<PAGE>
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File Number 0-26923
U.S. INTERACTIVE, INC.
(Exact name of registrant as specified in its charter)
Delaware 23-3316696
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
2012 Renaissance Boulevard, 19406
King of Prussia, Pennsylvania (Zip Code)
(Address of principal executive offices)
(610) 313-9700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes No X
------------ -----------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 19,256,062 shares of common
stock, $.001 par value per share, as of September 7, 1999.
- -----------------------------------------------------------------------------
<PAGE>
U.S. Interactive, Inc. and Subsidiaries
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Consolidated Balance Sheets as of June 30, 1999 (Unaudited) and December 31, 1998.................1
Consolidated Statements of Operations for the three and six months ended
June 30, 1999 and 1998 (Unaudited) ...............................................................2
Consolidated Statements of Cash Flows for the six months ended June 30, 1999 and 1998
(Unaudited) ......................................................................................3
Notes to Consolidated Financial Statements........................................................4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................................................9
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......................................18
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds........................................................19
Item 6. Exhibits and Reports on Form 8-K.................................................................19
SIGNATURES.......................................................................................21
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
June 30, December 31,
Assets 1999 1998
(unaudited)
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,998 $ 3,698
Accounts receivable (net of allowance of
$174 in 1999 and $526 in 1998) 8,038 3,388
Fees and expenditures in excess of billings 815 731
Prepaid expenses and other current assets 727 305
-------- --------
Total current assets 11,578 8,122
Furniture and equipment, net 2,346 1,375
Goodwill and other intangibles, net 10,894 12,542
Deferred offering costs 397 --
Other assets 126 223
-------- --------
Total Assets $ 25,341 $ 22,262
======== ========
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 2,018 $ 1,334
Accrued expenses 4,837 2,354
Notes payable - bank 1,075 1,706
Current portion of long-term debt 702 162
Billings in excess of fees and expenditures 3,577 650
-------- --------
Total current liabilities 12,209 6,206
Long-term debt, net of current portion 1,172 583
-------- --------
Total Liabilities 13,381 6,789
Mandatorily redeemable convertible preferred stock, $.001 par value, 15,000,000
shares authorized, 5,341,096 issued and outstanding in 1999 and
1998, including accreted dividends of $1,225 in 1999 (Unaudited)
and $477 in 1998: 18,041 17,293
-------- --------
Common Stock-90,000,000 shares authorized, $.001 par value 10,083,949
shares issued in 1999 (unaudited), 9,124,999 shares issued in 1998 10 9
Additional paid in capital 15,744 12,418
Treasury stock, 1,039,311 shares, at cost (4,812) (4,812)
Accumulated deficit (17,023) (9,435)
-------- --------
Total Stockholders' Deficit (6,081) (1,820)
-------- --------
Total Liabilities and Stockholders' Deficit $ 25,341 $ 22,262
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
1
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
-------- -------- -------- --------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue $ 7,641 $ 2,546 $ 13,763 $ 4,925
Operating costs and expenses:
Project personnel and related expenses 4,181 1,424 7,298 2,674
Management and administrative 3,921 1,200 6,594 1,890
Marketing and sales 728 490 1,451 841
Depreciation and amortization 2,597 123 5,057 213
-------- -------- -------- --------
11,427 3,237 20,400 5,618
-------- -------- -------- --------
Operating loss (3,786) (691) (6,637) (693)
Other income (expense):
Interest expense (119) (19) (239) (45)
Interest income 29 8 58 15
-------- -------- -------- --------
Net loss (3,876) (702) (6,818) (723)
Accretion of mandatorily redeemable preferred
stock to redemption value (374) -- (748) --
-------- -------- -------- --------
Net loss attributable to common stockholders $ (4,250) $ (702) $ (7,566) $ (723)
======== ======== ======== ========
Basic and diluted loss per common share: $ (.47) $ (.15) $ (.87) $ (.15)
======== ======== ======== ========
Weighted average shares outstanding used in the loss per common share
calculation:
Basic and diluted 9,037 4,737 8,723 4,737
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 1998
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(6,818) $ (723)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of deferred stock compensation and other non-cash 202 --
charges
Depreciation and amortization 5,057 213
Changes in operating assets and liabilities, net of effects of
acquisitions:
Increase in accounts receivable (4,618) (1,164)
Increase in fees and expenditures in excess of billings (497) (200)
Decrease (increase) in prepaid expenses and other current assets 27 (85)
Increase in accounts payable and accrued expenses 3,100 1,528
Increase (decrease) in billings in excess of fees and expenditures 2,927 (183)
------- -------
Net cash used in operating activities (620) (614)
------- -------
Cash flows from investing activities:
Purchase of furniture and equipment (1,090) (197)
Acquisition, net of cash acquired 17 (106)
Other 12 (66)
------- -------
Net cash used in investing activities (1,061) (369)
------- -------
Cash flows from financing activities:
Net borrowings (repayments) under bank line of credit (631) 825
Net proceeds (redemption) of note payable 837 (117)
Net proceeds from the exercise of stock options 172 --
Deferred offering costs (397) --
------- -------
Net cash (used in) provided by financing activities (19) 708
------- -------
Net decrease in cash and cash equivalents (1,700) (275)
Cash and cash equivalents, beginning of period 3,698 786
------- -------
Cash and cash equivalents, end of period $ 1,998 $ 511
======= =======
Supplemental disclosure of cash flow information:
Cash paid for interest $ 115 $ 27
======= =======
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Interim Financial Information
The interim consolidated financial statements of the Company for the
three and six months ended June 30, 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.
These unaudited consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto as of
December 31, 1998 included in the Company's registration statement on Form S-1,
as amended (File No. 333-78751). 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 June 30, 1999, and the results of its
operations and its cash flows for the three and six months ended June 30, 1998
and 1999.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
U.S. 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.
As more fully described in Note (4), in August 1999 the Company
completed an Initial Public Offering of its common stock.
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.
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 reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Deferred Offering Costs
As of June 30, 1999, specific incremental costs directly attributable
to the Company's initial public offering process have been deferred. These costs
will be charged against additional paid-in-capital in connection with the
consummation of its initial public offering.
4
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Historical 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 computed using the weighted-average number
of common and common equivalent shares outstanding during the period. For all
loss periods, the effect of common equivalent shares are excluded from the
computation if their 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.
2. ACQUISTIONS
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.
The Merger 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 options to purchase a total of 1,043,945 shares of 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 referred 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
=======
5
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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
was accounted for using the purchase method of accounting. Accordingly, a
portion of the purchase price was allocated to the net assets acquired and
liabilities assumed. The balance of the purchase price was recorded as goodwill
and is being 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. If an
employee leaves the Company during the two-year period all unvested shares for
such employee are forfeited. The Company recorded $1,376,000 of deferred stock
compensation in connection with these restricted shares that will be amortized
over the two-year period. The historical results of operations of InVenGen, LLC
are not material to the Company.
The following table reflects unaudited pro forma combined results of operations
of the Company, DE and InVenGen LLC on the basis that the acquisitions had taken
place at the beginning of 1998 (in thousands, except per share data).
<TABLE>
<CAPTION>
Three Months Ending Six Months Ending
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue.................................................................. $ 7,641 $ 3,557 $13,763 $7,735
Net loss attributable to common stockholders............................. (4,250) (4,732) (8,079) (8,017)
Basic and diluted loss per common share.................................. $ (.47) $ (.47) $ (.90) $ (.80)
</TABLE>
6
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 1998 or of future
operations of the combined companies under the ownership and management of the
Company.
3. LITIGATION
The Company is involved in certain claims and legal proceedings including
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 of liquidity.
4. SUBEQUENT EVENT - INITIAL PUBLIC OFFERING
In August 1999, the Company completed its Initial Public Offering of
securities and issued a total of 4,865,848 shares of common stock at $10.00 per
share (including a total of 692,250 shares issued to the underwriters upon
exercise of the option which the Company had granted to them solely to cover
overallotments). An additional 441,402 shares were sold by existing stockholders
at $10.00 per share. Upon the initial closing of the public offering, all
5,341,096 of the outstanding shares of manditorily redeemable convertible
preferred stock were converted to 5,341,096 shares of common stock. Proceeds to
the Company from its Initial Public Offering net of underwriting discounts and
costs of the offering were approximately $45 million. The Company used a total
of $ 2.9 million of the net proceeds to repay all outstanding debt under its
line of credit and term loan.
The following unaudited pro forma consolidated balance sheet sets forth the
financial position of the Company as of June 30, 1999 as if the offering had
closed and all proceeds were received on June 30, 1999 and all Initial Public
Offering related expenses had been accrued or paid.
7
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
UNAUDITED
(In thousands, except per share data)
<TABLE>
<CAPTION>
Assets June 30, 1999
June 30, IPO Pro Forma
1999 (unaudited) Adjustments (unaudited)
--------------- ----------- ---------------
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 1,998 42,135 44,133
Accounts receivable (net of allowance of
$174 in 1999) 8,038 8,038
Fees and expenditures in excess of billings 815 815
Prepaid expenses and other current assets 727 727
-------- -------- --------
Total current assets 11,578 42,135 53,713
Furniture and equipment, net 2,346 2,346
Goodwill, net 10,894 10,894
Deferred offering costs 397 (397) --
Other assets 126 126
-------- -------- --------
Total Assets $ 25,341 41,738 67,079
======== ======== ========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 2,018 2,018
Accrued expenses 4,837 4,837
Notes payable - bank 1,075 (1,075) --
Current portion of long-term debt 702 (702) --
Billings in excess of fees and expenditures 3,577 3,577
-------- -------- --------
Total current liabilities 12,209 (1,777) 10,432
Long-term debt, net of current portion 1,172 (1,172)
-------- -------- --------
Total Liabilities 13,381 (2,949) 10,432
Mandatorily redeemable convertible preferred stock, $.001 par value,
15,000,000 shares authorized, 5,341,096 issued and outstanding in 1999
(unaudited) and none pro forma:
18,041 (18,041) --
-------- -------- --------
Common stock- 90,000,000 shares authorized, $.001 par value
10,083,949 shares issued in 1999 (unaudited) and
20,290,893 Issued pro forma: 10 10 20
Additional paid in capital 15,744 62,718 78,462
Treasury stock, 1,039,311 shares, at cost (4,812) (4,812)
Accumulated deficit (17,023) (17,023)
-------- -------- --------
Total Stockholders' Equity (Deficit) (6,081) 62,728 56,647
-------- -------- --------
Total Liabilities and Stockholders' Equity (Deficit) $ 25,341 41,738 67,079
======== ======== ========
</TABLE>
8
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of operations of
U.S. Interactive, Inc. should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto included elsewhere
in this report. This Quarterly Report on Form 10-Q contains forward-looking
statements within the meaning of Section 27A of the Securities act of 1933, as
amended, and Section 1E of the Securities Exchange Act of 1934, as amended.
These forward-looking statements involve risks and uncertainties, and actual
results could be significantly different than those discussed in this Quarterly
Report on Form 10Q. 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 continued herein
that are not historical facts.
When used in this Report, 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: changes in general economic and
business conditions and those in the Internet professional services market in
particular; changes in Internet-related technologies; actions of competitors;
the extent to which we are able to expand our business into new markets; our
inability to effectively manage our growth (including growth through
acquisitions, including problems which may arise in intregrating acquired
businesses into the Company's operations and in achieving satisfactory operating
results from the acquired businesses; the level of demand for our services;
changes in our business strategies; Year 2000 issues including those affecting
the Company or its clients; our inability to obtain financing when required and
other factors discussed under the caption "Risk Factors" in our prospectus dated
August 9, 1999.
Overview
Revenue. 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 75% of our revenue for the six months ended June 30, 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 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 cost
associated with our development and maintenance of our marketing materials and
programs. Management and administrative expense consists primarily of the costs
associated with:
9
<PAGE>
o operations
o finance
o human resources
o information systems
o facilities
o other administrative support for project personnel
10
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
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 can, 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 higher than 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. We also
have experienced seasonality with respect to our revenues that has resulted in
lower revenue during summer, year-end vacation and holiday periods.
In July 1998, the Company completed the Digital Evolution merger which
resulted in issuance 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 the Company's results of
operations since July 1, 1998.
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
was accounted for using the purchase method of accounting. Accordingly, a
portion of the purchase price was allocated to the net assets acquired and
liabilities assumed. The balance of the purchase price was recorded as goodwill
and is being amortized over two years. The results of operations of InVenGen LLC
have been consolidated with the Company's results of operations since April 1,
1999.
11
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
Results of Operations
The following table presents, for the periods indicated, the relative
composition of revenue and selected statements of operations data as a
percentage of revenue:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues ......................... 100% 100% 100% 100%
Operating expenses:
Project personnel and related 55 56 53 54
Management and administration 51 47 48 38
Marketing and sales ......... 10 19 11 17
Depreciation and amortization 34 5 37 4
---- ---- ---- ----
Total operating expenses .... 150 127 148 114
---- ---- ---- ----
Loss from operations ................. (50) (27) (48) 14
Other income (expense), net .......... 1 1 2 1
---- ---- ---- ----
Net loss ............................. (51)% (28)% (50)% (15)%
==== ==== ==== ====
</TABLE>
Three Months Ended June 30, 1999 Compared to the Three Months Ended June 30,
1998
REVENUE. Revenue increased $5.1 million, or 200%, to $7.6 million for
the three months ended June 30, 1999, from $2.5 million for the three months
ended June 30, 1998. The increase in revenue was primarily due to growth in
services delivered to new clients, additional projects for existing clients and
larger average project size as well as the merger with Digital Evolution, Inc.
and the acquisition of InVenGen, LLC.
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 $2.8 million, or 194%, to $4.2 million for the three months ended June
30, 1999, from $1.4 million for the three months ended June 30, 1998. The
increase was primarily due to the increase in the hiring of project personnel
associated with the increased demand for the Company's services as well as
additional personnel related expenses associated with the Digital Evolution
merger and InVenGen, LLC acquisition.
MANAGEMENT AND ADMINISTRATIVE. Management and administrative expenses
increased $2.7 million, or 227%, to $3.9 million for the three months ended June
30, 1999, from $1.2 million for the three months ended June 30, 1998. The
increase was principally due to expenses incurred to accommodate current and
anticipated growth, including the expansion of office facilities and the
increased cost of management and administrative personnel and other general
operating expenses in the areas of legal, accounting, human resources and
general operations.
MARKETING AND SALES. Marketing and sales expenses increased $238,000,
or 49%, to $728,000 for the three months ended June 30, 1999, from $490,000 for
the three months ended June 30, 1998. The increase was attributable to the
continuing investment in the Company's marketing and sales programs including
the hiring of new business development and marketing personnel.
12
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$2.5 million to $2.6 for the three months ended June 30, 1999 as compared to
$100,000 for the three months ended June 30, 1998. The increase was primarily
due to amortization of approximately $2.0 million recognized from the Digital
Evolution merger and $370,000 from the InVenGen LLC acquisition. These amounts
are being amortized over 2 year periods. There was also increased capital
expenditures for new equipment and leasehold improvements.
OTHER INCOME (EXPENSE). Other expense increased $79,000 to $90,000 for
the three months ended June 30, 1999 compared to $11,000 for the three months
ended June 30, 1998. The increases were primarily attributable to increased
borrowings under our bank line of credit and term loan, which was partially
offset by increased interest income from cash investments.
INCOME TAX EXPENSE. As a result of the Company's losses there was no
income tax expense for the three months ended June 30, 1999 or the three months
ended June 30, 1998.
13
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
REVENUE. Revenue increased $8.9 million, or 180%, to $13.8 million for
the six months ended June 30, 1999 from $4.9 million for the six months ended
June 30, 1998. The increase in revenue was primarily due to growth in services
delivered to new clients, additional projects for existing clients and larger
average project size as well as the merger with Digital Evolution, Inc. and the
acquisition of InVenGen, LLC.
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 $4.6 million, or 173%, to $7.3 million for the six months ended June
30, 1999, from $2.7 million for the comparable period of 1998. The increase was
primarily due to the increase in the hiring of project personnel associated with
the increased demand for the Company's services as well as additional personnel
related expenses associated with the Digital Evolution merger and InVenGen, LLC
acquisition.
MANAGEMENT AND ADMINISTRATIVE. Management and administrative expenses
increased $4.7 million, or 249%, to $6.6 million for the six months ended June
30, 1999, from $1.9 million for the same period of 1998. The increase was
principally due to expenses incurred to accommodate current and anticipated
growth, including the expansion of office facilities and the increased cost of
management and administrative personnel and other general operating expenses in
the areas of legal, accounting, human resources and general operations.
MARKETING AND SALES. Marketing and sales expenses increased $700,000,
or 73%, to $1.5 million for the six months ended June 30, 1999 from $800,000 for
the same period in 1998. The increase was attributable to the continuing
investment in the Company's marketing and sales programs including the hiring of
new business development and marketing personnel.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$4.8 million to $5.0 million for the six months ended June 30, 1999 from
$200,000 for the comparable period in 1998. The increase was primarily due to
amortization of approximately $4.0 million recognized from the Digital Evolution
merger and $555,000 from the InVenGen LLC acquisition. These amounts are being
amortized over 2 year periods. There was also increased capital expenditures for
new equipment and leasehold improvements.
OTHER INCOME (EXPENSE). Other expense increased $151,000 to $181,000
for the six months ended June 30, 1999 compared to $30,000 for the same period
in 1998. The increases were primarily attributable to increased borrowings under
our bank line of credit and term loan, which was partially offset by increased
interest income from cash investments.
INCOME TAX EXPENSE. As a result of the Company's losses there was no
income tax expense for the six months ended June 30, 1999 or the six months
ended June 30, 1998.
14
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
Liquidity and Capital Resources
Since inception, prior to the completion of our initial public offering
in August 1999, we have financed our operations primarily from sales of
preferred stock and borrowings under a line of credit and term loan from a
commercial bank. Through December 31, 1998 we had raised approximately $12.7
million, net of offering expenses, through the sale of our preferred stock. At
June 30, 1999 we had approximately $2.0 million in cash and cash equivalents.
Net cash used in operating activities was $600,000 for both the six
month period ended June 30, 1999 and 1998. Cash used in operating activities in
each of these periods was primarily the result of net losses, which were
partially offset by non-cash charges for depreciation and amortization, as well
as increases in accounts receivable and other assets which were offset by
increases in accounts payable and other liabilities.
Net cash used in investing activities was $1.1 million for the six
months ended June 30, 1999 as compared to $400,000 for the six months ended June
30, 1998. The increase in net cash used was primarily due to increased purchases
of furniture and equipment.
Net cash provided by financing activities was zero for the six months
ended June 30, 1999 as compared to $700,000 for the six months ended June 30,
1998. The primary reason for the decline was a decrease in net borrowings under
our credit facility and term loan, which was partially offset by the exercise of
stock options.
In August 1999, the Company completed its Initial Public Offering of securities
and issued a total of 4,865,848 shares of common stock at $10.00 per share
(including a total of 692,250 shares issued to the underwriters upon exercise of
the option which the Company had granted to them solely to cover
overallotments). An additional 441,402 shares were sold by existing stockholders
at $10.00 per share. Upon the initial closing of the public offering, all
5,341,096 of the outstanding shares of manditorily redeemable convertible
preferred stock were converted to 5,341,096 shares of common stock. Proceeds to
the Company from its Initial Public Offering net of underwriting discounts and
costs of the offering were approximately $45 million. The Company used a total
of $2.9 million of the net proceeds to repay all outstanding debt under its line
of credit and term loan.
The Company believes that the net proceeds from the recently completed
public offering, combined with current cash balances and borrowings available
under the credit facilities, will be sufficient to fund requirements for working
capital and capital expenditures for at least the next twenty four months.
Thereafter, the Company 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 the Company's stockholders.
The Company 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. Future liquidity and capital
requirements will depend on numerous factors, including the success of existing
and new service offerings and competing technological and market developments.
Additional financing, if any, may not be available on satisfactory terms.
15
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
Year 2000 Readiness
GENERAL. Many older computer systems, software products, and embedded
microprocessor chips that are in use today were programmed to accept two digit
entries in the date code field (e.g., "98" for "1998"). These systems, software
and embedded microprocessor chips need to be modified or upgraded to distinguish
twenty-first century dates (e.g., "2002") from twentieth century dates (e.g.,
"1902"), in order to avoid the possibility of erroneous results or systems
failures.
We have reviewed and continue to evaluate and update our formal processes and
procedures to address any potential Year 2000 compliance issues relating to our
corporate infrastructure and our current and future client projects. We believe
that we have allocated adequate resources for this purpose and expect our Year
2000 compliance program to be completed before the end of 1999.
CORPORATE STATE OF READINESS. We believe that our identification of Year 2000
compliance issues is complete with respect to our internal operating systems.
The infrastructure is composed of Information Technology ("IT") systems (e.g.,
financial, human resources, client support, voicemail) and non-IT systems (e.g.,
elevators, fire suppression systems). We have identified those systems which are
not affected and those systems which need replacement or modification. We
believe that all material identified systems that are at risk will be made Year
2000 compliant or will be replaced before December 31, 1999 and that our
business critical systems that have date sensitivity will be fixed, tested, and
in place before the year 2000.
We have communicated with all of our material vendors, suppliers and other third
parties regarding Year 2000 compliance of embedded processors in products and
facilities which we obtain from such third parties. We anticipate that affected
embedded processors will be replaced before the year 2000. We have also required
all vendors who provide material hardware or software for our information
technology systems to provide assurances of their Year 2000 compliance. For
network infrastructure, servers and other shared technologies, all changes
identified by the vendors and providers as required for Year 2000 compliance of
their systems have been implemented. Changes required for Year 2000 compliance
of desktop systems are currently being implemented and are scheduled for
completion by October 31, 1999, although in the judgment of management any
failure of these systems would have a negligible impact on the our operations
and would take only a few days to resolve. Although we have completed our
assessment of the Year 2000 compliance issues with respect to the products,
facilities, and services which we obtain from third parties, we continue to
monitor and assess Year 2000 issues relating to such products, facilities and
services.
We have retained a third party consulting organization to inventory, assess,
remediate and test solutions software delivered to our clients. Based on the
results to date, we have required only very minor revisions to our solutions
software code. This effort is now 80% complete, with completion scheduled for
October 31, 1999.
COSTS. Based on work performed to date, we expect that the cost for material,
labor and upgrades to complete our year 2000 certification process will be
approximately $400,000. This includes the cost of material upgrades, software
modification and related consulting fees. As of June 30, 1999, we have expended
approximately $50,000 on our Year 2000 compliance efforts. To date, our Year
2000 remediation costs total approximately $200,000.
16
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
RISK FACTORS. Since we utilize third-party vendor equipment, telecommunications
products, and software products in the development of our Internet solutions, we
are currently taking steps to address the impact, if any, of the Year 2000
compliance issue surrounding such third-party products. We have communicated
with such third parties about their plans and progress in addressing the Year
2000 problem, and we have requested assurances that equipment, products and
services provided by such third parties will be Year 2000 compliant. We have
received assurances from certain of the third-party vendors. However, such third
parties' Year 2000 compliance efforts are not within our control. In the event
that such additional assurances are not timely received, we will switch to
another vendor or take such other action as we shall then deem appropriate.
Software products as complex as those utilized by us in the performance of our
services might contain undetected errors or failures when first introduced or
when new versions are released. This includes the risk that products thought to
be Year 2000 compliant are not Year 2000 compliant. While we believe that the
products utilized in the performance of our services are Year 2000 compliant,
there can be no assurance that these products contain or will contain all
necessary date code changes or that errors will not be found in new products or
product enhancements after commercial release, which could result in potential
liability to our clients or other third parties. The failure of any critical
technology components to operate properly may have a material impact on business
operations or require us to incur unanticipated expenses to remedy any problems.
Although as a general matter, we do not specifically warrant to a client that
its work will be Year 2000 compliant, certain clients have requested and
received such warranties. In such cases, we do not warrant the compliance of
third party software; rather, we warrant only that software created by us will
be Year 2000 compliant. However, even absent a specific Year 2000 warranty,
there is a risk that clients for whom we have created or implemented software
will attempt to hold us liable for any damages that result in connection with
Year 2000 problems.
We may experience difficulties caused by undetected errors or defects in the
technology we use in our internal systems. In addition, there are substantial
operation risks beyond our control, including the risk that vital services
provided by utilities and governmental agencies will be interrupted. It is
possible that interruptions in vital services in late calendar year 1999 and
early calendar year 2000 will interfere with normal business operations, and
that such failures could materially and adversely affect our results of
operations, financial condition and cash flows.
Many companies, including our clients and prospects, might need to modify or
upgrade their information systems to address this Year 2000 issue. The effects
of this issue and of the efforts by companies to address it are unclear. The
Year 2000 issues might affect the purchasing patterns of clients and prospective
clients. Many companies are allocating significant resources to attain Year 2000
compliance. These allocations might result in reduced resources available to
utilize our services. Additionally, Year 2000 issues inherent in a client's
other software programs might significantly limit that client's ability to
realize the intended benefits to be derived from our services.
CONTINGENCY PLANS. We have begun preparation of a contingency plan that provides
for backup systems and procedures and a full compliment of information services
support staff to deal with unforeseen information systems failures. We have
redundant servers for a number of systems to ensure our ability to reconstruct
failed systems quickly and a backup data center is being constructed to reduce
the effect of regional infrastructure failures.
17
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
Item 3 Quantitative and Qualitative Disclosures About Market Risk
The Company's 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 in limited, however, to the exposure related to those debt instruments
and credit facilities which are tied to variable 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. If market interest rates
were to increase by 10% from rates as of September 1,1999, we do not believe
that the effect would be material to the Company.
All of our revenues are realized currently in U.S. dollars and are from
customers primarily in the United States. Therefore, we do not believe that we
currently have any significant direct foreign currency exchange rate risk.
18
<PAGE>
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
(c) Sales of Unregistered Securities.
During the three months ended June 30, 1999, the Company issued a total of
9,250 shares of Common Stock which were not registered for sale under the
Securities Act. All such shares were issued upon exercise of options
granted to employees under the Company's 1997 Stock Option Plan, at
exercise prices ranging from $1.50 to $3.50 per share, for an aggregate
exercise price of $16,875.
(d) Use of Proceeds of Public Offering
On August 5, 1999, the Company's registration statement on Form S-1 (SEC
File No. 333-78571) was declared effective, for the Initial Public Offering
by the Company (the "IPO") of a total of 4,865,848 shares of its common
stock, at $10.00 per share (including a total of 692,250 shares issued to
the underwriters upon exercise of the option which the Company had granted
to them solely to cover overallotments). An additional 441,402 shares were
sold by existing stockholders of the Company at the same price. Lehman
Brothers, Hambrecht & Quist, and Adams, Harkness & Hill, Inc. acted as
managing underwriters for the IPO. The 4,865,848 shares consisted of
3,115,848 shares offered by the Company to the managing underwriters and
1,750,000 shares offered to eligible shareholders of Safeguard Scientifics,
Inc. in a Directed Share Subscription program (the "DSSP"). The IPO was
completed in August 1999.
The Company paid to the underwriters underwriting discounts in the total
amount of $ 2,181,093 and a management fee in connection with the DSSP in
the amount of $490,000. In addition, in connection with its IPO, the
Company paid an estimated $1,169,000 million in expenses. The Company
received $45 million in proceeds from the Offering, net of underwriting
discounts, DSSP management fee and expenses of the IPO. None of the
Company's expenses in connection with the IPO were paid directly or
indirectly to directors or officers of the Company or their associates, or
to persons owning 10% or more of the Company's common stock or other
affiliates of the Company.
The Company has used a total of $2.9 million of the net proceeds to repay
all outstanding debt under its line of credit and term loan. The balance of
the net proceeds will be used for general corporate purposes and for future
acquisitions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
The exhibits required by Item 601 of Regulation S-K are listed below
and are incorporated as indicated in the notes.
Number Description
------ -----------
* 10.9 Severance Agreement, dated May 18, 1999, between U.S.
Interactive and Richard J. Masterson
** 10.12 Letter agreement between U.S. Interactive and Chromazone,
dated April 6, 1999
27 Financial Data Schedule
19
<PAGE>
* Exhibit 10.9 to the Company's Registration Statement on Form S-1 (No.
333-78751), incorporated herein by reference.
** Exhibit 10.12 to the Company's Registration Statement on Form S-1 (No.
333-78751), incorporated herein by reference.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter for
which this report is filed.
20
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
U.S. INTERACTIVE, INC.
(Registrant)
Date: September 20, 1999 By: /s/ Stephen T. Zarrilli
------------------------------------------
Stephen T. Zarrilli
Chief Executive Officer
Date: September 20, 1999 By: /s/ Philip L. Calamia
------------------------------------------
Philip L. Calamia
Vice President, Chief Financial Officer
(Principal Financial Officer and
Chief Accounting Officer)
21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,998
<SECURITIES> 0
<RECEIVABLES> 8,212
<ALLOWANCES> (174)
<INVENTORY> 0
<CURRENT-ASSETS> 11,578
<PP&E> 3,702
<DEPRECIATION> (1,356)
<TOTAL-ASSETS> 25,341
<CURRENT-LIABILITIES> 12,209
<BONDS> 0
18,041
0
<COMMON> 10
<OTHER-SE> 27,955
<TOTAL-LIABILITY-AND-EQUITY> 25,341
<SALES> 13,763
<TOTAL-REVENUES> 13,763
<CGS> 0
<TOTAL-COSTS> 7,298
<OTHER-EXPENSES> 13,102
<LOSS-PROVISION> (6,637)
<INTEREST-EXPENSE> 181
<INCOME-PRETAX> (6,818)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,818)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,818)
<EPS-BASIC> (.87)
<EPS-DILUTED> (.87)
</TABLE>
