with respect to all of the
Option Shares if and only if the Optionee has been continuously present on the
Board of Director of the Company from the Date of Grant through May 1, 1998.
<PAGE>
2. Termination of Option.
a. The Option and all rights with respect thereto, to the extent such rights
shall not have been exercised, shall terminate and become null and void after
the expiration of five (5) years from the vesting date (the "Option Term").
b. In the event Optionee voluntarily or involuntarily ceases to be a director
prior to the date of vesting of any of the Options, any unvested Options shall
terminate immediately upon such termination and such unvested Options shall be
come null and void.
c. In the event of the death of the Optionee, the Option may be exercised by the
Optionee's estate or by a person who acquires the right to exercise such Option
by bequest or inheritance or by reason of the death of the Optionee, provided
that such exercise occurs within the sooner of the remaining Option Term of the
Option and one year after the Optionee's death.
3. Exercise of Options.
a. The Optionee may exercise the Option with respect to all or any part of the
number of Option Shares then exercisable hereunder by giving the Secretary of
Digital written notice of intent to exercise. The notice of exercise shall
specify the number of Option Shares as to which the Optionee is exercising and
the date of exercise thereof, which date shall be at least five (5) days after
the giving of such notice unless an earlier time shall have been mutually agreed
upon.
b. Full payment (in U.S. dollars) by the Optionee of the Option Price for the
Option Shares purchased shall be made on or before the exercise date specified
in the notice of exercise in cash, or, with the prior written consent of the
Board, which may be granted or withheld in the Board's sole discretion, in whole
or in part through the surrender of previously acquired shares of Stock at the
Fair Market Value thereof on the exercise date.
On the exercise date specified in the Optionee's notice or as soon
thereafter as is practicable, Digital shall cause to be delivered to the
Optionee, a certificate or certificates for the Option Shares then being
purchased (out of theretofore authorized and unissued Stock or Treasury Stock,
as Digital may elect) upon full payment for such Option Shares in accordance
with the terms of the Plan and this Agreement. The obligation of Digital to
deliver Stock shall, however, be subject to the condition that if at any time
the Board shall determine in its discretion that the listing, registration or
qualification of the Option or the Option Shares upon any securities exchange or
under any state or Federal law, or the consent or approval of any governmental
or regulatory body, or an agreement by the Optionee with respect to the
disposition of Option Shares, is necessary or desirable as a condition of, or in
connection with, the Option or the issuance or purchase of Stock thereunder, the
Option may not be exercised in whole or in part until such listing,
registration, qualification, consent, approval or agreement shall have been
effected or obtained free of any conditions not acceptable to the Board, and, if
it would otherwise expire, the term of the Option shall be extended until thirty
(30) days after receipt by Optionee of the foregoing.
<PAGE>
c. If the Optionee fails to pay for any of the Option Shares specified in such
notice or fails to accept delivery thereof, the Optionee's right to purchase
such Option Shares may be terminated by Digital. The date specified in the
Optionee's notice as the date of exercise shall be deemed the date of exercise
of the Option, provided that payment in full for the Option Shares to be
purchased upon such exercise shall have been received by such date.
d. The Optionee shall not sell any of the Common Stock received under this
Option Agreement during the period from the closing of an initial public
offering of the Company's Common Stock through the day that is one hundred
eighty (180) days from such date.
4. Non-Assignability of Option.
The Option is not assignable or transferable by the Optionee except by
will or by the laws of descent and distribution. During the life of the
Optionee, the Option is exercisable only by the Optionee or by the Optionee's
guardian or legal representative.
5. Employment Not Affected.
Nothing in the Plan or this Agreement shall confer upon the Optionee
the right to continue in his capacity as a director of Digital or affect any
right which Digital has to terminate the directorship of the Optionee.
6. Stock for Investment.
The Optionee shall upon each exercise of a part or all of the Option
represent and warrant that his purchase of Stock pursuant to such Option is for
investment only, for the Optionee's account only and not with a view to any
distribution thereof.
7. Rights as a Shareholder.
The Optionee shall have no rights as a shareholder of Digital unless
and until certificates for shares of Stock are issued to him.
8. Notice.
Any notice to Digital provided for in this instrument shall be
addressed to it in care of its Secretary at its executive offices at 11911 San
Vicente Blvd., Suite 225, Los Angeles, CA 90048, and any notice to the Optionee
shall be addressed to the Optionee at the current address shown on the payroll
records of the Employer. Any notice shall be deemed to be duly given if and when
properly addressed and posted by registered or certified mail, postage prepaid.
<PAGE>
9. Incorporation of Plan by Reference.
The Option is granted pursuant to the terms of the Plan, the terms of
which are incorporated herein by reference, and the Option shall in all respects
be interpreted in accordance with the Plan.
10. Governing Law.
The validity, construction, interpretation and effect of this
instrument shall exclusively be governed by and determined in accordance with
the law of the State of California, except to the extent preempted by federal
law, which shall to the extent govern.
IN WITNESS WHEREOF, Digital has caused its duly authorized officers to
execute and attest this Agreement, and to apply the corporate seal hereto, and
the Optionee has placed his or her signature hereon, effective as of the Date of
Grant.
Attest: DIGITAL EVOLUTION, INC.
/s/ [illegible signature] By:/s/ Eric Pulier
President
/s/ [illegible signature] /s/ John D. Shulman
Optionee
<PAGE>
DIGITAL EVOLUTION, INC.
OPTION AGREEMENT
Date of Grant: April 17, 1997
This Agreement (the "Agreement") dated as of the date of grant first
stated above (the "Date of Grant"), is entered into between Digital Evolution,
Inc., a California corporation ("Digital"), and Eric Pulier (the "Optionee"),
who is an employee of Digital.
WHEREAS, the Board of Directors of Digital (the "Board") on November 5,
1996, adopted, and the Shareholders approved, the Digital Evolution, Inc. 1996
Stock Option Plan (the "Plan");
WHEREAS, the Plan provides for the granting of stock options by Digital
to employees of Digital or any subsidiaries to purchase, or to exercise certain
rights with respect to, shares of Class B Common Stock, no par value, of Digital
(the "Stock"), in accordance with the terms and provisions thereof;
WHEREAS, the Board considers the Optionee to be a person who is
eligible for a grant of Incentive Stock Options under the Plan, and has
determined that it would be in the best interests of Digital to grant the
options documented herein; and
WHEREAS, capitalized terms used but not defined herein have the
meanings ascribed thereto in the Plan.
NOW, THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Grant of Option.
a. Subject to the terms and conditions of the Plan or hereinafter set forth,
Digital, with the approval and at the direction of the Board, hereby grants to
the Optionee, as of the Date of Grant, an Option to purchase up to 117,900
shares of Stock at an Option Price of $2.97 per share (the "Option Price"). Such
option is hereinafter referred to as the "Option" and the shares of stock
purchasable upon exercise of the Option are hereinafter sometimes referred to as
the "Option Shares."
b. Subject to any earlier vesting pursuant to Section 7(b) of that certain
employment agreement dated November 14, 1996 by and between Digital and the
Optionee (as amended from time to time, the "Employment Agreement"), this Option
shall vest and become exercisable with respect to one-half of the Option Shares
on December 31, 1997, if and only if the Employment Agreement had not been
terminated pursuant to Section 7(a) thereof prior to such date.
<PAGE>
c. Subject to any earlier vesting pursuant to Section 7(b) of the Employment
Agreement, this Option shall vest and become exercisable with respect to an
additional one-half of the Option Shares on December 31, 1998, if and only if
the Employment Agreement had not been terminated pursuant to Section 7(a)
thereof prior to such date.
2. Termination of Option.
a. The Option and all rights with respect thereto, to the extent such rights
shall not have been exercised, shall terminate and become null and void after
the expiration of five (5) years from the vesting date (the "Option Term").
b. Subject to any contrary provisions of the Employment Agreement, including,
without limitation, Sections 6(c), (d), (e) and (f) thereof, if the Optionee
voluntarily or involuntarily ceases to be employed by the Employer prior to the
date of vesting of any of the Options, any unvested Options shall terminate
immediately upon such termination of the Optionee's employment and such unvested
Options shall become null and void.
c. In the event of the death of the Optionee, the Option may be exercised by the
Optionee's estate or by a person who acquires the right to exercise such Option
by bequest or inheritance or by reason of the death of the Optionee, provided
that such exercise occurs within the sooner of the remaining Option Term of the
Option and one year after the Optionee's death.
3. Exercise of Options.
a. The Optionee may exercise the Option with respect to all or any part of the
number of Option Shares then exercisable hereunder by giving the Secretary of
Digital written notice of intent to exercise. The notice of exercise shall
specify the number of Option Shares as to which the Optionee is exercising and
the date of exercise thereof, which date shall be at least five (5) days after
the giving of such notice unless an earlier time shall have been mutually agreed
upon.
b. Full payment (in U.S. dollars) by the Optionee of the Option Price for the
Option Shares purchased shall be made on or before the exercise date specified
in the notice of exercise in cash, or, with the prior written consent of the
Board, which may be granted or withheld in the Board's sole discretion, in whole
or in part through the surrender of previously acquired shares of Stock at the
Fair Market Value thereof on the exercise date.
On the exercise date specified in the Optionee's notice or as soon
thereafter as is practicable, Digital shall cause to be delivered to the
Optionee, a certificate or certificates for the Option Shares then being
purchased (out of theretofore authorized and unissued Stock or Treasury Stock,
as Digital may elect) upon full payment for such Option Shares in accordance
with the terms of the Plan and this Agreement. The obligation of Digital to
deliver Stock shall, however, be subject to the condition that if at any time
the Board shall determine in its discretion that the listing, registration or
qualification of the Option or the Option Shares upon any securities exchange or
under any state or Federal law, or the consent or approval of any governmental
or regulatory body, or an agreement by the Optionee with respect to the
disposition of Option Shares, is necessary or desirable as a condition of, or in
connection with, the Option or the issuance or purchase of Stock thereunder, the
Option may not be exercised in whole or in part until such listing,
registration, qualification, consent, approval or agreement shall have been
effected or obtained free of any conditions not acceptable to the Board, and, if
it would otherwise expire, the term of the Option shall be extended until thirty
(30) days after receipt by Optionee of the foregoing.
c. If the Optionee fails to pay for any of the Option Shares specified in such
notice or fails to accept delivery thereof, the Optionee's right to purchase
such Option Shares may be terminated by Digital. The date specified in the
Optionee's notice as the date of exercise shall be deemed the date of exercise
of the Option, provided that payment in full for the Option Shares to be
purchased upon such exercise shall have been received by such date.
d. The Optionee shall not sell any of the Common Stock received under this
Option Agreement during the period from the closing of an initial public
offering of the Company's Common Stock through the day that is one hundred
eighty (180) days from such date.
<PAGE>
4. Non-Assignability of Option.
The Option is not assignable or transferable by the Optionee except by
will or by the laws of descent and distribution. During the life of the
Optionee, the Option is exercisable only by the Optionee or by the Optionee's
guardian or legal representative.
5. Employment Not Affected.
Nothing in the Plan or this Agreement shall confer upon the Optionee
the right to continue in the employment of Digital or affect any right which
Digital has to terminate the employment of the Optionee.
6. Stock for Investment.
The Optionee shall upon each exercise of a part or all of the Option
represent and warrant that his purchase of Stock pursuant to such Option is for
investment only, for the Optionee's account only and not with a view to any
distribution thereof.
7. Rights as a Shareholder.
The Optionee shall have no rights as a shareholder of Digital unless
and until certificates for shares of Stock are issued to him.
8. Notice.
Any notice to Digital provided for in this instrument shall be
addressed to it in care of its Secretary at its executive offices at 11911 San
Vicente Blvd., Suite 225, Los Angeles, CA 90048, and any notice to the Optionee
shall be addressed to the Optionee at the current address shown on the payroll
records of the Employer. Any notice shall be deemed to be duly given if and when
properly addressed and posted by registered or certified mail, postage prepaid.
<PAGE>
9. Incorporation of Plan by Reference.
The Option is granted pursuant to the terns of the Plan, the terms of
which are incorporated herein by reference, and the Option shall in all respects
be interpreted in accordance with the Plan.
10. Governing Law.
The validity, construction, interpretation and effect of this
instrument shall exclusively be governed by and determined in accordance with
the law of the State of California, except to the extent preempted by federal
law, which shall to the extent govern.
IN WITNESS WHEREOF, Digital has caused its duly authorized officers to
execute and attest this Agreement, and to apply the corporate seal hereto, and
the Optionee has placed his or her signature hereon, effective as of the Date of
Grant.
Attest: DIGITAL EVOLUTION, INC.
[illegible signature] By: /s/
Eric Pulier
President
[illegible signature] /s/
Eric Pulier
Optionee
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
The Board of Directors U.S. Interactive, Inc.:
The audits referred to in our report dated May 7, 1999, included the
related consolidated financial statement schedule for each of the years in the
three year period ended December 31, 1998, included in the registration
statement. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
We consent to the use of our reports included herein and to the reference
to our firm under the heading "Experts" and "Selected Financial Data" in the
prospectus.
KPMG LLP
Philadelphia, Pennsylvania
June 24, 1999
<PAGE>
EXHIBIT 23.3
Consent of Independent Certified Public Accountants
To the Board of Directors and Stockholders
Digital Evolution, Inc.
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form S-1 of our report dated August 25, 1998, relating
to the balance sheets of Digital Evolution as of December 31, 1997 and 1996 and
the related statements of operations, stockholders' equity and cash flows for
each of the two years then ended, which are contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO Seidman, LLP
-------------------------------
BDO Seidman, LLP
Los Angeles, California
June 25, 1999
