<PAGE>
As filed with the Securities and Exchange Commission on July 16, 1999
Registration No. 333-78751
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Amendment No.2
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. Michael D. Ecker, 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) 575-7180 (202) 220-6000
</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>
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 July 16, 1999
PROSPECTUS
5,200,000 Shares
[GRAPHIC OMITTED]
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 4,173,712 shares of our common stock in an initial public
offering. Several of our stockholders are offering a total of 1,026,288 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 350,000 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 1,750,000 shares of our common stock at the
initial public offering price to shareholders of Safeguard Scientifics, Inc.
that owned at least 100 common shares of Safeguard on June 24, 1999. Safeguard
may be deemed a statutory underwriter with respect to the shares offered by us
to the shareholders of Safeguard. Safeguard is not a statutory underwriter with
respect to any other shares offered by us and is not included in the term
"underwriter" as used elsewhere in this prospectus. See "Plan of Distribution --
Directed Share Subscription Program."
We have granted the underwriters a 30-day option to purchase up to 626,057
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>
[ARTWORK APPEARS HERE]
<PAGE>
[ARTWORK APPEARS HERE]
<PAGE>
[ARTWORK APPEARS HERE]
<PAGE>
TABLE OF CONTENTS
Page
------
Prospectus Summary ............................ 1
Risk Factors .................................. 6
Forward-Looking Statements .................... 15
Use of Proceeds ............................... 16
Dividend Policy ............................... 16
Capitalization ................................ 17
Dilution ...................................... 18
Selected Consolidated Financial Data .......... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations .................................. 22
Page
------
Business ...................................... 32
Management .................................... 45
Certain Relationships and Related
Transactions ................................ 52
Principal and Selling Stockholders ............ 53
Description of Capital Stock .................. 57
Shares Eligible for Future Sale ............... 60
Plan of Distribution .......................... 62
Legal Matters ................................. 66
Experts ....................................... 66
Additional Information ........................ 66
Index to Consolidated Financial Statements .... F-1
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.
<PAGE>
This Page Intentionally Left Blank
<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 organization's experience and expertise
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(TM). 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(TM), a process comprised of three phases. 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 extranets, which we
refer to as "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 since we commenced operations
in May 1994. For the twelve month period ending June 30, 1999, we performed
approximately 180 client projects for companies such as AIG, adidas, Deloitte
Consulting LLP, Royal Caribbean International, Sprint, Thomson Consumer
Electronics 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
<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 $19.6 million as of June 30, 1999. We incurred net losses of $6.8
million for the six months ended June 30, 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 continue to increase. These and other risks are addressed under the
caption "Risk Factors" beginning on page 6 of this prospectus.
Recent Developments
Our revenue was $13.7 million for the six months ended June 30, 1999
compared to $4.9 million for the six months ended June 30, 1998 and $7.7 million
on a pro forma basis for the six months ended June 30, 1998. Our net loss was
$6.8 million for the six months ended June 30, 1999 compared to $723,000 for the
six months ended June 30, 1998 and $5.4 million for the six months ended June
30, 1998 on a pro forma basis. Our net loss per share was $.78 for the six
months ended June 30, 1999 compared to $.15 for the six months ended June 30,
1998 and $.59 for the six months ended June 30, 1998 on a pro forma basis.
Weighted average shares outstanding used in calculating net loss per share were
8,722,813 at June 30, 1999, 4,736,842 at June 30, 1998 and 9,120,796 at June 30,
1998 on a pro forma basis.
2
<PAGE>
The Offering
<TABLE>
<CAPTION>
<S> <C>
Common stock offered by U.S.Interactive ............ 4,173,712 shares
Common stock offered by the selling stockholders 1,026,288 shares
Common stock outstanding after this offering ....... 18,559,446 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 July 5, 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 2,807,795 shares of common stock issuable upon the exercise of
stock options outstanding at July 5, 1999, at a weighted average exercise
price of $5.14 per share
o excludes 3,001,950 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 July 5, 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
shareholders of Safeguard Scientifics, Inc. that owned at least 100 common
shares of Safeguard on June 24, 1999 in a directed share subscription program.
The program is described in greater detail below under the heading "Plan of
Distribution -- Directed Share Subscription Program."
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.
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, the management fee payable with respect to the directed
share subscription program 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) (120) (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 (Unaudited)
----------------------------------
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 $42,258
Working capital .......................................... 1,596 1,596 42,902
Total assets ............................................. 25,464 25,464 65,395
Mandatorily redeemable convertible preferred stock ....... 17,667 -- --
Total stockholders' equity (deficit) ..................... (2,028) 15,639 57,844
</TABLE>
5
<PAGE>
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 success depends on our ability to effectively manage our future
growth. Our past growth has placed significant demands on our resources. We
have incurred substantial increases in expenses as our revenues have grown. As
a result, our losses have increased significantly in recent periods. For
example, our net loss was $6.8 million for the six months ended June 30, 1999
compared to $723,000 for the six months ended June 30, 1998. Our net loss
increased to $8.4 million for the year ended December 31, 1998 from $290,000 for
the year ended December 31, 1997. Our net loss was $14.4 million for the year
ended December 31, 1998 as calculated on a pro forma basis. 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. 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
operating results will be materially adversely affected. We may never be able
to achieve profitability.
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
6
<PAGE>
intense competition in our industry for qualified personnel. There is currently
a shortage of such personnel due to the rapid growth in demand for individuals
with Internet technology-related skills. This shortage is likely to continue for
the foreseeable future. We have had difficulty hiring a sufficient number of
technical 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 six months ended
June 30, 1999, our five largest clients by dollar volume accounted for
approximately 53% of our revenues. Two of these clients, Juggernaut Partners,
LLC and Diary Farm International, accounted for 18% and 12% of our revenues in
this period. 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, LLC and own, in the aggregate, 41.6% of the
equity of 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. Our revenues and losses from operations
for the last four fiscal quarters are as follows:
Three Months Ended Revenues Losses from Operations
-------------------- --------------- -----------------------
September 30, 1998 $4.6 million $3.4 million
December 31, 1998 4.2 million 4.2 million
March 31, 1999 6.1 million 2.9 million
June 30, 1999 7.6 million 3.9 million
Fluctuations in our operating results may be significant. It is difficult
for us to forecast accurately the frequency and duration of our client
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
7
<PAGE>
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.
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 will decrease and our
results of operations will be materially adversely affected.
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 six months ended June 30, 1999, approximately 75% 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 clients' projects on a timely basis
o effectively manage our clients' expectations
o complete the projects within budget and to our clients' satisfaction
If we do not successfully accomplish these goals, we could be exposed to
cost overruns and penalties. If this occurs in connection with a large project
or a sufficient number of projects, our revenues will decrease and our results
of operations will be materially adversely affected.
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
8
<PAGE>
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, results
of operations 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
o Philip L. Calamia, who has been with U.S. Interactive since December
1996, most recently as Vice President Finance and Accounting, was
promoted to Chief Financial Officer in April 1999
o Lawrence F. Shay has been our General Counsel and Senior Vice President,
Legal Affairs since June 1999
o Ajit Prabhu, who has been with U.S. Interactive since March 1999, was
appointed Chief Technology Officer in 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, results of operations 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 June 30,
1999, we had an accumulated deficit of approximately $19.6 million. We incurred
a net loss of $6.8 million for the six months ended June 30, 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.
9
<PAGE>
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 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 and training. We believe these
relationships are strategic to us in that we work closely with these companies
to share market objectives, new technologies and potential new client
opportunities as they evolve. We believe that a significant portion of our
revenue has come, and we expect will continue to come, as a result of these
relationships. These relationships are non-exclusive and the agreements or oral
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 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
10
<PAGE>
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.
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 results of operations 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:
11
<PAGE>
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 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 too rapidly, 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
12
<PAGE>
may make it more difficult for us to raise funds through future offerings of our
common stock. The shares of our common stock that were outstanding on July
5, 1999 that are not sold in the offering will become eligible for sale without
registration pursuant to Rule 144 or Rule 701 under the Securities Act as
follows:
o 1,732,041 shares are currently eligible for sale into the public market
under Rule 144(k)
o 8,223,953 shares will be eligible for sale under Rule 144 or Rule 701
beginning 90 days after the date of this prospectus
o the remaining 3,403,452 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 6,585,534 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 12,214,767 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.
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
48.2% of our outstanding common stock. Furthermore, if shareholders of Safeguard
do not choose to subscribe for shares in the directed share subscription
program, Safeguard will own approximately 22.0% 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 59.0% of the total amount paid by all
investors in U.S. Interactive but will own only 22.0% of the shares outstanding.
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
13
<PAGE>
stock may fluctuate widely. This volatility may result from many events directly
involving us, including our operating results, potential litigation, strategic
relationship 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 subject 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 subject 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 without stockholder approval. This preferred
stock could have voting rights, including voting rights that could be superior
to that of our common stock, and the board of directors has the power to
determine these voting rights. 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 the caption "Risk Factors"
14
<PAGE>
USE OF PROCEEDS
The estimated net proceeds to U.S. Interactive from the sale of the
4,173,712 shares of our common stock in this offering are estimated to be
approximately $42.2 million. This is based on an assumed initial public offering
price of $11.00 per share, after deducting underwriting discounts, the
management fee payable with respect to the directed share subscription program
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 of the proceeds from the
offering for equipment, software and the expansion of our facilities. We intend
to use the balance of the net proceeds to repay the outstanding balance under
our revolving credit agreement and a term loan with a commercial bank 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, nor have we entered into
any letters of intent. Pending such uses, we will invest the net proceeds of
this offering in short-term, investment grade securities. The outstanding
balance under our revolving credit agreement was $1.1 million on July 1, 1999.
Borrowings under the revolving credit agreement bear interest at variable rates
which averaged 9.25% at July 1, 1999. We may reborrow amounts under our
revolving credit agreement, which will be available for future borrowings
through June 30, 2000. The term loan matures on July 1, 2003, bears interest at
a rate of 9.75% and had an outstanding balance of $1.2 million as of July 1,
1999.
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.
15
<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
4,173,712 shares of common stock by us pursuant to this offering and the
application of the estimated net proceeds of approximately $42.2 million.
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)
<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 valaue $.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 19,589,507 shares issued of which
18,550,196 shares are outstanding - pro forma, as adjusted ................. 10 15 19
Additional paid-in capital .................................................. 16,871 34,533 76,734
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 57,844
------- ------- --------
Total capitalization ..................................................... $16,752 $16,752 $58,057
======= ======= ========
</TABLE>
The foregoing table excludes as of July 5, 1999:
o 2,807,795 shares of common stock issuable upon the exercise of
outstanding warrants and stock options at a weighted average exercise
price of $5.14 per share
o 3,001,950 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 July 5, 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 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 $44.7 million, or $2.41 per
share after:
o giving effect to our sale of 4,173,712 shares of common stock offered by
this prospectus at the assumed initial public offering price of $11.00
per share
o deducting underwriting discounts, the management fee payable with respect
to the directed share subscription program 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 $2.24 per share to existing stockholders
and an immediate dilution in pro forma net tangible book value of $8.59
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 ..................... $ 2.24
------
Pro forma net tangible book value per share after this offering ...... $ 2.41
------
Net tangible book value dilution per share to new investors ......... $ 8.59
======
</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 41% $ 2.24
New investors .................... 4, 173,712 22 45,910,832 59 $ 11.00
---------- -- ----------- -- --------
Total ........................... 18,550,196 100% $78,114,156 100%
========== ==== =========== ====
</TABLE>
The foregoing tables exclude 2,877,795 shares of common stock issuable
upon exercise of an outstanding warrant and outstanding stock options at a
weighted average exercise price of $5.10 per share. These tables also exclude
3,001,950 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.
18
<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
outstandinq 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 (Unaudited)
-------------------------------------------
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 $42,258
Working capital........................ 1,596 1,596 42,902
Total assets .......................... 25,464 25,464 65,395
Mandatorily redeemable
convertible preferred stock .......... 17,667 -- --
Total stockholders' equity (deficit) (2,028) 15,639 57,844
</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 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 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 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 a higher than expected percentage and
20
<PAGE>
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. 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.
Recent Developments. Our revenue was $13.7 million for the six months ended
June 30, 1999 compared to $4.9 million for the six months ended June 30, 1998
and $7.7 million on a pro forma basis for the six months ended June 30, 1998.
Our net loss was $6.8 million for the six months ended June 30, 1999 compared to
$723,000 for the six months ended June 30, 1998 and $5.4 million for the six
months ended June 30, 1998 on a pro forma basis. Our net loss per share was $.78
for the six months ended June 30, 1999 compared to $.15 for the six months ended
June 30, 1998 and $.59 for the six months ended June 30, 1998 on a pro forma
basis. Weighted average shares outstanding used in calculated net loss per share
were 8,722,813 at June 30, 1999, 4,736,842 at June 30, 1998 and 9,120,796 at
June 30, 1998 on a pro forma basis.
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.
21
<PAGE>
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31, (Unaudited)
------------------------------------- -----------------------------
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 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
22
<PAGE>
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.
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
23
<PAGE>
$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.
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
24
<PAGE>
$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.
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.
25
<PAGE>
<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 a line of credit and a term loan from a
commercial bank. 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.
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.
26
<PAGE>
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 July 1, 1999, U.S. Interactive had a $3.3 million line of credit and
a $1.2 million term loan with a commercial bank. The line of credit and the term
loan are secured by substantially all of our assets. 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% (9.25% at July 1, 1999). There was $1.1 million outstanding and
$1.6 million available under the line of credit as of July 1, 1999. The term
loan matures on July 1, 2003. The term loan bears interest at a rate of prime
plus 1.75% (9.75% at July 1, 1999) and had $1.2 million outstanding as of July
1, 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.
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
27
<PAGE>
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 the third quarter of 1999. We plan to perform a
year 2000 simulation on our software and information systems during the third
quarter 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 $400,000. This includes the cost of upgrades, software
modification and related consulting fees.
Contingency Plans. As discussed above, we are engaged in an ongoing year
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.
Disclosures About Market 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
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interest expense is 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
July 1, 1999, the effect would not be material to our 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.
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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 organization's experience and expertise
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 during which we:
o define the overall vision and scope for a project
o create and test a prototype that addresses the client's objective
o refine, integrate and deploy the final solution
To facilitate our implementation process, we employ extranets, which we
refer to as "Capture," for ongoing client communication on individual projects.
We believe Capture 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 websites. 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 websites.
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 websites 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 substantial 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 22 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. 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:
o an "Innovation" phase that 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.
o a "Validation" phase that 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.
o a "Launch" phase that 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.
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 of our client services personnel is assigned to each 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
projects. These extranets, called Capture, are password protected websites
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established to provide communications electronically. We believe that by
enabling our clients to monitor and comment on a project's direction and
progress on a real-time basis, these extranets improve 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
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, 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 Our 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
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relationships with software and Internet 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 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
Our solutions are developed using three primary elements: our e-Roadmap, IVL
Methodology and Capture extranets.
e-Roadmap
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 practice areas, which allow us to focus our
resources on specific areas of product development and implementation skills,
are as follows:
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.
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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 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 the wealth of employee knowledge that a
company acquires over time is a principal component of that company's potential
competitive advantage. We provide services that allow a company to gather,
organize and present its employees' knowledge in an electronically accessible
form. Components of knowledge management include:
o intranet development
o data warehousing design and development
o document management
IVL Methodology
When completing projects encompassing only one practice area or an
electronic enterprise solution which would encompass all our four practice
areas, we group our services within our three IVL Methodology phases. The
service deliverables we offer within each of these 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
evaluation
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
Brand Audit Evaluating the perception of a
company's existing brand and
developing strategies to maintain and
extend the brand using the Internet
Channel Audit Identifying new and existing Internet
distribution channels
</TABLE>
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<TABLE>
<CAPTION>
Methodology e-Roadmap
Phase Service Deliverables Service Description
- ----------- -------------------- ----------------------------------------
<S> <C> <C>
Innovation (cont.) Competitive Analysis Rating existing web presence against
competitors' sites, ease of navigation,
design, technology and presentation
Digital Brand Positioning Generating guidelines for brand
Strategy development through competitive
product, service and/or consumer
research analysis
Validation Creative Concepts Creating brand logos, banner
advertisements and layout and design of
websites
Digital Channel Strategy Strategic analysis of a client's value chain
Systems Architecture Establishing guidelines for technology
architecture
Digital Prototyping Visual demonstration of the proposed
solution
Usability Testing Testing a preliminary solution through a
target market sampling
Software Evaluation Workshop Bypasses the Request for Proposal (RFP)
process to identify the most effective
software application
Launch Development Implementation Using client's priorities to create project
Plan phases for "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 electronic 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>
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Capture
As part of many of our client projects, 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 sites allow clients to view shared:
o work plans
o project updates
o project communications
o creative/technical prototypes
o 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 project.
This feedback allows us to address client issues during the development phase.
We intend to continue to expand the features of Capture over time.
Clients
Set forth below is a selected list of our clients from whom we generated
significant revenues since January 1, 1998.
AIG Pioneer Electronics
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
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
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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 customer care audit
o enterprise architecture audit
o brand audit
o digital brand positioning strategy
o creative concepts
o digital channel strategy
o systems architecture
o development implementation plan
o enterprise design and development
o custom software development
o custom commerce solution
o enterprise software implementation
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 website 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
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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
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. 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 digital prototyping
o usability testing
o development implementation plan
o custom software development
o systems integration
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
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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, 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 business case execution
o brand audit
o creative concepts
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.
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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.
o Digex. Digex is a provider of complex Internet hosting services. We and
Digex have an "Authorized Alliance" agreement under which website
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 July 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 July 1, 1999, our direct sales force consisted of 11 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)
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o management consulting firms (such as Diamond Technology Partners and
Andersen Consulting)
o computer hardware and software vendors (such as IBM and Unisys)
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 capabilities
o reliability
o client service
o technology expertise and client industry knowledge
o cost management
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 July 1, 1999, we employed 254 people in five offices, consisting of
184 project personnel, 17 marketing and sales personnel and 53 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 Matters
U.S. Interactive is not a party to any material legal proceedings. In
connection with the directed share subscription program, Safeguard reset the
record date for participating in the directed share subscription program from
June 14, 1999 to June 24, 1999 for regulatory reasons. As a result, two former
shareholders of Safeguard have threatened to file a claim against Safeguard and
could also seek to prevent or delay us from completing our initial public
offering. We do not believe that any attempt to prevent or delay our offering
has legal merit or a likelihood of success.
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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
Lawrence F. Shay ............. 40 General Counsel and Senior Vice President,
Legal Affairs
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 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, as a result of our merger with Digital Evolution, is
considered to be a co-founder of our business. Mr. Pulier served as the
President and a director of Digital Evolution from May 1994 to July 1998, which
performed Internet 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.
43
<PAGE>
Lawrence F. Shay has served as our General Counsel since June 1999. Prior
to that time, Mr. Shay was a partner in the law firm of Dilworth Paxson LLP
where he had practiced law since 1985.
Ajit Prabhu has served as Chief Technology Officer since May 1999. Mr.
Prabhu served as a Vice President of Client Services from March 1999 to May
1999. Mr. Prabhu served as a Managing Director of InVenGen, an Internet
professional services company that he co-founded, from August 1997 until March
1999. 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 a part of 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.
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,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, since January 1998. Prior to
joining Safeguard, 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.
44
<PAGE>
Board Committees
Our board of directors has a compensation committee and an audit
committee. The compensation committee is comprised of Robert E. Keith and
E. Michael Forgash. The audit committee is comprised of Robert E. Keith and
E. 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 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. Directors who are not employees of U.S. Interactive are reimbursed
for their reasonable out-of-pocket expenses incurred in attending the meetings
of the board of directors and committees thereof. In addition, directors who are
not employees of U.S. Interactive are eligible to receive stock options under
our 1998 Performance Incentive Plan. Eric Pulier, our Chairman of the Board,
receives compensation for his services as an employee.
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.
45
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Awards
-------------
Annual Compensation Securities
-------------------------- Underlying All Other
Name and Principal Position(s) Salary Bonus Options Compensation(l)
- -------------------------------------------- ----------- ---------- ------------- ---------------
<S> <C> <C> <C> <C>
Eric Pulier, Chairman of the Board ......... $226,000 $ 50,000 --(2) $ 530
Stephen T. Zarrilli, President and
Chief Executive Officer .................... 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.
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.
<PAGE>
Option Grants in Last Fiscal Year(l)
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------------------------
Potential Realizable
Percent of Value at Assumed
Number of Total Annual Rate of
Shares Options Stock Price Appreciation
Underlying Granted to 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 $1l.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) These options expired on May 26, 1999 and were not exercised prior to
expiration.
(4) These options will expire on August 16, 1999 if not exercised by this date.
46
<PAGE>
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. Prior to this merger, Mr. Pulier had no interest in or
position with U.S. Interactive. Mr. Pulier relinquished his position as Chief
Technology Officer upon the appointment of Mr. Prabhu in May 1999. 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.
We intend to extend an employment agreement to Mr. Zarrilli providing for
his employment as President and Chief Executive Officer. 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 automobile
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
47
<PAGE>
o health, life and disability insurance and other benefits for the nine
month period commencing May 18, 1999, including automobile 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
of 1986, who are "non-employee directors" as defined under Rule 16b-3 of the
Securities Exhange Act of 1934. The compensation committee presently consists of
Messrs. Keith and Forgash. As of July 5, 1999, options issued under the 1998
Performance Incentive Plan to purchase a total of 163,500 shares of common stock
at a weighted average exercise price per share of $9.25 were outstanding, of
which options to purchase 36,000 shares at a weighted average exercise price of
$9.25 were fully vested. As of July 5, 1999 we had 2,836,500 shares of common
stock available for future grant under this 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 than 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
48
<PAGE>
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 July 5, 1999, options issued under
the 1998 Stock Option Plan to purchase a total of 1,397,083 shares of common
stock at a weighted average exercise price per share of $6.81 were outstanding,
of which options to purchase 128,250 shares at a weighted average exercise
price of $6.95 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 153 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
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 cormittee 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 July 5, 1999,
options issued under the 1997 Stock Option Plan to purchase a total of 335,753
shares of common stock at a weighted average exercise price per share of $2.95
were outstanding, of which options to purchase 228,636 shares were fully vested
and exercisable at a weighted average exercise price of $2.51. As of that date,
we had 165,297 shares of common stock available for future grant under this
plan. No options are issuable under the 1997 Stock Option Plan after September
2008.
49
<PAGE>
1996 Stock Option Plan. Digital Evolution had historically granted stock
options to its officers and key employees under a stock option 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.
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 of 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 Partners represented
more than 13% of our revenue for the three months ended March 31, 1999.
50
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock by:
o our Chairman of the Board and Chief Executive Officer and each director
o all of our 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 and acquirable upon conversion of our
preferred stock. All preferred stock is presently convertible, on a one-for-one
basis, into shares of common stock, and will automatically convert upon
consummation of the offering.
The address for all directors and executives is 2012 Renaissance
Boulevard, King of Prussia, Pennsylvania 19406.
As of July 5, 1999, there were 9,044,638 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
------------------------- Shares Offered ---------------------
Beneficial Owner Number Percentage hereby Shares Percentage
- ------------------------------------------------------- ----------- ------------ ---------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Executive Officers and Directors:
Eric Puller(1) ....................................... 3,400,809 23.6% 3,400,809 18.2
Stephen T. Zarrilli(2) ............................... 576,592 4.0 598,592 3.2
John D. Shulman(3) ................................... 308,536 2.1 308,536 1.7
E. Michael Forgash ................................... -- -- -- --
Robert E. Keith, Jr. ................................. -- -- -- --
All directors and executive officers as a
group(9 persons)(4) .................................. 4,344,387 30.2 4,344,387 23.1
Other Five Percent Holders:
Safeguard Scientifics, Inc.(5) ....................... 2,339,628 16.3 2,399,628 12.6
Technology Leaders II(6) ............................. 1,184,175 9.2 1,184,175 6.4
Selling Stockholders(7):
Richard J. Masterson(8) .............................. 1,189,511 8.3 300,000 855,511 4.6
Larry W. Smith(9) .................................... 1,168,701 8.1 400,000 595,701 3.2
Vulcan Ventures Inc.(10) ............................. 692,355 4.8 142,443 549,912 3.0
Trident Capital Management, LLC(11) .................. 692,354 4.8 142,443 549,911 3.0
Thurston Interests, LLC(12) .......................... 161,240 1.1 33,173 128,067 *
Thurston Bridge Fund, L.P.(13) ....................... 40,000 * 8,229 31,771 *
</TABLE>
- ------------
(1) Includes 127,308 shares issuable upon exercise of options and 1,080 shares
issuable upon exercise of options held by Heather Pulier, Mr. Pulier's wife.
51
<PAGE>
(2) Includes 31,525 shares issuable upon exercise of options, 24,195 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 22,000 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 8 and 9, below. Excludes
100,000 shares issuable upon exercise of options.
(3) Includes 10,799 shares issuable upon exercise of options. Excludes 25,000
shares issuable upon exercise of options.
(4) Includes 214,176 shares issuable upon exercise of options, including 1,080
shares issuable upon exercise of options held by Mr. Pulier's wife. Excludes
281,425 shares issuable upon exercise of options.
(5) Includes 2,339,628 shares of series D preferred stock issued to Safeguard
98 Capital L.P. Excludes any shares that may be purchased by Safeguard
Scientifics, Inc. that have not been purchased by its shareholders in the
directed share subscription program. 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 6, 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.
(6) 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 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
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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 Building 700, 435 Devon Park Drive,
Wayne, Pennsylvania 19087.
(7) All the selling stockholders are parties to the investors' rights agreement
and the stockholders' agreement.
(8) Includes 63,051 shares issuable upon exercise of options which expire on
August 16, 1999, 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). Mr. Masterson is a co-founder
of U.S. Interactive and served as one of our directors from August 1995, to
May 1999, President from July 1998, to May 1999, and Exective Vice
President of Business Development prior thereto. Mr. Masterson is party to
a severance agreement with U.S. Interactive relating to his resignation.
(9) Includes 173,000 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 173,000 of the
shares held by the trust will be distributed to beneficiaries of the trust
(19,000 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). Mr. Smith is a co-founder of U.S.
Interactive and served as one of our directors from 1991 to May 1999,
President from September 1991, to July 1998, and Chief Executive Officer
from September 1996, to December 1998. Mr. Smith is party to a severance
agreement with U.S. Interactive relating to his resignation.
(10) Includes 692,355 shares of series A preferred stock acquired in connection
with the merger of Digital Evolution, of which Vulcan Ventures is a former
shareholder, and U.S. Interactive.
(11) Includes 673,552 and 18,802 shares of series A preferred stock owned by
Information Associates L.P., and Information Associates, C.V.,
respectively, former shareholders of Digital Evolution, acquired in
connection with the merger of Digital Evolution and U.S. Interactive.
Trident Capital Management, LLC, is the sole general partner of Information
Associates, L.P., and the sole investment general partner of Information
Associates, C.V. Does not include options to acquire 10,799 shares of
common stock held by Rockwell Schnabel, one of eight managing directors of
Trident Capital Management, LLC. Mr. Schnabel is a former director of
Digital Evolution and U.S. Interactive.
(12) Includes 161,240 shares of common stock acquired on March 12, 1999, from
U.S. Interactive in connection with the acquisition of all of the assets of
InVenGen LLC. Thurston Interests, LLC is a 50% member of InVenGen LLC.
Does not include a total of 361,200 shares of common stock held by
Dilworth Paxson LLP as escrow agent pursuant to the terms of two escrow
agreements as security for certain contingent liabilities of InVenGen LLC
and contingent upon certain former employees of InVenGen LLC remaining in
the employ of U.S. Interactive through March 12, 2001.
(13) Includes 40,000 shares of common stock acquired on March 12, 1999, from
U.S. Interactive in connection with the acquisition of all of the assets
of InVenGen LLC in satisfaction of certain obligations owed by Thurston
Interests, LLC, to Thurston Bridge Fund, L.P., an affiliate of Thurston
Interests, LLC.
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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 18,559,446 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
right 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 18,559,446 shares of our common stock, assuming no exercise of the
underwriters' over-allotment option and no exercise of options that were
outstanding as of July 5, 1999. 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 13,359,446 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 July 5, 1999, subject to the contractual restrictions described
below, additional shares may be sold without registration under the
Securities Act as follows:
o 1,732,041 shares of our common stock then outstanding will be eligible
for sale into the public market following the effectiveness of the
registration statement
o 2,807,795 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); 836,271 of
such options were exercisable. There were a total of approximately
3,001,950 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 8,223,953 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 185,594 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 a warrant and the preferred stock, have been
granted registration rights under an investors' rights agreement with U.S.
Interactive. A total of 6,585,534 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 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. As of July 5, 1999, options to purchase 2,807,795 shares of our common
stock were issued and outstanding, of which options to purchase a total of
836,271 shares of our common stock were 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, have each agreed to purchase
from us the respective number of shares of common stock shown opposite its name
below:
Number of
Underwriters Shares
---------------- ---------
Lehman Brothers Inc. ......................
Hambrecht & Quist LLC .....................
Adams, Harkness & Hill, Inc. ..............
Total ................................. 3,450,000
=========
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
all of the shares offered in the directed share subscription program have been
purchased, that there is no material change in the financial markets and that
we deliver to the underwriters customary closing documents.
The representatives of the underwriters 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 overallotment 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 626,057 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 Inc., 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, Technology
Leaders II, Richard J. Masterson, Larry W. Smith and certain other stockholders,
including all of the holders of the preferred stock, have agreed under lock-up
agreements that, without the prior written consent of Lehman Brothers Inc., they
will not, directly or indirectly, offer, sell or otherwise dispose of any shares
of common stock or any securities that 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 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 (outside of the United States), in addition to the
offering price listed on the cover of this prospectus.
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Lehman Brothers Inc., Hambrecht & Quist and Adams, Harkness &, Hill have
informed us that they do not intend to confirm sales of shares of common stock
offered by this prospectus to any accounts over which they exercise
discretionary authority. In addition, the other 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.
At our request, the underwriters have reserved up to 350,000 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 Share Subscription Program
As part of this offering, we are offering approximately 1,750,000 shares of
our common stock in a directed share subscription program to 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 100 shares of Safeguard common stock as of June 24, 1999 are eligible to
purchase shares from us under the program. 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
will purchase these shares from us. Distribution of share certificates purchased
through the directed share subscription program will be made to the purchasers
as soon as practicable following closing of the sale of the shares to the
public. It is expected that sales under the directed share subscription program
will be reflected in purchasers' book-entry accounts at the Depository Trust
Company, if any, upon the closing of these sales. After the closing of these
sales, we will mail stock certificates to all purchasers who do not maintain
book-entry accounts at the Depository Trust Company. Prior to this offering,
Safeguard beneficially owned 16.3% of our common stock. After this offering,
Safeguard will beneficially own approximately 12.6% of our common stock,
assuming that all 1,750,000 shares are purchased by shareholders of Safeguard,
and will beneficially own approximately 22.0% of our common stock assuming that
none of the 1,750,000 shares are purchased by the shareholders of Safeguard. The
purchase price under the program, whether paid by Safeguard or its shareholders,
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 1,750,000 shares offered under
the directed share subscription program are sold. The underwriters, as a group,
will receive a 2.8% management fee on any shares sold through the directed share
subscription program to shareholders of Safeguard Scientifics. This is in lieu
of the underwriter discount to be paid to the underwriters shown on page 63.
Safeguard will not receive any compensation from U.S. Interactive or any other
person, with respect to this offering, including any underwriting discounts or
commissions.
Safeguard may be deemed a statutory underwriter with respect to the shares
included in the directed share subscription program. Safeguard is not a
statutory underwriter with respect to the other shares offered by this
prospectus. Safeguard is not included in the term "underwriter" as used in this
prospectus. Safeguard's sole condition to purchase any shares that are not
purchased by its shareholders in the direct shares subscription program is that
the conditions to the underwriter's obligations have been met. This means that
Safeguard will be required to purchase these shares if, and only if, the
underwriters are obligated to purchase shares. Safeguard has not participated in
any discussions or negotiations with the Company and the underwriters regarding
the initial public offering price. Safeguard will not have any right to seek
indemnification from U.S. Interactive regarding its agreement to accept
underwriter liability with respect to the shares included in the directed share
subscription program.
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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 partner of Dilworth Paxson LLP, is the owner of 112,500 shares of
our common stock. Certain other partners of Dilworth Paxson LLP have an interest
in these shares. Lawrence F. Shay was a partner of Dilworth Paxson LLP prior to
becoming our General Counsel in June 1999. Certain legal matters in connection
with this offering are being passed upon for U.S. Interactive and Safeguard 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 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.
63
<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 Shareholders' Deficiency, 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-40
Unaudited Pro Forma Combined Statement of Operations, Year ended December 31, 1998 ............... F-41
Unaudited Pro Forma Combined Statement of Operations, Three Months ended March 31,
1998 ............................................................................................ F-42
Notes to Unaudited Pro Forma Combined Financial Statements ...................................... F-43
</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 ............................ 79 523 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 .............. 2,239 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
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.
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 capital 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.
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.
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>
Three Months Ended March
Year Ended December 31, 31,
---------------------------- ------------------------
1996 1997 1998 1998 1999
------- ------- ------- -------- -----------
<S> <C> <C> <C> <C> <C>
Numerator: Net loss attributable 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)
Three Months Ended March
Year Ended December 31, 31,
---------------------------- -------------------------
1996 1997 1998 1998 1999
------- ------- ------- -------- --------
Numerator: Net loss attributable 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-l"). 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):
<TABLE>
<CAPTION>
<S> <C>
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
=======
</TABLE>
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):
December 31, December 31,
1997 1998
------------ ------------
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
==== ======
5. ACCRUED EXPENSES
Accrued expenses consist 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 utilizes 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 PLANS
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 its services primarily in North America,
Asia-Pacific and Europe as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
Years Ended December 31, March 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 29,699 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 $ 33,123
=========== =========== =========== ===========
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:
<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>
<PAGE>
NOTE 4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following:
<TABLE>
<CAPTION>
December 31, June 30,
------------------- ----------
1996 1997 1998
-------- -------- -----------
(unaudited)
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
December 31,
----------------
1996 1997
------ ------
<S> <C> <C>
Federal statutory tax benefit rate .............. (34%) (34%)
State income taxes (net of federal benefit)...... (6%) (6%)
Increase in valuation allowance ................. 40% 40%
-- --
0% 0%
== ==
</TABLE>
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 computa-
tion .......................................................... 20,299,285 20,299,285 23,567,873 20,299,285
============ ============ ============ ============
Diluted net income (loss) per common share ..................... $ (0.02) $ (.02) $ .03 $ (.10)
============ ============ ============ ============
</TABLE>
NOTE 10. EMPLOYEE RETIREMENT PLANS
The Company has sponsored a defined contribution retirement plan (the
"Plan") which covers 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.
F-37
<PAGE>
DIGITAL EVOLUTION, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information with respect to June 30, 1997 and 1998 is unaudited)
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.
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> <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> <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>
F-38
<PAGE>
DIGITAL EVOLUTION, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information with respect to June 30, 1997 and 1998 is unaudited)
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-39
<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 shares of 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-40
<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>
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-41
<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-42
<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-43
<PAGE>
[LANGUAGE FOR ART TO COME]
<PAGE>
[LANGUAGE FOR ART TO COME]
<PAGE>
[LANGUAGE FOR ART TO COME]
<PAGE>
This Page Intentionally Left Blank
<PAGE>
5,200,000 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 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 584,800 shares of our common stock in this acquisition,
which was accounted for using the purchase method of accounting. Under an 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.
In addition to the foregoing shares, 275,200 shares are being held in
escrow 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.
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 form 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, certain portions of which have been omitted based upon
a request for confidential treatment. The omitted portions have been separately filed with the
Commission
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+
10.11 Norton Plaza Office Lease
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
holding more than 100 shares describing the Directed Share Subscription Program
99.2 Form of Letter from Lehman Brothers Inc. to Safeguard Scientifics, Inc. 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> <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:
(i) 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. 2 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
16th day of July, 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. 2 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 July 16, 1999
- ----------------------------------------- (principal executive officer)
Stephen T. Zarrilli
/s/ Philip L. Calamia Vice President and Chief Financial Officer July 16, 1999
- ----------------------------------------- (principal financial and accounting officer)
Philip L. Calamia
* July 16, 1999
- ----------------------------------------- Director
Eric Pulier
*
- ----------------------------------------- Director July 16, 1999
Robert E. Keith, Jr.
*
- ----------------------------------------- Director July 16, 1999
John Shulman
*
- ----------------------------------------- Director July 16, 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 form 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, certain portions of which have been omitted based upon
a request for confidential treatment, The omitted portions have been separately filed with the
Commission
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+
10.11 Norton Plaza Office Lease
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 holding
more than 100 shares describing the Directed Share Subscription Program
99.2 Form of Letter from Lehman Brothers Inc. to Safeguard Scientifics, Inc. 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.
<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 STOCK OPTION UNDER THE 1998 PERFORMANCE
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.
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 or 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.
Except as otherwise provided expressly in this Agreement, such Option shall not
be exercisable for more than the number of shares which are then vested. Subject
to all of 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 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.
<PAGE>
This Option shall not be exercisable in any event after the tenth
anniversary [fifth anniversary in the case of a 10% stockholder] 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 Grantee 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 transferee) 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
Section 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
<PAGE>
Section 3 above, as to which Grantee could have exercised the Option at the time
of Grantee's death. The applicable requirements of Section 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 or
under a domestic relations order in settlement of marital property rights and in
each case, without any consideration, and (ii) that the transferee acknowledges
and agrees in writing that (y) if the transferor is a director or officer of the
Company, any shares acquired upon exercise of any such option may be subject to
restriction on resale under Rule 144 under the Securities Exchange Act of 1934,
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 Section 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.
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,
<PAGE>
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 the 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 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 HIS RIGHT OR THE COMPANY'S RIGHT
TO TERMINATE OR MODIFY HIS EMPLOYMENT AT ANY TIME, WITH OR WITHOUT CAUSE.
<PAGE>
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
_______________________
Grantee's Signature
Name of Grantee (Print)
<PAGE>
OFFICE SPACE LEASE
for
Building 12 Renaissance Boulevard
by and between
O'Neill Renaissance II Associates, L.P.
(as Landlord)
and
U.S. Interactive
(as Tenant)
Date: May 14, 1998
<PAGE>
THIS LEASE (the "Lease") is made the ____ day of May, 1998 between
O'Neill Renaissance II Associates, L.P. herein referred to as "Landlord") whose
address is 1710 Walton Road, Suite 200, Blue Bell, Pennsylvania 19422 and U. S.
Interactive (herein referred to as "Tenant") whose address is 7 Great Valley
Parkway, Malvern, PA 19355.
PREAMBLE
BASIC LEASE PROVISIONS AND DEFINITIONS
In addition to other terms elsewhere defined in this Lease, the
following terms whenever used in this Lease shall have only the meanings set
forth in this section, unless such meanings are expressly modified, limited or
expanded elsewhere herein.
1. ADDITIONAL RENT shall mean all sums in addition to Fixed Basic Rent
payable by Tenant to Landlord or to third parties pursuant to the provisions of
the Lease;
2. BROKERS shall mean Smith Mack & Co., Inc. and Kelley-Pitcairn, Inc.
3. BUILDING shall mean Building No. 12, 2012 Renaissance Boulevard, King of
Prussia, PA as described on Exhibit A hereto.
4. BUILDING HOLIDAYS shall be those shown on Exhibit D.
5. COMMENCEMENT DATE shall be December 1, 1998 subject to Section 4 of the
Lease.
6. DEMISED PREMISES OR PREMISES shall be the entire Building consisting of
approximately Twenty Eight Thousand Seventy Seven (28,077) gross rentable square
feet in the Building subject to final measurement and agreement in accordance
with 1996 BOMA standards.
7. EXHIBITS shall be the following, attached to this Lease and incorporated
herein and made a part hereof:
Exhibit A Site Plan with Parking
Exhibit B Rules and Regulations
Exhibit C Plans and Specifications
Exhibit D Building Holidays
Exhibit E Tenant Estoppel Certificate
Exhibit F Commencement Date Agreement
Exhibit G Project Schedule
8. EXPIRATION DATE shall be the day before the seventh (7th) calendar year
anniversary of the Commencement Date.
i
<PAGE>
9. FIXED BASIC RENT shall be calculated and payable as follows:
<TABLE>
<CAPTION>
Rate Per Rentable
Square Foot Monthly
Year (net of utilities) Installment Yearly Rate
---- ------------------ ----------- -----------
<S> <C> <C> <C> <C>
1 $21.50 $50,304.63 $603,655.50
2 $22.00 $51,474.50 $617,694.00
3 $22.50 $52,644.38 $631,732.50
4 $23.00 $53,814.25 $645,771.00
5 $23.50 $54,984.13 $659,809.50
6 $24.00 $56,154.00 $673,848.00
7 $24.50 $57,323.88 $687,886.50
</TABLE>
10. PERMITTED USE shall be general office use and for no other purpose.
11. PROPORTIONATE SHARE shall mean one hundred percent (100%) with respect
to the Building.
12. SECURITY DEPOSIT shall be an irrevocable and transferable letter of
credit payable on sight in favor of holder in the amount of One Hundred
Twenty-Five Thousand Dollars ($125,000.00) which shall be in form and substance
acceptable to Landlord. In the event Tenant is not in default and has not been
in default, beyond any applicable notice and cure periods, after two (2) years
after the Commencement Date, then the letter of credit shall be reduced to the
then current amount of one (1) month's Fixed Basic Rent.
13. TERM shall mean seven (7) years from the Commencement Date unless
terminated or extended pursuant to any option or provision contained herein.
ii
<PAGE>
TABLE OF CONTENTS
Section Page
1. Definitions...........................................................1
2. Premises..............................................................1
3. Completion of Premises................................................1
4. Term..................................................................2
5. Use of Premises.......................................................2
6. Rent..................................................................2
7. Insurance.............................................................5
8. Repairs and Maintenance...............................................6
9. Utilities and Services................................................7
10. Governmental Regulations..............................................8
11. Signs.................................................................8
12. Alterations, Additions and Fixtures...................................8
13. Mechanic's Liens......................................................9
14. Landlord's Right of Entry............................................10
15. Damage by Fire or Other Casualty.....................................11
16. Non-Abatement of Rent................................................12
17. Indemnification......................................................12
18. Condemnation.........................................................12
19. Quiet Enjoyment......................................................13
20. Rules and Regulations................................................14
21. Assignment and Subletting............................................14
22. Tenant's Expansion/Relocation........................................17
23. Subordination........................................................17
24. Curing Tenant's Defaults.............................................17
25. Surrender............................................................17
26. Defaults-Remedies....................................................18
27. Condition of Premises................................................21
28. Hazardous Substances.................................................21
29. Recording............................................................21
30. Brokers'Commission...................................................22
31. Notices..............................................................22
32. Irrevocable Offer, No Option.........................................23
33. Inability to Perform.................................................23
34. Survival.............................................................23
35. Corporate Tenants....................................................23
36. Waiver of Invalidity of Lease........................................23
37. Security Deposit.....................................................23
38. Tenant Estoppel Certificate..........................................23
39. Rights Reserved by Landlord..........................................24
40. Miscellaneous........................................................26
41. Additional Definitions...............................................27
<PAGE>
For and in consideration of the covenants herein contained, and upon
the terms and conditions herein set forth, Landlord and Tenant, intending to be
legally bound, agree as follows:
1. Definitions. The definitions set forth in the preceding Preamble shall
apply to the same capitalized terms appearing in this Lease Agreement.
Additional definitions are contained in Section 41 and throughout this Lease.
2. Premises. Landlord hereby demises and leases the Premises to Tenant and
Tenant hereby leases and takes the Premises from Landlord for the Term (as
defined in Section 4) and upon the terms, covenants, conditions, and provisions
set forth in this Lease Agreement, including the Preamble (this "Lease"). The
Tenant's interest in the Premises as tenant shall include the right, in common
with Landlord and other occupants of the Building, to use driveways, sidewalks,
loading and parking areas, lobbies, hallways and other facilities which are
located within the Property (defined in Section 6) and which are designated by
Landlord from time to time for the use of all of the tenants of the Building
(the "Common Facilities").
3. Completion of Premises. The premises shall be completed in accordance
with the plans and specifications attached hereto as Exhibit C (herein called
the "Plans") at Landlord's expense. All necessary construction shall be
commenced promptly following Landlord's execution and acceptance of this Lease
and Tenant's delivery of the first month's Fixed Basic Rent and the Security
Deposit to Landlord and shall be substantially completed ready for use and
occupancy by Tenant on the Lease Commencement Date set forth in the Preamble;
provided, however, that the time for substantial completion of the Premises
shall be extended for additional periods of time equal to the time lost by
Landlord or Landlord's contractors, subcontractors or suppliers due to strikes
or other labor troubles; delays in Tenant's selection of materials, plans or
specifications; governmental restrictions and limitations; unavailability or
delays in obtaining fuel, labor or materials; war or other national emergency;
accidents; floods; defective materials; fire damage or other casualties; adverse
weather conditions; the inability to obtain building or use and occupancy
permits; or any cause similar or dissimilar to the foregoing which is beyond the
reasonable control of Landlord or Landlord's contractors, subcontractors or
suppliers. The Premises shall be deemed substantially completed when Tenant is
in receipt of a Certificate of Occupancy or Temporary Certificate of Occupancy
(which is convertible to a permanent Certificate of Occupancy) (punchlist items
excepted) such certificate to be obtained by Landlord. All construction shall be
done in a good and workmanlike manner and shall comply at the time of completion
with all applicable and lawful laws, ordinances, regulations and orders of the
federal, state, county or other governmental authorities having jurisdiction
thereof Tenant and its authorized agents, employees and contractors shall have
the right, at Tenant's own risk, expense and responsibility, at all reasonable
times prior to the Commencement Date as hereinafter defined, to enter the
Premises for the purpose of taking measurements and installing its furnishings
and equipment; provided that Tenant, in so doing, shall not interfere with or
delay the work to be performed hereunder by Landlord, and Tenant shall use
contractors and workmen compatible with the contractors and workmen engaged in
the work to be performed hereunder by Landlord, and Tenant shall have obtained
Landlord's written consent to installing any furnishings or equipment. Tenant's
occupancy of the Premises shall constitute acceptance of the Work performed by
Landlord pursuant to this Section 3. If Landlord shall fail to deliver
possession of the Premises by the Commencement Date for any reason, whether or
not within
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Landlord's control, Landlord shall not be subject to any liability to Tenant. No
failure to deliver the Premises by the Commencement Date or any other date shall
in any respect affect the validity or continuance of this Lease of any
obligation of Tenant hereunder or extend the Term of the Lease provided,
however, the Commencement Date shall be extended to such time as Landlord
substantially completes the work set forth in the Plans (the "Work"). In the
event Landlord fails to substantially complete the Work on or before January 1,
1999, then Tenant shall be entitled to one (1) day of Rent abatement for every
day of delay beyond January 1, 1999. In the event Landlord fails to
substantially complete the Work on or before May 1, 1999; then Tenant may
terminate this Lease by written notice to Landlord and neither party will have
any further obligations thereunder.
4. Term. The term of this Lease shall commence on the first to occur of (a)
Commencement Date and (b) the date on which the Premises are actually occupied
by Tenant. Following the Commencement Date, the term of this Lease, unless
sooner terminated as expressly provided in this Lease, shall continue until the
date of expiration of the term specified as the Term of Lease in the Preamble
plus the number of days which remain in the calendar month in which such term
expires (the "Term"). Upon request of Landlord, Tenant shall enter into a
memorandum agreement stipulating the actual Commencement Date of the Term
substantially in the form attached hereto as Exhibit F.
5. Use of Premises. Tenant shall occupy the Premises throughout the Term
and shall use the same for, and only for, the Permitted Use specified in the
Preamble. The Building is designed to normal building standards for floor
loading capacity.
6. Rent. Unless otherwise specifically requested by Landlord at any time,
Fixed Basic Rent, Additional Rent and any other rent or other sums due under
this Lease (hereunder collectively referred to as Rent) shall be paid and
delivered to Landlord's property manager, if any, as agent for Landlord, in the
amounts, time and manner more particularly provided in this Lease.
a. Fixed Basic Rent. Tenant shall pay, throughout the Term, Fixed Basic
Rent in the amount specified in the Preamble, without notice or demand and
without setoff or deduction, in equal monthly installments equal to one-twelfth
of the Fixed Basic Rent (specified as Monthly Installments in the Preamble), in
advance, on the first day of each calendar month during the Term. If the
Commencement Date falls on a day other than the first day of a calendar month,
the Fixed Basic Rent shall be apportioned on a per diem basis for the period
between the Commencement Date and the first day of the first full calendar month
in the Term and such apportioned sum shall be paid on the Commencement Date.
b. Additional Rent. Commencing on the Commencement Date, Tenant shall
pay to Landlord, as Additional Rent, in the manner more particularly set forth
below, Tenant's Proportionate Share of Annual Operating Costs (as defined below)
for the Property to the extent that such Proportionate Share exceeds Tenant's
Proportionate Share of Annual Operating Costs for the Premises for the 1999
calendar year (the "Base Year"):
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i) Annual Operating Costs. The term "Annual Operating Costs" shall mean
all costs Landlord incurs from owning, operating and maintaining the Building
and the lot or tract of land on which it is situated (the "Property"). Annual
Operating Costs shall include, by way of example rather than limitation:
insurance costs, including premiums; fees; Impositions (defined below); costs
for repairs, maintenance and service contracts; management fees; landscaping;
snow removal; governmental permits fees; costs of compliance with governmental
orders and regulations; administrative and overhead expenses; costs of the use
of water, sewer, electricity, gas, fuel, and other utility services, for use in
common areas of the Building and Property; and the cost of janitorial service
and trash removal; excluding however, from Annual Operating Costs the following:
costs which are treated as capital expenditures (except as provided in Section
10(b)) under generally accepted accounting principles; mortgage debt or ground
rents incurred by Landlord as owner of the Proper; income, excess profits,
corporate capital stock or franchise tax imposed or assessed upon Landlord,
unless such tax or any similar tax is levied or assessed, in lieu of all or any
part of any currently existing Imposition or an increase in any currently
existing Imposition; leasing commissions, accountants', consultants' or
attorneys' fees, costs and disbursement and other expenses incurred in
connection with negotiations or disputes with tenants or prospective tenants or
associated with the enforcement of any leases or the defense of Landlord's title
to or interest in the Building in connection with any proceedings involving real
property taxes other than disputes regarding tax assessment and reduction of
real property taxes; costs of construction of the Building and related
facilities and correction of defects in construction of the Building (including
permit, license and inspection fees); costs of any items or services sold or
provided to tenants (including Tenant) for which Landlord is entitled to be
reimbursed by such tenants or which are not generally provided to all tenants of
the Building; fees and higher interest charges caused by Landlord's refinancing
the Building; all repairs to the interior of the Building of a structural nature
(not made necessary by unusual use by Tenant); costs incurred due to violation
by Landlord or any tenant of the terms and conditions of any lease; overhead and
profit increment paid to subsidiaries or affiliates of Landlord, or to any party
as a result of a noncompetitive selection process, for management or other
services on or to the Building or for supplies or other materials, to the extent
that the costs of such services, supplies or materials exceed the costs that
would have been paid had the services, supplies or materials been provided by
unaffiliated parties on a competitive basis; general overhead and administrative
expenses except salaries of on-site property manager, management secretary and
maintenance man; any compensation paid to clerks, attendants or other persons in
commercial concessions operated by Landlord, rentals and other related expenses
incurred in leasing air conditioning systems, elevators or other equipment
ordinarily considered to be for a capital nature, except equipment which is used
in providing janitorial services and which is not affixed to the Building; all
items and services for which Tenant reimburses Landlord or pays third persons or
which Landlord provides selectively to one or more tenants or occupants of the
Building (other than Tenant) without reimbursement; commissions, advertising,
and promotional expenditures; costs incurred in managing or operating any
parking facilities; nor any other expense which under generally accepted
accounting principles and practice would not be considered a normal maintenance
or repair expense. "Impositions" shall mean all levies, taxes, assessments,
charges, imposts, and burdens, of whatever kind and nature, ordinary and
extraordinary, which are assessed or imposed during the Term by any federal,
state or municipal government or public authority or under any law, ordinance or
regulation thereof or pursuant to any recorded covenants or agreements upon or
with respect to the Property or any
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part thereof, any improvements thereto, any personal property necessary to the
operation thereof and owned by Landlord this Lease. If under the requirements of
any state or local law, a new Imposition is imposed upon Landlord which Tenant
is prohibited by law from paying, Landlord may, as its election, terminate this
Lease by giving written notice thereof to Tenant provided, however, that
Landlord and Tenant shall first negotiate in good faith to resolve the issues
raised by such change in law.
ii) Annual Operating Costs - Expense Statement and Reconciliation. For
and with respect to each calendar year of the Term (and any renewals or
extensions thereof) there shall accrue, as Additional Rent payable hereunder, an
amount equal to the product of Tenant's Proportionate Share and the amount of
Annual Operating Costs for such year (appropriately pro-rated for any partial
calendar year included within the beginning or end of the Term).
(1) Landlord shall submit to Tenant a statement as soon as
reasonably possible after the beginning of each calendar year of the Term, the
following:
(a) a statement setting forth (i) the Annual Operating Costs
for the previous calendar year of the Term and (ii) a calculation of Tenant's
Proportionate Share of the Annual Operating Costs for the previous calendar year
(the "Expense Statement"); and;
(b) a statement of Landlord's good faith estimate of the Annual
Operating Costs for the current calendar year and (2) a calculation of Tenant's
Proportionate Share of the Annual Operating Costs for the current calendar year
("Tenant's Estimated Share").
(2) Beginning with the next installment of Fixed Basic Rent due
after the delivery of the aforesaid statements to Tenant, Tenant shall pay to
Landlord, on account of its Proportionate Share of the Annual Operating Costs,
the following:
(a) a sum equal to the product of one-twelfth (1/12) of
Tenant's Estimated Share and the number of calendar months elapsed during the
current calendar year up to and including the month payment is made, plus any
amounts due from Tenant to Landlord on account of Annual Operating Costs for any
prior period(s) of time, less
(b) a sum equal to the amount, if any, by which the sum of all
payments made by Tenant to Landlord on account of Annual Operating Costs for the
previous calendar year exceed those actually specified in the Expense Statement.
(3) On the first day of each succeeding calendar month until such
time as Tenant receives a new Expense Statement and statement of Tenant's
Estimated Share, Tenant shall pay to Landlord, on account of its Proportionate
Share of Annual Operating Costs, one-twelfth (1/12) of the then current Tenant's
Estimated Share. Any payment due from Tenant to Landlord, or any refund due from
Landlord to be, on account of Annual Operating Costs not yet determined as of
the expiration of the Term shall be made within thirty (30) days after
submission to Tenant of the next Expense Statement.
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c. Disputes. Unless Tenant, within thirty (30) days after any
statement of Additional Rent is furnished, shall give notice to Landlord that
Tenant disputes said statement, specifying in detail the basis for such dispute,
each statement furnished to Tenant by Landlord under any provision of this
Section shall be conclusively binding upon Tenant as to the particular
Additional Rent due from Tenant for the period represented thereby; provided,
however, that additional amounts due may be required to be paid by any
supplemental statement furnished by Landlord. Tenant shall have the right at
reasonable times to examine the records used in making the aforestated
determinations, upon written notice in advance; provided, however, such disputed
amount shall have been paid by Tenant to Landlord. In the event any such
examination shall reveal an adverse variance in excess of 10% of the total
operating expenses of which Tenant is required to pay their Proportionate Share,
Landlord shall reimburse Tenant for the reasonable cost of such examination
within thirty (30) days after demand. Tenant shall make all payments of
Additional Rent without delay and regardless of any pending dispute over the
amount of Additional Rent that is due in accordance with the statements
furnished by Landlord. Landlord shall have the right to retain Tenant's security
deposit until all Additional Rent payable by Tenant is determined and paid.
d. Independent Covenant; Survival. Tenant's covenant to pay Rent
is independent of any other covenant, agreement, term or condition of this
Lease. Without limitation of any obligation of Tenant under this Lease which
shall survive the expiration of the Term, the obligation of Tenant to pay Rent
shall survive the expiration of the Term.
7. Insurance.
a. Liability. Tenant, at Tenant's sole cost and expense, shall
maintain and keep insurance in effect throughout the Term against liability for
bodily injury (including death) and property damage in or about the Premises or
the Property under a policy of comprehensive general public liability insurance,
with such limits as to each as may be reasonably required by Landlord from time
to time, but not less than $2,000,000.00 for each person and S5,000,000.00 in
the aggregate for bodily injury (including death) to more than one (1) person
and $2,000,000.00 for property damage. The policies of comprehensive general
public liability insurance shall name Landlord and Tenant (and if requested, any
mortgagee of Landlord) as the insured parties. Each such policy shall provide
that it shall not be cancelable without at least thirty (30) days prior written
notice to Landlord and to any mortgagee named in an endorsement thereto and
shall be issued by an insurer and in a form satisfactory to Landlord. At least
ten (10) days prior to the Commencement Date, and thereafter upon Landlord's
request, a certificate of insurance shall be delivered to Landlord proving
compliance with the foregoing requirements. If Tenant shall fail, refuse or
neglect to obtain or to maintain any insurance that it is required to provide or
to furnish Landlord with satisfactory evidence of coverage on any such policy
upon demand, Landlord shall have the right to purchase such insurance. All
payments made by Landlord for such insurance shall be recoverable by Landlord
from Tenant, together with interest thereon, as Additional Rent promptly upon
demand. Notwithstanding anything contained herein to the contrary, Tenant may
self-insure all of its personal property situated within the Premises against
property damage and destruction.
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b. Waiver of Subrogation. The parties to this Lease each release
the other, to the extent of the releasing party's insurance coverage, from any
and all liability for any loss or damage covered by such insurance which may be
inflicted upon the property of such party even if such loss or damage shall be
brought about by the fault or negligence of the other party, its agents or
employees. If any policy does not permit such a release of liability and a
waiver of subrogation, and if the party to benefit therefrom requests that such
a waiver be obtained, the other party agrees to obtain an endorsement to its
insurance policies permitting such waiver of subrogation if it is available. If
an additional premium is charged for such waiver, the party benefiting therefrom
agrees to pay the amount of such additional premium promptly upon demand. In the
event a party is unable to obtain such a waiver, it shall immediately notify the
other party of its inability. In the absence of such notifications, each party
shall be deemed to have obtained such waiver of subrogation.
c. Increase of Premiums. Tenant will not do anything or fail to
do anything or permit anything to be done which will cause the cost of
Landlord's insurance to increase or which will prevent Landlord from procuring
insurance (including but not limited to public liability insurance) from
companies, and in a form, satisfactory to Landlord. If any breach of this
subsection (c) by Tenant shall cause the rate of fire or other insurance to be
increased, Tenant shall pay the amount of such increase as Additional Rent
promptly upon demand. If Tenant does anything or fails to do anything or permits
anything to be done for which insurance cannot be obtained, Landlord may
terminate this Lease upon written notice to Tenant.
8. Repairs and Maintenance.
a. Tenant shall, throughout the Term and at Tenant's sole cost
and expense, keep and maintain the Premises in a neat and orderly condition;
and, upon expiration of the Term, Tenant shall leave the Premises in good order
and condition' ordinary wear and tear, damage by fire or other casualty (which
fire or other casualty has not occurred through the negligence of Tenant or
those claiming under Tenant or their agents, employees or invitees,
respectively) alone excepted, and for that purpose and except as stated, Tenant
will make all necessary repairs and replacements. Tenant shall not permit any
waste, damage or injury to the Premises. Tenant shall not use or permit the use
of any portion of the common areas for other than their intended use as
specified by the Landlord from time to time.
b. Landlord shall, throughout the Term, make all necessary
repairs to the structural elements of the Premises and other improvements
located on the Property; provided, however, that Landlord shall have no
responsibility to make any repairs unless and until Landlord receives written
notice of the need for such repair. Landlord shall keep and maintain all common
areas of the Property and any sidewalks, parking areas, curbs and access ways
adjoining the Property in a clean and orderly condition, free of accumulation of
dirt and rubbish and shall keep and maintain all landscaped areas within the
Property in a neat and orderly condition.
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c. Notwithstanding the foregoing, repairs and replacements to
the Premises and the Property arising out of or caused by Tenant's use, manner
of use or occupancy of the Premises (normal wear and tear excepted), by Tenant's
installation of alterations, additions, improvements, trade fixtures or
equipment in or upon the Premises or by any act or omission of Tenant or any
employee, agent, contractor or invitee of Tenant shall be made at Tenant's sole
cost and expense and Tenant shall pay Landlord the cost of any such repair or
replacement, as Additional Rent, upon demand.
9. Utilities and Services.
a. Landlord shall furnish the Premises with electricity, heating
and air conditioning for the normal use and occupancy of the Premises as general
offices between twenty four hours per day, every day during the Term. Tenant
agrees to pay as Additional Rent all charges for electricity, light, heat or
other utility used by' Tenant at the Premises. If a separate meter is installed,
Tenant shall pay for the consumption of such utilities based upon its metered
usage. If no meter is installed, Tenant shall pay its Proportionate Share of any
utility charges covering the Demised Premises and the remainder of the Building.
Tenant shall pay all bills for separately metered utility usage within ten (10)
days after receipt thereof, and any non-payment or late payment of such utility
bills shall be deemed a default under the terms of this Lease. All charges for
installation and repairs of any meters servicing the Premises shall be payable
by Tenant as Additional Rent and shall be paid when the same shall become due.
If Tenant shall require electricity or install electrical equipment using
current in excess of 110 volts or which will in any way increase the amount of
electricity furnished by Landlord for general office use (including but not
limited to electrical heating or refrigeration equipment or electronic data
processing machines) or if Tenant shall attempt to use the Premises in such a
manner that the services to be furnished by Landlord are required during periods
other than the business hours specified above, Tenant will obtain prior written
approval from Landlord and will pay, as Additional Rent, for the resulting
additional direct expense to Landlord, including the expense resulting from the
installation of any equipment and meters, promptly upon receipt of an invoice
from Landlord.
b. Within the common areas of the Building on a twenty four hour
basis, every day during the Term, Landlord shall furnish reasonably: (i)
adequate electricity, (ii) hot and cold water, (iii) lavatory supplies, (iv)
automatically operated elevator service, (v) normal and customary cleaning
services (on a five-day a week basis) (Building Holidays excepted) after
business hours, (vi) heat and air conditioning in season, (vii) landscaping,
(viii) on Business Days, parking lot maintenance, (ix) common area maintenance
and (x) on Business Days snow removal. Tenant shall be responsible for its
Proportionate Share of such services in accordance with Section 6(b) hereof.
Landlord shall provide janitorial service to the Premises, five days per week,
(Building Holidays excepted) after regular business hours, and the costs of such
service will be passed through to Tenant as set forth in Section 6.
c. Landlord shall not be liable for any damages to Tenant
resulting from the quality, quantity, failure, unavailability or disruption of
any services beyond the reasonable control of Landlord and the same shall not
constitute a termination of this Lease or an actual or constructive eviction or
entitle Tenant to an abatement of rent. Landlord shall not be responsible for
providing any services not specifically provided for in this Lease.
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10. Governmental Regulations.
a. Landlord and Tenant shall comply with all laws, ordinances,
notices, orders, rules, regulations and requirements of all federal, state and
municipal government or any department, commission, board of officer thereof, or
of the National Board of Fire Underwriters or any other body exercising similar
functions, relating to the Premises or to the use or manner of use of the
Property. Tenant shall not knowingly do or commit, or suffer to be done or
committed anywhere in the Building, any act or thing contrary to any of the
laws, ordinances, regulations and requirements referred to in this Section.
Tenant shall give Landlord prompt written notice of any accident in the Premises
and of any breakage, defect or failure in any of the systems or equipment
servicing the Premises or any portion of the Premises.
b. Tenant shall pay its Proportionate Share of the cost of
capital improvements which Landlord shall install or construct in compliance
with governmental requirements which take effect after the commencement of the
Term hereof or as energy saving devices. Tenant's Proportionate Share shall be
determined based upon the estimated life of the capital investment item,
determined by Landlord in accordance with generally accepted accounting
principles, and shall include a cost of capital funds adjustment equal to twelve
percent (12%) per year on the unamortized portion of all such costs. Tenant
shall only have to pay for the portion of the useful life of the capital
improvement which falls within the Term. Tenant shall thus make payments in
equal annual installments for such capital improvements until the Term expires
or until the cost of the improvement has been fully paid for, whichever first
occurs; such payments shall be computed by Landlord at the time of installation
of the capital improvement in the same manner as Landlord makes computations of
Tenant's share of the annual operating costs pursuant to Section 6(b)(ii).
c. Tenant shall pay all taxes imposed upon Tenant's furnishings,
trade fixtures, equipment or other personal property.
11. Signs. Tenant shall be permitted to place, erect, maintain or
paint any signs upon the Premises or the Property provided the design of such
signs, comply with all applicable restrictions of record, have been approved by
any and all entities with approval rights and comply with all applicable
governmental rules, regulating ordinances or other statutes. Tenant shall be
solely responsible for all costs and expenses associated with the erection of
any signs upon the Premises and shall be obligated to obtain and provide to
Landlord any and all necessary permits and approvals prior to the placement or
erection of such signs.
12. Alterations, Additions and Fixtures.
a. Tenant shall have the right to install in the Premises any
trade fixtures; provided, however, that no such installation and no removal
thereof shall be permitted which affects any structural component of the
Building or Premises and that Tenant shall repair and restore any damage or
injury to the Premises or the Property caused by installation or removal.
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b. Tenant shall not make or permit to be made any alterations,
improvements or additions to the Premises or Property without on each occasion
first presenting plans and specifications to Landlord and obtaining Landlord's
prior written consent, which shall not be unreasonably withheld or delayed, but
may be conditioned upon compliance with reasonable requirements of Landlord
including, without limitation, the filing of mechanics' lien waivers by Tenant's
contractors and the submission of written evidence of adequate insurance
coverage naming Landlord as an additional insured thereunder. If Landlord
consents to any proposed alterations, improvements or additions or Tenant's
contractor performs any of the work identified in Section 3 of this Lease
Agreement, then Tenant shall make the proposed alterations, improvements and
additions at Tenant's sole cost and expense provided that: (i) Tenant supplies
any necessary permits; (ii) such alterations and improvements do not, in
Landlord's judgment, impair the structural strength of the Building or any other
improvements or reduce the value of the Property; (iii) Tenant takes or causes
to be taken all steps that are otherwise required by Section 13 of this Lease
and that are required or permitted by law in order to avoid the imposition of
any mechanic's, laborer's or materialman's lien upon the Premises or the
Property; (iv) Tenant uses a contractor approved by Landlord; (v) the occupants
of the Building and of any adjoining real estate owned by Landlord are not
annoyed or disturbed by such work; (vi) the alterations, improvements or
additions shall be installed in accordance with the approved plans and
specifications and completed according to a construction schedule approved by
Landlord; and (vii) Tenant provides insurance of the types and coverage amounts
required by Landlord. Any and all alterations, improvements and additions to the
Premises which are constructed, installed or otherwise made by Tenant shall be
the property of Tenant until the expiration or sooner termination of this Lease;
at that time all such alterations and additions shall remain on the Premises and
become the property of Landlord without payment by Landlord unless, upon the
termination of this Lease, Landlord instructs Tenant in writing to remove the
same in which event Tenant will remove such alterations, improvements and
additions, and repair and restore any damage to the Property caused by the
installation or removal. Notwithstanding anything to the contrary contained in
this Lease, Landlord may withhold its approval to any proposed alterations,
additions or improvements to the Premises in its absolute and sole discretion
with respect to any such alteration, addition or improvement which Landlord
determines involves any modification to the Building's exterior or its
structural, electrical, mechanical or plumbing systems, or any components
thereof.
13. Mechanic's Liens. Tenant shall promptly pay any contractors and
materialmen who supply labor, work or materials to Tenant at the Premises or the
Property so as to minimize the possibility of a lien attaching to the Premises
or the Property. Tenant shall take all steps permitted by law in order to avoid
the imposition of any mechanic's, laborer's or materialman's lien upon the
Premises or the Property. Should any such lien or notice of lien be filed for
work performed for Tenant other than by Landlord, Tenant shall cause such lien
or notice of lien to be discharged of record by payment, deposit, bond or
otherwise within fifteen (15) days after the filing thereof or after Tenant's
receipt of notice thereof, whichever is earlier, regardless of the validity of
such lien or claim. If Tenant shall fail to cause such lien or claim to be
discharged and removed from record within such fifteen (15) day period, then,
without obligation to investigate the validity thereof and in addition to any
other right or remedy Landlord may have, Landlord may, but shall not be
obligated to, contest the lien or claim or discharge it by payment, deposit,
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bond or otherwise; and Landlord shall be entitled to compel the prosecution of
an action for the foreclosure of such lien by the lienor and to pay the amount
of the judgment in favor of the lienor with interest and costs. Any amounts so
paid by Landlord and all costs and expenses including, without limitation,
attorneys' fees incurred by Landlord in connection therewith, together with
interest at a rate of twelve percent (12%) per annum from the respective dates
of Landlord's making such payment or incurring such cost or expense, which shall
constitute Additional Rent payable hereunder promptly upon demand therefor.
Nothing in this Lease is intended to authorize Tenant to do or cause any work or
labor to be done or any materials to be supplied for the account of Landlord,
all of the same to be solely for Tenant's account and at Tenant's risk and
expense. Further, notwithstanding anything to the contrary contained in this
Lease, nothing contained in or contemplated by this Lease shall be deemed or
construed in any way to constitute the consent or request by Landlord for the
performance of any work or services or the furnishing of any materials for which
any lien could be filed against the Premises or the Building or the Property or
any part of any thereof, nor as giving Tenant any right, power or authority to
contract or permit the performance of any work or services or the furnishing of
any materials for which any lien could be filed against the Premises, the
Building, the Property or any part of any thereof. Throughout this Lease the
term "mechanic's lien" is used to include any lien, encumbrance or charge levied
or imposed upon the Premises or the Property or any interest therein or income
therefrom on account of any mechanic's, laborer's or materialman's lien or
arising out of any debt or liability to or any claim or demand of any
contractor, mechanic, supplier, materialman or laborer and shall include without
limitation any mechanic's notice of intention given to Landlord or Tenant, any
stop order given to Landlord or Tenant, any notice of refusal to pay naming
Landlord or Tenant and any injunctive or equitable action brought by any person
entitled to any mechanic's lien.
14. Landlord's Right of Entry.
a. Tenant shall permit Landlord and the authorized
representatives of Landlord and of any mortgagee or any prospective mortgagee to
enter the Premises at all reasonable times, with prior notice to Tenant, for the
purpose of (i) inspecting the Premises or (ii) making any necessary repairs to
the Premises or to the Building and performing any work therein. During the
progress of any work on the Premises or the Building, Landlord will attempt not
to inconvenience Tenant, but shall not be liable for inconvenience, annoyance,
disturbance, loss of business or other damage to Tenant by reason of making any
repair or by bringing or storing materials, supplies, tools and equipment in the
Premises during the performance of any work, and the obligations of Tenant under
this Lease shall not be thereby affected in any manner whatsoever.
b. Landlord shall have the right at all reasonable times to,
with prior notice to Tenant, enter and to exhibit the Premises for the purpose
of inspection or showing the Premises in connection with a sale or mortgage and,
during the last twelve (12) months of the Term, to enter upon and to exhibit the
Premises to any prospective tenant.
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15. Damage by Fire or Other Casualty.
a. If the Premises or Building is damaged or destroyed by fire
or other casualty, Tenant shall promptly notify Landlord whereupon Landlord
shall, subject to the consent of Landlord's present or future mortgagee and to
the conditions set forth in this Section 15, repair, rebuild or replace such
damage and restore the Premises to substantially the same condition as the
Premises were in immediately prior to such damage or destruction; provided,
however, that Landlord shall only be obligated to restore such damage or
destruction to the extent of the proceeds of fire and other extended coverage
insurance policies. Notwithstanding the foregoing, if the Premises is destroyed
or damaged to the extent that in Landlord's reasonable judgment the Premises
cannot be repaired or restored within one hundred twenty (120) days after such
casualty, Landlord may, subject to the rights of Landlord's mortgagee, terminate
this Lease by written notice to Tenant within sixty (60) days after the date of
such casualty.
b. The repair, rebuilding or replacement work shall be
commenced promptly and completed with due diligence, taking into account the
time required by Landlord to effect a settlement with, and procure insurance
proceeds from, the insurer, and for delays beyond Landlord's reasonable control.
c. The net amount of any insurance proceeds recovered by reason
of the damage or destruction of the Building (meaning the gross insurance
proceeds excluding proceeds received pursuant to a rental coverage endorsement
and the cost of adjusting the insurance claim and collecting the insurance
proceeds) shall be applied towards the cost of restoration. Notwithstanding
anything to the contrary in this Lease Agreement, if in Landlord's sole opinion
the net insurance proceeds will not be adequate to complete such restoration,
Landlord shall have the right to terminate this Lease and all the unaccrued
obligations of the parties hereto by sending a written notice of such
termination to Tenant specifying a termination date no less then ten (10) days
after its transmission; provided, however, that Tenant may require Landlord,
except during the last two (2) years of the Term, to withdraw the notice of
termination by agreeing to pay the cost of restoration in excess of the net
insurance proceeds and by giving Landlord adequate security for such payment
prior to the termination date specified in Landlord's notice of termination. If
the net insurance proceeds are more than adequate, the amount by which the net
insurance proceeds exceed the cost of restoration will be retained by Landlord
or applied to repayment of any mortgage secured by the Premises.
d. Landlord's obligation or election to restore the Premises
under this Section shall be subject to the terms of any present or future
mortgage affecting the Premises and to the mortgagee's consent if required in
the mortgage and shall not, in any event, include the repair, restoration or
replacement of the fixtures, improvements, alterations, furniture or any other
property owned, installed, made by, or in the possession of Tenant.
e. Landlord shall maintain insurance against loss or damage to
the Building by fire and such other casualties as may be included within fire
and extended coverage insurance or all risk insurance, together with a rental
coverage endorsement or other comparable form of coverage. If Tenant is
dispossessed of the Premises due to fire or other casualty, Tenant will receive
an abatement of its Fixed Basic Rent during the period Tenant is dispossessed.
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16. Non-Abatement of Rent. (Intentionally Deleted)
17. Indemnification.
a. Unless such loss, costs or damages were caused by negligence
of Landlord, its employees, agents or contractors, Tenant hereby agrees to
indemnify, defend and hold the Landlord and its employees, agents and
contractors harmless from any loss, costs and damages (including reasonable
attorney's fees and costs) suffered by Landlord, its agents, employees or
contractors, as a result of any claim by a third party, its agents, employees or
contractors arising from Tenant's occupancy of the Premises. Tenant shall have
the right to designate counsel acceptable to Landlord, such approval not be
unreasonably withheld, to assume the defense of any such third party claim on
behalf of itself and Landlord. Landlord shall not have the right to settle any
claim without the consent of Tenant. This indemnity shall survive the expiration
or termination of this Lease.
b. If Landlord brings any action under this Lease Agreement,
Tenant agrees in each case to pay Landlord's reasonable attorney's fees and
other costs and expenses incurred by Landlord in connection therewith; provided,
however, the Landlord obtains a final, unappealable judgment in a court of law
(or other agreed upon tribunal body).
18. Condemnation.
a. Termination. If (i) all of the Premises are covered by a
condemnation; or (ii) any of the Premises is covered by a condemnation and the
remaining part is insufficient for the reasonable operation therein of Tenant's
business; or (iii) subject to the provisions of subsection 1 8(b)(i) hereof, any
of the Property is covered by a condemnation and, in Landlord's sole opinion, it
would be impractical or the condemnation proceeds are insufficient to restore
the remainder of the Property; then, in any such event, this Lease shall
terminate and all obligations hereunder shall cease as of the date upon which
possession is taken by the condemnor. Upon such termination the Fixed Basic Rent
and all Additional Rent herein reserved shall be apportioned and paid in fill by
Tenant to Landlord to that date and all such rent prepaid for periods beyond
that date shall forthwith be repaid by Landlord to Tenant.
b. Partial Condemnation.
i) If there is a partial condemnation and Landlord decides
to terminate pursuant to subsection 1 8(a)(iii) hereof then Tenant may require
Landlord, except during the last two (2) years of the Term, to withdraw its
notice of termination by: [A] giving Landlord written notice thereof within ten
(10) days from transmission of Landlord's notice to Tenant of Landlord's
intention to terminate, [B] agreeing to pay the cost of restoration in excess of
the condemnation proceeds reduced by those sums expended by Landlord in
collecting the condemnation proceeds, and [C] giving Landlord adequate security
for such payment within such ten (10) day period.
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ii) If there is a partial condemnation and this Lease has
not been terminated pursuant to subsection (a) hereof, Landlord shall restore
the Building and the improvements which are part of the Premises to a condition
and size as nearly comparable as reasonably possible to the condition and size
thereof immediately prior to the date upon which possession shall have been
taken by the condemnor; provided, however, that Landlord shall only be obligated
to restore such damage from condemnation to the extent possible with the award
damage. If the condemnation proceeds are more than adequate to cover the cost of
restoration and the Landlord's expenses in collecting the condemnation proceeds,
any excess proceeds shall be retained by Landlord or applied to repayment of any
mortgage secured by the Premises.
iii) If there is a partial condemnation and this Lease has
not been terminated by the date upon which the condemnor obtains possession, the
obligations of Landlord and Tenant under this Lease shall be unaffected by such
condemnation except that there shall be an equitable abatement for the balance
of the Term of the Fixed Basic Rent according to the value of the Premises
before and after the date upon which the condemnor takes possession. In the
event that the parties are unable to agree upon the amount of such abatement,
either party may submit the issue to arbitration.
c. Award. In the event of a condemnation affecting Tenant,
Tenant shall have the right to make a claim against the condemnor for removal
expense and moving expenses, loss of business and any other claims Tenant may
have; provided and to the extent, however, that such claims or payments do not
reduce the sums otherwise payable by the condemnor to Landlord. Except as
aforesaid, Tenant hereby waives all claims against Landlord and against the
condemnor, and Tenant hereby assigns to Landlord all claims against the
condemnor including, without limitation, all claims for leasehold damages and
diminution in value of Tenant's leasehold interest.
d. Temporary Taking. If the condemnor should take only the
right to possession for a fixed period of time or for the duration of an
emergency or other temporary condition then, notwithstanding anything
hereinabove provided, this Lease shall continue in full force and effect without
any abatement of rent, but the amounts payable by the condemnor with respect to
any period of time prior to the expiration or sooner termination of this Lease
shall be paid by the condemnor to Landlord and the condemnor shall be considered
a subtenant of Tenant. Landlord shall apply the amount received from the
condemnor applicable to the rent due hereunder, net of costs, to Landlord for
the collection thereof, or as much thereof as may be necessary for the purpose,
toward the amount due from Tenant as rent for that period; and, Tenant shall pay
to Landlord any deficiency between the amount thus paid by the condemnor and the
amount of the rent, or Landlord shall pay to Tenant any excess of the amount of
the award over the amount of the rent.
19. Quiet Enjoyment. Tenant, upon paying the Fixed Basic Rent,
Additional Rent and other charges herein required and observing and keeping all
covenants, agreements and conditions of this Lease, shall quietly have and enjoy
the Premises during the Term without hindrance or molestation by anyone claiming
by or through Landlord, subject, however, to the exceptions, reservations and
conditions of this Lease and Landlord shall take all reasonable steps necessary
to ensure such quiet enjoyment.
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20. Rules and Regulations. The Landlord hereby reserves the right
to prescribe, from time to time, at its sole discretion, reasonable rules and
regulations (herein called the "Rules and Regulations") attached hereto as
Exhibit B governing the use and enjoyment of the Premises and the remainder of
the Property. The Rules and Regulations shall not materially interfere with the
Tenant's use and enjoyment of the Premises in accordance with the provisions of
this Lease for the Permitted Use and shall not increase or modify Tenant's
obligations under this Lease. In the event of a conflict between the Lease
Agreement and such rules and regulations, the Lease Agreement shall control. The
Tenant shall comply at all times with the Rules and Regulations and shall cause
its agents, employees, invitees, visitors, and guests to do so.
21. Assignment and Sublease. Tenant may assign or sublease the
within Lease to any party subject to the following:
a. In the event Tenant desires to assign this Lease or sublease
all or part of the Premises to any other party, Tenant shall provide written
notice of the terms and conditions of such assignment or sublease to Landlord
prior to the effective date of any such sublease or assignment, and, prior to
such effective date, the Landlord shall have the option, exercisable by written
notice to Tenant within ten (10) business days of Landlord's receipt of written
notice from Tenant, to: (i) sublease such space from Tenant at the lower rate of
(a) the rental rate per rentable square foot of Fixed Basic Rent and Additional
Rent then payable pursuant to this Lease or (b) the terms set forth in the
proposed sublease, (ii) recapture (in the case of subletting) that portion of
the Premises to be sublet or all of the Premises (in the case of an assignment)
("Recapture Space") so that such prospective subtenant or assignee shall then
become the sole Tenant of Landlord hereunder, or (iii) recapture the Recapture
Space for Landlord's own use, whereupon Tenant shall be fully released from any
and all obligations hereunder with respect to the Recapture Space.
b. In the event that the Landlord elects not to recapture the
Lease as hereinabove provided, the Tenant may nevertheless assign this Lease or
sublet the whole or any portion of the Premises, subject to the Landlord's prior
written consent, on the basis of the following terms and conditions:
i) The Tenant shall provide to the Landlord the name and
address of the assignee or subtenant.
ii) The assignee or subtenant shall assume, by written
instrument, all of the obligations of this Lease, and a copy of such assumption
agreement shall be furnished to the Landlord within ten (10) days of its
execution. Any sublease shall expressly acknowledge that said subtenant's rights
against Landlord shall be no greater than those of Tenant.
iii) The Tenant and each assignee shall be and remain liable
for the observance of all the covenants and provisions of this Lease, including,
but not limited to, the payment of Fixed Basic Rent and Additional Rent reserved
herein, through the entire Term of this Lease, as the same may be renewed,
extended or otherwise modified.
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iv) The Tenant and any assignee shall promptly pay to
Landlord fifty percent (50%) of the net profit received from such subleasing or
assignment. Net profit will be calculated after deducting the Tenant's direct
costs of implementing the sublease or assignment (including broker commissions,
tenant improvements, and reasonable attorneys fees).
v) In any event, the acceptance by the Landlord of any rent
from the assignee or from any of the subtenants or the failure of the Landlord
to insist upon a strict performance of any of the terms, conditions and
covenants herein shall not release the Tenant herein, nor any assignee assuming
this Lease, from any and all of the obligations herein during and for the entire
Term of this Lease.
vi) Landlord shall require a Five Hundred Dollars ($500.00)
payment to cover its handling charges for each request for consent to any subset
or assignment prior to its consideration of the same. Tenant acknowledges that
its sole remedy with respect to any assertion that Landlord's failure to consent
to any sublet or assignment is unreasonable shall be the remedy of specific
performance and Tenant shall have no other claim or cause of action against
Landlord as a result of Landlord's actions in refusing to consent thereto.
c. If Tenant is a corporation other than a corporation whose
stock is listed and traded on a nationally recognized stock exchange, the
provisions of subsection a hereof shall apply to a transfer (however
accomplished, whether in a single transaction or in a series of related or
unrelated transactions) of stock (or any other mechanism such as, by way of
example, the issuance of additional stock, a stock voting agreement or change in
class(es) of stock) which results in a change of control of Tenant as if such
transfer of stock (or other mechanism) which results in a change of control of
Tenant were an assignment of this Lease, and if Tenant is a partnership or joint
venture, said provisions shall apply with respect to a transfer (by one or more
transfers) of an interest in the distributions of profits and losses of such
partnership or joint venture (or other mechanism, such as, by way of example,
the creation of additional general partnership or limited partnership interests)
which results in a change of control of such a partnership or joint venture, as
if such transfer of an interest in the distributions of profits and losses of
such partnership or joint venture which results in a change of control of such
partnership or joint venture were an assignment of this Lease; but said
provisions shall not apply to transactions with a corporation into or with which
Tenant is merged or consolidated or to which all or substantially all of
Tenant's assets are transferred or to any corporation which controls or is
controlled by Tenant or is under common control with Tenant, provided that in
the event of such merger, consolidation or transfer of all or substantially all
of Tenant's assets (i) the successor to Tenant has a net worth computed in
accordance with generally accepted accounting principles at least equal to the
greater of (1) the net worth of Tenant immediately prior to such merger,
consolidation or transfer, or (2) the net worth of Tenant herein named on the
date of this Lease, and (ii) proof satisfactory to Landlord of such net worth
shall have been delivered to Landlord at least ten (10) days prior to the
effective date of any such transaction.
d. In the event that any or all of Tenant's interest in the
Premises and/or this Lease is transferred by operation of law to any trustee,
receiver, or other representative or agent of Tenant, or to Tenant as a debtor
in possession, and subsequently any or all of Tenant's interest
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in the Premises and/or this Lease is offered or to be offered by Tenant or any
trustee, receiver, or other representative or agent of Tenant as to its estate
or property (such person, firm or entity being hereinafter referred to as the
"Grantor", for assignment, conveyance, lease, or other disposition to a person,
firm or entity other than Landlord (each such transaction being hereinafter
referred to as a "Disposition"), it is agreed that Landlord has and shall have a
right of first refusal to purchase, take, or otherwise acquire, the same upon
the same terms and conditions as the Grantor thereof shall accept upon such
Disposition to such other person, firm, or entity; and as to each such
Disposition the Grantor shall give written notice to Landlord in reasonable
detail of all of the terms and conditions of such Disposition within twenty (20)
days next following its determination to accept the same but prior to accepting
the same, and Grantor shall not make the Disposition until and unless Landlord
has failed or refused to accept such right of first refusal as to the
Disposition, as set forth herein. Landlord shall have sixty (60) days next
following its receipt of the written notice as to such Disposition in which to
exercise the option to acquire Tenant's interest by such Disposition, and the
exercise of the option by Landlord shall be effected by notice to that effect
sent to the Grantor; but nothing herein shall require Landlord to accept a
particular Disposition or any Disposition, nor does the rejection of any one
such offer of first refusal constitute a waiver or release of the obligation of
the Grantor to submit other offers hereunder to Landlord. In the event Landlord
accepts such offer of first refusal, the transaction shall be consummated
pursuant to the teens and conditions of the Disposition described in the notice
to Landlord. In the event Landlord rejects such offer of first refusal, Grantor
may consummate the Disposition with such other person, firm, or entity; but any
decrease in price of more than two percent (2%) of the price sought from
Landlord or any change in the terms of payment for such Disposition shall
constitute a new transaction requiring a further option of first refusal to be
given to Landlord hereunder.
e. Without limiting any of the provisions of this Section 21,
if pursuant to the Federal Bankruptcy Code (herein referred to as the "Code"),
or any similar law hereafter enacted having the same general purpose, Tenant is
permitted to assign this Lease notwithstanding the restrictions contained in
this Lease, adequate assurance of future performance by an assignee expressly
permitted under such Code shall be deemed to mean the deposit of cash security
in an amount equal to the sum of one year's Fixed Basic Rent plus an amount
equal to the Additional Rent for the calendar year preceding the year in which
such assignment is intended to become effective, which deposit shall be held by
Landlord for the balance of the Term, without interest, as security for the full
performance of all of Tenant's obligations under this Lease, to be held and
applied in the manner specified for any security deposit required hereunder.
f. Except as specifically set forth above, no portion of the
Premises or of Tenant's interest in this Lease may be acquired by any other
person or entity, whether by assignment, mortgage, sublease, transfer, operation
of law or act of the Tenant, nor shall Tenant pledge its interest in this Lease
or in any security deposit required hereunder.
g. Notwithstanding the foregoing, Landlord acknowledges that
Tenant intends to sublet approximately 4,500 rentable square feet of the
Premises until such time as Tenant expands into such space. Tenant shall be
entitled to sublease such space without Landlord's prior consent provided
Landlord is given written notice of the identity of such subtenant and such
subtenant agrees to be bound by the terms of this Lease.
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22. Tenant's Relocation. [Intentionally Deleted]
23. Subordination. This Lease and Tenant's rights hereunder shall
be subject and subordinate at all times in lien and priority to any first
mortgage or other primary encumbrance now or hereafter placed upon or affecting
the Property or the Premises, and to any second mortgage or encumbrance with the
consent of the first mortgagee, and to all renewals, modifications,
consolidations and extensions thereof, without the necessity of any further
instrument or act on the part of Tenant. Tenant shall execute and deliver upon
demand any further instrument or instruments confirming the subordination of
this Lease to the lien of any such first mortgage or to the lien of any other
mortgage, if requested to do so by Landlord with the consent of the first
mortgagee, and any further instrument or instruments of attornment that may be
desired by any such mortgagee or Landlord, provided, however, that any holder of
such lien or mortgage agrees not to disturb the use and occupancy of the
Premises in accordance with the terms of this Lease Agreement upon any
foreclosure and further provided that Tenant's obligations (including monetary
obligations) will not be materially effected thereby Notwithstanding the
foregoing, any mortgagee may at any time subordinate its mortgage to this Lease,
without Tenant's consent, by giving notice in writing to Tenant and thereupon
this Lease shall be deemed prior to such mortgage without regard to their
respective dates of execution and delivery. In that event such mortgagee shall
have the same rights with respect to this Lease as though this Lease had been
executed prior to the execution and delivery of the mortgage and had been
assigned to such mortgagee. Landlord agrees that it will use best efforts to
obtain and deliver to Tenant a subordination, non-disturbance and attornment
agreement from the holder(s) of any mortgage or other security interest
affecting the Premises of Building.
24. Curing Tenant's Defaults. If Tenant defaults in the performance
of any of its obligations hereunder beyond any applicable cure periods (except
in the case of emergency), Landlord may, without any obligation to do so and in
addition to any other rights it may have in law or equity, elect to cure such
default on behalf of Tenant after written notice to Tenant. Tenant shall
reimburse Landlord upon demand for any sums paid or costs incurred by Landlord
in curing such default, including interest thereon from the respective dates of
Landlord's making the payments and incurring such costs, which sums and costs
together with interest thereon shall be deemed Additional Rent payable within
ten (10) days of demand.
25. Surrender.
a. At the expiration or earlier termination of the Term Tenant
shall promptly yield up the Premises and all improvements, alterations and
additions thereto, and all fixtures and equipment servicing the Premises in a
condition which is clean of garbage and debris and broom clean and in the same
condition, order and repair in which they are required to be kept throughout the
Term, ordinary wear and tear excepted.
b. If Tenant, or any person claiming through Tenant, continues
to occupy the Premises after the expiration or earlier termination of the Term
or any renewal thereof without prior written consent of Landlord, the tenancy
under this Lease shall become, at the option of Landlord, expressed in a written
notice to Tenant and not otherwise, either from month-to-month
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or for a period of one (l) year, terminable by Landlord on thirty (30) days
prior notice, under the same terms and conditions set forth in this Lease;
except, however, that the Fixed Basic Rent during such continued occupancy shall
be 200% of the amount set forth in subsection 6(a) and Tenant shall indemnify
Landlord for any loss or damage incurred by reason of Tenant's failure to
surrender the Premises. Anything to the contrary notwithstanding, any holding
over by Tenant without Landlord's prior written consent shall constitute a
default hereunder and shall be subject to all the remedies set forth in
subsection 26(b) hereof
26. Defaults-Remedies.
a. Defaults. It shall be an event of default under this Lease
if any one or more of the following events occurs:
i) Tenant fails to pay in full, within five (5) days of
written notice from Landlord, any and all installments of Fixed Basic Rent or
Additional Rent or any other charges or payments due and payable under this
Lease whether or not herein included as rent.
ii) Tenant violates or fails to perform or otherwise
breaches any agreement, term, covenant or condition contained in this Lease
within fifteen (15) days of written notice from Landlord (or such additional
time, not to exceed thirty (30) days as is reasonably required to cure such
breach).
iii) Tenant abandons or vacates the Premises without notice
without having first paid to Landlord in full all Fixed Basic Rent, Additional
Rent and other charges that have become due as well as all which will become due
thereafter through the end of the Term.
iv) Tenant becomes insolvent or bankrupt in any sense or
makes an assignment for the benefit of creditors or if a petition in bankruptcy
or for reorganization or for an arrangement with creditors under any federal or
state law is filed by or against Tenant, or a bill in equity or other proceeding
for the appointment of a receiver or similar official for any of Tenant's assets
is commenced, or if any of the real or personal property of Tenant shall be
levied upon by any sheriff, marshal or constable; provided, however, that any
proceeding brought by anyone other than the parties to this Lease under any
bankruptcy, reorganization arrangement, insolvency, readjustment, receivership
or similar law shall not constitute an event of default until such proceeding,
decree, judgment or order has continued unstayed for more than sixty (60)
consecutive days.
v) Any of the events enumerated in subsection (a)(i) through
(a) (iv) of this Section happen to any guarantor of this Lease.
b. Remedies. Upon the occurrence of an event of default under
this Lease, Landlord shall have all of the following rights:
i) Landlord may charge a late payment charge of five (5%)
percent of any amount owed to Landlord pursuant to this Lease which is not paid
within five (5) days of the due date which is set forth in the Lease or, if a
due date is not specified in this Lease, within
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thirty (30) days of the mailing of a bill therefore by Landlord. If Landlord
incurs a late charge in connection with any payment which Tenant has failed to
make within the times required in this Lease, Tenant shall pay Landlord, in
addition to such payment due, the full amount of such late charge incurred by
Landlord. Nothing in this Lease shall be construed as waiving any rights of
Landlord arising out of any default of Tenant, by reason of Landlord's imposing
or accepting any such late charge(s) and/or interest; the right to collect such
late charge(s) and/or interest is separate and apart from any rights relating to
remedies of Landlord after default by Tenant including, without limitation, the
rights and remedies of Landlord provided herein.
ii) Landlord may accelerate the whole or any part of the
Fixed Basic Rent and all Additional Rent for the entire unexpired balance of the
Term of this Lease, as well as all other charges, payments, costs and expenses
herein agreed to be paid by Tenant, and any Fixed Basic Rent or other charges,
payments, costs and expenses so accelerated shall, in addition to any and all
installments of rent already due and payable and in arrears and any other charge
or payment herein reserved, included or agreed to be treated or collected as
rent and any other charge, expense or cost herein agreed to be paid by Tenant
which may be due and payable and in arrears, be deemed due and payable as if, by
the terms and provisions of this Lease, such accelerated rent and other charges,
payments, costs and expenses were on that date payable in advance. Landlord
agrees to undertake commercially reasonable efforts to mitigate its damages.
iii) Landlord may re-enter the Premises and, at the option
of Landlord, remove all persons and all or any property therefore either by
summary dispossess proceedings or by any suitable action or proceeding at law,
without being liable for prosecution or damages therefore, and Landlord may
repossess and enjoy the Premises. Upon legally recovering possession of the
Premises by reason of or based upon or arising out of a default on the part of
Tenant Landlord may, at Landlord's option, either terminate this Lease or make
such alterations and repairs as may be necessary in order to relet the Premises
and may relet the Premises or any part or parts thereof, either in Landlord's
name or otherwise, for a term or terms which may, at Landlord's option, be less
than or exceed the period which would otherwise have constituted the balance of
the Term of this Lease and at such rent or rents and upon such other terms and
conditions as in Landlord's sole discretion may seem advisable and to such
person or persons as may in Landlord's discretion seem best; upon each such
reletting all rents received by Landlord from such reletting shall be applied as
follows: first, to the payment of any costs and expenses of such reletting,
including all costs of alterations and repairs; second, to the payment of any
indebtedness other than Fixed Basic Rent, Additional Rent or other charges due
hereunder from Tenant to Landlord; third, to the payment of Fixed Basic Rent,
Additional Rent and other charges due and unpaid hereunder; and the residue, if
any, shall be held by Landlord and applied in payment of future rent as it may
become due and payable hereunder. If rentals received from reletting during any
month are less than that to be paid during that month by Tenant, Tenant shall
pay any such deficiency to Landlord. Such deficiency shall be calculated and
paid monthly. No such re-entry or taking possession of the Premises or the
making of alterations or improvements thereto or the reletting thereof shall be
construed as an election on the part of Landlord to terminate this Lease unless
written notice of termination is given to Tenant. Landlord shall in no event be
liable in any way whatsoever for failure to relet the Premises or, in the event
that the Premises or any part or parts thereof are relet, for failure to collect
the rent thereof under such reletting. Notwithstanding any such reletting
without termination, Landlord may at any time thereafter elect to terminate this
Lease for such previous breach.
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iv) Landlord may terminate this Lease and the Term without
any right on the part of Tenant to waive the forfeiture by payment of any sum
due or by other performance of any condition, term or covenant broken. Upon such
termination, Landlord shall be entitled to exercise its rights set forth in
Section 26(b)(ii).
v) WHEN THIS LEASE AND THE TERM OR ANY EXTENSION OR RENEWAL
THEREOF SHALL HAVE BEEN TERMINATED ON ACCOUNT OF ANY DEFAULT BY TENANT, OR WHEN
THE TERM HAS EXPIRED, IT SHALL BE LAWFUL FOR ANY ATTORNEY OF ANY COURT OF RECORD
TO APPEAR AS ATTORNEY FOR TENANT AS WELL AS FOR ALL PERSONS CLAIMING BY, THROUGH
OR UNDER TENANT, AND TO FILE AN AGREEMENT FOR ENTERING IN ANY COMPETENT COURT AN
AMICABLE ACTION FOR JUDGMENT IN EJECTMENT AGAINST TENANT AND ALL PERSONS
CLAIMING BY, THROUGH OR UNDER TENANT FOR THE RECOVERY BY LANDLORD OF POSSESSION
OF THE PREMISES, FOR WHICH THIS LEASE SHALL BE A SUFFICIENT WARRANT; WHEREUPON,
IF LANDLORD SO DESIRES, AN APPROPRIATE WRIT OF POSSESSION MAY ISSUE FORTHWITH,
WITHOUT ANY PRIOR WRIT OR PROCEEDING WHATSOEVER, AND PROVIDED THAT IS FOR ANY
REASON AFTER SUCH ACTION SHALL HAVE BEEN COMMENCED IT SHALL BE DETERMINED AND
POSSESSION OF THE PREMISES REMAIN IN OR BE RESTORED TO TENANT, LANDLORD SHALL
HAVE THE RIGHT FOR THE SAME DEFAULT AND UPON ANY SUBSEQUENT DEFAULT OR DEFAULTS,
OR UPON THE TERMINATION OF THIS LEASE OR TENANT'S RIGHT OF POSSESSION AS
HEREINBEFORE SET FORTH, TO BRING ONE OR MORE FURTHER ACTIONS IN EJECTMENT AS
HEREINBEFORE SET FORTH TO CONFESS JUDGMENT FOR THE RECOVERY OF POSSESSION OF THE
PREMISES.
c. Waiver of Jury Trial. IT IS MUTUALLY AGREED BY AND BETWEEN
LANDLORD AND TENANT THAT (A) THEY HEREBY WAIVE TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR COUNTER-CLAIM BROUGHT BY EITHER OF THE PARTIES HERETO AGAINST THE
OTHER ON ANY MATTER WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS
LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT, TENANT'S USE OF OCCUPANCY OF THE
PREMISES OR CLAIM OF INJURY OR DAMAGE, AND (B) IN ANY ACTION AGAINST LANDLORD BY
TENANT, THE LEGAL FEES OF THE PREVAILING PARTY WILL BE PAID BY THE OTHER PARTY
TO THE ACTION.
d. Non-Waiver. No waiver by Landlord of any breach by Tenant of
any of Tenant's obligations, agreements or covenants herein shall be a waiver of
any subsequent breach or of any other obligation, agreement or covenant, nor
shall any forbearance by Landlord to seek a remedy for any event of default by
Tenant be a waiver by Landlord of any rights and remedies with respect to such
or any subsequent event of default.
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e. Rights and Remedies Cumulative. No right or remedy herein
conferred upon or reserved to Landlord is intended to be exclusive of any other
right or remedy provided herein or by law, but each shall be cumulative and in
addition to every other right or remedy given herein or now or hereafter
existing at law or in equity or by statute.
27. Condition of Premises. [Intentionally Deleted]
28. Hazardous Substances.
a. Landlord and Tenant shall not cause or allow the generation,
treatment, storage or disposal of Hazardous Substances on or near the Premises
or Property. "Hazardous Substances" shall mean (i) any hazardous substance as
that term is defined in the Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA"), 42 U.S.C. 9601 et seq., as amended, (ii) any
hazardous waste or hazardous substance as those terms are defined in any local,
state or Federal law, regulation or ordinance not inapplicable to the Premises
and Property, or (iii) petroleum including crude oil or any fraction thereof. In
the event Landlord or Tenant uses any Hazardous Substances, Landlord or Tenant
shall dispose of such substances in accordance with all applicable Federal,
state and local laws, regulations and ordinances.
b. Landlord and Tenant agree to indemnify, defend and hold
harmless the other, its employees, agents, successors, and assigns, from and
against any and all damage, claim, liability, or loss, including reasonable
attorneys' and other fees, arising out of or in any way connected to the
generation, treatment, storage or disposal of Hazardous Substances by Landlord
or Tenant, its employees, agents, contractors, or invitees, on or near the
Premises or Property. Such duty of indemnification shall include, but not be
limited to damage, liability, or loss pursuant to all Federal, state and local
environmental laws, rules and ordinances, strict liability and common law.
c. Landlord and Tenant agree to notify each other immediately
of any disposal of Hazardous Substances in the Premises or Property, of any
discovery of Hazardous Substances in the Premises, or of any notice by a
governmental authority or private party alleging or suggesting that a disposal
of Hazardous Substances on or near the Premises or Property may have occurred.
Furthermore, Landlord and Tenant agree to provide the other with full and
complete access to any documents or information in its possession or control
relevant to the question of the generation, treatment, storage, or disposal of
Hazardous Substances on or near the Premises.
d. Other than as set forth in that certain Phase 1
Environmental Site Assessment prepared by Oxford Engineers and Consultants, Inc.
dated February 1998 for the Property, Landlord represents and warrants that, to
the best of its knowledge, there are no Hazardous Substances in, under or about
the Building.
29. Recording. Neither this Lease nor a memorandum of this Lease
shall be recorded in any public records without the written consent of Landlord.
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30. Brokers' Commission. Tenant represents and warrants to Landlord
that the Brokers (as defined in the Preamble) are the sole brokers with whom
Tenant has negotiated in bringing about this Lease and Tenant agrees to
indemnify and hold Landlord and its mortgagee(s) harmless from any and all
claims of other brokers and expenses in connection therewith arising out of or
in connection with the negotiation of or the entering into this Lease by
Landlord and Tenant. In no event shall Landlord's mortgagee(s) have any
obligation to any broker involved in this transaction. In the event that no
broker was involved as aforesaid, then Tenant represents and warrants to the
Landlord that no broker brought about this transaction, and Tenant agrees to
indemnify and hold Landlord harmless from any and all claims of any broker
arising out of or in connection with the negotiations of, or entering into of,
this Lease by Tenant and Landlord.
31. Notices. All notices, demands, requests, consents,
certificates, and waivers required or permitted hereunder from either party to
the other shall be in writing and sent by United States certified mail, return
receipt requested, postage prepaid, or by recognized overnight courier,
addressed as follows:
If to Tenant:
U.S. Interactive
with a copy to:
J. Gregory Kost, Esquire
220 Fifth Avenue
New York, NY 10001
If to Landlord:
O'Neill Renaissance II Associates, L.P.
c/o O'Neill Properties Group, L.P.
1710 Walton Road, Suite 200
Blue Bell, PA 19422
Attn: President
with a copy to:
Kevin W. Walsh, Esquire
Adelman Lavine Gold and Levin
Suite 1900,Two Penn Center
Philadelphia, PA 19102-1799
Either party may at any time, in the manner set forth for giving notices to the
other, specify a different address to which notices to it shall thereafter be
sent.
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32. Irrevocable Offer: No Option. Although Tenant's execution of
this Lease shall be deemed an offer irrevocable by Tenant, the submission of
this Lease by Landlord to Tenant for examination shall not constitute a
reservation of or option for the Premises. This Lease shall become effective
only upon execution thereof by both parties and delivery thereof to Tenant.
33. Inability to Perform. If Landlord is delayed or prevented from
performing any of its obligations under this Lease by reason of strike, labor
troubles, or any cause whatsoever beyond Landlord's control, the period of such
delay or such prevention shall be deemed added to the time herein provided for
the performance of any such obligation by Landlord.
34. Survival. Notwithstanding anything to the contrary contained in
this Lease, the expiration of the Term of this Lease, whether by lapse of time
or otherwise, shall not relieve Tenant from its obligations accruing prior to
the expiration of the Term.
35. Corporate Tenants. If Tenant is a corporation, the person(s)
executing this Lease on behalf of Tenant hereby covenant(s) and warrant(s) that:
Tenant is a duly formed corporation qualified to do business in the state in
which the Property is located; Tenant will remain qualified to do business in
said state throughout the Term and any renewals thereof; and such persons are
duly authorized by such corporation to execute and deliver this Lease on behalf
of the corporation.
36. Waiver of Invalidity of Lease. Each party agrees that it will
not raise or assert as a defense to any obligation under the Lease or this or
make any claim that the Lease is invalid or unenforceable due to any failure of
this document to comply with ministerial requirements including, without
limitation, requirements for corporate seals, attestations, witnesses,
notarizations or other similar requirements and each party hereby waives the
right to assert any such defenses or make any claim of invalidity or
unenforceability due to any of the foregoing.
37. Security Deposit. As additional security for the full and
prompt performance by Tenant of the terms and covenants of this Lease, Tenant
has deposited with Landlord the Security Deposit, as set forth in the Preamble.
The Security Deposit shall not constitute rent for any month (unless so applied
by Landlord on account of Tenant's default hereunder). Tenant shall, upon
demand, restore any portion of the Security Deposit which may be applied by
Landlord to cure any default by Tenant hereunder. To the extent that Landlord
has not applied the Security Deposit or any portion thereof on account of a
default, the Security Deposit, or such remaining portion of the Security
Deposit, shall be returned to Tenant, without interest, promptly following the
termination of this Lease.
38. Tenant Estoppel Certificate.
a. Tenant shall from time to time, within five (5) days after
Landlord's request or that of any mortgagee of Landlord, execute, acknowledge
and deliver to Landlord a written instrument in recordable form, substantially
in the form attached hereto as Exhibit E (a "Tenant Estoppel Certificate"),
certifying (i) that this Lease is in full force and effect and has not been
modified, supplemented or amended (or, if there have been modifications,
supplements or amendments, that it is in full force and effect as modified,
supplemented or amended, and stating
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such modifications, supplements and amendments); (ii) the dates to which Fixed
Basic Rent and Additional Rent and any other charges arising hereunder have been
paid; (iii) the amount of any prepaid rents or credits due Tenant, if any; (iv)
if applicable, that Tenant has accepted possession and has entered into
occupancy of the Premises, and certifying the Commencement Date and the
Termination Date; (v) whether or not, to the best of the Tenant's knowledge, all
conditions under the Lease to be performed by Landlord prior thereto have been
satisfied and whether or not Landlord is then in default in the performance of
any covenant, agreement or condition contained in this Lease and specifying
each, if any, unsatisfied condition and each, if any, default of which Tenant
may have knowledge; and (vi) any other fact or condition reasonably requested.
Any certification delivered pursuant to the provisions of this Article shall be
intended to be relied upon by Landlord and any mortgagee or prospective
mortgagee or purchaser of the Property or of any interest therein.
b. The failure of Tenant to execute, acknowledge and deliver to
Landlord a written Tenant Estoppel Certificate in accordance with the provisions
of this Section 38 within said five (5) day period shall constitute an
acknowledgment by Tenant, which may be relied upon by any mortgagee or
prospective mortgagee or any purchaser of the Property or of any interest
therein, that this Lease has not been modified, supplemented or amended except
as set forth in landlord's request, and is in full force and effect (or in full
force and effect as so modified, supplemented or amended), that the Base Rent,
Additional Rent and any other charges arising hereunder have not been paid
beyond the respective due dates immediately preceding the date of such request,
that Tenant has no right of set off or other defense to this Lease and of the
truth of such other facts and conditions as shall have been requested to be
certified, and shall constitute, as to any person entitled to rely as aforesaid,
a waiver of any defaults which may exist prior to the date of such request.
Notwithstanding the foregoing, Tenant's failure to furnish a Tenant Estoppel
Certificate within said five (5) day period shall constitute a default under
this Lease.
39. Rights Reserved by Landlord. Landlord waives no rights, except
those that may be specifically waived herein, and explicitly retains all other
rights including, without limitation, the following rights, each of which
Landlord may exercise without notice to Tenant and without liability to Tenant
for damage or injury to property, person or business on account of the exercise
thereof, and the exercise of any such rights shall not be deemed to constitute
an eviction or disturbance of Tenant's use or possession of the Premises and
shall not give rise to any claim for set off or abatement of Rent or any other
claim:
a. To change the name or street address of the Building.
b. To install, affix and maintain any and all signs on the
exterior and on the interior of the Building.
c. Where necessary, to decorate or to make repairs,
alterations, additions, or improvements, whether structural or otherwise, in and
about the Building, or any part thereof, and for such purposes to enter upon the
Premises and during the continuance of any of such work, to temporarily close
doors, entry ways, public space and corridors in the Building and to interrupt
or temporarily suspend services or use of facilities, all without affecting any
of Tenant's obligations hereunder, so long as the Premises are reasonably
accessible and usable.
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d. To furnish door keys for the entry door(s) in the Premises
on the Commencement Date and to retain at all times, and to use in appropriate
instances, keys to all doors within and into the Premises. Tenant agrees to
purchase only from Landlord additional duplicate keys as required, to change no
locks, and not to affix locks on doors without the prior written consent of the
Landlord. Upon the expiration of the Term or Tenant's right to possession,
Tenant shall return all keys to Landlord and shall disclose to Landlord the
combination of any safes, cabinets or vaults left in the Premises.
e. To designate and approve all window coverings used in the
Building.
f. To approve the weight, size and location of safes, vaults
and other heavy equipment and articles in and about the Premises and the
Building so as not to exceed the legal load per square foot designated by the
structural engineers for the Building, and to require all such items and
furniture and similar items to be moved into or out of the Building and Premises
only at such times and in such manner as Landlord shall direct in writing.
Tenant shall not install or operate machinery or any mechanical devices of a
nature not directly related to Tenant's ordinary use, as limited by the
Permitted Use, of the Premises without the prior written consent of Landlord.
The movement of Tenant's property into or out of the Building or the Premises
and within the Building are entirely at the risk and responsibility of Tenant,
and Landlord reserves the right to require written authorization from Tenant, in
form and content satisfactory to Landlord, before allowing any property to be
moved into or out of the Building or Premises.
g. To regulate delivery of supplies and the usage of the
loading docks, receiving areas and freight elevators.
h. To enter the Premises in accordance with Section 14, and in
the last year of the Term, to show the Premises to prospective tenants at
reasonable times and, if vacated or abandoned, to show the Premises at any time
and to prepare the Premises for re-occupancy.
i. To erect, use and maintain pipes, ducts, wiring and
conduits, and appurtenances thereto, in and through the Premises.
j. To enter the Premises at any reasonable time to inspect the
Premises and to make repairs or alterations as Landlord reasonably deems
necessary, with due diligence and minimum disturbance.
k. To grant to any person or to reserve unto itself the
exclusive right to conduct any business or render any service in the Building.
If Landlord elects to make available to tenants in the Building any services or
supplies, or arranges a master contract therefore, Tenant agrees to obtain its
requirements, if any, therefore from Landlord or under any such contract,
provided that the charges therefore are reasonable.
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l. To alter the layout, design and/or use of the Building in
such manner as Landlord, in its sole discretion, deems appropriate, so long as
the character of the Building as a first class office building is maintained and
so long as Tenant's business 4s not unreasonably interrupted.
40. Miscellaneous.
a. Captions. The captions in this Lease are for convenience
only and are not a part of this Lease and do not in any way define, limit,
describe or amplify the terms and provisions of this Lease or the scope or
intent thereof.
b. Entire Agreement. This Lease represents the entire agreement
between the parties hereto and there are no collateral or oral agreements or
understandings between Landlord and Tenant with respect to the Premises or the
Property. No rights, easements or licenses are acquired in the Property or any
land adjacent to the Property by Tenant by implication or otherwise except as
expressly set forth in the provisions of this Lease.
c. Modification. This Lease shall not be modified in any manner
except by an instrument in writing executed by the parties. Notwithstanding the
foregoing, Landlord shall have the right at anytime, and from time to time,
during the Term, to unilaterally amend the provisions of this Lease if Landlord
is advised by its counsel that all or any portion of the moneys paid by Tenant
to Landlord hereunder are, or may be deemed to be, unrelated business income
within the meaning of the United States Internal Revenue Code or regulations
issued thereunder; and Tenant agrees that it will execute all documents or
instruments necessary to effect such amendment or amendments, provided that no
such amendment shall result in Tenant having to pay in the aggregate a larger
sum of money on account of its occupancy of the Premises under the terms of this
Lease as so amended, and provided further that no such amendment or amendments
shall result in Tenant receiving under this Lease less services than it is
entitled to receive, nor services of a less quality. In addition, Tenant agrees
to make such changes to this Lease as are required by any mortgagee, provided
such changes do not substantially affect Tenant's rights and obligation
hereunder.
d. Interpretation. The masculine (or neuter) pronoun, singular
number, shall include the masculine, feminine and neuter genders and the
singular and plural number.
e. Exhibits. Each writing or plan referred to herein as being
attached as an Exhibit or otherwise designated herein as an Exhibit hereto is
hereby made a part hereof.
f. Captions and Headings. The captions and headings of
sections, subsections and the table of contents herein are for convenience only
and are not intended to indicate all of the subject matter in the text and they
shall not be deemed to limit, construe, affect or alter the meaning of any
provisions of this Lease and are not to be used in interpreting this Lease or
for any other purpose in the event of any controversy.
g. Interest. Wherever interest is required to be paid
hereunder, such interest shall be at the highest rate permitted under law but
not in excess of twelve percent (12%).
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h. Severability. If any term or provision of this Lease, or the
application thereof to any person or circumstance shall, to any extent, be
invalid or unenforceable, the remainder of this Lease, or the application of
such term or provision to persons or circumstances other than those as to which
it is held invalid or unenforceable, shall not be affected thereby, and each
term and provision of this Lease shall be valid and be enforced to the fullest
extent permitted by law.
i. Joint and Several Liability. If two or more individuals,
corporations, partnerships or other persons (or any combination of two or more
thereof) shall sign this Lease as Tenant, the liability of each such individual,
corporation, partnership or other persons to pay the Rent and perform all other
obligations hereunder shall be deemed to be joint and several, and all notices,
payments and agreements given or made by, with or to any one of such
individuals, corporations, partnerships or other persons shall be deemed to have
been given or made by, with or to all of them. In like manner, if Tenant shall
be a partnership or other legal entity, the members of which are, by virtue of
any applicable law or regulation, subject to personal liability, the liability
of each such member shall be joint and several.
j. No Representations by Landlord. Landlord and Landlord's
agents have made no representations, agreements, conditions, warranties,
understandings or promises, either oral or written, other than as expressly set
forth herein, with respect to this Lease. the Premises and/or the Building.
k. Relationship of Parties. This Lease shall not create any
relationship between the parties other than that of Landlord and Tenant.
l. Choice of Law. The terms of this Lease shall be construed
under the laws of the Commonwealth of Pennsylvania, and that exclusive
jurisdiction and venue shall be in the Court of Common Pleas of the County in
which the Property is located.
41. Additional Definitions.
a. "Date of this Lease" or "date of this Lease" shall mean the
date of acceptance of this Lease by the Landlord, following execution and
delivery thereof to Landlord by Tenant and that date shall be inserted in the
space provided in the Preamble.
b. "Landlord" as used herein includes the Landlord named above
as well as its successors and assigns, each of whom shall have the same rights,
remedies, powers, authorities and privileges as he would have had he originally
signed this lease as Landlord. Any such person, whether or not named herein,
shall have no liability hereunder after ceasing to hold title to the Premises.
Neither Landlord nor any principal of Landlord nor any owner of the Building or
the Lot, whether disclosed or undisclosed, shall have any personal liability
with respect to any of the provisions of this Lease or the Premises, and if
Landlord is in breach or default with respect to Landlord's obligations under
this Lease or otherwise, Tenant shall look solely to the equity of Landlord in
the Premises for the satisfaction of Tenant's remedies.
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c. "Tenant" as used herein includes the Tenant named above as
well as its heirs, successors and assigns, each of which shall be under the same
obligations, liabilities and disabilities and each of which shall have the same
rights, privileges and powers as it would have possessed had it originally
signed this Lease as Tenant. Each and every person named above as Tenant shall
be bound formally and severally by the terms, covenants and agreements contained
herein. However, no such rights, privileges or powers shall inure to the benefit
of any assignee of Tenant, immediate or remote, unless the assignment to such
assignee is permitted or has been approved in writing by Landlord. Any notice
required or permitted by the terms of this Lease may be given by or to any one
of the persons named above as Tenant, and shall have the same force and effect
as if given by or to all of them.
d. "Mortgage" and "Mortgagee" as used herein includes any lien
or encumbrance on the Premises or the Property or on any part of or interest in
or appurtenance to any of the foregoing, including without limitation any ground
rent or ground lease if Landlord's interest is or becomes a leasehold estate.
The word "mortgagee" is used herein to include the holder of any mortgage,
including any ground Landlord if Landlord's interest is or becomes a leasehold
estate. Wherever any right is given to a mortgagee, that right may be exercised
on behalf of such mortgagee by any representative or servicing agent of such
mortgagee.
e. "Person" as used herein includes a natural person, a
partnership, a corporation, an association, and any other form of business
association or entity.
f. "Property" as used herein shall mean the Building and the
lot, tract or parcel of land on which the Building is situated.
g. "Rent" or "rent" as used herein shall mean all Fixed Basic
Rent and Additional Rent reserved under this Lease.
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IN WITNESS WHEREOF, and in consideration of the mutual entry into this
Lease and for other good and valuable consideration, and intending to be legally
bound, each party hereto has caused this agreement to be duly executed under
seal.
Landlord: O'Neill Renaissance II Associates, L.P.
- --------
Date Signed: 5/14/98 By: O'Neill Renaissance II Associates
--------------- Acquisition Corporation
By: /s/
---------------------------------------
Name: [illegible name]
---------------------------
Title: __________________________
Attest: __________________________________
Tenant: U.S. Interactive
- -------
Date Signed: 5/8/98 U.S. Interactive, Inc.
--------------
By: /s/
---------------------------------------
Name: Stephen T. Zarrilli
Title: EVP - Finance & Administration
--------------------------------
Attest: _________________________________
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EXHIBIT A
LOCATION OF PREMISES
See Exhibit C
<PAGE>
EXHIBIT A-1
-----------
OFFICE BUILDING AREA
See Exhibit C
<PAGE>
CERTAIN PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED BASED
UPON A REQUEST FOR CONFIDENTIAL TREATMENT.
PROFESSIONAL SERVICES AND CONSULTING AGREEMENT
BETWEEN JUGGERNAUT PARTNERS, LLC AND
U.S. INTERACTIVE, INC.
THIS PROFESSIONAL SERVICES AND CONSULTING AGREEMENT (this
"Agreement"), is made and entered into as of January 6, 1999, by and between
JUGGERNAUT PARTNERS, LLC, a Delaware limited liability company, with offices at
C/o ONYX International Company, LLC, 3299 K Street, N.W., Suite 602, Washington,
D.C. 20007 ("Juggernaut"), and U.S. INTERACTIVE, INC., a Delaware corporation
with offices at 11911 San Vicente Boulevard, Suite 225, Los Angeles, California
90049 ("USI").
W I T N E S S E T H:
WHEREAS, USI is in the business of, among other things, providing
consulting and professional services in connection with electronic enterprise,
including digital marketing, E-commerce business planning, knowledge management
consulting, graphical interface design, Internet systems design, and Internet
systems management; and
WHEREAS, Juggernaut desires to retain the Services (as defined
below) of USI; and
WHEREAS, USI desires to furnish the Services to Juggernaut upon
the terms, provisions, and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of these premises, the mutual
covenants, promises and conditions set forth herein, and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
Section 1. Retention of USI. Juggernaut hereby retains the
Services of USI, and USI hereby agrees to perform the Services for Juggernaut on
the terms and conditions hereinafter provided. USI understands and agrees that
it is retained to provide consulting and professional services, including work
for hire.
Section 2. Term of Agreement. This Agreement shall commence on the
date set forth above and shall remain in full force and effect until terminated
by either party as provided herein or as provided by law.
Section 3. Scope of Services. During the terms of this Agreement,
USI will provide materials and perform services (the "Services") described in
Work Orders (as defined below), which shall be incorporated into this Agreement
by reference. Such Services shall be performed with the authorization of, and
under the direction of, an authorized representative of Juggernaut.
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Section 4. Work Orders. The particular Services to be provided by
USI to Juggernaut hereunder shall be described in a work order in a form
substantially similar to the work order attached hereto as Exhibit 4 (a "Work
Order"), which will be presented by Juggernaut to SUI describing: (i) Services;
(ii) the dates USI shall commence and end the Services (iii) the amount to be
paid by Juggernaut to USI upon the completion of the Services to be provided
under a particular Work Order; (iv) specifically-identifiable deliverables to
result from the Services; and (v) any other details and special terms and
conditions related to the Services, including, but not limited to, billing and
taxation, as applicable. USI shall be under no obligation to provide the
Services, and Juggernaut shall be under no obligation to pay for the Services,
unless and until a mutually agreeable Work Order is executed by both parties.
Section 5. Juggernaut Requested Modifications. Pursuant to this
Agreement and upon execution by the parties of any Work Order, Juggernaut may
from time to time request in writing changes in or additions to the Services
being performed by USI under any Work Order, which request shall include a
detailed description of such requested changes or additions (the
"Modifications"). After receipt of such request, USI shall submit to Juggernaut
an amended Work Order (an "Amended Work Order") which shall include a
description of the modifications and the time and charges required to provide
the requested Modifications. USI shall be under no obligation to proceed with
any requested Modifications prior to the receipt of an Amended Work Order, fully
executed by the parties.
Section 6. Compensation and Billing. Issues of compensation and
billing for the Services shall be addressed in each Work Order.
Section 7. Taxes. Any taxing of the Services shall be addressed in
each Work Order.
Section 8. Out-of-Pocket Expenses. In addition to the fees payable
for Services performed pursuant to, and which fees are governed, by Work Order,
Juggernaut shall also pay for reasonable travel, lodging, and other expenses
actually incurred by USI in providing the Services.
Section 9. Concept/Product Ownership. For purposes of, and when
used in, this Section 9, he phrases "to use" and "for use," when applied with
respect to Juggernaut, shall mean use in the conduct of the business of
Juggernaut or any affiliate of Juggernaut but shall not include the right to
sub-license; for purposes of the foregoing definition, an "affiliate of
Juggernaut" shall mean any person or entity controlling, controlled by, or under
common control with Juggernaut, provided that ownership of at least 25% of the
equity securities of any entity shall be deemed to be control for purposes of
this definition.
9.1 The parties agree that Juggernaut will own all
Juggernaut-specific code and Juggernaut-specific proprietary design generated
through USI's Services for Juggernaut to the extent paid for by Juggernaut.
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9.2 The parties agree that concepts, information, and materials
developed by USI prior to commencement of and independent of Services to be
performed under a Work Order, including all versions of the e-commerce suite of
technologies that USI has rights to use, shall remain the property of USI,
except that, for so long as Juggernaut is not in default with respect to any
payment required under the pertinent Work Order and thereafter upon completion
of all payments required under such Work Order, Juggernaut shall have a
non-exclusive, royalty-free license to use all code then owned by USI associated
with e-commerce engines already created by USI. In addition for so long as
Juggernaut is not in default with respect to any payment required under the
pertinent Work Order and thereafter upon completion of all payments required
under such Work Order Juggernaut shall have a non-exclusive, royalty-free
license to use all code associated with e-commerce engines to be created and
owned by USI in the next three years following the date of this Agreement. For
so long as Juggernaut is not in default with respect to any payment required
under the pertinent Work Order, and thereafter upon completion of all payments
required under such Work Order, Juggernaut shall have a non-exclusive license to
use all code then owned by USI associated with e-commerce engines and tools
already created and owned by USI or then to be created and owned by USI and
USI's 1998 Agreement with Dairy Farm Management Services, Ltd.
9.3 USI agrees that concepts, information, and materials developed
by Juggernaut prior to commencement of and independent of Services to be
performed under a Work Order, or owned by a third-party, Juggernaut, or a
supplier of Juggernaut and furnished to USI by Juggernaut to enable USI to
perform the Services described in a Work Order, shall remain the property of
Juggernaut or such third-party, or supplier of Juggernaut.
9.4 For so long as Juggernaut is not in default with respect to
any payment required under the pertinent Work Order and thereafter upon
completion of all payments required under such Work Order, all copyrights in
Juggernaut-specific computer programs, Juggernaut-specific source code listing,
Juggernaut-specific programming documentation, and Juggernaut-specific manuals
and written materials relating to the specific materials developed by USI solely
for, and in connection with, the Services provided under this Agreement (the
"Deliverables," on in the singular "Deliverable") shall be the property of
Juggernaut. For so long as Juggernaut is not in default with respect to any
payment required under the pertinent Work Order, and thereafter upon completion
of all payments required under such Work Order, Juggernaut shall have a
non-exclusive, royalty-free, right to display, perform and distribute the "User
Interface" (meaning, all screen displays in Deliverables, and all test,
graphics, images and audiovisual works included in Deliverables, as well as all
combinations and sequences thereof included in Deliverables, owned by USI prior
to creation of Deliverable), and to make modifications and enhancements to, and
to create derivative works based on, the User Interface, for use in connection
with, inter alia, the Deliverables for the benefit of their customers.
3
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9.5 Juggernaut acknowledges that in the course of USI's
performance hereunder, USI may incorporate into particular Deliverables source
data consisting of products, materials or methodologies proprietary to USI. For
so long as Juggernaut is not in default with respect to any payment required
under the pertinent Work Order and thereafter upon completion of all payments
required under such Work Order, Juggernaut shall have a non-exclusive,
royalty-free, license to use such proprietary products, materials and
methodologies incorporated into particular Deliverables, including the right to
distribute, modify, and enhance the materials for use in connection with
Juggernaut's distribution of the Deliverables to Juggernaut's customers.
9.6 For so long as Juggernaut is not in default with respect to
any payment required under the pertinent Work Order and thereafter upon
completion of all payments required under such Work Order, USI agrees and hereby
grants to Juggernaut a non-exclusive royalty-free license to use USI's Java game
engine to the extent it is now owned by USI, and a royalty-free, non-exclusive
sub-license to use all the intellectual property that was licensed to USI as the
Castle Infinity on-line game in or about February, 1997.
Section 10. Personnel. Contingent upon timely discharge of all
payment obligations of Juggernaut under the pertinent Work Orders, Juggernaut
shall, in its sole reasonable discretion, have the right to appoint reasonably
available USI employees to any work team for performances of the Services under
a Work Order. Contingent upon timely discharge of all payment obligations of
Juggernaut under the pertinent Work Orders, Juggernaut shall further have the
right, in its sole reasonable discretion, to reject any USI employee that it
deems to be unsatisfactory and to remove any USI employee that proves to be
unsatisfactory to Juggernaut, in its sole reasonable discretion. Each party
agrees not to hire or solicit for employment or otherwise engage the services of
any individual employed by the other party during performance of the Agreement
as an employee rather than as a contractor, and utilized to complete any of the
projects contemplated by this Agreement, without the other party's consent, for
a period of 12 months after the completion or termination of this Agreement.
Section 11. Acceptance Criteria of Deliverables. USI shall provide
the Deliverable described in, and when scheduled in, the Work Orders. Neither
party shall be held responsible for any delay or failure in performance of any
part of the Agreement to the extent such delay or failure is caused by fire,
flood, explosion, war, strike, embargo, government requirement, civil or
military authority, act of God, or other similar causes beyond its control and
without the fault or negligence of the delayed or non-performing party ("Force
Majeure Condition"). If any Force Majeure Condition occurs, the party affected
by the other's delay or inability to perform may elect to (1) suspend this
Agreement for the duration of the Force Majeure Condition and, once the Force
Majeure Condition ceases, resume performance under this Agreement with an option
in the affected party to extend the period of this Agreement up to the length of
time the Force Majeure Condition was endured; and/or (2) when the delay or
non-performance continues for a period of at least thirty (30) days, terminate,
at no charge, and effective upon written notice thereof to the non-terminating
party, this Agreement in its entirety, provided however that the terminating
party shall remain liable in respect of Services provided through the date of
such termination. Unless written notice is given within forty-five (45) days
after the affected party is notified of the Force Majeure Condition, election
(1) shall be deemed selected.
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Section 12. Warranty. USI represents and warrants that it is
capable of providing the Services and that the Services will be performed with
due care and diligence at a level that meets professional standards and in a
workmanlike manner typically employed by U.S. firms in the same industry as of
the effective date of this Agreement.
Section 13. Independent Contractor. USI's status will be that of
an independent contractor, and neither it nor its employees will be deemed to be
employees or agents of Juggernaut. USI accepts full and exclusive liability for
the payment of contribution or taxes measured by the remuneration paid to its
employees. These include but are not limited to Federal and state unemployment
insurance, Federal Insurance Contribution Act (FICA), Federal and local payroll
taxes, compensation insurance, or any similar item now or hereafter imposed by
Federal, state, county or local government.
Section 14. Confidentiality.
14.1 Both parties acknowledge that they each have confidential and
proprietary information, including certain information that derives actual or
potential economic value from not being generally known to the public, which
confidential and proprietary information is the subject of reasonable efforts
under the circumstances to maintain its secrecy ("confidential information").
Each party may receive confidential information from the other such as, but not
limited to, non-public information concerning the business products, customers,
or finances of either party. Neither receiving party shall, directly or
indirectly, disclose to any party other than its employees, affiliated
companies, and authorized agents or contractors (and such party shall be liable
to the other party for any material disclosure made by such employees,
affiliated companies and agents or contractors in violation of this Agreement)
any confidential information concerning the disclosing party's business methods,
products, customers, or finances, or any other confidential information which is
disclosed to it by the other party, whether or nor in writing and whether or not
designated as confidential, without the prior written permission of the
disclosing party, unless such disclosure is specifically required in the course
of the performance by the receiving party of its obligations hereunder and then
only to the extent necessary to perform the receiving party's obligations under
this Agreement. Each party shall take reasonable steps under the circumstances
to maintain the secrecy of confidential information received from the other
party. The obligations of USI and Juggernaut under this Section 14 shall not
extend to any information which: (i) becomes publicly available other than
through the action of the receiving party; (ii) is subsequently rightfully
furnished to the receiving party by a third party without restriction on
disclosure; (iii) is furnished by the disclosing party at the time of receiving
such disclosure; (iv) is rightfully known by the receiving party at the time of
receiving such information; provided, however, that nothing in this Section 14
shall prevent disclosure of any information which is required to be disclosed by
valid order of a court or other governmental body or by law.
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14.2 The parties acknowledge that this Agreement contains
commercially confidential information that may be considered proprietary by
either or both parties, and agree to limit distribution of this Agreement to
those individuals in their respective organizations with a need to know the
contents of this Agreement.
14.3 Specific performance. Each of the parties hereto acknowledge
that any material breach by them of their respective obligations under this
Section 14 will cause irreparable harm to the other party for which its remedies
at law will be inadequate and that each of the parties hereto agrees that they
each shall be entitled to an injunction or injunctions to prevent breaches of
the provisions of this Agreement and to enforce specifically the terms and
conditions hereof in addition to any other remedy to which such party may be
entitled, at law or in equity.
14.4 The provisions of this Section 14 shall survive termination
of this Agreement and shall remain valid for a period of two (2) years from the
termination or expiration of this Agreement.
14.5 Upon completion of the Services to be provided hereunder,
each party shall return to the other party all of such other party's
confidential information and copies thereof in the receiving party's possession.
Section 15. Termination.
15.1 Juggernaut shall have the right to terminate this Agreement
at its sole discretion and without cause (a "Termination for Convenience"). In
the event of a Termination for Convenience, Juggernaut shall, after giving
written notice to USI (a "Notice of Termination") of a Termination of
Convenience, pay to USI reasonable actual expenses incurred by USI in connection
with providing the Services up to the date of the Termination for Convenience.
Any Notice of Termination shall be provided pursuant to Section 22 hereof. Upon
receipt of the Notice of Termination, USI shall immediately cease performance of
the Services and USI shall make commercially reasonable efforts to minimize cost
and to preserve the Deliverables completed to date. This Agreement shall be
considered terminated effective as of the receipt of the Notice of Termination.
Juggernaut shall not be responsible for fees, costs, or expenses (including, but
not limited to, travel and lodging) of any Services performed by USI after USI
receives the Notice of Termination, other than unavoidable and reasonable
expenses experienced by USI despite good faith efforts by USI to make
commercially reasonable efforts to minimize cost and to preserve the
Deliverables completed to date. Upon termination of this Agreement, each party
shall return to the other party all of such other party's confidential
information and copies thereof in the receiving party's possession.
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15.2 The parties agree that upon termination under this Section
USI will own all Juggernaut-specific code and Juggernaut-specific proprietary
design generated through USI's Services for Juggernaut, if and to the extent not
paid for by Juggernaut.
15.3 Upon termination under this Section, Juggernaut shall have no
license of any sort to use code owned by USI associated with e-commerce engines
already created by USI if Juggernaut has failed to make all payments due prior
to such termination under the pertinent Work Orders, but if Juggernaut has made
all payments due prior to such termination under the pertinent Work Orders,
subject to Section 15.9, Juggernaut shall continue to have a non-exclusive,
royalty-free license to such code. Upon termination under this Section,
Juggernaut shall not have any license to use any code created or generated by
USI under USI's 1998 Agreement with Diary Farm Management Services, Ltd. if
Juggernaut has failed to make all payments due prior to such termination under
the pertinent Work Orders, but if Juggernaut has made all payments due prior to
such termination under the pertinent Work Orders, subject to Section 15.9,
Juggernaut shall continue to have a non-exclusive, royalty-free license to such
code.
15.4 Upon termination under this Section, copyrights in
Juggernaut-specific computer programs, Juggernaut-specific source code listings,
Juggernaut-specific programming documentation, and Juggernaut-specific manuals
and written materials (the affected Deliverables) (a) shall be the property of
USI if and to the extent that Juggernaut has failed to make all payments due
prior to such termination under the pertinent Work Orders, and (b) shall be the
property of Juggernaut if and to the extent that Juggernaut has made all
payments due prior to such termination under the pertinent Work Orders.
15.5 Upon termination under this Section, Juggernaut shall not
have any license as to the User Interface (meaning, all screen displays in
Deliverables, and all test, graphics, images and audiovisual works included in
Deliverables, as well as all combinations and sequences thereof included in
Deliverables), owned by USI prior to creation of Deliverables if Juggernaut has
failed to make all payments due prior to such termination under the pertinent
Work Orders, but if Juggernaut has made all payments due prior to such
termination under the pertinent Work Orders, Juggernaut shall continue to have a
non-exclusive, royalty-free license to such User Interface.
15.6 Upon termination under this Section, Juggernaut shall not
have any sort of license as to USI's proprietary products, materials and
methodologies incorporated into particular Deliverables if Juggernaut has failed
to make all payments due prior to such termination under the pertinent Work
Orders, but if Juggernaut has made all payments due prior to such termination
under the pertinent Work Orders, Juggernaut shall continue to have a
non-exclusive, royalty-free license to such proprietary products, materials and
methodologies.
15.7 Upon termination under this Section, Juggernaut shall not
have any sort of license to use USI's Java game engine or any sort of license or
sub-license from USI to use intellectual property that was licensed to USI as
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the Castle Infinity on-line game in or about February, 1997 if Juggernaut has
failed to make all payments due prior to such termination under pertinent Work
Order, but if Juggernaut has made all payments due prior to such termination
under the pertinent Work Orders, subject to Section 15.9, Juggernaut shall
continue to have a non-exclusive, royalty free license to USI's Java game engine
and such intellectual property.
15.8 Either party may, upon thirty (30) days' prior written notice
to the other, terminate this Agreement if the terminating party determines, in
its reasonable and lawful judgment, the other party is in breach. Upon
termination under this Section, Concept/Product Ownership rights shall be
equitably adjusted in accordance with Sections 15.2 to 15.7 of this Agreement,
if and to the extent Juggernaut has failed to make all payments due prior to
such termination under the pertinent Work Order, and the parties agree to
execute any documents reasonably requested by the other party concerning the
termination and the effect it had on Concept/Product ownership rights. The power
or right to terminate for breach set forth in this Section does not imply
elimination of any rights either party might otherwise have to bring an action
for damages (including interest at the legal rate) or equitable relief.
15.9 In the event that USI has not been paid a total of $2,000,000
by Juggernaut for USI's work efforts under agreed Work Orders, within 18 months
of the date of this Agreement (other than due to termination of this Agreement
for a material breach by USI pursuant to Section 15.8), the licenses granted
under Section 9.2 and Section 9.6 shall terminate on the 18 month anniversary of
this Agreement. If the Agreement termination is due to material breach by USI
pursuant to Section 15.8, and USI has not been paid a total of $1,000,000 by
Juggernaut for USI's work efforts under agreed Work Orders, within 18 months of
the date of this Agreement, then the licenses granted under Section 9.2 and
Section 9.6 shall terminate on the 18 month anniversary of this Agreement.
Section 16. Assignability. This Agreement shall not be assignable
by either party to any other party without the consent of the other party.
Consent by USI shall not be unreasonably withheld.
Section 17. Non-Exclusivity. This Agreement is a non-exclusive
agreement. USI reserves the right to provide services to others and Juggernaut
reserves the right to obtain similar services from others; provided, however,
that neither party shall violate the provisions of Section 9 (Concept/Product
Ownership) or Section 14 (Confidentiality) in its transactions with others.
Section 18. Intellectual Property. Except as expressly provided
herein, nothing contained in this Agreement shall be construed as conferring by
implication, estoppel, or otherwise, any license or right, under any patent,
trademark, trade name, trade secret, copyright, or other proprietary right of
either party.
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Section 19. Access to Premises. Juggernaut shall, at no charge to
USI, grant reasonable access to Juggernaut's premises in connection with the
Services to be provided by USI. USI shall coordinate such access with
Juggernaut's designated representative. USI agrees that its employee(s)
performing the Services on Juggernaut's premises shall observe Juggernaut's
security and safety rules and guidelines. In the event any of the Services to be
provided by USI necessitate that the work be performed on Juggernaut's premises,
Juggernaut agrees to provide at no charge to USI working space, telephone
access, terminals, computer time, clerical support, and any other facilities and
support reasonably requested by USI.
Section 20. Compliance with Laws. Each party shall comply with all
applicable federal, state, and local laws, ordinances, regulations, codes,
rules, orders and requirements of all duly constituted governmental authorities,
including the procurement of permits and licenses when needed.
Section 21. No Third-Party Beneficiaries. This Agreement and the
Work Orders entered into pursuant hereto are for the benefit of USI and
Juggernaut and not for any other person.
Section 22. Notices. Any notice required to be given hereunder
shall be in writing and shall be either hand delivered, with receipt
acknowledged, sent by U.S. registered or certified mail, return receipt
requested, postage prepaid by a reputable overnight air carrier service that
provides written notice of delivery, or by facsimile transmission. Notices shall
be deemed given on the business day following the date shown on the facsimile
transmission or the date shown on the signed evidence of receipt. Notices
intended for USI shall be sent to its address appearing on page 1 hereof to the
attention of Mark J. Silverman, telephone (310) 440-3377, facsimile (310)
440-3378. Notices intended for Juggernaut shall be sent to its address appearing
on page 1 hereof to the attention of John Shulman, telephone 202/965-5700,
facsimile 202/333-8260. Either party may change its address, telephone or
facsimile number for notice purposes by providing written notice to the other
party in accordance with this Section 24.
Section 23. Severability. If any provision of this Agreement or
the application of any such provision shall be held by a tribunal of competent
jurisdiction to be contrary to law, the remaining provisions of this Agreement
and all other applications of such provision shall continue in full force and
effect.
Section 24. Governing Law; Jurisdiction. This Agreement shall be
governed by and construed under the laws of the State of Delaware, except for
the conflicts of law principles thereof.
Section 25. Entire Agreement; Survival. This Agreement and Work
Orders entered into pursuant hereto constitute the entire agreement between the
parties concerning the subject matter hereof and may not be amended or modified
except by written instrument signed by authorized representatives of both
parties hereto. The provisions of Sections 9, 10, 14 and 15 hereof shall survive
any termination or expiration of this Agreement and shall continue in effect
unless otherwise specified by the terms of this Agreement.
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Section 26. Titles and Headings. Titles and headings used in this
Agreement have been inserted for convenience of reference only and are not to be
considered a part hereof and shall in no way define, modify or restrict the
meaning or interpretation of the terms or provisions of this Agreement.
Section 27. Authority. EACH PARTY HAS FULL POWER AND AUTHORITY TO
ENTER INTO, PERFORM, AND EXECUTE THIS AGREEMENT, AND EACH PERSON SIGNING THIS
AGREEMENT ON BEHALF OF EITEHR PARTY HAS BEEN PROPERLY AUTHORIZED AND EMPOWERED
TO ENTER INTO AND EXECUTE THIS AGREEMENT. EACH PARTY FURTHER ACKNWOLEDGES THAT
IT HAS READ THIS AGREEMENT, UNDERSTANDS IT, AND AGREES TO BE BOUND BY IT.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized representatives as of, and to be effective as
of, the date first above written.
"JUGGERNAUT"
JUGGERNAUT PARTNERS, LLC, a Delaware
limited liability company
By: /s/ John D. Shulman
----------------------------------------
Name: John D. Shulman
Title: CEO
"USI"
U.S. INTERACTIVE, INC., a New Jersey
corporation
By: /s/ Mark J. Silverman
----------------------------------------
Name: Mark J. Silverman
Title: EVP
<PAGE>
Juggernaut Web Site Development - Launch 1
US Interactive Statement of Work
Created for Juggernaut Partners
Revised March 27, 1999
CONFIDENTIAL - Copyright 1999 US Interactive
1
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Table of Contents
INTRODUCTION ............................................................... 4
PROJECT OVERVIEW ........................................................... 5
SCOPE FOR LAUNCH 1 DEVELOPMENT ............................................. 6
Interface Scope ................................................... 6
User Interface ............................................... 6
[ ] Interface ............................................... 7
Global Management Application ................................ 7
Technical Scope ................................................... 9
Security Layer ............................................... 10
Juggernaut Database .......................................... 10
Data Access Layer ............................................ 10
Registration and Account Management .......................... 10
Login ........................................................ 11
Navigation ................................................... 11
Search ....................................................... 11
[ ] Dispatcher .............................................. 11
[ ] ......................................................... 12
Transaction .................................................. 12
Accounting ................................................... 12
Category Management .......................................... 13
Product/Service Management ................................... 13
Fulfillment .................................................. 13
Promotions and Advertisement ................................. 14
[ ] ......................................................... 14
Business Rules Module ........................................ 14
[ ] ......................................................... 15
[ ] ......................................................... 15
Error and Logging ............................................ 15
Messaging / Email ............................................ 16
Customer Support ............................................. 16
[ ] ......................................................... 16
Online Help .................................................. 17
System Monitor ............................................... 17
SCOPE CONTINGENCIES ........................................................ 18
PROJECT MANAGEMENT METHODOLOGY ............................................. 20
PRODUCTION TEAM ............................................................ 21
Team Members .......................................................... 21
Team Structure ........................................................ 22
LAUNCH TIMELINE ............................................................ 25
MILESTONES AND DELIVERABLES ................................................ 26
PRODUCTION COST ESIMATE FOR LAUNCH 1 ....................................... 27
Technical Development Costs ........................................... 27
Creative Development Costs ............................................ 28
Other Costs ........................................................... 28
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PAYMENT SCHEDULE ........................................................... 29
RISKS / CRITICAL PATH DEADLINES ............................................ 31
PRODUCTION PLAN / BUDGET CONTINGENCIES ..................................... 35
AGREEMENT .................................................................. 38
3
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- --------------------------------------------------------------------------------
Introduction
Juggernaut's mission is to provide a global-exchange platform,
[
]
The following features are a part of the vision for the Juggernaut Web Site:
o [ ]
o [ ]
o [ ]
o Powerful search feature
o [ ]
o [ ]
o [ ]
o [ ]
o [ ]
o [ ]
o Market-tested interface usability
o International Brand / Logo strategy
o [ ]
o [ ]
o [ ]
o Juggernaut Site Management System
o Expansive Customer Support / Help Desk System
This document describes the Project Scope, Cost Estimates, Production Plan, and
Timeline for Launch 1 of the Juggernaut Web Site, the first step toward this
vision.
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- --------------------------------------------------------------------------------
Project Overview
US Interactive is being hired by Juggernaut Partners to provide Business Plan
Development and production toward Launch 1 for the Juggernaut Web Site. Two
separate teams have been created to work on the Juggernaut engagement: the
Business Development Team and the Production Team.
The USI Business Development Team and the USI Production Team are being retained
by separate Statements of Work with Juggernaut Partners.* This document details
the scope of work to be completed by the USI Production Team for Launch 1.
Juggernaut Partners is responsible for:
o Business Plan Development
o Business Operations
o Top-level Business Strategies
o Establishing Supplier Partnerships
o Establishing Bank Partnerships
The USI Business Development team is responsible for:
o Business Plan Development
o Top-level Business Strategies
o Communication of Top-level Business Strategies to Production Team
The USI Production Team is responsible for the following, as they relate to the
feature-set described in the Project Scope section of this document:
o Planning and development of the web site technical architecture
o Planning and Development of the web site information architecture
o Planning and Development of the web site Interface Design
o Product Categorization Plan and Implementation
o Tactical implementation of the Business Strategies as communicated by
the Business Team
o Full Technical and Creative documentation - providing descriptions and
breakdowns of all processes, technical systems, code, and design
style-guides. (This will be further defined to a mutually agreeable
level once production begins.)
o Management of third party vendors, including:
o Brand/Logo company(ies)
o Market Research company(ies)
o Companies providing outsourced software development
o Call Center [ ]
o Hosting/Site Maintenance [ ]
* Additional Statements of Work will also be created between Juggernaut and any
necessary third-party vendor, such as Landor, Questus New Media, IVT, Call
Center [ ], and Data Center [ ]. USI is not responsible for these contracts.
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Scope for Launch 1 Development
- --------------------------------------------------------------------------------
The following scope description details the feature-set of the Juggernaut site
on Launch 1. Additional features will be incorporated into future versions of
the site, as agreed by both Juggernaut and USI.
Interface Scope:
User Application
----------------
o [ ]
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Scope for Launch 1 Development: (Continued)
- --------------------------------------------------------------------------------
User Application (Continued)
---------------- -----------
[ ]
[ ] Interface - External Application
--------------------------------
o [ ]
Global Management Application
-----------------------------
o [ ]
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Scope for Launch 1 Development: Continued
- --------------------------------------------------------------------------------
Interface Scope: (Continued)
Global Management Application (Continued)
-----------------------------------------
[ ]
8
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Scope for Launch 1 Development: Continued
- --------------------------------------------------------------------------------
Technical Scope Launch 1
Having discussed in detail the functional requirements for Juggernaut we have
identified the implementation level modules which will serve as the technical
scope for this project. Displayed below in Figure 1 is the software application
architecture for the Juggernaut project. Each module is described in detail in
the next section so that the technical scope of the project becomes more
apparent. Please refer to the Technical Design Document, to be presented and
approved on 3/19, for full detail on the specific scope of each module to be
completed during production of Juggernaut web site Launch 1. [ ]
Figure 1. Software Architecture Diagram
---------------------------------------
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Scope for Launch 1 Development: Continued
- --------------------------------------------------------------------------------
Technical Scope Launch 1: (Continued)
The module functionality descriptions are provided below:
1) Security Layer
The security layer provides a secure environment for the application.
It provides a secure socket layer (SSL) communication between the
user-interface and the underlying application and data. Also, whenever
necessary a user-name and password will be used to authenticate entry
to the available application resources. This module not only manages
security for data access but also takes into consideration data
confidentiality issues and audit/logging issues whenever the system is
accessed.
2) Juggernaut Database
The Juggernaut database will serve as the heart of the application.
[ ]
3) Data Access Layer
The data access layer will be the interface between the database and
the application. The data access layer will manage the database
connections and database calls. The data access layer will define a
uniform method of data access to all the other application modules.
4) Registration & Account Management
[ ]
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Scope for Launch 1 Development: Continued
- --------------------------------------------------------------------------------
Technical Scope Launch 1: (Continued)
5) Login
The Login module functions to authenticate the user via their user-name
and password.
[ ]
6) Navigation
The Navigator tool and the associated functionality will be part of
this module. [ ]
7) Search
[ ]
11
8) [ ]
<PAGE>
Scope for Launch 1 Development: Continued
- --------------------------------------------------------------------------------
Technical Scope Launch 1: (Continued)
9) [ ]
10) Transaction
This module is the key to the purchase process. [ ]
11) Accounting Interface
This module will provide programmatic interfaces to accounting packages
and tools that are used by management and partners. [ ]
12
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Scope for Launch 1 Development: Continued
- --------------------------------------------------------------------------------
Technical Scope Launch 1: (Continued)
12) Category Management
[ ]
13) Product Management
The Product Management module will be one of the most important modules
of the application. [ ]
14) Fulfillment
[ ]
13
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Scope for Launch 1 Development: Continued
- --------------------------------------------------------------------------------
Technical Scope Launch 1: (Continued)
15) Promotions & Advertisement
[ ]
16) [ ]
17) Business Rules Module
The business rules module will be tightly coupled with the database and
the data access layer. It is the development teams intention to
consolidate all business rules in a centralized module so that it is
easier to manage any changes that need to be made.
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Scope for Launch 1 Development: Continued
- --------------------------------------------------------------------------------
Technical Scope Launch 1: (Continued)
18) [ ]
19) [ ]
20) Error & Logging
The error and logging module will be very critical in identifying
problems that occur with the system while in production mode. The
errors and logs captured by this module will be invaluable in debugging
and solving problems. [ ]
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- --------------------------------------------------------------------------------
Scope for Launch 1 Development: Continued
Technical Scope Launch 1: (Continued)
21) Messaging/Email
This module will provide interfaces to create, modify, activate, and
inactivate emails to be sent out to the users on a regular basis. [ ]
22) Customer Support
The customer support module is a portion of the management application.
This module will support all functionality that is needed to assist a
user when s/he calls the customer service center. The customer support
module will be an integration of functionality already created for the
users.
[ ]
23) [ ]
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Scope for Launch 1 Development: Continued
- --------------------------------------------------------------------------------
Technical Scope Launch 1: (Continued)
24) Online Help
The online help module is one of the simpler modules within the
Juggernaut system. The online help module will have frequently asked
questions (FAQ) section for users and guides.
25) System Monitor
The System Monitor module will provide the heartbeat of the system.
[ ]
17
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Scope Contingencies:
- --------------------------------------------------------------------------------
The Project Budget and Production Schedule are based on the following Scope
Contingencies for Launch 1. If the following Scope Contingency list changes, the
Budget and Production Schedule may need to be altered accordingly.
1. Business-specific system
o [ ]
2. [ ]
3. Call-Center / Help Desk Module
o [ ]
4. Purchasing Escrow
o We will be designing the system to support purchasing escrow.
o [ ]
5. Recurring Purchases / Scheduling Tool
o [ ]
6. [ ]
7. Fulfillment
o [ ]
8. Services
o Services will be offered through our database during future site
releases.
9. [ ]
10. [ ]
11. Hosting / Site Maintenance
o [ ]
12. Business Rules Module
o [ ]
13. [ ]
18
<PAGE>
Project Management Methodology:
- --------------------------------------------------------------------------------
The USI Senior Project manager will be in contact with Juggernaut daily,
discussing the project, ensuring that all deliverables and reviews are met, and
documenting all progress. In order to expedite communication between USI and
Juggernaut, the following reports and processes will be implemented:
Production Schedule
The Production Schedule is a timeline of the project, outlining the
important project milestones. If the project scope is altered during
production, the Production Schedule is updated accordingly to reflect
the change. All internal and external reviews and milestones will be
reflected in this schedule. The Production Schedule will be updated
with completed tasks and delivered to Juggernaut twice monthly.
Status Meetings
Internal team Status Meetings will be held on a weekly basis. Client
Status Meetings will be determined by milestones within the Production
Schedule; a schedule of all Client Status Meetings will be generated
and distributed on a monthly basis.
Weekly Status Report
Given to Juggernaut weekly. These reports reflect all conversations,
developments, and issues relevant to the project, and reiterate any
dependencies or deliverables that are needed from Juggernaut.
Contact Report
Used as a verification of an agreement or important meeting with
Juggernaut, a Contact Report is usually sent a few days after the
conversation takes place. Our policy is to fax the report -- if it is
not disputed within 24 hours, it is understood that Juggernaut agrees
with the account of the decisions made, and the next production steps
will be taken.
Milestone Approval
At each major milestones or deliverable, the presentation overview, any
appropriate revisions, and next steps will be presented in a report.
The report will be signed by Juggernaut before work toward the
revisions will be done by USI.
Change Request Form
This form will be sent from Juggernaut to USI whenever a change or
revision to the scope is requested, as outlined in the Change Request
Process (Addendum l of this document). It is an invaluable tool in
clearly defining the change in Project Scope and the implications to
the Production Schedule and Estimated Costs.
19
<PAGE>
- --------------------------------------------------------------------------------
Production Team:
Total people: 38
Technical: 21
Creative: 10
Other: 7 (Project Managers, Taxonomist, Asset Manager, Copywriters,
etc.)
Total Team:
1. [
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38. ]
20
<PAGE>
- --------------------------------------------------------------------------------
Production Team: Continued
Team Structure:
(people are spread across multiple teams ... Please refer to Team Org Chart
for more detail)
Overall Management Team:
o [
o
o
o ]
Cross-Functional Integration Team:
o [
o
o
o ]
Internal Market Research Team:
o [
o
o
o ]
Brand / Logo Management:
o [
o ]
All Site Copy:
o [
o
o
o ]
Information Architecture Development:
o [
o
o
o
o
o
o ]
21
<PAGE>
Production Team: Continued
- --------------------------------------------------------------------------------
Database Module Team:
o [
o
o ]
Application Development Team:
o [ ]
22
<PAGE>
- --------------------------------------------------------------------------------
Production Team: Continued
User Application Interface Design:
o [
o
o
o
o
o
o
o
o ]
Quality Assurance Team:
o (All team for each responsible module)
o [
o ]
Technical Documentation Team:
o Full-time Technical Writer
o [
o
o
o
o
o
o
o
o
o ]
[ ]
Interface Design Production Team:
o [
o
o
o ]
23
<PAGE>
- --------------------------------------------------------------------------------
Launch 1 Timeline:
The Production Schedule is based on the project scope as outlined in the Scope
for Launch 1 Development section of this document. If the project scope is
altered, either through a Change Order Request or other request, the Production
Schedule may be updated to reflect the change.
Important Dates / Deadlines for Launch 1:
[ ]
[ ]
* If USI is fully involved in the Quality Assurance of the Juggernaut Web Site
by the launch date of [ ], Juggernaut may decide to retain the USI team on a
Time and Material basis for an extended timeframe for further Quality Assurance
work under this agreement, [ ]
Milestone Schedule:
- --------------------------------------------------------------------------------
(Please refer to the Production Schedule for additional details)
[ ] [ ]
[ ] [ ]
Technical Design Document Presented [ ]
[ ] [ ]
[ ] [ ]
[ ] [ ]
[ ] [ ]
[ ] [ ]
Copy Review 1 [ ]
Usability Test Report [ ]
24
<PAGE>
[ ] [ ]
[ ] [ ]
[ ] [ ]
Technical Integration Report 1 [ ]
[ ] [ ]
Copy Review 2 [ ]
[ ] [ ]
[ ] [ ]
[ ] [ ]
Logo Presentation [ ]
Technical Integration Report 2 [ ]
[ ] [ ]
User Interface Design Complete [ ]
Technical Integration Report 3 [ ]
[ ] [ ]
[ ] [ ]
[ ] [ ]
[ ] [ ]
25
<PAGE>
Production Cost Estimate for Launch 1:
- --------------------------------------------------------------------------------
Based on the current scope as defined in the Project Scope sections above, the
budget is set at a fixed price. USI and Juggernaut will have monthly evaluations
of the project, from which any necessary Change Orders will be generated.
Technical Development Costs:
---------------------------------------------------------------------
Development / Integration Effort: Estimated Cost:
---------------------------------------------------------------------
[ ] [ ]
---------------------------------------------------------------------
Technical / Creative Integration [ ]
---------------------------------------------------------------------
Database [ ]
---------------------------------------------------------------------
[ ] [ ]
---------------------------------------------------------------------
Login Module [ ]
---------------------------------------------------------------------
Registration Module [ ]
---------------------------------------------------------------------
[ ] [ ]
---------------------------------------------------------------------
[ ] [ ]
--------------------------------------------------------------------
[ ] [ ]
---------------------------------------------------------------------
Customer Support Module [ ]
---------------------------------------------------------------------
[ ] [ ]
---------------------------------------------------------------------
[ ] [ ]
---------------------------------------------------------------------
[ ] [ ]
---------------------------------------------------------------------
[ ] [ ]
---------------------------------------------------------------------
Transaction Module [ ]
---------------------------------------------------------------------
Financial/Billing Module [ ]
---------------------------------------------------------------------
[ ] [ ]
---------------------------------------------------------------------
Online Help [ ]
---------------------------------------------------------------------
[ ] [ ]
---------------------------------------------------------------------
[ ] [ ]
---------------------------------------------------------------------
[ ] [ ]
---------------------------------------------------------------------
[ ] [ ]
---------------------------------------------------------------------
System Monitor Module [ ]
---------------------------------------------------------------------
Security [ ]
---------------------------------------------------------------------
Fulfillment and Shipping Feedback [ ]
---------------------------------------------------------------------
[ ] [ ]
---------------------------------------------------------------------
User Interface Programming [ ]
---------------------------------------------------------------------
[ ] [ ]
---------------------------------------------------------------------
Quality Assurance [ ]
---------------------------------------------------------------------
Documentation [ ]
---------------------------------------------------------------------
SUBTOTAL [ ]
---------------------------------------------------------------------
26
<PAGE>
Production Cost Estimate for Launch 1: Continued
- --------------------------------------------------------------------------------
Creative Development Costs:
--------------------------------------------------------------------
Development / Integration Effort: Estimated Cost:
--------------------------------------------------------------------
[ ] [ ]
--------------------------------------------------------------------
Information Architecture Development [ ]
--------------------------------------------------------------------
Interface Design [ ]
User Interface
[ ]
--------------------------------------------------------------------
Production [ ]
--------------------------------------------------------------------
SUBTOTAL [ ]
--------------------------------------------------------------------
Other Costs:
--------------------------------------------------------------------
Production Effort: Estimated Cost:
--------------------------------------------------------------------
Team Management: [ ]
Overall Project Management
Senior Project Manager
Project Manager
Project Coordinator
Technical Team leadership
Senior Tech Lead
Co-Tech Lead
Co-Tech Lead
Creative Team leadership
Creative Director
Senior Art Director
--------------------------------------------------------------------
[ ]
[ ]
--------------------------------------------------------------------
[ ] [ ]
--------------------------------------------------------------------
[ ] [ ]
--------------------------------------------------------------------
SUBTOTAL [ ]
--------------------------------------------------------------------
ESTIMATED TOTAL [ ]
NEGOTIATED TOTAL $3,600,000
27
Payment Schedule:
- --------------------------------------------------------------------------------
US Interactive is to receive equal payments at the end of each month for the
duration of the project. Upon approval of this document, the first month's
payment is due.
If work toward Launch 1 continues past the estimated launch end-date of July 30,
1999 (or such later date as the Launch 1 Date shall have been extended to in
accordance with the provisions set forth in the Production Plan/Budget
Contingencies section of this Statement of Work), because of reasons other than
reasonably avoidable delay solely attributable to USI, or a Force Majeure
Condition (as defined in the Agreement [defined below]) in which case the
provisions of Section 11 of the Agreement shall apply.1 Force Majeure Conditions
do not include reasonably avoidable days of delay attributable to Juggernaut or
its suppliers or other contractors, or reasonably avoidable days of delay
attributable to third parties not connected with either party. U.S. Interactive
will be paid the remainder of the fixed fee of $3.6 million in accordance
herewith and will then be paid monthly at the end of each month on a time and
material basis for work on and after July 30, 1999 at the usual and customary
rates charged by U.S. Interactive, discounted by 20%. The last $1 million of the
fixed fee of $3.6 million shall be paid no later than October 15, 1999.Should
<PAGE>
payment of the last $1 million not occur by before October 15, 1999, then
Juggernaut will pay interest to U.S. Interactive at 10% per annum from July 30,
1999 on any such unpaid amount until the same is paid.
Some additional team members working specifically on the Business Plan portion
of the project are not included in the cost estimate. These team members will be
retained on a time and material basis until the Business Plan is completed.
- ----------
(1) Section 11 of the Agreement provides: USI shall provide the
Deliverable described in, and when scheduled in, the Work Orders. Neither party
shall be held responsible for any delay or failure in performance of any part of
the Agreement to the extent such delay or failure is caused by fire, flood,
explosion, war, strike, embargo, government requirement, civil or military
authority, act of God, or other similar causes beyond its control and without
the fault or negligence of the delayed or non-performing party ("Force Majeure
Condition"). If any Force Majeure Condition occurs, the party affected by the
other's delay or inability to perform may elect to (1) suspend this Agreement
for the duration of the Force Majeure Condition and, once the Force Majeure
Condition ceases, resume performance under this Agreement with an option in the
affected party to extend the period of this Agreement up to the length of time
the Force Majeure Condition was endured; and/or (2) when the delay or
non-performance continues for a period of at least thirty (30) days, terminate,
at no charge, and effective upon written notice thereof to the non-terminating
party, this Agreement in its entirety, provided however that the terminating
party shall remain liable in respect of Services provided through the date of
such termination. Unless written notice is given within forty-five (45) days
after the affected party is notified of the Force Majeure Condition, election
(1) shall be deemed selected.
28
<PAGE>
Payment Schedule: Continued
- --------------------------------------------------------------------------------
It is agreed that Juggernaut may terminate work under this Statement of Work,
effective as of the receipt of Juggernaut's notice of termination, for
Juggernaut's convenience and not based on any default, if the amounts paid to US
Interactive under this Statement of Work as of the date of such termination
total $2,500,000 or more. In the event that USI has not been paid a total of
$2,500,000 by Juggernaut for USI's work efforts under this Statement of Work,
within 18 months of the date of this Statement of Work (other than due to
termination of the Professional Services And Consulting Agreement dated as of
January 6, 1999 Between Juggernaut Partners, LLC and U.S.Interactive, Inc. [the
"Agreement"] for a material breach by USI pursuant to Section 15.8 thereof), the
licenses granted under Section 9.2 and Section 9.6 of the Agreement shall
terminate on the 18 month anniversary of this Statement of Work.
Except as set forth above, this Statement of Work is not intended to modify or
waive the rights of either party under the Agreement. In the event of a
termination for convenience, Juggernaut shall pay to USI reasonable actual
expenses incurred by USI in connection with providing the services under this
Statement of Work up to the date of the termination for convenience. Upon
receipt of the notice of termination, USI shall immediately cease performance of
services under this Statement of Work and USI shall make commercially reasonable
efforts to minimize cost and to preserve the Deliverables completed to date.
Juggernaut shall not be responsible for fees, costs, or expenses (including, but
not limited to, travel and lodging) of any services performed by USI more than
30 days after USI receives the notice of termination, other than unavoidable and
reasonable expenses experienced by USI despite good faith efforts by USI to make
commercially reasonable efforts to minimize cost and to preserve the
deliverables completed to date. The parties agree that licenses to intellectual
property and ownership thereof will be allocated in accord with the Agreement
upon such termination.
29
<PAGE>
Risks / Critical Path Deadlines:
- --------------------------------------------------------------------------------
Outlined below are critical business/partnership issues that Juggernaut and the
USI Business Development Team are responsible for. These deadlines directly
effect the Production Schedule and Production Team efforts. If any of the
following Critical Path Deadlines are not met, the Production Schedule and/or
Production Budget may be effected.
The following table details the Critical Path Issues and specific responsible
party:
<TABLE>
<CAPTION>
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Critical Path Issue: Responsible Party: Deadline:
- ---------------------------------------------------------------------------------------------------------
Juggernaut Management Hiring Plan Juggernaut [ ] [ ]
- ---------------------------------------------------------------------------------------------------------
Juggernaut Management Hiring Juggernaut [ ] [ ]
Immediate Needs:
[ ]
- ---------------------------------------------------------------------------------------------------------
Juggernaut Management Hiring Juggernaut [ ] [ ]
Secondary Needs:
[ ]
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
[ ] Juggernaut [ ] [ ]
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Technical Due Diligence for [ ] USI Development Team [ [ ]
] with assistance from
Juggernaut [
]
- ---------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
Risks / Critical Path Deadlines: Continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Bank Partnership Juggernaut [ [ ]
]
- ----------------------------------------------------------------------------------------------------------
Accounting Software Package Decision Juggernaut [ ] [ ]
- ----------------------------------------------------------------------------------------------------------
Legal Questions Juggernaut [ ] May 10
- ----------------------------------------------------------------------------------------------------------
Business Strategy: Juggernaut and USI Business [ ]
[ ] Development Team
[ ] TBL
Business Strategists)
- ----------------------------------------------------------------------------------------------------------
[ ] Juggernaut [ ] [ ]
- ----------------------------------------------------------------------------------------------------------
[ ] USI Production Team [ ]
[ ]
- ----------------------------------------------------------------------------------------------------------
</TABLE>
* * This [ ] deadline will be fulfilled when Juggernaut delivers the
Following information per partner to USI:
1. [ ]
2. Technical contact information
3. Contract status, interest level and time estimates for contract
signing and integration
4. Category
5. [ ]
6. General Systems Capabilities
7. Systems Issues - Answers to as many of the technical due-diligence
questions (listed in next footnote below) as possible
8. Next Steps
* * * Technical Due Diligence is defined as answers to the following questions:
1. File format Information:
o [ ]
2. Category Information:
o Organization of data
o Organizational structure protocols
31
<PAGE>
3. Branding Information:
o Representation concerns
4. File Access Information:
o Process for receiving information (i.e. FTP, HTTP, E-mail)
o Frequency of data updates
o Charges associated with accessing the partner's data
o Times for access availability (24/7 or other)
5. Order Entry Information:
o Process for communicating an order
o [ ]
o Back-order system reliability
o Back-order logistics
6. Shipping Information:
o Carrier information
o Shipping locations
o Multiple warehouses or singe warehouse
o Availability of shipping cost information
o Availability of any additional information
7. Returns Information:
o Return logistics
8. Technical Support and Customer Service:
o Availability of technical support for development team
o Logistics of customer support
o Times of customer support availability
9. Fees and Pricing Information:
o Fees associated with [ ]
o Fees associated with placing orders
o Fees associated with sending back returns
o [ ]
o Pricing contingencies
32
<PAGE>
Risks / Critical Path Deadlines: Continued
- --------------------------------------------------------------------------------
* * * Technical Due Diligence is defined as answers to the following questions:
(Continued from previous page ... )
10. Network and Security Information
o Network Topology (Private[Leased] line, Internet)
o Security and Access Control Policy
o [ ] requirements
o Data encryption requirements
33
<PAGE>
Production Plan / Budget Contingencies:
- --------------------------------------------------------------------------------
o Once the Production Schedule and Estimated Costs are approved, by
execution of this Statement of Work by the parties, modifications in
the scope of the project will come in the form of a Change Request, as
outlined in the Change Request Procedure attached as Addendum l of
this document.
o Modifications of the scope of work as a result of the Focus
Group/Usability reports will come in the form of a Change Request, as
outlined in the Change Request Procedure attached as Addendum l of
this document.
o [ ]
o All milestones in the Production Schedule will be strictly adhered to.
In the event of a delay of a Juggernaut-driven milestone or approval,
the Production Schedule will be adjusted accordingly on a case-by-case
basis as agreed by both parties. In the event of a delay of a
USI-driven milestone or deliverable, the schedule will not be modified
and USI will use it's best efforts to meet the final launch date as
agreed by both parties.
o USI will communicate to Juggernaut when a Juggernaut-driven milestone
or approval is approaching.
o Due to the aggressive Production Schedule, USI requests that approval
turnaround for updated Budget Estimate and Production Schedules, or
any deliverable associated with the project occur within 72 hours and
that the parties negotiate in good faith during such 72 hour period to
reach agreement with respect to the terms of any updated Budget
Estimate and Production Schedule presented by USI. If there is a delay
of more than 72 hours for any approval, it is understood that USI will
be granted an extension for delivery of the effected deliverable and
all other deliverables that are reasonably likely to be delayed and
actually are delayed as a result of such delay in approval (unless
such delay is due to USI's failure to negotiate in good faith during
such 72 hour period to reach agreement with respect to the terms of
any updated Budget Estimate and Production Schedule presented by USI).
o At every major milestone/deliverable point (as detailed in the
Production Schedule), Juggernaut will be required to sign a Milestone
Review Sheet. Project production work and/or work toward the requested
revisions for the deliverable will commence upon execution of this
form.
o If a milestone status meeting and the associated milestone
approval/revision discussions take longer than 2 days, the final
Launch 1 Date will be pushed back one day for each day in excess of
such 2 day period until the terms of the Reviewed Deliverable are
finally agreed upon and such Milestone Review Sheet is executed by
Juggernaut).
o For artistic or creative approvals, there will only be one round of
revisions per deliverable.
o If the time necessary to complete revisions to a given deliverable
exceeds two weeks, a Change Order Request will be required from
Juggernaut containing terms that are mutually agreed to by Juggernaut
and USI.
34
<PAGE>
Production Plan / Budget Contingencies: Continued
- --------------------------------------------------------------------------------
o If any of the Critical Path deadlines for which USI is not responsible
or for which USI does not share responsibility (as described in the
Critical Path section above) are not met, USI will not be held to the
Launch 1 deadline and a change order will be required to review the
project schedule. The number of days that the Launch 1 Date is moved
will be communicated by USI on a case-by-case basis.
o Status Meetings requested by Juggernaut which are not already outlined
in the predetermined monthly Status Meeting schedule will effect the
Launch 1 Date. The number of days that the Launch 1 Date is moved will
be communicated by USI on a case-by-case basis. However, any ad hoc
Status Meetings (1 hour or less in length, consisting of an oral
presentation of general project status with no resulting additional
work) will not effect the Launch 1 Date.
o [ ]
o [ ]
o [ ]
o [ ]
o The Production Cost Estimate does not include costs for the following,
which will be billed separately with prior approval from Juggernaut:
- [ ]
35
<PAGE>
o All Out of Pocket Expenses, including fees associated with travel,
hardware, and software licenses for both USI and any third-party
vendors, are not included in the Project Estimate and will be billed
separately with prior approval from Juggernaut.
o US Interactive is not responsible for any delays in the production
schedule as caused by development partners or third party vendors. If
such a delay occurs, the Launch date may be effected. The number of
days that the Launch Date is moved will be communicated by USI on a
case-by-case basis.
o USI is responsible for hiring the Production Team members necessary to
complete the Project Scope by the Launch 1 deadlines.
o Pending any future Change Order Requests or other requests to alter
the scope of the project, USI is responsible for creating the system
to include the features described in the Project Scope section above.
o If the Launch 1 Date (as the same may be extended in accordance with
the provisions set forth in the Production Plan/Budget Contingencies
section of this Statement of Work) is not met or clearly will not be
met because of the reasonably avoidable delays solely attributable to
USI, then Juggernaut may, upon written notice to USI, terminate this
Statement of Work and the provisions of Section 15.8 of the Agreement
with respect to allocation of licenses and ownership of property
rights will apply. The power or right to terminate for such breach
does not eliminate any rights Juggernaut might otherwise have to bring
an action for damages (including interest at the legal rate) or
equitable relief.
36
<PAGE>
Agreement
- --------------------------------------------------------------------------------
The following signatures designate intent to proceed with development of
Juggernaut's online electronic commerce business with specific acknowledgement
on the scope of work, the estimated cost and the timeline of the engagement.
Upon execution by both parties, this Statement of Work shall become Appendix B
to the Professional Services and Consulting Agreement.
By: _________________________________________________________________________
Name: _________________________________________________________________________
Date: ________________________
Juggernaut Partners, LLC
By: _________________________________________________________________________
Name: _________________________________________________________________________
Date: ________________________
US Interactive, Inc.
37
<PAGE>
EXHIBIT 10.11
NORTON PLAZA OFFICE LEASE
LANDLORD
Norton Plaza Associates,
A California Limited Partnership
Tenant
U. S. Interactive, Inc.
A Delaware corporation
<PAGE>
SUMMARY OF BASIC LEASE INFORMATION
The undersigned hereby agree to the following terms of this Summary of Basic
Lease Information (the "Summary"). This Summary is hereby incorporated into and
made a part of the attached Office Lease (this Summary and the Office Lease to
be known collectively as the "Lease") which pertains to the office building
described in Section 6.1 below (the "Building"). Each reference in the Office
Lease to any term of this Summary shall have the meaning as set forth in this
Summary for such term. In the event of a conflict between the terms of this
Summary and the Office Lease, the terms of the Office Lease shall prevail. Any
initially capitalized terms used herein and not otherwise defined herein shall
have the meaning as set forth in the Office Lease.
Terms of Lease Description
(References Are to the Office Lease)
1. Dated as of: March 30, 1999
2. Landlord: Norton Plaza Associates
a California limited partnership
3. Address of Landlord 1800 Avenue of the Stars
(Section 29.14) Suite 1400
Los Angeles, CA 90067-4216
4. Tenant: U. S. Interactive
A Delaware corporation
5. Address of Tenant 11911 San Vicente Boulevard
(Section 29.14): Suite 225
Los Angeles, CA 90049
Attn: Eric Pulier
6. Premises (Article 1):
6.1 Building 11911 San Vicente Boulevard
6.2 Premises: Consisting of several suites located
on the first, second, and third
floors as set forth in Exhibit A
attached hereto and identified below
including the corresponding square
footages for each suite: Square
Footage
Suite
138 4,302
200 3,960
225 6,482
230 2,693
236 1,534
255 2,941
265 2,847
324 4,167
351 728
6.3 Number of Rentable Square Feet in 91,431 the Building:
7. Term:
7.1 Lease Term: Five years plus any partial month.
7.2 Commencement Date: Commencing sixty (60) days following
the date Landlord delivers
possession of the final suite to
Tenant. 8. Base Rent (Article 1)
<TABLE>
<CAPTION>
Annual Base Monthly Installment of Monthly Rental Rate for
Months Rent Base Rent Rentable Square Foot
------ ---- --------- --------------------
<S> <C> <C> <C>
1 - 30 $833,068.80 $69,422.40 $2.40
31 - 60 $881,664.48 $73,472.04 $2.54
</TABLE>
2
<PAGE>
Rent shall commence at the monthly per square foot rate stated above as to
suites 225, 265, and 324 on the first day of the first month following full
lease execution. Rent for suite 350 shall be $5,942.00 per month until vacated
by Tenant. Tenant shall pay no rent on suite 138 for the first five months
following delivery of possession. For suites 200, 230, and 236 Rent shall
commence upon the earliest to occur of (i) sixty (60) days following the date
Landlord delivers possession and Tenant accepts possession of each suite, and
(ii) Tenant occupies the suite for other than installation of improvements,
furniture fixtures or equipment.
9. Additional Rent
(Article 4):
9.1 Base Year: Calendar Year 1999
9.2 Tenant's share of Direct Expenses: Approximately 32.43%
10. Security Deposit $11,343.50; Tenant shall provide
(Article 21): a letter of credit in the amount
of $40,000.00, which letter of
credit amount shall be decreased
by $10.000.00 each year on the
anniversary of the commencement
date.
11. Number of Parking Passes One parking pass for each 333
(Article 28): rentable square feet of space
leased. The rate shall be at
prevailing rate per pass minus
$10.00.
12. Brokers (Section 29.18):
Landlord's Broker: Topa Management Company
Tenant's Broker Julien J. Studley, Inc.
13. Permitted Use General office, editing,
(Article 5) production, computer,
multimedia, online service
related work, and any lawful use
consistent with a class A office
building, including an employee
exercise room on the ground
floor.
14. Improvement Allowance: Landlord shall pay to Tenant an
allowance in an amount equal to
$5.00 per rentable square foot
on each suite except suite 200.
For suite 200 the allowance
shall be $15.00 per rentable
square foot. The allowance shall
be paid within ten business days
following the date rent
commences as to each suite.
Tenant shall be paid an
additional $5,000.00 to
interconnect (including with
cable) various suites. Tenant
has a right at its own expense
to further cable between
portions of the Premises.
15. Signage: Tenant at Tenant's
expense shall be allowed to
place a corporate identification
sign in the location identified
on the elevation drawing
attached hereto as Exhibit A-4
<PAGE>
16. Expansion: Subject only to existing
tenant's options to renew, and
provided Tenant has not allowed
any default to continue beyond
its applicable cure period,
after written notice to cure,
Tenant shall have the option to
lease any space which becomes
available on the second or third
floor. No more than four months
prior to the expiration of each
existing tenant's term, Landlord
shall notify Tenant of the
pending availability and Tenant
shall have thirty days in which
to elect to lease the space. Any
space leased pursuant to this
right shall be at the same terms
and conditions as the Lease at
the time Tenant takes possession
of the suite, including rental
rate, and remodeling allowance
at $5.00 per rentable square
foot reduced on a straight line
basis to reflect the remaining
term. For example, if there are
thirty months remaining on the
lease the allowance shall be
36/60 X $5.00, or $3.00 per
rentable square foot. If there
are less than thirty (30) months
3
<PAGE>
remaining on the term and Tenant
elects to exercise an option as
to additional space, at
Landlord's option the term for
all space leased shall be
extended for a period, so that
the Lease will expire thirty six
(36) months following the date
Tenant takes possession of each
expansion suite. If so extended
the Basic Rent shall increase to
$2.70 per rentable square foot
at the beginning of the 61st
month following the Commencement
Date
17. Option to Renew: Provided Tenant
has not allowed any default to
continue beyond the applicable
cure period, after written
notice to cure, Tenant shall
have an option to renew the
Lease for one additional term of
five years in accordance with
Exhibit F attached hereto.
18. Use of Patio: Except for the area immediately
behind the adjacent tenants,
Tenant shall have the exclusive
right to use all of the patio
space to the north and west of
the ground floor premises.
Tenant may place patio furniture
and or plant material on the
patio. Tenant shall be
responsible for maintaining any
items placed on the patio and
shall keep the area free from
debris and trash.
19. Internal Stairway: Subject to all applicable codes
and ordinances and Landlord's
reasonable approval Tenant at
Tenant's expense shall have the
option to install an internal
stairway within the Premises to
connect the 1st and 2nd and/or
2nd and 3rd floors. Prior to
Lease termination, if requested
by Landlord, Tenant shall remove
any stairway constructed by
Tenant and return the Premises
to the condition in which it was
delivered to Tenant.
Notwithstanding anything else
contained in this Lease, Tenant
shall have the right to
terminate this Lease with
respect to Suite 138 if, within
sixty (60) days after Lease
execution, Tenant is unable (or
unwilling due to cost) to
construct the internal
stairwell. In the event that
Tenant elects to terminate Suite
138, Tenant shall pay to
Landlord a termination fee equal
to $20,649.60, two (2) months
base rent for Suite 138.
<PAGE>
The foregoing terms of this Summary are hereby agreed to by Landlord and Tenant.
"Tenant" U.S. Interactive, Inc.,
a Delaware corporation
By: /s/
--------------------------------
Eric Pulier
Its: President
"Landlord": Norton Plaza Associates,
a California limited partnership
By: San Vicente Montana Associate
A partnership
By: /s/
--------------------------------
Paul R. Gienger
Its: General Partner
4
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
SUMMARY OF BASIC LEASE INFORMATION................................................................................2
INDEX OF MAJOR DEFINED TERMS......................................................................................7
ARTICLE 1.........................................................................................................8
REAL PROPERTY, BUILDING AND PREMISES...........................................................................8
ARTICLE 2.........................................................................................................8
LEASE TERM.....................................................................................................8
ARTICLE 3.........................................................................................................9
BASE RENT......................................................................................................9
ARTICLE 4.........................................................................................................9
ADDITIONAL RENT................................................................................................9
ARTICLE 5........................................................................................................15
USE OF PREMISES...............................................................................................15
ARTICLE 6........................................................................................................15
SERVICES AND UTILITIES........................................................................................15
ARTICLE 7........................................................................................................17
REPAIRS.......................................................................................................17
ARTICLE 8........................................................................................................17
ADDITIONS AND ALTERATIONS.....................................................................................17
ARTICLE 9........................................................................................................19
COVENANT AGAINST LIENS........................................................................................19
ARTICLE 10.......................................................................................................20
INSURANCE.....................................................................................................20
ARTICLE 11.......................................................................................................22
DAMAGE AND DESTRUCTION........................................................................................22
ARTICLE 12.......................................................................................................24
NONWAIVER.....................................................................................................24
ARTICLE 13.......................................................................................................24
CONDEMNATION..................................................................................................24
ARTICLE 14.......................................................................................................25
ASSIGNMENT AND SUBLETTING.....................................................................................25
ARTICLE 15.......................................................................................................28
SURRENDER OF PREMISES; REMOVAL OF TRADE FIXTURES..............................................................28
ARTICLE 16.......................................................................................................29
HOLDING OVER..................................................................................................29
ARTICLE 17.......................................................................................................29
ESTOPPEL CERTIFICATES.........................................................................................29
ARTICLE 18.......................................................................................................30
SUBORDINATION.................................................................................................30
ARTICLE 19.......................................................................................................30
DEFAULTS; REMEDIES............................................................................................30
ARTICLE 20.......................................................................................................32
ATTORNEYS'FEES................................................................................................32
ARTICLE 21.......................................................................................................32
SECURITY DEPOSIT..............................................................................................32
ARTICLE 22.......................................................................................................33
SUBSTITUTION OF OTHER PREMISES................................................................................33
ARTICLE 23.......................................................................................................33
SIGNS.........................................................................................................33
ARTICLE 24.......................................................................................................34
COMPLIANCE WITH LAW...........................................................................................34
ARTICLE 25.......................................................................................................34
LATE CHARGES..................................................................................................34
ARTICLE 26.......................................................................................................34
LANDLORD'S RIGHT TO CURE DEFAULT; PAYMENTS BY TENANT..........................................................34
ARTICLE 27.......................................................................................................35
ENTRY BY LANDLORD.............................................................................................35
ARTICLE 28.......................................................................................................36
TENANT PARKING................................................................................................36
ARTICLE 29.......................................................................................................36
MISCELLANEOUS PROVISIONS......................................................................................36
ARTICLE 30.......................................................................................................40
SIGNATURES....................................................................................................40
</TABLE>
5
<TABLE>
<CAPTION>
<S> <C>
EXHIBIT A........................................................................................................41
BASIC FLOOR PLANS.............................................................................................41
EXHIBIT B........................................................................................................42
RULES AND REGULATIONS.........................................................................................42
EXHIBIT C........................................................................................................46
NOTICE OF LEASE TERM DATES....................................................................................46
EXHIBIT D........................................................................................................47
LANDLORD WORK LETTER..........................................................................................47
EXHIBIT E........................................................................................................54
ESTOPPEL CERTIFICATE..........................................................................................54
EXHIBIT F........................................................................................................56
OPTION PERIOD RENT............................................................................................56
EXHIBIT H........................................................................................................58
HAZARDOUS WASTES..............................................................................................58
EXHIBIT I........................................................................................................59
EXCLUSIONS ADDENDUM...........................................................................................59
PROPERTY DESCRIPTION.............................................................................................62
</TABLE>
6
<PAGE>
INDEX OF MAJOR DEFINED TERMS
LOCATION OF DEFINED TERMS
<TABLE>
<CAPTION>
DEFINED TERMS IN OFFICE LEASE
- ------------- ---------------
<S> <C>
Additional Rent.........................................................................Section 4.1
Base Rent...............................................................................Article 3
Base Year...............................................................................Section 4.2.1
Building................................................................................Article 1
Estimate................................................................................Section 4.3.3
Estimated Excess........................................................................Section 4.3.3
Estimate Statement......................................................................Section 4.3.3
Excess..................................................................................Section 4.3.1
Expense Year............................................................................Section 4.2.3
Force Majeure...........................................................................Section 29.13
Holidays................................................................................Section 6.1.1
Lease Commencement Date.................................................................Article 2
Lease Expiration Date...................................................................Article 2
Lease Term..............................................................................Article 2
Lease Year..............................................................................Article 2
Notices.................................................................................Section 29.14
Operating Expenses......................................................................Section 4.2.4
Premises................................................................................Article 1
Real Property...........................................................................Article 1
Rent....................................................................................Section 4.1
Security Deposit........................................................................Article 21
Statement...............................................................................Section 4.3.2
Tax Expenses............................................................................Section 4.2.5
Tenant's Share..........................................................................Section 4.2.6
Transfer Notice.........................................................................Section 14.1
Transfer Premium........................................................................Section 14.3
Transferee..............................................................................Section 14.1
Transfers...............................................................................Sections 14.1, 14.6 and 14.7
EXHIBITS
Exhibit A - Basic Floor Plan
Exhibit B - Rules and Regulations
Exhibit C - Notice of Lease Term Dates
Exhibit D - Tenant Work Letter
Exhibit E - Estoppel Certificate
Exhibit F - Option to Extend Term
Exhibit G - (not used)
Exhibit H - Hazardous Material
Exhibit I - Exclusion Addendum
</TABLE>
7
<PAGE>
OFFICE LEASE
This Office Lease, which includes the preceding Summary of Basic Lease
Information (the "Summary") attached hereto as pages (ii) through (iv) and
incorporated herein by this reference (the Office Lease and Summary to be known
sometimes collectively hereafter as the "Lease"), dated as of the date set forth
in Section 1 of the Summary, is made by and between "Landlord" and "Tenant" as
those terms are defined in Sections 2 and 4 of the Summary, respectively.
ARTICLE 1
REAL PROPERTY, BUILDING AND PREMISES
1.1 Real Property, Building and Premises. Upon and subject to the terms set
forth in this Lease, Landlord hereby leases to Tenant and Tenant hereby
leases from Landlord the premises set forth in Section 6.2 of the
Summary (the "Premises"), which Premises are located in the building
(the "Building") set forth in Section 6.1 of the Summary. The outline
of the Premises is set forth in Exhibit A attached hereto. The rentable
square footages of the Premises and the Building are set forth in
Section 6 of the Summary. The Building, the parking structure servicing
the Building, the land upon which the Building stands, and the land,
improvements and other buildings surrounding the Building which are
designated from time to time by Landlord as appurtenant to or servicing
the Building, are herein sometimes collectively referred to herein as
the "Real Property." Tenant acknowledges that Landlord has made no
representation or warranty regarding the condition of the Real Property
except as specifically set forth in this Lease. Tenant is hereby
granted the right to the nonexclusive use of the common corridors and
hallways, stairwells, elevators, restrooms and other public or common
areas located on the Real Property; provided, however, that the manner
in which such public and common areas are maintained and operated shall
be at the sole discretion of Landlord and the use thereof shall be
subject to the rules, regulations and restrictions attached hereto as
Exhibit B (the "Rules and Regulations"). Landlord reserves the right to
make alterations or additions to or to change the location of elements
of the Real Property and the common areas thereof.
ARTICLE 2
LEASE TERM
The terms and provisions of this Lease shall be effective as of the date of this
Lease. The term of this Lease (the "Lease Term") shall be as set forth in
Section 7.1 of the Summary and shall commence on the date (the "Lease
Commencement Date") set forth in Section 7.2 of the Summary, and shall terminate
on the date (the "Lease Expiration Date") set forth in Section 7.3 of the
Summary, unless this Lease is sooner terminated as hereinafter provided. For
purposes of this Lease, the term "Lease Year" shall mean each consecutive twelve
(12) month period during the Lease Term; provided, however, that the first Lease
Year shall commence on the Lease Commencement Date and end on the last day of
8
<PAGE>
the eleventh month thereafter and the second succeeding Lease Year shall
commence on the first day of the next calendar month; and further provided that
the last Lease Year shall end on the Lease Expiration Date. An any time during
the Lease Term, Landlord may deliver to Tenant a notice in the form as set forth
in Exhibit C, attached hereto, which Tenant shall execute and return to Landlord
within five (5) days of receipt thereof. Tenant shall be given access to the
Premises 15 days prior to the Lease Commencement Date for installation of
furniture and equipment including communication and computer equipment.
ARTICLE 3
BASE RENT
Tenant shall pay, without notice or demand, to Landlord at the management office
of the Building, or at such other place as Landlord may from time to time
designate in writing, in the form of a check (which is drawn upon a bank which
is located in the State of California) or currency which, at the time of
payment, is legal tender for private or public debts in the United States of
America, base rent ("Base Rent") as set forth in Section 8 of the Summary,
payable in equal monthly installments as set forth in Section 8 of the Summary
in advance on or before the first day of each and every calendar month during
the Lease Term, without any setoff or deduction whatsoever. The Base Rent for
the first full calendar month of the Lease Term, shall be paid at the time of
Tenant's execution of this Lease. If any "Rent," as that term is defined in
Section 4.1, below, payment date (including the Lease Commencement Date) falls
on a day of a calendar month other than the first day of such calendar month or
if any Rent payment is for a period which is shorter than one calendar month
such as during the last month of the Lease Term, the Rent for any fractional
calendar month shall accrue on a daily basis for the period from the date such
payment is due to the end of such calendar month or to the end of the Lease Term
at a rate per day which is equal to 1/365 of the Rent. All other payments or
adjustments required to be made under the terms of this Lease that require
proration on a time basis shall be prorated on the same basis.
ARTICLE 4
ADDITIONAL RENT
4.1 Additional Rent. In addition to paying the Base Rent specified in Article 3
of this Lease, Tenant shall pay as additional rent "Tenant's Share" of the
annual "Direct Expenses," as those terms are defined in Sections 4.2.6 and 4.2.2
of this Lease, respectively, which are in excess of the amount of Direct
Expenses applicable to the "Base Year," as that term is defined in Section 4.2.1
of this Lease. Such additional rent, together with any and all other amounts
payable by Tenant to Landlord, as additional rent or otherwise, pursuant to the
terms of this Lease, shall be hereinafter collectively referred to as the
"Additional Rent." The Base Rent and Additional Rent are herein collectively
referred to as the "Rent." All amounts due under this Article 4 as Additional
Rent shall be payable for the same periods and in the same manner, time and
place as the Base Rent. Without limitation on other obligations of Tenant which
shall survive the expiration of the Lease Term, the obligations of Tenant to pay
the Additional Rent provided for in this Article 4 shall survive the expiration
of the Lease Term.
9
<PAGE>
4.2 Definitions. As used in this Article 4, the following terms shall have
the meanings hereinafter set forth:
4.2.1 "Base Year" shall mean the period set forth in Section 9.1 of the
Summary.
4.2.2 "Direct Expenses" shall mean "Operating Expenses" and "Tax Expenses."
4.2.3 "Expense Year" shall mean each calendar year in which any portion of
the Lease Term falls, through and including the calendar year in which
the Lease Term expires.
4.2.4 "Operating Expenses" shall mean all reasonable expenses, excluding
those set forth in the Exclusions Addendum attached hereto, costs and
amounts of every kind and nature which Landlord shall pay or incur
during any Expense Year because or in connection with the ownership,
management, maintenance, repair, replacement, restoration or operation
of the Real Property, including, without limitation, any amounts paid
or incurred for (i) the cost of supplying all utilities, the cost of
operating, maintaining, repairing, replacing, renovating and managing
the utility systems, mechanical systems, sanitary and storm drainage
systems, and escalator and elevator systems, and the cost of supplies,
tools, and equipment and maintenance and service contracts in
connection therewith; (ii) the cost of licenses, certificates, permits
and inspections and the cost of contesting the validity or
applicability of any governmental enactments which may affect Operating
Expenses, and the costs incurred in connection with the implementation
and operation of a transportation system management program or similar
program; (iii) the cost of insurance carried by Landlord, in such
amounts as Landlord may reasonably determine; (iv) fees, charges and
other costs, including management fees or administrative charges (or
amounts in lieu thereof), consulting fees (including but not limited to
any consulting fees incurred in connection with the procurement of
insurance), legal fees and accounting fees, of all persons engaged by
Landlord or otherwise reasonably incurred by Landlord in connection
with the management, operation, maintenance and repair of the Real
Property; (v) the cost of parking area repair, restoration, and
maintenance, including, but not limited to, resurfacing, repainting,
restriping, and cleaning; (vi) wages, salaries and other compensation
and benefits of all persons engaged in the operation, maintenance or
security of the Real Property, and employer's Social Security taxes,
unemployment taxes or insurance, and any other taxes which may be
levied on such wages, salaries, compensation and benefits; provided,
that if any employees of Landlord provide services for more than one
building of Landlord, then a prorated portion of such employees' wages,
benefits and taxes shall be included in Operating Expenses based on the
portion of their working time devoted to the Real Property, and
provided further, that no portion of any employee's wages, benefits, or
taxes allocable to time spent on the development or marketing of the
Real Property shall be included in Operating Expenses; (vii) payments
10
<PAGE>
under any easement, license, operating agreement, declaration,
restrictive covenant, or instrument pertaining to the sharing of costs
by the Building; (viii) amortization (including interest on the
unamortized cost at a rate equal to the floating commercial loan rate
announced from time to time by Bank of America, a national banking
association, or its successor, as its prime rate, plus 2% per annum
(the "Interest Rate")) of the cost of acquiring or the rental expense
of personal property used in the maintenance, operation and repair of
the Building and Real Property; and (ix) the cost of capital
improvements incurred in connection with the Real Property (A) which
are intended as a labor-saving device or to effect other economies in
the operation or maintenance of the Real Property, or any portion
thereof to the extent of cost savings reasonably anticipated by
Landlord, or (B) that are required under any governmental law or
regulation that is then enforced against the Real Property by a
federal, state or local governmental agency; provided, however, that
each such permitted capital expenditure shall be amortized (including
interest on the unamortized cost) over its useful life as Landlord
shall reasonably determine. If the Building is not fully occupied
during all or a portion of any Expense Year, Landlord shall make an
appropriate adjustment to the variable components of Operating Expenses
for such Expense Year as reasonably determined by Landlord employing
sound accounting and management principles, to determine the amount of
Operating Expenses that would have been paid had the Building been
ninety-five percent (95%) occupied, and the amount so determined shall
be deemed to have been the amount of Operating Expenses for such
Expense Year.
4.2.5 "Tax Expenses" shall mean all federal, state, county, or local
governmental or municipal taxes, fees, charges or other impositions of
every kind and nature, whether general, special, ordinary or
extraordinary (including, without limitation, real estate taxes,
general and special assessments, transit taxes, leasehold taxes or
taxes based upon the receipt of rent, including gross receipts or sales
taxes applicable to the receipt of rent, unless required to be paid by
Tenant, personal property taxes imposed upon the fixtures, machinery,
equipment, apparatus, systems and equipment, appurtenances, furniture
and other personal property used in connection with the Building),
which Landlord shall pay or incur during any Expense Year (without
regard to any different fiscal year used by such governmental or
municipal authority) because of or in connection with the ownership,
leasing and operation of the Real Property. For purposes of this Lease,
Tax Expenses shall be calculated as if the tenant improvements in the
Building were fully constructed and the Real Property, the Building,
and all tenant improvements in the Building were fully assessed for
real estate tax purposes, and accordingly, during the portion of any
Expense Year occurring during the Base Year, Tax Expenses shall be
deemed to be increased appropriately.
4.2.5.1 Tax Expenses shall include, without limitation:
(i) Any assessment, tax, fee, levy or charge in addition to, or in
substitution, partially or totally, of any assessment, tax, fee, levy
11
<PAGE>
or charge previously included within the definition of real property
tax, it being acknowledged by Tenant and Landlord that Proposition 13
was adopted by the voters of the State of California in the June 1978
election ("Proposition 13") and that assessments, taxes, fees, levies
and charges may be imposed by governmental agencies for such services
as fire protection, street, sidewalk and road maintenance,
conservation, refuse removal and for other governmental services
formerly provided without charge to property owners or occupants,
and, in further recognition of the decrease in the level and quality
of governmental services and amenities as a result of Proposition 13,
Tax Expenses shall also include any governmental or private
assessments or the Project's contribution towards a governmental or
private cost-sharing agreement for the purpose of augmenting or
improving the quality of services and amenities normally provided by
governmental agencies. It is the intention of Tenant and Landlord
that all such new and increased assessments, taxes, fees, levies, and
charges and all similar assessments, taxes, fees, levies and charges
be included within the definition of Tax Expenses for purposes of
this Lease;
(ii) Any assessment, tax, fee, levy, or charge allocable to or measured
by the area of the Premises or, the rent payable hereunder,
including, without limitation, any gross income tax with respect to
the receipt of such rent, or upon or with respect to the possession,
leasing, operating, management, maintenance, alteration, repair, use
or occupancy by Tenant of the Premises, or any portion thereof;
(iii) Any assessment, tax, fee, levy or charge, upon this transaction
or any document to which Tenant is a party, creating or transferring
an interest or an estate in the Premises; and
(iv) Any possessory taxes charged or levied in lieu of real estate
taxes.
4.2.5.2 Any expenses incurred by Landlord in attempting to protest,
reduce or minimize Tax Expenses in the Expense Year such expenses
are paid. Tax refunds shall be deducted from Tax Expenses in the
Expense Year they are received by Landlord, or if the Lease has
terminated and Tenant is otherwise entitled to part of the refund,
paid in pertinent part to the Tenant. All special assessments
which may be paid in installments shall be paid by Landlord in the
maximum number of installments permitted by law and not included
in Operating Expenses except in the year in which the assessment
is actually paid; provided, however, that if the prevailing
practice in comparable buildings located in the vicinity of the
Building is to pay such assessments on an early basis, and
Landlord pays the same on such basis, such assessments shall be
included in Operating Expenses in the year paid by Landlord. The
amount of Tax Expenses for the Base Year attributable to the
valuation of the Real Property, inclusive of tenant improvements,
shall be known as "Base Taxes." If in any comparison year
subsequent to the Base Year, the amount of Base Taxes decreases,
then for purposes of all subsequent comparison years, including
the comparison year in which such decrease in Expenses occurred,
the Base Year shall be decreased by an amount equal to the
decrease in Base Taxes.
12
<PAGE>
4.2.5.3 Notwithstanding anything to the contrary contained in this
Section 4.2.5 (except as set forth in Section 4.2.5.1 or levied in
whole or part in lieu of Tax Expenses), there shall be excluded
from Tax Expenses (i) all excess profits taxes, franchise taxes,
gift taxes, capital stock taxes, inheritance and succession taxes,
estate taxes, federal and state income taxes, and other taxes to
the extent applicable to Landlord's general or net income (as
opposed to rents, receipts or income attributable to operations at
the Building), (ii) any items included as Operating Expenses, and
(iii) any items paid by Tenant under Section 4.5 of this Lease.
4.2.6 "Tenant's Share" shall mean the percentage set forth in Section 9.2
of the Summary. Tenant's Share was calculated by multiplying the number
of rentable square feet of the Premises by 100 and dividing the product
by the total rentable square feet in the Building. In the event either
the Premises and/or the Building is expanded or reduced, Tenant's Share
shall be appropriately adjusted, and, as to the Expense Year in which
such change occurs, Tenant's Share for such year shall be determined on
the basis of the number of days during such Expense Year that each such
Tenant's Share was in effect.
4.3 Calculation and Payment of Additional Rent.
4.3.1 Calculation of Excess. If for any Expense Year ending or commencing
within the Lease Term, Tenant's Share of Direct Expenses for such
Expense Year exceeds Tenant's Share of the amount of Direct Expenses
applicable to the Base Year, then Tenant shall pay to Landlord, in the
manner set forth in Section 4.3.2, below, and as Additional Rent, an
amount equal to the excess (the "Excess"). Tenant's Share of Direct
Expenses excluding Tax Expense, and excluding that portion of Direct
Expense attributable to the cost of insurance and utilities shall not
increase by more than 5% in any year.
4.3.2 Statement of Actual Direct Expenses and Payment by Tenant. Landlord
shall endeavor to give to Tenant, on or before the first day of April
following the end of each Expense Year, a statement (the "Statement")
which shall state the Direct Expenses incurred or accrued for such
preceding Expense Year, and which shall indicate the amount, if any, of
any Excess. Upon receipt of the Statement for each Expense Year ending
during the Lease Term, if an Excess is present, Tenant shall pay, with
its next installment of Base Rent due, the full amount of the Excess
for such Expense Year, less the amounts, if any, paid during such
Expense Year, less the amounts, if any, paid during such Expense Year
as "Estimated Excess," as that term is defined in Section 4.3.3, below.
The failure of Landlord to timely furnish the Statement for any Expense
Year shall not prejudice Landlord from enforcing its rights under this
Article 4. Even though the Lease Term has expired and Tenant has
vacated the Premises, when the final determination is made of Tenant's
Share of the Direct Expenses for the Expense Year in which this Lease
terminates, taking into consideration that the Lease Expiration Date
may have occurred prior to the final day of the applicable Expense
Year, if an Excess is present, Tenant shall immediately pay to Landlord
an amount as calculated pursuant to the provisions of Section 4.3.1 of
this Lease. The provisions of this Section 4.3.2 shall survive the
expiration or earlier termination of the Lease Term.
13
<PAGE>
4.3.3 Statement of Estimated Direct Expenses. In addition, Landlord shall
give Tenant a yearly expense estimate statement (the "Estimate
Statement") which shall set forth Landlord's reasonable estimate (the
"Estimate") of what the total amount of Direct Expenses for the
then-current Expense Year shall be and the estimated excess (the
"Estimated Excess") as calculated by comparing Direct Expenses, which
shall be based upon the Estimate, to the amount of Direct Expenses
applicable to the Base Year, which Estimate Statement may be revised
and reissued by Landlord from time to time. The failure of Landlord to
timely furnish the Estimate Statement for any Expense Year shall not
preclude Landlord from enforcing its rights to collect any Estimated
Excess under this Article 4. If pursuant to the Estimate Statement (or
a revision thereof) an Estimated Excess is calculated for the
then-current Expense Year, Tenant shall pay, with its next installment
of Base Rent due, a fraction of the Estimated Excess (or the increase
in the Estimated Excess if pursuant to a revised Estimated Statement)
for the then-current Expense Year (reduced by any amounts paid pursuant
to the last sentence of this Section 4.3.3). Such fraction shall have
as its numerator the number of months which have elapsed in such
current Expense Year to the month of such payment, both months
inclusive, and shall have twelve (12) as its denominator. Until a new
Estimate Statement is furnished, Tenant shall pay monthly, with the
monthly Base Rent installments, an amount equal to one-twelfth (1/12)
of the total Estimated Excess set forth in the previous Estimate
Statement delivered by Landlord to Tenant.
4.4 Allocation of Direct Expenses. Notwithstanding anything to the contrary set
forth in this Article 4, when calculating the Direct Expenses for the Base
Year, such Direct Expenses shall not include any increase in Tax Expenses
attributable to special assessments, charges, costs, or fees, or due to
modifications or changes in governmental laws or regulations, including but
not limited to the institution of a split tax roll, and Operating Expenses
shall exclude market-wide labor-rate increases due to extraordinary
circumstances, including, but not limited to, boycotts and strikes, and
utility rate increases due to extraordinary circumstances including, but
not limited to, conservation surcharges, boycotts, embargoes or other
shortages and amortized costs relating to capital improvements.
4.5 Taxes and Other Charges for Which Tenant Is Directly Responsible. Tenant
shall reimburse Landlord, as Additional Rent, upon demand for any and all
taxes required to be paid by Landlord (except to the extent included in Tax
Expenses by Landlord), excluding state, local and federal personal or
corporate income taxes measured by the net income of Landlord from all
sources and estate and inheritance taxes, whether or not now customary or
within the contemplation of the parties hereto, when:
14
<PAGE>
4.5.1 Said taxes are measured by or reasonably attributable to the cost or
value of Tenant's equipment, furniture, fixtures and other personal
property located in the Premises, or by the cost or value of any
leasehold improvements made in or to the Premises by or for Tenant, to
the extent the cost or value of such leasehold improvements exceeds the
cost or value of a building standard build-out plus an additional $10
per square foot, regardless of whether title to such improvements shall
be vested in Tenant or Landlord;
4.5.2 Said taxes are assessed upon or with respect to the possession,
leasing, operation, management, maintenance, alteration, repair, use or
occupancy by Tenant of the Premises, any portion of the Real Property
or the parking facility used by Tenant in connection with this Lease;
or
4.5.3 Said taxes are assessed upon this transaction or any document to
which Tenant is a party creating or transferring an interest or an
estate in the Premises.
ARTICLE 5
USE OF PREMISES
Tenant shall use the Premises solely for the "Permitted Use," as that term is
defined in Section 13 of the Summary, and Tenant shall not use or permit the
Premises to be used for any other purpose or purposes whatsoever without the
prior written consent of Landlord, which may be withheld in Landlord's sole
discretion. Tenant further covenants and agrees that it shall not use, or suffer
or permit any person or persons to use, the Premises or any part thereof for any
use or purpose contrary to the Rules and Regulations, or in violation of the
laws of the United States of America, the State of California, or the
ordinances, regulations or requirements of the local municipal or county
governing body or other lawful authorities having jurisdiction over the
Building. Tenant shall faithfully observe and comply with the Rules and
Regulations. Without limiting its covenant of quiet enjoyment, Landlord shall
not be responsible to Tenant for the nonperformance of any of such Rules and
Regulations by or otherwise with respect to the acts or omissions of any other
tenants or occupants of the Building. Tenant shall comply with all recorded
covenants, conditions, and restrictions now or hereafter affecting the Real
Property. Tenant shall not use or allow another person or entity to use any part
of the Premises for the storage, use, treatment, manufacture or sale of
hazardous materials or substances as defined pursuant to any applicable federal,
state or local governmental or quasi-governmental law, code, ordinance, rule, or
regulation.
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ARTICLE 6
SERVICES AND UTILITIES
6.1 Standard Tenant Services. Landlord shall provide the following services on
all days during the Lease Term, unless otherwise stated below.
6.1.1 Subject to all governmental rules, regulations and guidelines
applicable thereto, Landlord shall provide heating and air conditioning
when necessary for normal comfort for normal office use in the
Premises, from 8:00 am to 6:00 pm Monday through Friday and 8:00 am to
l:00 pm Saturday, except for Sundays and New Year's Day, President's
Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, the
day after Thanksgiving Day, Christmas Day (collectively, the
"Holidays"). Tenant may arrange with building management for after
hours air conditioning at Landlord's direct cost, which is $12.50 per
hour as January 1995.
6.1.2 Landlord shall provide adequate electrical wiring, facilities and
power for normal general office use as determined by Landlord. Tenant
shall bear the cost of replacement of lamps, starters and ballasts for
Tenant supplied lighting fixtures within the Premises.
6.1.3 Landlord shall provide city water from the regular Building outlets
for drinking, lavatory and toilet purposes.
6.1.4 Landlord shall provide janitorial services Monday through Friday
except the date of observation of the Holidays, in and about the
Premises.
6.1.5 Landlord shall provide nonexclusive automatic elevator service at all
times.
6.2 Overstandard Tenant Use. Tenant shall not, without Landlord's prior written
consent, use heat-generating machines, machines other than normal
fractional horsepower office machines, or equipment or lighting other than
building standard lights in the Premises, which may affect the temperature
otherwise maintained by the air conditioning system or increase the water
normally furnished for the Premises by Landlord pursuant to the terms of
Section 6.1 of this Lease. If Tenant uses water, electricity, heat or air
conditioning in excess of that supplied by Landlord pursuant to Section 6.1
of this Lease, Tenant shall pay to Landlord, upon billing, the cost of such
excess consumption, the cost of the installation, operation, and
maintenance of equipment which is installed in order to supply such excess
consumption, and the cost of the increased wear and tear on existing
equipment caused by such excess consumption; and Landlord may install
devices to separately meter any increased use and in such event Tenant
shall pay the increased cost directly to Landlord, on demand, including the
cost of such additional metering devices. If Tenant desires to use heat,
ventilation or air conditioning during hours other than those for which
Landlord is obligated to supply such utilities pursuant to the terms of
Section 6.1 of this Lease, Tenant shall give Landlord such prior notice, as
Landlord shall from time to time establish as appropriate, of Tenant's
desired use and Landlord shall supply such utilities to Tenant at such
hourly cost to Tenant as Landlord shall from time to time establish (which
shall be treated as Additional Rent).
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6.3 Interruption of Use. Tenant agrees that Landlord shall not be liable for
damages, but shall abate rent after seven days, for material failure to
furnish or material delay in furnishing any service (including telephone
and telecommunication services), or for any material diminution in the
quality or quantity thereof, when such failure or delay or diminution is
occasioned, in whole or in part, by repairs, replacements, or improvements,
by any strike, lockout or other labor trouble, by inability to secure
electricity, gas, water, or other fuel at the Building after reasonable
effort to do so, by any accident or casualty whatsoever, by act or default
of Landlord or Tenant or other parties, or by any other cause within or
beyond Landlord's reasonable control; and such failures or delays or
diminution shall never be deemed to constitute an eviction. Furthermore,
Landlord shall not be liable under any circumstances for a loss of, or
injury to, property or for injury to, or interference with, Tenant's
business, including, without limitation, loss of profits, however
occurring, through or in connection with or incidental to a failure to
furnish any of the services or utilities as set forth in this Article 6.
Landlord may comply with voluntary controls or guidelines promulgated by
any governmental entity relating to the use or conservation of energy,
water, gas, light or electricity or the reduction of automobile or other
emissions without creating any liability of Landlord to Tenant under this
Lease, provided that the Premises are not thereby rendered untenantable.
ARTICLE 7
REPAIRS
Tenant shall, at Tenant's own expense, pursuant to the terms of this Lease,
including without limitation Article 8 hereof, keep the Premises, including all
improvements, fixtures and furnishings therein, in good order, repair and
condition at all times during the Lease Term. In addition, Tenant shall, at
Tenant's own expense but under the supervision and subject to the prior approval
of Landlord, and within any reasonable period of time specified by Landlord,
pursuant to the terms of this Lease, including without limitation Article 8
hereof, promptly and adequately repair all damage to the Premises and replace or
repair all damaged or broken fixtures and appurtenances; provided however, that,
at Landlord's option, or if Tenant fails to make such repairs, Landlord may, but
need not, make such repairs and replacements, and Tenant shall pay Landlord the
cost thereof, including a percentage of the cost thereof (to be uniformly
established for the Building) sufficient to reimburse Landlord for all overhead,
general conditions, fees and other costs or expenses arising from Landlord's
involvement with such repairs and replacements forthwith upon being billed for
same. Landlord may, but shall not be required to, enter the Premises at all
reasonable times to make such repairs, alterations, improvements and additions
to the Premises or to the Building or to any equipment located in the Building
as Landlord shall desire or deem necessary or as Landlord may be required to do
by governmental or quasi-governmental authority or court order or decree. Tenant
hereby waives and releases its right to make repairs at Landlord's expense under
Sections 1941 and 1942 of the California Civil Code or under any similar law,
statute, or ordinance now or hereafter in effect.
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ARTICLE 8
ADDITIONS AND ALTERATIONS
8.1 Landlord's Consent to Alterations. Tenant may not make any improvements,
alterations, additions or changes to the Premises (collectively, the
"Alterations") without first procuring the prior written consent of
Landlord to such Alterations, which consent shall be requested by Tenant
not less than thirty (30) days prior to the commencement thereof, and which
consent shall not be unreasonably withheld by Landlord. The construction of
the initial improvements to the Premises shall be governed by the terms of
the Tenant Work Letter, attached hereto as Exhibit D, and not the terms of
this Article 8.
8.2 Manner of Construction. Landlord may impose, as a condition of its consent
to all Alterations or repairs of the Premises or about the Premises, such
requirements as Landlord in its sole discretion may deem desirable,
including, but not limited to, the requirement that upon Landlord's
request, Tenant shall, at Tenant's expense, remove such Alterations upon
the expiration or any early termination of the Lease Term, and/or the
requirement that Tenant utilize for such purposes only contractors,
materials, mechanics and materialmen reasonably selected by Landlord.
Tenant shall construct such Alterations and perform such repairs in
conformance with any and all applicable rules and regulations of any
federal, state, county or municipal code or ordinance and pursuant to a
valid building permit, issued by the City of Los Angeles, in conformance
with Landlord's reasonable construction rules and regulations. In
performing the work of any such Alterations, Tenant shall have the work
performed in such manner as not to obstruct access to the Building or the
common areas for any other tenant of the Building, and as not to obstruct
the business of Landlord or other tenants in the Building, or interfere
with the labor force working in the Building. Upon completion of any
Alterations, Tenant agrees to cause a timely Notice of Completion to be
recorded in the office of the Recorder of the county in which the Building
is located in accordance with the terms of Section 3093 of the Civil Code
of the State of California or any successor statute, and Tenant shall
deliver to the Building management office a reproducible copy of the "as
built" drawings of the Alterations.
8.3 Payment for Improvements. In the event Tenant orders any Alteration or
repair work directly from Landlord, or from a contractor selected by
Landlord, the charges for such work shall be deemed Additional Rent under
this Lease, payable upon billing therefor, either periodically during
construction or upon the substantial completion of such work, at Landlord's
option. Upon completion of such work, Tenant shall deliver to Landlord, if
payment is made directly to contractors, evidence of payment, contractors'
affidavits and full and final waivers of all liens for labor, services or
materials. If Tenant orders any work directly from Landlord, Tenant shall
pay to Landlord a percentage of the cost of such work (such percentage to
be established on a uniform basis for the Building) sufficient to
compensate Landlord for all overhead, general conditions, fees and other
costs and expenses arising from Landlord's involvement with such work, and
if Tenant does not order any work directly from Landlord, Tenant shall
reimburse Landlord for Landlord's reasonable out-of-pocket costs and
expenses reasonably incurred in connection with Landlord's review of such
work.
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8.4 Construction Insurance. In the event that Tenant makes any Alterations,
Tenant agrees to carry "Builder's All Risk" insurance in an amount approved
by Landlord covering the construction of such Alterations, and such other
insurance as Landlord may require, it being understood and agreed that all
of such Alterations shall be insured by Tenant pursuant to Article 10 of
this Lease immediately upon completion thereof.
In addition, Landlord may, in its discretion, require Tenant to obtain
a lien and completion bond or some alternate form of security reasonably
satisfactory to Landlord in an amount sufficient to ensure the lien-free
completion of such Alterations and naming Landlord as a co-obligee.
8.5 Landlord's Property. All Alterations, improvements, fixtures and/or
equipment which may be installed or placed in or about the Premises, and
all signs installed in, on or about the Premises, from time to time, shall
be at the sole cost of Tenant and shall be and become the property of
Landlord, except that Tenant may remove any Alterations, improvements,
fixtures and/or equipment which Tenant can substantiate to Landlord have
not been paid for with any tenant improvement allowance funds provided to
Tenant by Landlord, provided Tenant repairs any damage to the Premises and
Building caused by such removal. Furthermore, if Landlord, as a condition
to Landlord's consent to any Alteration, requires that Tenant remove any
Alteration upon the expiration or early termination of the Lease Term,
Landlord may, by written notice to Tenant prior to the end of the Lease
Term, or given upon any earlier termination of this Lease, require Tenant
at Tenant's expense to remove such Alterations and to repair any damage to
the Premises and Building caused by such removal. If Tenant fails to
complete such removal and/or to repair any damage caused by the removal of
any Alterations, Landlord may do so and may charge the cost thereof to
Tenant.
ARTICLE 9
COVENANT AGAINST LIENS
Tenant has no authority or power to cause or permit any lien or encumbrance of
any kind whatsoever, whether created by act of Tenant, operation of law or
otherwise, to attach to or be placed upon the Real Property, Building or
Premises, and any and all liens and encumbrances created by Tenant shall attach
to Tenant's interest only. Landlord shall have the right at all times to post
and keep posted on the Premises any notice which it deems reasonably necessary
for protection from such liens. Tenant covenants and agrees not to suffer or
permit any lien of mechanics or materialmen or others to be placed against the
Real Property, the Building or the Premises with respect to work or services
claimed to have been performed for or materials claimed to have been furnished
to Tenant or the Premises, and, in case of any such lien attaching or notice of
any lien, Tenant covenants and agrees to cause it to be immediately released and
removed of record. Notwithstanding anything to the contrary set forth in this
Lease, in the event that such lien is not released and removed on or before the
date occurring ten (10) days after notice of such lien is delivered by Landlord
to Tenant, Landlord, at its sole option, may immediately take all reasonable
action necessary to release and remove such lien, without any duty to
investigate the validity thereof, and all sums, costs and expenses, including
reasonable attorneys' fees and costs, incurred by Landlord in connection with
such lien shall be deemed - Additional Rent under this Lease and shall
immediately be due and payable by Tenant.
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ARTICLE 10
INSURANCE
10.1 Indemnification and Waiver. To the extent not prohibited by law, Landlord,
its partners, trustees, ancillary trustees and their respective officers,
directors, shareholders, beneficiaries, agents, servants, employees, and
independent contractors (collectively, the "Landlord Parties") shall not be
liable for any damage either to person or property or resulting from the
loss of use thereof, which damage is sustained by Tenant or by other
persons claiming through Tenant. To the extent covered by its General
Liability and Contractual Liability insurance, Tenant shall indemnify,
defend, protect, and hold harmless Landlord Parties from any and all loss,
cost, damage, expense and liability (including without limitation court
costs and reasonable attorneys' fees) incurred in connection with or
arising from any cause in, on or about the Premises or any acts, omissions
or negligence of Tenant or of any person claiming by, through or under
Tenant, its partners, and their respective officers, agents, servants,
employees, and independent contractors (collectively, the "Tenant
Parties"), in, on or about the Real Property, during the Lease Term,
provided that the terms of the foregoing indemnity shall not apply to the
negligence or willful misconduct of Landlord or the Landlord Parties. To
the extent coverage is provided by Tenant's General Liability and
Contractual Liability insurance, should Landlord be named as a defendant in
any suit brought against Tenant in connection with or arising out of an
event covered by the foregoing indemnity, Tenant shall pay to Landlord its
costs and expenses incurred in such suit, including without limitation, its
actual professional fees such as appraisers', accountants' and attorneys'
fees. Tenant's agreement to indemnify Landlord pursuant to this Section
10.1 is not intended and shall not relieve any insurance carrier of its
obligations under policies required to be carried by Tenant pursuant to the
provision of this Lease, to the extent such policies cover the matters
subject to the Tenant's indemnification obligations; nor shall they
supersede any inconsistent agreement of the parties set forth in any other
provision of this Lease. The provisions of this Section 10.1 shall survive
the expiration or sooner termination of this Lease with respect to any
claims or liability occurring prior to such expiration or termination.
10.2 Tenant's Compliance with Landlord's Fire and Casualty Insurance. Landlord
shall insure the Building and the Real Property during the Lease Term
against loss or damage due to fire and other casualties covered within the
classification of fire and extended coverage, vandalism coverage and
malicious mischief, sprinkler leakage, water damage and special extended
coverage on the Building. Such coverage shall be in such amounts, from such
companies, and on such terms and conditions, as Landlord may from time to
time determine. Additionally, at the option of Landlord, such insurance
coverage may include the risks of earthquakes and/or flood damage and
additional hazards, a rental loss endorsement and one or more loss payee
endorsements in favor of the holders of any mortgages or deeds of trust
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encumbering the interest of Landlord in the Building or the ground or
underlying lessors of the Building, or any portion thereof. Tenant shall,
at Tenant's expense, comply with all of Landlord's and Tenant's insurance
companies reasonable requirements pertaining to the use of the Premises. If
Tenant's conduct or use of the Premises causes any increase in the premium
for any insurance policies carried by Landlord, then Tenant shall reimburse
Landlord for any such increase. Tenant, at Tenant's expense, shall comply
with all rules, orders, regulations or requirements of the American
Insurance Association (formerly the National Board of Fire Underwriters)
and with any similar body.
10.3 Tenant's Insurance. Tenant shall maintain the following coverages in the
following amounts.
10.3.1 Commercial General Liability Insurance covering the insured against
claims of bodily injury, personal injury and property damage arising
out of Tenant's operations, assumed liabilities or use of the Premises,
including a Commercial General Liability endorsement covering the
insuring provisions of this Lease and the performance by Tenant of the
indemnity agreements set forth in Section l0.l of this Lease, for
limits of liability not less than: (i) Bodily Injury and Property
Damage Liability - $2,000,000 each occurrence and $2,000,000 annual
aggregate, and (ii) Personal Injury Liability - $2,000,000 each
occurrence and $2,000,000 annual aggregate.
10.3.2 Physical Damage Insurance covering (i) all office furniture, trade
fixtures, office equipment, merchandise and all other items of Tenant's
property on the Premises installed by, for, or at the expense of
Tenant, (ii) the "Tenant Improvements," as that term is defined in the
Tenant Work Letter, and (iii) all other improvements, alterations and
additions to the Premises. Such insurance shall be written on an "all
risks" of physical loss or damage basis, for the full replacement cost
value new without deduction for depreciation of the covered items and
in amounts that meet any co-insurance clauses of the policies of
insurance and shall include a vandalism and malicious mischief
endorsement, sprinkler leakage coverage and earthquake sprinkler
leakage coverage.
10.3.3 Except as specified in Section 10.1, the minimum limits of policies
of insurance required of Tenant under this Lease shall in no event
limit the liability of Tenant under this Lease. Such insurance shall
(i) name Landlord as an additional insured; (ii) specifically and
reasonably cover the routinely insurable liability assumed by Tenant
under this Lease; (iii) be issued by an insurance company having a
rating of not less than A-VIII in Best's Insurance Guide or which is
otherwise acceptable to Landlord and licensed to do business in the
State of California; (iv) be primary insurance as to all claims
thereunder exclusively concerning the Premises and provide that any
insurance carried by Landlord is excess and is non-contributing with
any insurance requirement of Tenant; (v) provide that said insurance
shall not be canceled or coverage changed unless thirty (30) days'
prior written notice shall have been given to Landlord and any
mortgagee of Landlord; and (vi) contain a cross-liability endorsement
or severability of interest clause reasonably acceptable to Landlord.
Tenant shall deliver said policy or policies or certificates thereof to
Landlord on or before the Lease Commencement Date and at least thirty
(30) days before the expiration dates thereof.
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10.4 Waiver of Subrogation. Landlord and Tenant agree to have their respective
insurance companies issuing property damage insurance waive any rights of
subrogation that such companies may have against Landlord or Tenant, as the
case may be. Landlord and Tenant hereby waive any right that either may
have against the other on account of any loss or damage to their respective
property to the extent such loss or damage is insurable under policies of
insurance for fire and all risk coverage, theft, or other similar
insurance. If Tenant fails to carry the amounts and types of insurance
required to be carried pursuant to this Article 10, in addition to any
remedies Landlord may have under this Lease, such failure shall be deemed
to be a covenant and agreement by Tenant to self-insure with respect to the
type and amount of insurance Tenant so failed to carry, with full waiver of
subrogation with respect thereto.
10.5 Additional Insurance Obligations. Tenant shall carry and maintain during
the entire Lease Term, at Landlord's sole cost and expense, increased
amounts of the insurance required to be carried by Tenant pursuant to this
Article 10, and such other reasonable types of insurance coverage and in
such reasonable amounts covering the Premises and Tenant's operations
therein, as may be reasonably requested by Landlord. Notwithstanding
anything to the contrary contained in this Lease, in the event of any
termination of this Lease pursuant to Article 11 or Article 13 below,
Tenant shall assign and deliver to Landlord (or to any party designated by
Landlord) all applicable tangible property damage insurance proceeds
payable to Tenant under Tenant's insurance required under Section 10.3 of
this Lease.
ARTICLE 11
DAMAGE AND DESTRUCTION
11.1 Repair of Damage to Premises by Landlord. Tenant shall promptly notify
Landlord of any damage to the Premises resulting from fire or any other
casualty. If the Premises or any common areas of the Building serving or
providing access to the Premises shall be damaged by fire or other
casualty, Landlord shall promptly and diligently, subject to reasonable
delays for insurance adjustment or other matters beyond Landlord's
reasonable control, and subject to all other terms of this Article 11,
restore the base, shell, and core of the Premises and such common areas.
Such restoration shall be to substantially the same condition of the base,
shell, and core of the Premises and common areas prior to the casualty,
except for modifications required by zoning and building codes and other
laws or by the holder of a mortgage on the Building or any other
modifications to the common areas deemed desirable by Landlord, provided
access to the Premises and any common restrooms serving the Premises shall
not be materially impaired. Notwithstanding any other provisions of this
Lease, upon the occurrence of any damage to the Premises, Tenant shall
assign to Landlord (or to any party designated by Landlord) all applicable
tangible property damage insurance proceeds payable to Tenant under
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Tenant's insurance required under Section 10.3 of this Lease, and Landlord
shall repair any injury or damage to the Tenant Improvements installed in
the Premises and shall return such Tenant Improvements to their original
condition; provided that if the cost of such repair by Landlord exceeds the
amount of insurance proceeds received by Landlord from Tenant's insurance
carrier, as assigned by Tenant, the cost of such repairs shall be paid by
Tenant to Landlord prior to Landlord's repair of the damage. Any excess
tangible property damage insurance proceeds, after reasonable expenditures
by the Landlord, shall be returned to the Tenant. Landlord shall not be
liable for any inconvenience or annoyance to Tenant or its visitors, or
injury to Tenant's business resulting in any way from such damage or the
repair thereof; provided however, that if such fire or other casualty shall
have damaged the Premises or common areas necessary to Tenant's occupancy,
and if such damage is not the result of the reckless or willful misconduct
of Tenant or Tenant's employees, contractors, licensees, or invitees,
Landlord shall allow Tenant a proportionate abatement of Rent, during the
time and to the extent the Premises are unfit for occupancy for the
purposes permitted under this Lease, and not occupied by Tenant as a result
thereof; provided, further, if the Premises is damaged such that the
remaining portion thereof is not sufficient to allow Tenant to conduct its
business operations from such remaining portion and Tenant does not conduct
its business operations therefrom, and if such damage is not the result of
the reckless or willful misconduct of Tenant or any of the Tenant Parties,
Landlord shall allow Tenant a total abatement of Rent during the time and
to the extent the Premises are unfit for occupancy for the purposes
permitted under this Lease, and not occupied by Tenant as a result of the
subject damage.
11.2 Landlord's Option to Repair. Notwithstanding the terms of Section 11.1 of
this Lease, Landlord may elect not to rebuild and/or restore the Premises
and/or Building and instead terminate this Lease by notifying Tenant in
writing of such termination within sixty (60) days after the date of
damage, such notice to include a termination date giving Tenant ninety (90)
days to vacate the Premises, but Landlord may so elect only if the Building
shall be damaged by fire or other casualty or cause, whether or not the
Premises are affected, and one or more of the following conditions is
present: (i) repairs cannot reasonably be completed within one hundred
eighty (180) days of the date of damage (when such repairs are made without
the payment of overtime or other premiums); (ii) the holder of any mortgage
on the Building or ground lessor with respect to the Real Property shall
require that the insurance proceeds or any portion thereof be used to
retire the mortgage debt, or shall terminate the ground lease, as the case
may be; (iii) the damage is not fully covered, except for deductible
amounts, by Landlord's insurance policies; or (iv) the damage occurs during
the last eighteen (18) months of the Lease Term. Notwithstanding anything
set forth above, if the Landlord would have the option to elect not to
rebuild based on the existence of condition 11.2(i) or (iv), the Tenant may
also elect to terminate the Lease, with thirty days written notice, given
at any time within sixty days after the date of damage. The provisions of
this Lease, including this Article 11, constitute an express agreement
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between Landlord and Tenant with respect to any and all damage to, or
destruction of, all or any part of the Premises, the Building or any other
portion of the Real Property, and any statute or regulation of the State of
California, including, without limitation, Sections 1932(2) and 1933(4) of
the California Civil Code, with respect to any rights or obligations
concerning damage or destruction in the absence of an express agreement
between the parties, and any other statute or regulation, now or hereafter
in effect, shall have no application to this Lease or any damage or
destruction to all or any part of the Premises, the Building or any other
portion of the Real Property.
ARTICLE 12
NONWAIVER
No waiver of any provision or breach of this Lease shall be implied by any
failure of Landlord to enforce any remedy on account of the violation of such
provision, even if such violation shall continue or be repeated subsequently,
any waiver by Landlord of any provision of this Lease may only be in writing,
and no express waiver shall affect any provision other than the one specified in
such waiver and that one only for the time and in the manner specifically
stated. Forbearance by Landlord in enforcement of one or more of the remedies
herein provided upon an event of default shall not be deemed or construed to
constitute a waiver of such default. The acceptance of any Rent hereunder by
Landlord following the occurrence of any default, whether or not known to
Landlord, shall not be deemed a waiver of any such default, except only a
default in the payment of the Rent so accepted.
ARTICLE 13
CONDEMNATION
If ten percent (10%) or more of the Premises or Building shall be taken by power
of eminent domain or condemned by any competent authority for any public or
quasi-public use or purpose, or if Landlord shall grant a deed or other
instrument in lieu of such taking by eminent domain or condemnation, Landlord
shall have the option to terminate this Lease upon ninety (90) days' notice,
provided such notice is given no later than one hundred eighty (180) days after
the date of such taking, condemnation, reconfiguration, vacation, deed or other
instrument. If more than twenty-five percent (25%) of the rentable square feet
of the Premises is taken, or if access to the Premises is substantially
impaired, Tenant shall have the option to terminate this Lease upon ninety (90)
days' notice, provided such notice is given no later than one hundred eighty
(180) days after the date of such taking. Landlord shall be entitled to receive
the entire award or payment in connection therewith, except that Tenant shall
have the right to file any separate claim available to Tenant for any taking of
Tenant's personal property and fixtures belonging to Tenant and removable by
Tenant upon expiration of the Lease Term pursuant to the terms of this Lease,
and for moving expenses, loss of goodwill, loss of profits, or the like, so long
as such claim does not diminish the award available to Landlord, its ground
lessor with respect to the Real Property or its mortgagee, and such claim is
payable separately to Tenant. All Rent shall be apportioned as of the date of
such termination, or the date of such taking, whichever shall first occur. If
any part of the Premises shall be taken, and this Lease shall not be so
terminated, the Rent shall be proportionately abated. Tenant hereby waives any
and all rights it might otherwise have pursuant to Section 1265.130 of the
California Code of Civil Procedure.
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ARTICLE 14
ASSIGNMENT AND SUBLETTING
14.1 Transfers. Tenant shall not, without the prior written consent of Landlord,
assign, mortgage, pledge, hypothecate, encumber, or permit any lien to
attach to, or otherwise transfer, this Lease or any interest hereunder,
permit any assignment or other such foregoing transfer of this Lease or any
interest hereunder by operation of law, sublet the Premises or any part
thereof, or permit the use of the Premises by any persons other than Tenant
and its employees (all of the foregoing are hereinafter sometimes referred
to collectively as "Transfers" and any person to whom any Transfer is made
or sought to be made is hereinafter sometimes referred to as a
"Transferee"). If Tenant shall desire Landlord's consent to any Transfer,
Tenant shall notify Landlord in writing, which notice (the "Transfer
Notice") shall include (i) the proposed effective date of the Transfer,
which shall not be less than thirty (30) days nor more than one hundred
eighty (180) days after the date of delivery of the Transfer Notice, (ii) a
description of the portion of the Premises to be transferred (the "Subject
Space"), (iii) all of the terms of the proposed Transfer and the
consideration therefor, including a calculation of the "Transfer Premium,"
as that term is defined in Section 14.3, below, in connection with such
Transfer, the name and address of the proposed Transferee, and a copy of
all existing and/or proposed documentation pertaining to the proposed
Transfer, including all existing operative documents to be executed to
evidence such Transfer or the agreements incidental or related to such
Transfer, (iv) current financial statements of the proposed Transferee
certified by an officer, partner or owner thereof, and any other
information reasonably required by Landlord, which will enable Landlord to
determine the financial responsibility, character, and reputation of the
proposed Transferee, nature of such Transferee's business and proposed use
of the Subject Space, (v) an executed estoppel certificate from Tenant in
the form attached hereto as Exhibit E, and (vi) such other information as
Landlord may reasonably require. Any Transfer made without Landlord's prior
written consent shall, at Landlord's option, be null, void and of no
effect, and shall, at Landlord's option, constitute a default by Tenant
under Section 19.1.7 of this Lease. Whether or not Landlord shall grant
consent, Tenant shall pay Landlord's review and processing fees, as well as
any reasonable legal fees incurred by Landlord, within thirty (30) days
after written request by Landlord.
14.2 Landlord's Consent. Landlord shall not unreasonably withhold its consent to
any proposed Transfer of the Subject Space to the Transferee on the terms
specified in the Transfer Notice. The parties hereby agree that it shall be
deemed to be reasonable under this Lease and under any applicable law for
Landlord to withhold consent to any proposed Transfer where one or more of
the following apply, without limitation as to other reasonable grounds for
withholding consent:
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14.2.1 The Transferee is of a character or reputation or engaged in a
business which is not consistent with the quality of
the Building;
14.2.2 The Transferee is either a governmental agency or instrumentality
thereof (i) which is of a character or reputation, is engaged in a
business, or is of, or is associated with, a domestic or foreign
political orientation or faction, which is inconsistent with the
quality of the Building, or which would otherwise reasonably offend a
landlord of a comparable building located in the vicinity of the
Building, (ii) which is capable of exercising the power of eminent
domain or condemnation, or (iii) which would significantly increase the
human traffic in the Premises or Building;
14.2.3 The Transferee's intended use of the Premises is inconsistent with
the Permitted Use;
14.2.4 Intentionally omitted;
14.2.5 The Transferee is not a party of reasonable financial worth and/or
financial stability in light of the responsibilities involved under the
Lease on the date consent is requested;
14.2.6 The proposed Transfer would cause Landlord to be in violation of
another lease or agreement to which Landlord is a party, or would give
an occupant of the Building a right to cancel its lease; or
14.2.7 The Transferee does not intend to occupy the entire Premises and
conduct its business therefrom for a substantial portion of the term of
the Transfer.
Notwithstanding anything to the contrary in this Lease, if Tenant or any
proposed Transferee claims that Landlord has unreasonably withheld or delayed
its consent under Section 14.2 or otherwise has breached or acted unreasonably
under this Article 14, their sole remedies shall be declaratory judgment and an
injunction for the relief sought without any monetary damages, other than
attorneys fees and costs, and Tenant hereby waives all other remedies on its own
behalf and, to the extent permitted under all applicable laws, on behalf of the
proposed Transferee. Tenant shall indemnify, defend and hold harmless Landlord
from any and all liability, losses, claims, damages, costs, expenses, causes of
action and proceedings involving any third party or parties (including without
limitation Tenant's proposed subtenant or assignee) who claim they were damaged
by Landlord's wrongful withholding or conditioning of Landlord's consent. If
Landlord consents to any Transfer pursuant to the terms of this Section 14.2
(and does not exercise any recapture rights Landlord may have under Section 14.4
of this Lease), Tenant may within six (6) months after Landlord's consent, but
not later than the expiration of said six-month period, enter into such Transfer
of the Premises or portion thereof, upon substantially the same terms and
conditions as are set forth in the Transfer Notice furnished by Tenant to
Landlord pursuant to Section 14.1 of this Lease, provided that if there are any
changes in the terms and conditions from those specified in the Transfer Notice
(i) such that Landlord would initially have been entitled to refuse its consent
to such Transfer under this Section 14.2, or (ii) which would cause the proposed
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Transfer to be more favorable to the Transferee than the terms set forth in
Tenant's original Transfer Notice, Tenant shall again submit the Transfer to
Landlord for its approval and other action under this Article 14 (including
Landlord's right of recapture, if any, under Section 14.4 of this Lease).
14.3 Transfer Premium. If Landlord consents to a Transfer, as a condition
thereto which the parties hereby agree is reasonable, Tenant shall pay to
Landlord Fifty percent (50%) of any "Transfer Premium," as that term is
defined in this Section 14.3, received by Tenant from such Transferee.
"Transfer Premium" shall mean all rent, additional rent or other
consideration payable by such Transferee in excess of the Rent and
Additional Rent payable by Tenant under this Lease, on a per rentable
square foot basis if less than all of the Premises is transferred. In the
calculations of the Rent (as it relates to the Transfer Premium calculated
under this Section 14.3), and the Transferee's Rent and Quoted Rent under
Section 14.2 of this Lease, the Rent paid during each annual period for the
Subject Space, and the Transferee's Rent and the Quoted Rent, shall be
computed after adjusting such rent to the actual effective rent to be paid,
and after first deducting Tenant's cost of effecting the transfer,
including advertising, legal expenses, tenant improvements, and brokerage
commissions.
14.4 Landlord's Option as to Subject Space. Notwithstanding anything to the
contrary contained in this Article 14, Landlord shall have the option, by
giving written notice to Tenant within fifteen (15) days after receipt of
any Transfer Notice, to (i) recapture the Subject Space, or (ii) take an
assignment or sublease of the Subject Space from Tenant. Such recapture, or
sublease or assignment notice shall cancel and terminate this Lease, or
create a sublease or assignment, as the case may be, with respect to the
Subject Space as of the date stated in the Transfer Notice as the effective
date of the proposed Transfer until the last day of the term of the
Transfer as set forth in the Transfer Notice. In the event of a recapture
by Landlord, if this Lease shall be canceled with respect to less than the
entire Premises, the Rent reserved herein shall be prorated on the basis of
the number of rentable square feet retained by Tenant in proportion to the
number of rentable square feet contained in the Premises, and this Lease as
so amended shall continue thereafter in full force and effect, and upon
request of either party, the parties shall execute written confirmation of
the same, If Landlord declines, or fails to elect in a timely manner to
recapture, sublease or take an assignment of the Subject Space under this
Section 14.4, then provided Landlord has consented to proposed Transfer,
Tenant shall be entitled to proceed to transfer the Subject Space to the
proposed Transferee, subject to provisions of the last paragraph of Section
14.2 of this Lease.
14.5 Effect of Transfer. If Landlord consents to a Transfer, (i) the terms and
conditions of this Lease shall in no way be deemed to have been waived or
modified, (ii) such consent shall not be deemed consent to any further
Transfer by either Tenant or a Transferee, (iii) Tenant shall deliver to
Landlord, promptly after execution, an original executed copy of all
documentation pertaining to the Transfer in form reasonably acceptable to
Landlord, (iv) Tenant shall furnish upon Landlord's request a complete
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statement, certified by an independent certified public accountant, or
Tenant's chief financial officer, setting forth in detail the computation
of any Transfer Premium Tenant has derived and shall derive from such
Transfer, and (v) no Transfer relating to this Lease or agreement entered
into with respect thereto, whether with or without Landlord's consent,
shall relieve Tenant or any guarantor of the Lease from liability under
this Lease. Landlord or its authorized representatives shall have the right
at all reasonable times to audit the books, records and papers of Tenant
relating to any Transfer, and shall have the right to make copies thereof.
If the Transfer Premium respecting any Transfer shall be found understated,
Tenant shall, within thirty (30) days after demand, pay the deficiency and
Landlord's costs of such audit, and if understated by more than ten percent
(10%), Landlord shall have the right to cancel this Lease upon thirty (30)
days' notice to Tenant.
14.6 Additional Transfers. For purposes of this Lease, the term "Transfer" shall
also include (i) if Tenant is a partnership, the withdrawal or change,
voluntary, involuntary or by operation of law, of twenty-five percent (25%)
or more of the partners, or transfer of twenty-five percent or more of
partnership interests, within a twelve (12) - month period, or the
dissolution of the partnership without immediate reconstitution thereof,
and (ii) if Tenant is a closely held corporation (i.e., whose stock is not
publicly held and not traded through an exchange or over the counter), (A)
the dissolution, merger, consolidation or other reorganization of Tenant,
the sale or other transfer of more than an aggregate of twenty-five percent
(25%) of the voting shares of Tenant (other than in an initial public
offering of to immediate family members by reason of gift or death), within
a twelve (12)-month period, or (C) the sale, mortgage, hypothecation or
pledge of more than an aggregate of twenty-five percent (25%) of the value
of the unencumbered assets of Tenant within a twelve (12) month period.
ARTICLE 15
SURRENDER OF PREMISES; REMOVAL OF TRADE FIXTURES
15.1 Surrender of Premises. No act or thing done by Landlord or any agent or
employee of Landlord during the Lease Term shall be deemed to constitute an
acceptance by Landlord of a surrender of the Premises unless such intent is
specifically acknowledged in a writing signed by Landlord. The delivery of
keys to the Premises to Landlord or any agent or employee of Landlord shall
not constitute a surrender of the Premises or effect a termination of this
Lease, whether or not the keys are thereafter retained by Landlord, and
notwithstanding such delivery Tenant shall be entitled to the return of
such keys at any reasonable time upon request until this Lease shall have
been terminated. The voluntary or other surrender of this Lease by Tenant,
whether accepted by Landlord or not, or a mutual termination hereof, shall
not work a merger, and at the option of Landlord shall operate as an
assignment to Landlord of all subleases or subtenancies affecting the
Premises.
15.2 Removal of Tenant Property by Tenant. Upon the expiration of the Lease
Term, or upon any earlier termination of this Lease, Tenant shall, subject
to the provisions of this Article 15, quit and surrender possession of the
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Premises to Landlord in as good order and condition as when Tenant took
possession and as thereafter improved by Landlord and/or Tenant, reasonable
wear and tear and repairs which are specifically made the responsibility of
Landlord hereunder excepted. Upon such expiration or termination, Tenant
shall, without expense to Landlord, remove or cause to be removed from the
Premises all debris and rubbish, and such items of furniture, equipment,
free-standing cabinet work, and other articles of personal property owned
by Tenant or installed or placed by Tenant at its expense in the Premises,
and such similar articles of any other persons claiming under Tenant, as
Landlord may, in its sole discretion, require to be removed, and Tenant
shall repair at its own expense all damage to the Premises and Building
resulting from such removal.
ARTICLE 16
HOLDING OVER
If Tenant holds over after the expiration of the Lease Term hereof, with or
without the express or implied consent of Landlord, such tenancy shall be from
month-to-month only, and shall not constitute a renewal hereof or an extension
for any further term, and in such case Rent shall be payable at a monthly rate
equal to one hundred twenty five percent (125%) the Rent applicable during the
late rental period of the Lease Term under this Lease. Such month-to-month
tenancy shall be subject to every other term, covenant and agreement contained
herein. Nothing contained in this Article 16 shall be construed as consent by
Landlord to any holding over by Tenant, and Landlord expressly reserves the
right to require Tenant to surrender possession of the Premises to Landlord as
provided in this Lease upon the expiration or other termination of this Lease.
The provisions of this Article 16 shall not be deemed to limit or constitute a
waiver of any other rights or remedies of Landlord provided herein or at law.
Tenant acknowledges that if Tenant holds over without Landlord's consent, such
holding over may compromise or otherwise affect Landlord's ability to enter into
new leases with prospective tenants regarding the Premises. Therefore, if Tenant
fails to surrender the Premises upon the termination or expiration of this
Lease, in addition to any other liabilities to Landlord accruing therefrom,
Tenant shall protect, defend, indemnify and hold Landlord harmless from all
loss, costs (including reasonable attorneys' fees) and liability resulting from
such failure, including, without limiting the generality of the foregoing, any
claims made by any succeeding tenant founded upon such failure to surrender, and
any losses suffered by Landlord, including lost profits, resulting from such
failure to surrender.
ARTICLE 17
ESTOPPEL CERTIFICATES
Within ten (10) days following a request in writing by Landlord, Tenant shall
execute and deliver to Landlord an estoppel certificate, which, as submitted by
Landlord, shall be substantially in the form of Exhibit E, attached hereto, (or
such other form as may be reasonably required by any prospective mortgagee or
purchaser of the Building, or any portion thereof), indicating therein any
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exceptions thereto that may exist at that time, and shall also contain any other
information reasonably requested by Landlord or Landlord's mortgagee or
prospective mortgagee or purchasers. Tenant shall execute and deliver whatever
other instruments may be reasonably required for such purposes. At any time
during the Lease Term, but not more than annually, Landlord may require Tenant
to provide Landlord with a current financial statement and financial statements
of the two (2) years prior to the current financial statement year. Tenant may
require the Landlord to execute a reasonable confidentiality agreement before
providing any financial information under the Lease. Such statements shall be
prepared in accordance with generally accepted accounting principles and, if
such is the normal practice of Tenant, shall be audited by an independent
certified public accountant. Failure of Tenant to timely execute and deliver
such estoppel certificate or other instruments shall constitute an acceptance of
the Premises and an acknowledgment by Tenant that statements included in the
estoppel certificate are true and correct, without exception.
ARTICLE 18
SUBORDINATION
This Lease is subject and subordinate to all present and future liens of any
mortgages or trust deeds, now or hereafter in force against the Real Property
and the Building, if any, and to all renewals, extensions, modifications,
consolidations and replacements thereof, and to all advances made or hereafter
to be made upon the security of such mortgages or trust deeds, unless the
holders of such mortgages or trust deeds require in writing that this Lease be
superior thereto. In consideration of, and as a condition precedent to, Tenant's
agreement to permit its interest pursuant to this Lease to be subordinated to
any particular future lien of any first mortgage or trust deed, hereafter
enforced against the Building or the Real Property and to any renewals,
extensions, modifications, consolidations and replacements thereof, Landlord
shall deliver to Tenant a commercially reasonable non-disturbance agreement
executed by the landlord and the holder of such mortgage or trust deed. Tenant
covenants and agrees in the event any proceedings are brought for the
foreclosure of any such mortgage, to attorn, without any deductions or setoffs
whatsoever, to the purchaser upon any such foreclosure sale if so requested to
do so by such purchaser, and to recognize such purchaser as the lessor under
this Lease. Tenant shall, within five (5) days of request by Landlord, execute
such further instruments or assurances as Landlord may reasonably deem necessary
to evidence or confirm the subordination or superiority of this Lease to any
such mortgages, trust deeds.
ARTICLE 19
DEFAULTS; REMEDIES
19.1 Defaults. The occurrence of any of the following shall constitute a default
of this Lease by Tenant:
19.1.1 Any failure by Tenant to pay any Rent or any other charge required
to be paid under this Lease, or any part thereof, within five (5)
business days of notice that the same is late, which notice shall be in
lieu of any notice required under California Code of Civil Procedure
Section 1161 or any similar or successor law; or
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19.1.2 Any failure by Tenant to observe or perform any other provision,
covenant or condition of this Lease to be observed or performed by
Tenant where such failure continues for thirty (30) days after written
notice thereof from Landlord to Tenant; provided however, that any such
notice shall be in lieu of, and not in addition to, any notice required
under California Code of Civil Procedure Section 1161 or any similar or
successor law; and provided further that if the nature of such default
is such that the same cannot reasonably be cured within a thirty (30)
day period, Tenant shall not be deemed to be in default if it
diligently commences such cure within such period and thereafter
diligently proceeds to rectify and cure said default, as soon as
possible; or
19.1.3 Abandonment or vacation of the Premises by Tenant; Abandonment is
herein defined to include, but is not limited to, any absence by Tenant
from the Premises for three (3) business days or longer while in
default of any provision of this Lease.
19.2 Remedies Upon Default. Upon the occurrence of a default by Tenant, Landlord
shall have, in addition to any other remedies available to Landlord at law
or in equity, the option to pursue any one or more of the following
remedies, each and all of which shall be cumulative and nonexclusive,
without any notice or demand whatsoever.
19.2.1 Terminate this Lease, in which event Tenant shall immediately
surrender the Premises to Landlord, and if Tenant fails to do so,
Landlord may, without prejudice to any other remedy which it may have
for possession or arrearages in rent, enter upon and take possession of
the Premises and expel or remove Tenant and any other person who may be
occupying the Premises or any part thereof, without being liable for
prosecution or any claim or damages therefor; and Landlord may recover
from Tenant the following:
(i) The worth at the time of award of any unpaid rent which has been
earned at the time of such termination; plus
(ii) The worth at the time of award of the amount by which the unpaid
rent which would have been earned after termination until the time
of award exceeds the amount of such rental loss that Tenant proves
could have been reasonably avoided; plus
(iii) The worth at the time of award of the amount by which the unpaid
rent for the balance of the Lease Term after the time of award
exceeds the amount of such rental loss that Tenant proves could
have been reasonably avoided; plus
(iv) Any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform its
obligations under this Lease or which in the ordinary course of
things would be likely to result therefrom, specifically including
but not limited to, brokerage commissions and advertising expenses
incurred, expenses of remodeling the Premises or any portion
thereof for a new tenant, whether for the same or a different use,
and any special concessions made to obtain a new tenant; and
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(v) At Landlord's election, such other amounts in addition to or in
lieu of the foregoing as may be permitted from time to time by
applicable law.
The term "rent" as used in this Section 19.2 shall be deemed to be and to mean
all sums of every nature required to be paid by Tenant pursuant to the terms of
this Lease, whether to Landlord or to others. As used in Paragraphs 19.2.1(i)
and (ii), above, the "worth at the time of award" shall be computed by allowing
interest at the rate set forth in Article 25 of this Lease, but in no case
greater than the maximum amount of such interest permitted by law. As used in
Paragraph 19.2.1(iii) above, the "worth at the time of award" shall be computed
by discounting such amount at the discount rate of the Federal Reserve Bank of
San Francisco at the time of award plus one percent (1%).
19.2.2 Landlord shall have the remedy described in California Civil Code
Section 1951.4 (lessor may continue lease in effect after lessee's
breach and abandonment and recover Rent as it becomes due, if lessee
has the right to sublet or assign, subject only to reasonable
limitations). Accordingly, if Landlord does not elect to terminate this
Lease on account of any default by Tenant, Landlord may, from time to
time, without terminating this Lease, enforce all of its rights and
remedies under this Lease, including any right to recover all rent as
it becomes due.
19.3 Subleases of Tenant. Whether or not Landlord elects to terminate this Lease
on account of any default by Tenant, as set forth in this Article 19,
Landlord shall have the right to terminate any and all subleases, licenses,
concessions or other consensual arrangements for possession entered into by
Tenant and affecting the Premises or may, in Landlord's sole discretion,
succeed to Tenant's interest in such subleases, licenses, concessions or
arrangements. In the event of Landlord's election to succeed to Tenant's
interest in any such subleases, licenses, concessions or arrangements,
Tenant shall, as of the date of notice by Landlord of such election, have
no further right to or interest in the rent or other consideration
receivable thereunder.
ARTICLE 20
ATTORNEYS' FEES
If either party commences litigation against the other for the specific
performance of this Lease, for damages for the breach hereof or otherwise for
enforcement of any remedy hereunder, the prevailing party shall be entitled to
recover from the other party such costs and reasonable attorneys' fees as may
have been incurred.
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ARTICLE 21
SECURITY DEPOSIT
Concurrent with Tenant's execution of this Lease, Tenant shall deposit with
Landlord a security deposit (the "Security Deposit") in the amount set forth in
Section 10 of the Summary, as security for the faithful performance by Tenant of
all of its obligations under this Lease. If Tenant defaults with respect to any
provisions of this Lease, including, but not limited to, the provisions relating
to the payment of Rent, Landlord may, but shall not be required to, apply all or
any part of the Security Deposit for the payment of any Rent or any other sum in
default and Tenant shall, within five (5) days after written demand therefor,
restore the Security Deposit to its original amount. Any unapplied balance of
the Security Deposit shall be returned to Tenant, or, at Landlord's option, to
the last assignee of Tenant's interest hereunder, within sixty (60) days
following the expiration of the Lease Term. Tenant shall not be entitled to any
interest on the Security Deposit.
ARTICLE 22
SUBSTITUTION OF OTHER PREMISES
Landlord shall have the privilege of moving Tenant to other space in the
Building comparable to the Premises, and all terms hereof shall apply to the new
space with equal force. In such event, Landlord shall give Tenant prior notice,
shall provide Tenant, at Landlord's sole cost and expense, with tenant
improvements at least equal in quality to those in the Premises and shall move
Tenant's effects to the new space at Landlord's sole cost and expense at such
time and in such manner as to inconvenience Tenant as little as practicable.
Simultaneously with such relocation of the Premises, the parties shall
immediately execute an amendment to this Lease stating the relocation of the
Premises.
ARTICLE 23
SIGNS
23.1 Full Floor Tenants. Subject to Landlord's prior written approval, in its
sole discretion, and provided all signs are in keeping with the quality,
design and style of the Building, Tenant, if the Premises comprise an
entire floor of the Building, at its sole cost and expense, may install
identification signage anywhere in the Premises including in the elevator
lobby of the Premises, provided that such signs must not be visible from
the exterior of the Building.
23.2 Multi-Tenant Floor Tenants. If Tenant occupies less than the entire floor
on which the Premises is located, Tenant's identifying signage shall be
provided by Landlord, at Tenant's cost, and such signage shall be
comparable to that used by Landlord for other similar floors in the
Building and shall comply with Landlord's Building standard signage
program.
23.3 Prohibited Signage and Other Items. Except as provided in the Summary of
Basic Lease Information (item 15), any signs, notices, logos, pictures,
names or advertisements which are installed and that have not been
individually approved by Landlord may be removed without notice by Landlord
at the sole expense of Tenant. Except as provided in the Summary of Basic
Lease Information (item 15), Tenant may not install any signs on the
exterior or roof of the Building or the common areas of the Building or the
Real Property. Any signs, window coverings, or blinds (even if the same are
located behind the Landlord approved window coverings for the Building), or
other items visible from the exterior of the Premises or Building are
subject to the prior written approval of Landlord, in its sole discretion.
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ARTICLE 24
COMPLIANCE WITH LAW
Tenant and Landlord shall not do anything or suffer anything to be done in or
about the Premises which will in any way conflict with any law, statute,
ordinance or other governmental rule, regulation or requirement now in force or
which may hereafter be enacted or promulgated. Should any standard or regulation
now or hereafter be imposed on Tenant by a state, federal or local governmental
body charged with the establishment, regulation and enforcement of occupational,
health or safety standards for employers, employees, landlords or tenants, then
Tenant agrees, at its sole cost and expense, to comply promptly with such
standards or regulations, solely with respect to the Tenant's premises. Tenant
shall be responsible, at its sole cost and expense, to make all alterations to
the Premises as are required of Tenant to comply with the governmental rules,
regulations, requirements or standards described in this Article 24, solely with
respect to the Tenant's premises. The judgment of any court of competent
jurisdiction or the admission of Tenant in any judicial action, regardless of
whether Landlord is a party thereto, that Tenant has violated any of said
governmental measures, shall be conclusive of that fact as between Landlord and
Tenant.
ARTICLE 25
LATE CHARGES
If any installment of Rent or any other sum due from Tenant shall not be
received by Landlord or Landlord's designee within five (5) business days after
said amount is due, then Tenant shall pay to Landlord a late charge equal to the
greater of One Hundred Fifty and No/100 Dollars ($150.00) ten percent (10%) of
the overdue amount, plus any attorneys' fees incurred by Landlord by reason of
Tenant's failure to pay Rent and/or other charges when due hereunder. The late
charge shall be deemed Additional Rent and the right to require it shall be in
addition to all of Landlord's other rights and remedies hereunder or at law and
shall not be construed as liquidated damages or as limiting Landlord's remedies
in any manner. In addition to the late charge described above, any Rent or other
amounts owing hereunder which are not paid on or before the date they are due
shall thereafter bear interest until paid at a rate per annum equal to Wells
Fargo Bank's published prime rate plus three percent (3%) per annum, provided
that in no case shall such rate be higher than the highest rate permitted by
applicable law.
ARTICLE 26
LANDLORD'S RIGHT TO CURE DEFAULT; PAYMENTS BY TENANT
26.1 Landlord's Cure. All covenants and agreements to be kept or performed by
Tenant under this Lease shall be performed by Tenant at Tenant's sole cost
and expense and without any reduction of Rent. If Tenant shall fail to
perform any of its obligations under this Lease, within a reasonable time
after such performance is required by the terms of this Lease, Landlord
may, but shall not be obligated to, after reasonable prior notice to
Tenant, make any such payment or perform any such act on Tenant's part
without waiving its right based upon any default of Tenant and without
releasing Tenant from any obligations hereunder.
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26.2 Tenant's Reimbursement. Except as may be specifically provided to the
contrary in this Lease, Tenant shall pay to Landlord, within fifteen (15)
days after delivery by Landlord to Tenant of statements therefor: (i) sums
equal to expenditures reasonably made and obligations incurred by Landlord
in connection with the remedying by Landlord of Tenant's defaults pursuant
to the provisions of Section 26.1; (ii) sums equal to all losses, costs,
liabilities, damages and expenses referred to in Article 10 of this Lease;
and (iii) sums equal to all expenditures made and obligations incurred by
Landlord in collecting or attempting to collect the Rent or in enforcing or
attempting to enforce any rights of Landlord under this Lease or pursuant
to law, including, without limitation, all legal fees and other amounts so
expended. Tenant's obligations under this Section 26.2 shall survive the
expiration or sooner termination of the Lease Term.
ARTICLE 27
ENTRY BY LANDLORD
Landlord reserves the right at all reasonable times and upon reasonable notice
to the Tenant to enter the Premises to (i) inspect them; (ii) show the Premises
to prospective purchasers, mortgagees or ground or underlying lessors, or,
during the last twelve (12) months of the Lease Term, prospective tenants; (iii)
post notices of non-responsibility; or (iv) reasonably alter, improve or repair
the Premises or the Building if necessary to comply with current building codes
or other applicable laws, or for reasonable structural alterations, repairs or
improvements to the Building. Notwithstanding anything to the contrary contained
in this Article 27, Landlord may enter the Premises at any time to (A) perform
services required of Landlord; (B) take possession due to any material, uncured
breach of this Lease in the manner provided herein; and (C) perform any material
covenants of Tenant which Tenant fails to perform. Landlord may make any such
entries without the abatement of Rent and may take such steps as reasonably
required to accomplish the stated purposes; provided, however, that any such
entry shall be accomplished as expeditiously as reasonably possible and in a
manner so as to cause as little interference to Tenant as reasonably possible.
Tenant hereby waives any claims for damages or for any injuries or inconvenience
to or interference with Tenant's business, lost profits, any loss of occupancy
or quiet enjoyment of the Premises, and any other loss occasioned thereby, based
on entry by Landlord as provided for in Article 27. For each of the above
purposes, Landlord shall at all times have a key with which to unlock all the
doors in the Premises, excluding Tenant's vaults, safes and special security
areas designated in advance by Tenant. In an emergency, Landlord shall have the
right to use any means that Landlord may deem proper to open the doors in and to
the Premises. Any entry into the Premises by Landlord in the manner hereinbefore
described shall not be deemed to be a forcible or unlawful entry into, or a
detainer of, the Premises, or an actual or constructive eviction of Tenant from
any portion of the Premises.
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ARTICLE 28
TENANT PARKING
Tenant shall have the right to rent from Landlord parking passes on a monthly
basis throughout the Lease Term in the quantity set forth in Section 11 of the
Summary. Tenant shall pay to Landlord for automobile parking passes on a monthly
basis the prevailing rate charged for parking passes at the location of such
passes. In addition, Tenant shall be responsible for any taxes imposed by any
governmental authority in connection with the renting of such parking passes by
Tenant or the use of the parking facility by Tenant. Tenant's continued right to
use the parking passes is conditioned upon Tenant reasonably abiding by all
rules and regulations which are prescribed from time to time for the orderly
operation and use of the parking facility where the passes are located and upon
Tenant's cooperation in seeing that Tenant's employees and visitors also comply
with such rules and regulations. Landlord specifically reserves the right to
change the location, size, configuration, design, layout and all other aspects
of the parking facility in question, including the discontinuance of the valet
parking system, at any time and Tenant acknowledges and agrees that Landlord
may, without incurring any liability to Tenant and without any abatement of Rent
under this Lease, from time to time, temporarily close-off or restrict access to
the parking facility in question for purposes of reasonably permitting or
facilitating any such construction, alteration or improvements. Landlord may
totally or partially delegate its responsibilities hereunder to a parking
operator in which case such parking operator shall have all the rights of
control delegated by Landlord. The parking passes rented by Tenant pursuant to
this Article 28 are provided to Tenant solely for use by Tenant's own personnel
(not including Tenant's invitees and guests) and such passes may not be
transferred, assigned, subleased or otherwise alienated by Tenant without
Landlord's prior approval.
ARTICLE 29
MISCELLANEOUS PROVISIONS
29.1 Binding Effect. Each of the provisions of this Lease shall extend to and
shall, as the case may require, bind or inure to the benefit not only of
Landlord and of Tenant, but also of their respective successors or assigns,
provided this clause shall not permit any assignment by Tenant contrary to
the provisions of Article 14 of this Lease.
29.2 No Air Rights. No rights to any view or to light or air over any property,
whether belonging to Landlord or any other person, are granted to Tenant by
this Lease. If at any time any windows of the Premises are temporarily
darkened or the light or view therefrom is obstructed by reason of any
short-term repairs, improvements, maintenance or cleaning in or about the
Building, the same shall be without liability to Landlord and without any
reduction or diminution of Tenant's obligations under this Lease.
29.3 Modification of Lease. Should any current or prospective mortgagee or
ground lessor for the Building require a modification of this Lease, which
modification will not cause an increased cost or expense to Tenant or in
any other way materially and adversely change the rights and obligations of
Tenant hereunder, then and in such event, Tenant agrees that this Lease may
be so modified and agrees to execute whatever documents are required
therefor and deliver the same to Landlord within ten (10) days following
the request therefor. At the request of Landlord or any mortgagee or ground
lessor, Tenant agrees to execute a short form of Lease and to deliver the
same to Landlord within ten (l0) days following the request therefor.
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29.4 Transfer of Landlord's Interest. Tenant acknowledges that Landlord has the
right to transfer all or any portion of its interest in the Real Property
and Building and in this Lease, and Tenant agrees that in the event of any
such transfer and a transfer of the Security Deposit, Landlord shall
automatically be released from all liability thereafter arising under this
Lease and Tenant agrees to look solely to such transferee for the
performance of Landlord's obligations hereunder after the date of transfer.
29.5 Prohibition Against Recording. Except as provided in Section 29.3 of this
Lease, neither this Lease, nor any memorandum, affidavit or other writing
with respect thereto, shall be recorded by Tenant or by anyone acting
through, under or on behalf of Tenant.
29.6 Captions. The captions of Articles and Sections are for convenience only
and shall not be deemed to limit, construe, affect or alter the meaning of
such Articles and Sections.
29.7 Relationship of Parties. Nothing contained in this Lease shall be deemed or
construed by the parties hereto or by any third party to create the
relationship of principal and agent, partnership, joint venturer or any
association between Landlord and Tenant.
29.8 Time of Essence. Time is of the essence of this Lease and each of its
provisions.
29.9 Partial Invalidity. If any term, provision or condition contained in this
Lease shall, to any extent, be invalid or unenforceable, the remainder of
this Lease, or the application of such term, provision or condition to
persons or circumstances other than those with respect to which it is
invalid or unenforceable, shall not be affected thereby, and each and every
other term, provision and condition of this Lease shall be valid and
enforceable to the fullest extent possible permitted by law.
29.10 Exculpation. It is expressly understood and agreed that notwithstanding
anything in this Lease to the contrary, and notwithstanding any applicable
law to the contrary, the liability of Landlord and the Landlord Parties
hereunder (including any successor landlord) and any recourse by Tenant
against Landlord or the Landlord Parties shall be limited solely and
exclusively to an amount which is equal to the net worth of the Landlord,
and neither Landlord, nor any of the Landlord Parties shall have any
personal liability therefor. Tenant hereby expressly waives and releases
such personal liability on behalf of itself and all persons claiming by,
through or under Tenant. It is also expressly understood and agreed that
notwithstanding anything in this Lease to the contrary, and notwithstanding
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any applicable law to the contrary, the liability of Tenant and the Tenant
Parties hereunder (including any successor tenant) and any recourse by
Landlord against Tenant or the Tenant Parties shall be limited solely and
exclusively to an amount which is equal to the net worth of the Tenant, and
neither Tenant, nor any of the Tenant Parties shall have any personal
liability therefor. Landlord hereby expressly waives and releases such
personal liability on behalf of itself and all persons claiming by, through
or under Landlord.
29.11 Entire Agreement. It is understood and acknowledged that there are no oral
agreements between the parties hereto affecting this Lease and this Lease
constitutes the parties' entire agreement with respect to the leasing of
the Premises and supersedes and cancels any and all previous negotiations,
arrangements, brochures, agreements and understandings, if any, between the
parties hereto or displayed by Landlord to Tenant with respect to the
subject matter thereof, and none thereof shall be used to interpret or
construe this Lease. None of the terms, covenants, conditions or provisions
of this Lease can be modified, deleted or added to except in writing signed
by the parties hereto.
29.12 Right to Lease. Landlord reserves the absolute right to effect such other
tenancies in the Building as Landlord in the exercise of its sole business
judgment shall determine to best promote the interests of the Building.
Tenant does not rely on the fact, nor does Landlord represent, that any
specific tenant or type or number of tenants shall, during the Lease Term,
occupy any space in the Building.
29.13 Force Majeure. Any prevention, delay or stoppage due to strikes, lockouts,
labor disputes, acts of God, inability to obtain services, labor, or
materials or reasonable substitutes therefor, governmental actions, civil
commotions, fire or other casualty, and other causes beyond the reasonable
control of the party obligated to perform (collectively, the "Force
Majeure"), notwithstanding anything to the contrary contained in this
Lease, shall excuse the performance of such party for a period equal to any
such prevention, delay or stoppage and, therefore, if this Lease specifies
a time period for performance of an obligation of either party, that time
period shall be extended by the period of any delay in such party's
performance caused by a Force Majeure.
29.14 Notices. All notices, demands, statements, approvals or communications
(collectively, "Notices") given or required to be given by either party to
the other hereunder shall be in writing, shall be sent by United States
certified or registered mail, postage prepaid, return receipt requested, or
delivered personally (i) to Tenant at the appropriate address set forth in
Section 5 of the Summary, or to such other place as Tenant may from time to
time designate in a Notice to Landlord; or (ii) to Landlord at the
addresses set forth in Section 3 of the Summary, or to such other firm or
to such other place as Landlord may from time to time designate in a Notice
to Tenant. Any Notice will be deemed given on the date it is mailed as
provided in this Section 29.14 or upon the date personal delivery is made
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or attempted to be made. If Tenant is notified of the identity and address
of Landlord's mortgagee or ground or underlying lessor, Tenant shall give
to such mortgagee or ground or underlying lessor written notice of any
default by Landlord under the terms of this Lease by registered or
certified mail, and such mortgagee or ground or underlying lessor shall be
given a reasonable opportunity to cure such default prior to Tenant's
exercising any remedy available to Tenant.
29.15 Joint and Several. If there is more than one Tenant, the obligations
imposed upon Tenant under this Lease shall be joint and several.
29.16 Authority. If Tenant is a corporation or partnership, each individual
executing this Lease on behalf of Tenant hereby represents and warrants
that Tenant is a duly formed and existing entity qualified to do business
in California and that Tenant has full right and authority to execute and
deliver this Lease and that each person signing on behalf of Tenant is
authorized to do so.
29.17 Governing Law. This Lease shall be construed and enforced in accordance
with the laws of the State of California.
29.18 Brokers. Landlord and Tenant hereby warrant to each other that they have
had no dealings with any real estate broker or agent in connection with the
negotiation of this Lease, excepting only the real estate brokers or agents
specified in Section 12 of the Summary (the "Brokers"), and that they know
of no other real estate broker or agent who is entitled to a commission in
connection with this Lease. Each party agrees to indemnify and defend the
other party against and hold the other party harmless from any and all
claims, demands, losses, liabilities, lawsuits, judgments, and costs and
expenses (including without limitation reasonable attorneys' fees) with
respect to any leasing commission or equivalent compensation alleged to be
owing on account of the indemnifying party's dealings with any real estate
broker or agent other than the Brokers. The terms of this Section 29.18
shall survive the expiration or earlier termination of the Lease Term.
Tenant's Broker shall be paid a commission in accordance with a letter
agreement dated March 16,1999.
29.19 Independent Covenants. This Lease shall be construed as though the
covenants herein between Landlord and Tenant are independent and not
dependent and Tenant hereby expressly waives the benefit of any statute to
the contrary and agrees that if Landlord fails to perform its obligations
set forth herein, Tenant shall not be entitled to make any repairs or
perform any acts hereunder at Landlord's expense or to any setoff of the
Rent or other amounts owing hereunder against Landlord.
29.20 Building Name and Signage. Subject to the Summary of Basic Lease
Information (Item 15), Landlord shall have the right at any time to
install, affix and maintain any and all signs on the exterior and on the
interior of the Building as Landlord may, in Landlord's sole discretion,
desire. Tenant shall not use the name of the Building or use pictures or
illustrations of the Building in advertising or other publicity, without
the prior written consent of Landlord, which shall not be unreasonably
withheld.
29.21 Transportation Management. Tenant shall fully comply with all present or
future programs intended to manage parking, transportation or traffic in
and around the Building, and in connection therewith, Tenant shall take
responsible action for the transportation planning and management of all
employees located at the Premises by working directly with Landlord, any
governmental transportation management organization or any other
transportation-related committees or entities.
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29.22 Successors. Except as otherwise expressly provided herein, the obligations
of this Lease shall bind and benefit the successors and assigns of the
parties hereto; provided, however, that no assignment, sublease or other
transfer in violation of the provisions of Article 14 shall operate to vest
any rights in any putative assignee, subtenant or transferee of Tenant.
29.23 Landlord Renovations. It is specifically understood and agreed that
Landlord has no obligation and has made no promises to alter, remodel,
improve, renovate, repair or decorate the Premises, Building, or any part
thereof and that no representations respecting the condition of the
Premises or the Building have been made by Landlord to Tenant except as
specifically set forth herein or in the Tenant Work Letter. However, Tenant
acknowledges that Landlord may during the Lease Term renovate, improve,
alter, or modify (collectively, the "Renovations") the Building, Premises,
and/or Real Property, including without limitation the parking structure,
common areas, systems and equipment, roof, and structural portions of the
same, without unreasonably limiting the quiet enjoyment of the Premises.
Tenant hereby agrees that such Renovations and Landlord's actions in
connection with such Renovations shall in no way constitute a constructive
eviction of Tenant nor entitle Tenant to any abatement of Rent. Landlord
shall have no responsibility or for any reason be liable to Tenant for any
direct or indirect injury to or interference with Tenant's business arising
from the Renovations, nor shall Tenant be entitled to any compensation or
damages from Landlord for loss of the use of the whole or any part of the
Premises or of Tenant's personal property or improvements resulting from
the Renovations or Landlord's actions in connection with such Renovations,
or for any inconvenience or annoyance occasioned by such Renovations or
Landlord's actions in connection with such Renovations.
ARTICLE 30
SIGNATURES
IN WITNESS WHEREOF, Landlord and Tenant have caused their duly authorized
representatives to execute this Lease as of the day and date first above written
"Tenant": U.S. Interactive, Inc.,
a Delaware corporation
By: /s/ Eric Pulier
----------------------------------------
Its: President
"Landlord" Norton Plaza Associates,
a California limited partnership
By: San Vicente Montana Associates
Its; General Partner
By: /s/ Paul R. Ginger
Its: General Partner
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EXHIBIT A
BASIC FLOOR PLANS
<PAGE>
EXHIBIT B
RULES AND REGULATIONS
Tenant shall faithfully observe and comply with the following Rules and
Regulations. Without limiting its covenant of quiet enjoyment, Landlord shall
not be responsible to Tenant for the nonperformance of any of said Rules and
Regulations by or otherwise with respect to the acts or omissions of any other
tenants or occupants of the Real Property.
1. Tenant shall not alter any lock or install any new or additional
locks or bolts on any doors or windows of the Premises without obtaining
Landlords prior written consent. Tenant shall bear the cost of any lock changes
or repairs required by Tenant. Two keys will be furnished by Landlord for the
Premises, and any additional keys required by Tenant must be obtained from
Landlord at a reasonable cost to be established by Landlord.
2. All doors opening to public corridors shall be kept closed at all
times except for normal ingress and egress to the Premises.
3. Landlord reserves the right to close and keep locked all entrance
and exit doors of the Building during such hours as are customary for comparable
buildings. Tenant, its employees and agents must be sure that the doors to the
Building are securely closed and locked when leaving the Premises if it is after
the normal hours of business for the Building. Any tenant, its employees, agents
or any other persons entering or leaving the Building at any time when it is so
locked, or any time when it is considered to be after normal business hours for
the Building, may be required to sign the Building register. Access to the
Building may be refused unless the person seeking access has proper
identification or has a previously arranged pass for access to the Building.
Landlord and his agents shall in no case be liable for damages for any error
with regard to the admission to or exclusion from the Building of any person. In
case of invasion, mob, riot, public excitement, or other commotion, Landlord
reserves the right to prevent access to the Building or the Real Property during
the continuance thereof by any means it deems appropriate for the safety and
protection of life and property.
4. No furniture, freight or equipment of any kind shall be brought into
the Building without prior notice to Landlord. All moving activity into or out
of the Building shall be scheduled with Landlord and done only at such time and
in such manner as Landlord designates. No service deliveries (other than
messenger services) will be allowed between hours of 4:00 p.m. to 6:00 p.m.,
Monday through Friday. Landlord shall have the right to prescribe the weight,
size and position of all safes and other heavy property brought into the
Building and also the times and manner of moving the same in and out of the
Building. Safes and other heavy objects shall, if considered necessary by
Landlord, stand on supports of such thickness as is necessary to properly
distribute the weight. Landlord will not be responsible for loss of or damage to
any such safe or property in any case. Any damage to any part of the Building,
its contents, occupants or visitors by moving or maintaining any such safe or
other property shall be the sole responsibility and expense of Tenant.
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5. No furniture, packages, supplies, equipment or merchandise will be
received in the Building or carried up or down in the elevators, except between
such hours and in such specific elevator as shall be designated by Landlord.
6. The requirements of Tenant will be attended to only upon application
at the management office for the Real Property or at such office location
designated by Landlord. Employees of Landlord shall not perform any work or do
anything outside their regular duties unless under special instructions from
Landlord.
7. Tenant shall not disturb, solicit, or canvass any occupant of the
Real Property and shall cooperate with Landlord and its agents of Landlord to
prevent the same.
8. The toilet rooms, urinals, wash bowls and other apparatus shall not
be used for any purpose other than that for which they were constructed, and no
foreign substance of any kind whatsoever shall be thrown therein. The expense of
any breakage, stoppage or damage resulting from the violation of this rule shall
be borne by the tenant who, or whose employees or agents, shall have caused it.
9. Tenant shall not overload the floor of the Premises, nor mark, drive
nails or screws, or drill into the partitions, woodwork or plaster or in any way
deface the Premises or any part thereof without Landlord's prior written
consent.
10. Except for vending machines intended for the sole use of Tenant's
employees and invitees, no vending machine or machines other than fractional
horsepower office machines shall be installed, maintained or operated upon the
Premises without the written consent of Landlord.
11. Tenant shall not use or keep in or on the Premises, the Building,
or the Real Property any kerosene, gasoline or other inflammable or combustible
fluid or material.
12. Tenant shall not without the prior written consent of Landlord use
any method of heating or air conditioning other than that supplied by Landlord.
13. Tenant shall not use, keep or permit to be used or kept, any foul
or noxious gas or substance in or on the Premises, or permit or allow the
Premises to be occupied or used in a manner offensive or objectionable to
Landlord or other occupants of the Real Property by reason of noise, odors, or
vibrations, or interfere in any way with other tenants or those having business
therein.
14. Tenant shall not bring into or keep within the Real Property, the
Building or the Premises any animals, birds, bicycles or other vehicles.
15. No cooking shall be done or permitted on the Premises, nor shall
the Premises be used for the storage of merchandise, for lodging or for any
improper, objectionable or immoral purposes. Notwithstanding the foregoing,
Underwriters' laboratory-approved equipment and microwave ovens may be used in
the Premises for heating food and brewing coffee, tea, hot chocolate and similar
beverages for employees and visitors, provided that such use is in accordance
with all applicable federal, state and city laws, codes, ordinances, rules and
regulations.
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16. Landlord will approve where and how telephone and telegraph wires
are to be introduced to the Premises. No boring or cutting floor wires shall be
allowed without the consent of Landlord, which shall not be unreasonably
withheld. The location of telephone, call boxes and other office equipment
affixed to the Premises shall be subject to the reasonable approval of Landlord.
17. Landlord reserves the right to exclude or expel from the Real
Property any person who, in the judgment of Landlord, is intoxicated or under
the influence of liquor or drugs, or who shall in any manner do any act in
violation of any of these Rules and Regulations.
18. Tenant, its employees and agents shall not loiter in or on the
entrances, corridors, sidewalks, lobbies, halls, stairways, elevators, or any
common areas of the Building for the purpose of smoking tobacco products or for
any other purpose, nor in any way obstruct such areas, and shall use them only
as a means of ingress and egress for the Premises.
19. Tenant shall not waste electricity, water or air conditioning and
agrees to cooperate fully with Landlord to ensure the most effective operation
of the Building's heating and air conditioning system, and shall refrain from
attempting to adjust any controls.
20. Tenant shall store all its trash and garbage within the interior of
the Premises. No material shall be placed in the trash boxes or receptacles if
such material is of such nature that it may not be disposed of in the ordinary
and customary manner of removing and disposing of trash in the vicinity of the
Building without violation of any law or ordinance governing such disposal. All
trash, garbage and refuse disposal shall be made only through entryways and
elevators provided for such purposes at such times as Landlord shall designate.
21. Tenant shall comply with all safety, fire protection and evacuation
procedures and regulations established by Landlord or any governmental agency.
22. Tenant shall assume any and all responsibility for protecting the
Premises from theft, robbery and pilferage, which includes keeping doors locked
and other means of entry to the Premises closed.
23. No awnings or other projection shall be attached to the outside
walls of the Building without the prior written consent of Landlord. No
curtains, blinds, shades or screens shall be attached to or hung in, or used in
connection with, any window or door of the Premises without the prior written
consent of Landlord. All electrical ceiling fixtures hung in offices or spaces
along the perimeter of the Building must be fluorescent and/or of a quality,
type, design and bulb color approved by Landlord. Tenant shall abide by
Landlord's regulations concerning the opening and closing of window coverings
which are attached to the windows in the Premises, if any, which have a view of
any interior portion of the Building or the common areas of the Building.
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24. The sashes, sash doors, skylights, windows, and doors that reflect
or admit light and air into the halls, passageways or other public places in the
Building shall not be covered or obstructed by Tenant, nor shall any bottles,
parcels or other articles be placed on the windowsills.
25. Tenant must comply with requests by Landlord concerning the
informing of their employees of items of importance to Landlord.
26. Tenant shall not use in any space or in the public halls of the
Building any hand trucks except those equipped with rubber tires and side guards
or such other material-handling equipment as Landlord may approve. Tenant shall
not bring any other vehicles of any kind into the Building.
27. Without the written consent of Landlord, Tenant shall not use the
name of the Building in connection with or in promoting or advertising the
business of Tenant except as Tenant's address.
Landlord reserves the right at any time to change or rescind any one or more of
these Rules and Regulations, or to make such other and further reasonable Rules
and Regulations as in Landlord's judgment may from time to time be necessary for
the management, safety, care and cleanliness of the Premises, Building, and the
Real Property, and for the preservation of good order therein, as well as for
the convenience of other occupants and tenants therein. Landlord may waive any
one or more of these Rules and Regulations for the benefit of any particular
tenants, but no such waiver by Landlord shall be construed as a waiver of such
Rules and Regulations in favor of any other tenant, nor prevent Landlord from
thereafter enforcing any such Rules or Regulations against any or all tenants of
the Real Property. Tenant shall be deemed to have read these Rules and
Regulations and to have agreed to abide by them as a condition of its occupancy
of the Premises.
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EXHIBIT C
NOTICE OF LEASE TERM DATES
To:
Re: Office Lease dated ____________, 19__ between _____________, a
_________________ ("Landlord"), and __________________, a _________________
("Tenant") concerning Suite _____ on floor(s) _____________ of the office
building located at ______________________, ______________, California.
Gentlemen:
In accordance with the Office Lease (the "Lease"), we wish to advise you and/or
confirm as follows:
l. The Premises are Ready For Occupancy, and the Lease Term shall commence
on or has commenced on _______________ for a term of __________ ending
on ______________.
2. Rent commenced to accrue on _____________, in the amount of
_________________.
3. If the Lease Commencement Date is other than the first day of the
month, the first billing will contain a pro rata adjustment. Each
billing thereafter, with the exception of the final billing, shall be
for the full amount of the monthly installment as provided for in the
Lease.
4. Your rent checks should be made payable to ________
________________________ at _____________.
5. The exact number of rentable square feet within the Premises is
_____________ square feet.
6. Tenant's Share as adjusted based upon the exact number of rentable
square feet within the Premises is ____%.
"Landlord":
________________________
a _________________________
By: ________________________
Its: _______________________
By: ________________________
Its: _______________________
Agreed to and Accepted as
of _____________, 19__.
"Tenant":
___________________________,
a __________________________
By: ________________________
Its: _______________________
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EXHIBIT D
LANDLORD WORK LETTER
11911 San Vicente Boulevard, space for U.S. Interactive, Inc.
This Tenant Work Letter shall set forth the terms and conditions
relating to the construction of the Premises. This Tenant Work Letter is
essentially organized chronologically and addresses the issues of the
construction of the Premises, in sequence, as such issues will arise during the
actual construction of the Premises. All references in this Tenant Work Letter
to Articles or Sections of "this Lease" shall mean the relevant portions of
Articles 1 through 29 of this Lease to which this Tenant Work Letter is attached
as Exhibit D, and all references in this Tenant Work Letter to Sections of "this
Tenant Work Letter" shall mean the relevant portions of Sections 1 through 5 of
this Tenant Work Letter.
SECTION 1
DELIVERY OF THE PREMISES AND BASE BUILDING
1.1 Base Building as Constructed by Landlord. Upon the full execution
and delivery of this Lease by Landlord and Tenant, Landlord shall deliver the
Premises and "Base Building," as that term is defined below, to Tenant, and
Tenant shall accept the Premises and Base Building from Landlord in their
presently existing, "as-is" condition. The "Base Building" shall consist of
those portions of the Premises which are in existence prior to the construction
of the tenant improvements in the Premises.
SECTION 2
TENANT IMPROVEMENTS
2.1 Tenant Improvement Allowance. Tenant shall be entitled to a
one-time tenant improvement allowance (the "Tenant Improvement Allowance") for
the costs relating to the initial design and construction of Tenant's
improvements, which are permanently affixed to the Premises including cabling
costs (the "Tenant Improvements"). In no event shall Landlord be obligated to
make disbursements pursuant to this Tenant Work Letter in a total amount which
exceeds the Tenant Improvement Allowance.
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2.2 Disbursement of the Tenant Improvement Allowance.
2.2.1 Tenant Improvement Allowance Items. Except as otherwise set forth
in this Tenant-Work Letter, the Tenant Improvement Allowance shall be: Landlord
shall pay to Tenant an allowance in an amount equal to $5.00 per rentable square
foot on each suite except suite 200. For suite 200 the allowance shall be $15.00
per rentable square foot. The allowance shall be paid within ten business days
following the date rent commences as to each suite. Tenant shall be paid an
additional $5,000.00 to interconnect various suites.
2.3 Standard Tenant Improvement Package. Landlord has established
specifications (the "Specifications") for the Building standard components to be
used in the construction of the Tenant Improvements in the Premises
(collectively, the "Standard Improvement Package"), which Specifications shall
be supplied to Tenant by Landlord. The quality of Tenant Improvements shall be
equal to or of greater quality than the quality of the Specifications.
SECTION 3
CONSTRUCTION DRAWINGS
3.1 Selection of Architect/Construction Drawings. Tenant shall retain
an architect/space planner reasonably approved by Landlord (the "Architect") to
prepare the "Construction Drawings," as that term is defined in this Section
3.1. Tenant shall retain the engineering consultants reasonably approved by
Landlord (the "Engineers") to prepare all plans and engineering working drawings
relating to the structural, mechanical, electrical, plumbing, HVAC, lifesafety,
and sprinkler work in the Premises, which work is not part of the Base Building.
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3.2 Final Working Drawings. Tenant shall promptly cause the Architect
and the Engineers to complete the architectural and engineering drawings for the
Premises, and Architect shall compile a fully coordinated set of architectural,
structural, mechanical, electrical and plumbing working drawings in a form which
is complete to allow subcontractors to bid on the work and to obtain all
applicable permits (collectively, the "Final Working Drawings") and shall submit
the same to Landlord for Landlord's approval, as to the internal stairwell.
Tenant shall supply Landlord with four (4) copies signed by Tenant of such Final
Working Drawings. Landlord shall advise Tenant within five (5) business days
after Landlord's receipt of the Final Working Drawings for the Premises if the
same is unsatisfactory or incomplete in any respect. If Tenant is so advised,
Tenant shall immediately revise the Final Working Drawings in accordance with
such review and any disapproval of Landlord in connection therewith.
3.3 Approved Working Drawings. After approval by Landlord of the Final
Working Drawings, relating to the internal stairwell, Tenant may submit the same
to the appropriate municipal authorities for all applicable building permits.
Tenant hereby agrees that neither Landlord nor Landlord's consultants shall be
responsible for obtaining any building permit or certificate of occupancy for
the Premises and that obtaining the same shall be Tenant's responsibility;
provided, however, that Landlord shall cooperate with Tenant in executing permit
applications and performing other ministerial acts reasonably necessary to
enable Tenant to obtain any such permit or certificate of occupancy. No changes,
modifications or alterations in the Approved Working Drawings relating to the
internal stairwell may be made without the prior written consent of Landlord,
which consent may not be unreasonably withheld.
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SECTION 4
CONSTRUCTION OF THE TENANT IMPROVEMENTS
4.1 Tenant's Selection of Contractors.
4.1.1 The Contractor. A general contractor shall be retained by Tenant
to construct the Tenant Improvements. Such general contractor ("Contractor")
shall be subject to Landlord's reasonable approval and shall be experienced in
working in First Class office buildings.
4.2 Construction of Tenant Improvements by Tenant's Agents.
4.2.1 Indemnity. Tenant's indemnity of Landlord as set forth in Section
10.1 of this Lease shall also apply with respect to any and all costs, losses,
damages, injuries and liabilities related in any way to any act or omission of
Tenant or Tenant's Agents, or anyone directly or indirectly employed by any of
them, or in connection with Tenant's non-payment of any amount arising out of
the Tenant Improvements. Such indemnity by Tenant, as set forth in Section 10.1
of this Lease, shall also apply with respect to any and all costs, losses,
damages, injuries and liabilities related in any way to Landlord's performance
of any ministerial acts reasonably necessary (i) to permit Tenant to complete
the Tenant Improvements, and (ii) to enable Tenant to obtain any building permit
or certificate of occupancy for the Premises.
4.2.2 Requirements of Tenant's Agents. Tenant's Contractors shall
guarantee to Tenant and for the benefit of Landlord that the portion of the
Tenant Improvements for which it is responsible shall be free from any defects
in workmanship and materials for a period of not less than one (1) year from the
date of completion thereof.
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4.2.2.1 Insurance Requirements.
4.2.2.1.1 General Coverages. All of Tenant's contractors and
subcontractors shall carry worker's compensation insurance with California
statutory limits covering all of their respective employees, and shall also
carry commercial general liability insurance, including property damage, with
limits no less than $2,000,000 each occurrence and $5,000,000 in the aggregate.
4.2.2.1.2 Special Coverages. Tenant shall carry "Builder's All Risk"
insurance in an amount reasonably approved by Landlord covering the construction
of the Tenant Improvements, it being understood and agreed that the Tenant
Improvements shall be insured by Tenant pursuant to Article 10 of this Lease
immediately upon completion thereof. Such insurance shall be in amounts and
shall include such extended coverage endorsements as may be reasonably required
by Landlord.
4.2.2.1.3 General Terms. Certificates for the Contractor's insurance
carried pursuant to this Section 4.2.2.1 shall be delivered to Landlord before
the commencement of construction of the Tenant Improvements and before the
Contractor's equipment is moved onto the site. All such policies of insurance
must contain a provision that the company writing said policy will give Landlord
thirty (30) days prior written notice of any cancellation or lapse of the
effective date or any reduction in the amounts of such insurance. Tenant's
contractor and subcontractors shall maintain all of the foregoing insurance
coverage in force until the Tenant Improvements are fully completed and accepted
by Landlord. All policies carried under this Section 4.2.2.1 shall insure
Landlord and Tenant, as their interests may appear. All insurance, except
Workers' Compensation, maintained by Tenant's Contractor or Subcontractors shall
preclude subrogation claims by the insurer against anyone insured thereunder.
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4.2.3 Governmental Compliance. The Tenant Improvements shall comply in
all material respects with the following: (i) the Code and other state, federal,
city or quasi-governmental laws, codes, ordinances and regulations, as each may
apply according to the rulings of the controlling public official, agent or
other person; and (ii) applicable standards of the American Insurance
Association (formerly, the National Board of Fire Underwriters) and the National
Electrical Code.
4.3 Notice of Completion; Copy of Record Set of Plans. Within ten (10)
days after completion of construction of the Tenant Improvements, Tenant shall
cause a Notice of Completion to be recorded in the office of the Recorder of the
County of Los Angeles in accordance with Section 3093 of the Civil Code of the
State of California or any successor statute, and shall furnish a copy thereof
to Landlord upon such recordation. If Tenant fails to do so; Landlord may
execute and file the same on behalf of Tenant as Tenant's agent for such
purpose, at Tenant's sole cost and expense. At the conclusion of construction,
(i) Tenant shall cause the Architect and Contractor (A) to update the Approved
Working Drawings as necessary to reflect all changes made to the Approved
Working Drawings during the course of construction, (B) to certify to the best
of their knowledge that the "record-set" of as-built drawings are true and
correct, which certification shall survive the expiration or termination of this
Lease, and (C) to deliver to Landlord two (2) sets of copies of such record set
of drawings within ninety (90) days following issuance of a certificate of
occupancy for the Premises, and (ii) Tenant shall deliver to Landlord a copy of
all warranties, guaranties, and operating manuals and information relating to
the permanently installed improvements, equipment, and systems in the Premises.
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<PAGE>
EXHIBIT E
ESTOPPEL CERTIFICATE
To: _____________________________
______________________________________
______________________________________
Attn: _______________________
_____________________________________("Tenant") hereby certifies as follows:
1. The undersigned is the Tenant under that certain Office Lease dated
______________, 19__ (the "Lease"), executed by __________________________
("Landlord") as Landlord and the undersigned as Tenant, covering a portion of
the property located at ____________________________________(the "Property").
2. Pursuant to the Lease, Tenant has leased approximately _________
square feet of space (the "Premises") at the Property and has paid to Landlord a
security deposit of $_____________. The term of the Lease commenced on
_____________, 19__ and the expiration date of the Lease is _______________,
19__. Tenant has paid rent through _____________________, 19__. The next rental
payment in the amount of $__________ is due on ___________, 19__. Tenant is
required to pay _________ percent (__%) of specified annual operating expenses
for the Property in excess of ______________________________.
3. Tenant is entitled to _____ parking spaces at a charge of $_________
per month per space.
4. The Lease provides for an option to extend the term of the Lease for
____________ years. The rental rate for such extension term is as follows:
________________________________________________________________________________
_______________________________________________________________________________.
Except as expressly provided in the Lease, and other documents attached hereto,
Tenant does not have any right or option to renew or extend the term of the
Lease, to lease other space at the Property, nor any preferential right to
purchase all or any part of the Premises or the Property.
5. True, correct and complete copies of the Lease and all amendments,
modifications and supplements thereto are attached hereto and the Lease, as so
amended, modified and supplemented, is in full force and effect, and represents
the entire agreement between Tenant and Landlord with respect to the Premises
and the Property. There are no amendments, modifications or supplements to the
Lease, whether oral or written, except as follows (include the date of such
amendment, modification or supplement):_________________________________________
________________________________________________________________________________
6. All space and improvements leased by Tenant have been completed and
furnished in accordance with the provisions of the Lease, and Tenant has
accepted and taken possession of the Premises.
7. Landlord is not in any respect in default in the performance of the
terms and provisions of the Lease. Tenant is not in any respect in default under
the Lease and has not assigned, transferred or hypothecated the Lease or any
interest therein or subleased all or any portion of the Premises.
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<PAGE>
8. There are no offsets or credits against rentals payable under the
Lease and no free periods or rental concessions have been granted to Tenant,
except as follows: _____________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
9. Tenant has no actual or constructive knowledge of any processing,
use, storage, disposal, release or treatment of any hazardous or toxic materials
or substances on the Premises or the Property except as follows (if none, state
"none"): _______________________________________________________________________
_______________________________________________________________________________.
This Certificate is given to _______________________ with the
understanding that __________ will rely hereon in connection with the conveyance
of the Property of which the Premises constitute a part to ____________.
Following any such conveyance, Tenant agrees that the Lease shall remain in full
force and effect and shall bind and inure to the benefit of the ______________
and its successor in interest as if no purchase had occurred.
DATED: ______________, 19__ " TENANT "
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<PAGE>
EXHIBIT F
OPTION PERIOD RENT
Tenant is given the option to extend the Lease Term, on all the
provisions contained in this Lease, except for Minimum Rent, for ____ additional
terms of _____ (___) years each following the expiration of the initial Lease
Term, by giving written notice of exercise of the option ("option notice") to
Landlord at least twelve (12) months but not more than two (2) years before the
expiration of the initial Lease Term or any extension term. If Tenant fails to
deliver a timely exercise notice, Tenant shall be considered to have elected not
to exercise any Extension Option. Provided that, if Tenant is in default beyond
any notice and cure periods on the date of giving the option notice, the option
notice shall be totally ineffective, or if Tenant is in default beyond any
notice and cure period on the date the extended term is to commence, the
extended term shall not commence and this Lease shall expire at the end of the
initial Lease Term.
Rent To Be Negotiated by Parties for Option Term
At least eighteen (18) months prior to the expiration date of the
initial Lease Term or any extension term, Landlord shall send a written notice
to Tenant requiring the parties to determine the option period Minimum Rent. The
parties shall have thirty (30) days after Tenant receives said notice in which
to agree on Minimum Rent during the extended term which Minimum Rent shall be
the fair market value of the Premises. If the parties agree on the Minimum Rent
for the extended term during that period, they shall immediately execute an
amendment to this Lease stating the Minimum Rent. If the parties are unable to
agree on the Minimum Rent for the extended term within that period, then within
ten (10) days after expiration of that period each party, at its cost and by
giving notice to the other party, shall appoint a real estate appraiser with at
least five years full-time commercial appraisal experience in the area in which
the Premises are located to appraise and set the Minimum Rent for the extended
term. If a party does not appoint an appraiser within ten (10) days after the
other party has given notice of the name of its appraiser, the single appraiser
appointed shall be the sole appraiser and shall set the Minimum Rent for the
extended term. If the two appraisers are appointed by the parties as stated in
this paragraph, they shall meet promptly and attempt to set the Minimum Rent for
the extended term. If they are unable to agree within thirty (30) days after the
second appraiser has been appointed, they shall attempt to select a third
appraiser meeting the qualifications stated in this paragraph within ten (10)
days after the last day the two appraisers are given to set the Minimum Rent. If
they are unable to agree on the third appraiser, either of the parties to this
Lease, by giving ten (10) days' notice to the other party, may file a petition
with the American Arbitration Association solely for the purpose of selecting a
third appraiser who meets the qualifications stated in this paragraph. Each
party shall bear half the cost of the American Arbitration Association's
appointing the third appraiser and of paying the third appraiser's fee. The
third appraiser however selected, shall be a person who has not previously acted
in any capacity for either party.
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Within thirty (30) days after the selection of the third appraiser, a
majority of the appraisers shall set the Minimum Rent for the extended term. If
a majority of the appraisers are unable to set the Minimum Rent within the
stipulated period of time, the two appraisals closest in value to each other
shall be added together and their total divided by two; the resulting quotient
shall be the Minimum Rent for the Premises during the extended term.
In setting the Minimum Rent for the extended term, the appraiser or
appraisers shall consider the use to which the Premises are restricted under
this Lease and shall not consider the highest and best use for the Premises
without regard to the restriction on use of the Premises contained in this
Lease.
After the Minimum Rent for the extended term has been set, the
appraisers shall immediately notify the parties. If Tenant objects to the
Minimum Rent that has been set, Tenant shall have the right to have this Lease
expire at the end of the initial Lease Term or the first extended term, provided
that Tenant pays all the costs in connection with the appraisal procedure that
set the Minimum Rent. Tenant's election to allow this Lease to expire at the end
of the initial Lease Term or the first extended term must be exercised within
ten (10) days after receipt of notice from the appraisers of the Minimum Rent
for the extended term. If Tenant does not exercise its election within the ten
(10) day period, the term of this Lease shall be extended as provided in this
EXHIBIT F.
Tenant shall have no other right to extend the term beyond the extended
term provided in this EXHIBIT F.
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<PAGE>
EXHIBIT H
HAZARDOUS WASTES
Hazardous Wastes. Tenant and Landlord shall comply strictly and in all respects
with the applicable laws, statutes, ordinances, permits, orders, decrees,
guidelines, rules, regulations and orders pertaining to health or the
environment ("Applicable Environmental Laws"), including, without limitation,
the Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA") and the resource Conservation and Recovery Act ("RCRA"), as each of
the foregoing may be amended from time to time. Tenant does hereby, for itself
and its heirs, legal representatives, successors and assigns agree to and hereby
does indemnify, defend and hold harmless Landlord, and its heirs, legal
representatives, successors and assigns, from any and all liabilities,
assessments, suits, damages, costs and expenses, attorneys' fees and judgments
related to or arising out of (a) the breach of any of the agreements of Tenant
under this section, (b) the handling, installation, storage, use, generation,
treatment or disposal of Hazardous Materials, including any cleanup, remedial,
removal or restoration work required by the Applicable Environmental Laws or (c)
the assertion of any lien or claim upon the Premises, the Building, the Real
Property or Landlord pursuant to the Applicable Environmental Laws. Landlord
does hereby, for itself and its heirs, legal representatives, successors and
assigns agree to and hereby does indemnify, defend and hold harmless Tenant, and
its heirs, legal representatives, successors and assigns, from any and all
liabilities, assessments, suits, damages, costs and expenses, attorneys' fees
and judgments related to or arising out of (a) the breach of any of the
agreements of Landlord under this section, (b) the handling, installation,
storage, use, generation, treatment or disposal of Hazardous Materials,
including any cleanup, remedial, removal or restoration work required by the
Applicable Environmental Laws or (c) the assertion of any lien or claim upon the
Premises pursuant to the Applicable Environmental Laws. The covenants and
agreements of Tenant and Landlord under this section shall survive the
expiration or termination of this Lease. As used in this Lease, the term
"Hazardous Material" means any flammables, explosives, radioactive material,
asbestos-containing material, petroleum products, the group of organic compounds
known as polychlorinated byphenyls and other hazardous waste, toxic substances
or related materials, including, without limitation, substances defined as
hazardous substances, hazardous materials, toxic substances or solid waste in
CERCLA, the Hazardous Materials Transportation Act and RCRA, as each of the
foregoing may be amended from time to time.
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<PAGE>
EXHIBIT I
EXCLUSIONS ADDENDUM
(a) Notwithstanding anything to the contrary set forth in the Lease, Operating
Expenses shall not include the following:
(1) Costs, incurred with respect to the installation of other occupants'
improvements in the Shopping Center or incurred in renovating,
decorating, painting or redecorating vacant space for other occupants
in the Shopping Center;
(2) Leasing commissions, brokerage fees and attorneys' fees in connection
with the negotiation and preparation of leases, subleases or
assignments with present or prospective tenants or other occupants of
the Shopping Center;
(3) Costs (including in connection therewith all attorneys' fees and costs
of settlement, judgments and payments in lieu thereof) arising from
claims, disputes or potential disputes in connection with potential or
actual claims, litigation or arbitrations pertaining to Landlord and/or
the Shopping Center;
(4) Advertising and promotional expenditures and marketing costs;
(5) Interest, principal, points and fees (including brokerage fees) on
debts or any mortgage or deed of trust ecumbering the Shopping Center;
(6) Costs incurred by Landlord for the repair of damage to the Shopping
Center, to the extent that Landlord is reimbursed by insurance
proceeds;
(7) Costs arising from the negligence or fault of other tenants or Landlord
or its agents, or any vendors, contractors, or providers of materials
or services selected, hired or engaged by Landlord or its agents;
(8) Costs incurred by Landlord due to the violation by Landlord or any
tenant of the terms and conditions of any lease of space in the
Shopping Center;
(9) Items considered capital improvements in connection with repairs and
replacements under generally accepted accounting principles
consistently applied or otherwise ("Capital Improvements"), except for
(l) the annual amortization (amortized over the longest useful life for
such item under Internal Revenue Service depreciation rules) of costs,
including financing costs, if any, incurred by Landlord after the
Commencement Date for any Capital Improvements installed or paid for by
Landlord; however Capital Improvements shall not include the cost of
any additions to or enlargement of the Shopping Center;
(10) Costs incurred to comply with disability, life, fire and safety codes,
ordinances, statutes, or other laws in effect prior to the Commencement
Date, including, without limitation, the ADA (as hereinafter defined),
including penalties or damages incurred due to such non-compliance;
58
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(11) Costs incurred in connection with any environmental clean-up, response
action, or remediation on, in, under or about the Premises or the
Shopping Center, including but not limited to, costs and expenses
associated with the defense, administration, settlement, monitoring or
management thereof;
(12) The cost of electric power used by any other tenant or occupant in the
Shopping Center;
(13) Rentals and other related expenses incurred in leasing HVAC systems,
elevators or other equipment ordinarily considered to be Capital
Improvements, except for (1) expenses in connection with making minor
repairs on or keeping building systems in operation while minor repairs
are being made, and (2) costs of equipment not affixed to the Shopping
Center which is used in providing janitorial or similar services;
(14) Costs arising from latent defects in the base, shell or core of the
Shopping Center or improvements installed by Landlord or repair
thereof;
(15) Tax penalties incurred as a result of Landlord's negligence, inability
or unwillingness to make payments and/or to file any tax or
informational returns when due;
(16) Services and utilities provided, taxes attributable to, and costs
incurred in connection with the operation of any retail and restaurant
operations in the Shopping Center, except to the extent the square
footage of such operations is included in the rentable square feet of
the Shopping Center and do not exceed the services, utility and tax
costs which would have been incurred had the retail and/or restaurant
space been used for general office purposes;
(17) Depreciation, amortization and interest payments, except as provided
herein and except on materials, tools, supplies and vendor-type
equipment purchased by Landlord to enable Landlord to supply services
Landlord might otherwise contract for with a third party where such
depreciation, amortization and interest payments would otherwise have
been included in the charge for such third party's services, all as
determined in accordance with generally accepted accounting principles,
consistently applied, and when depreciation or amortization is
permitted or required, the item shall be amortized over its reasonably
anticipated useful life;
(18) Any ground lease rental, or any other charges payable under superior
leases;
(19) Landlord's general corporate overhead and general and administrative
expenses;
(20) Overhead and profit increment paid to Landlord or to subsidiaries or
affiliates of Landlord for goods and/or services in or to the Shopping
Center to the extent the same exceeds the costs of such goods and/or
services rendered by unaffiliated third parties on a competitive basis;
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(21) Costs for which Landlord has been compensated by a management fee, and
any management fees in excess of those management fees which are
normally and customarily charged by comparable landlords of comparable
buildings;
That portion of Lot 45 and of the Easterly 25 feet of Lot 46 of Westgate Acres,
in the City of Los Angeles, County of Los Angeles, State of California, as per
Map recorded in Book 7, Pages 90 and 91 of Maps. In the Office of the County
Recorder of said County, which lie Southerly of the following described line:
Beginning on the Westerly line of said Easterly 25 feet of said lot 46, 100 feet
Northerly along said line from the Southerly line of said Lot 46; thence
Easterly and parallel to the Southerly line of said Lot 46 and the Easterly
prolongation thereof, to the Northeasterly line of said Lot 45.
Except all subterranean waters except such as may be pumped or developed for use
on said land for domestic purposes or for irrigation.
60
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PROPERTY DESCRIPTION
61
<PAGE>
1st Amendment to Lease
WHEREAS:
Norton Plaza Associates ("Landlord") and Digital Evolution, Inc. ("Tenant")
entered into a lease (undated) for premises known as Suite 225 consisting of
6,482 rentable square feet located at 119111 San Vincente Boulevard, Los
Angeles, CA 90049 ("Lease").
WHEREAS:
Landlord and Tenant have entered into month to month rental agreements for Suite
265 and 350 at the same property.
WHEREAS:
For good and valuable consideration Landlord and Tenant agree to combine the
Lease and month to month agreements under the Lease and to amend said Lease.
NOWTHEREFORE:
The Lease shall be extended and modified.
1. Premises: The Suites to be covered by the Lease and this amendment are:
Suite Rentable Area
----- -------------
225 6,482
265 2,847
324 4,167
350 2,502
2. Term: The term of the Lease shall be extended through the date below subject
to Tenant's right to extend the term. Tenant shall vacate the suites according
to the following schedule.
Suite Date to be Vacated
----- ------------------
225, 265, 350 December 31, 1998
324 March 31, 1999
Any additional Suite Added
By Amendment to this Lease March 31, 1999
3. Rent: Effective December 1, 1997 monthly rent shall be according to the
following schedule:
Suite Monthly Rent
----- ------------
225 $12,964.00
265 5, 694.00
350 5,004.00
324 8,334.00
<PAGE>
4. Operating Expenses: There shall be no pass through of building operating cost
increase, however the monthly rent shall be increased by 1.5% for all space
occupied each January 1, commencing 1/1/99.
5. Option to Extend: Upon not less than ninety (90) days prior written notice
Tenant shall have the option to lease Suite 255 (consisting of 2,941 Rentable
square feet) commencing August 1, 1998, and Suite 200 (consisting of 3,690
rentable square feet) on November 1, 1998. The monthly rent shall be $2.25 per
rentable square foot for either suite. The option to expand shall be subject to
non renewal by the existing tenants.
6. Option to Renew: Upon not less than ninety (90) days prior written notice
Tenant shall have the option to renew the term for all space leased under this
Lease and its amendments for one (1) additional term of one (1) year under the
same terms and conditions.
7. Month to Month Rental Agreement Cancellation: Effective November 30, 1997 the
month to month agreement for Suite 265 dated November 22, 1996 and for Suite 350
dated September 22, 1997 shall be null and void and of no further force or
effect.
Except as provided for herein the Lease shall remain in full force and effect.
The parties have executed this 1st Amendment to Lease as of this 14th
day of November 1997.
Tenant Landlord
Digital Evolution, Inc. Norton Plaza Associates
A California corporation a California limited partnership
By San Vicente-Montana Associates
General Partner
By: /s/ By: /s/
------------------------------ ------------------------------
Eric Pulier Paul R. Gienger
Its: President Its: General Partner
<PAGE>
2nd Amendment to Lease
WHEREAS:
Norton Plaza Associates ("Landlord") entered into an undated Lease
("Lease") with Digital Evolution, Inc. for premises located at 11911 San Vicente
Boulevard, Los Angeles, CA 90049.
WHEREAS:
Landlord and Digital Evolution, Inc. executed 1st Amendment to Lease as
of November 14, 1997.
WHEREAS:
Digital Evolution, Inc. assigned its interest in said Lease to U.S.
Interactive, Inc. ("Tenant") by Assignment and Assumption of Lease dated July 1,
1998.
NOW THEREFORE:
Landlord and Tenant for good and valuable consideration agree to amend
the Lease in the following respect only.
1. Term: The term of the Lease shall be extended and the termination
date for each suite shall be:
Suite Expiration
----- ----------
225 December 31, 1999
265 December 31, 1999
350 December 31, 1999
324 March 31, 2000
2. Rent: The monthly rent for each suite effective January 1, 1999 shall be:
Suite Monthly Rent
----- ------------
225 $15,395.00
265 $ 6,762.00
350 $ 5,942.00
324 $ 8,460.00
3. Rent Increase: The monthly rent allocated to suite 324 shall
increase to $9,897.00 effective April 1, 1999, unless earlier
terminated.
4. Option to Terminate: Tenant may elect to terminate the lease as to
suites 225, 265 and 350 at any time by giving Landlord not less that
90 day advance written notice. Tenant may terminate the Lease as to
suite 324 by providing Landlord 90 days advance written notice,
however, the effective date of termination for suite 324 must be not
less than 90 days after the effective date of termination as to
suites 225, 265, and 350, or must be more than 90 days prior to the
effective date of termination for suites 225, 265 and 350.
<PAGE>
5. Operating Expenses: There shall be no pass through for increases in
operating expenses. Tenant shall pay for after hours HVAC.
Except as modified herein the lease shall remain in full force and
effect. If there is a conflict between this 2nd Amendment and the
Lease or the 1st Amendment this 2nd Amendment shall prevail.
IN WITNESS WHEREOF, Landlord and tenant have executed this 2nd
Amendment to Lease as of this 30th day of September 1998.
Landlord Tenant
Norton Plaza Associates U.S. Interactive, Inc.
By: San Vicente Montana Associates
By: /s/ By: /s/
------------------------------- ------------------------
Paul R. Gienger Mark Silverman
General Partner Its: EVP
<PAGE>
April 27, 1998
Mr. Eric Pullier
Digital Evolution
11911 San Vicente Blvd., #225
Los Angeles, CA 90049
Re: Norton Plaza
11911 San Vicente Boulevard
Los Angeles, CA 90049
Dear Eric:
Norton Plaza Associates has agreed to sell Norton Plaza to
Christina Development Corporation. The attached statement is to
confirm to Christina Development Corporation the information
contained in the statement.
Please review the statement for accuracy, date, sign and
return to Christina Development Corporation at P.O. Box 2613,
Malibu, CA 90265. If you have any questions, please call me.
Time is of the essence and your earliest attention is
sincerely appreciated.
Very truly yours,
TOPA MANAGEMENT COMPANY
/s/
---------------------------------------------
Paul R. Gienger
Vice President
<PAGE>
6. Option to Renew: Upon not less than ninety (90) days prior written
notice Tenant shall have the option to renew the term for all space
leased under this Lease and its amendments for one (1) additional
term of one (1) year under the same terms and conditions.
7. Month to Month Rental Agreement Cancellation: Effective November 30,
1997 the month agreement for Suite 265 dated November 22, 1996 and
for Suite 350 dated September 22, 1997 shall be null and void and of
no further force or effect.
Except as provided for herein the Lease shall remain in full force
and effect.
The parties have executed this 1st Amendment to Lease as of this
14th day of November 1997.
Tenant Landlord
Digital Evolution, Inc. Norton Plaza Associates
A California corporation a California limited partnership
By: San Vicente-Montana Associates
General Partner
By: By: /s/
------------------------- ------------------------------
Eric Pulier Paul R. Gienger
Its: President Its: General Partner
<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
July 16, 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
July 16, 1999
<PAGE>
Exhibit 99.1
[GRAPHIC OMITTED]
DIRECTED SHARE SUBSCRIPTION PROGRAM FOR
US INTERACTIVE, INC.
FOR HOLDERS OF
100 OR MORE SHARES OF
SAFEGUARD SCIENTIFICS, INC.
COMMON STOCK
ON JUNE 24, 1999
Holders of fewer than 100 shares of Safeguard Scientifics, Inc. common stock on
June 24, 1999 are not eligible to participate in this offer.
If you have any questions regarding the Directed Share Subscription Program,
please call Safeguard's automated investor relations line at (888) SFE-1200 or
the information agent at (877) 460-4356.
Please do not call US Interactive with any questions regarding this program.
Only Safeguard's automated investor relations line or the information agent will
be able to answer your questions.
<PAGE>
, 1999
Dear Safeguard Stockholder:
As you may know, we are undertaking an initial public offering of the
common stock of US Interactive. We are permitting Safeguard Scientifics to use
its Directed Share Subscription Program so that we and the selling stockholders
may offer you the opportunity to buy our common stock at our initial public
offering price. We will be offering all of the 1,750,000 shares under the
program.
Safeguard has previously sent you materials describing in general terms
how the program works. Set forth below is a detailed description of how the
program will work in connection with our offering. Please review this
description and the attached prospectus carefully in deciding whether or not you
wish to invest.
Who can subscribe
Only holders of 100 or more shares of Safeguard common stock as of June
24, 1999 are eligible to purchase shares of our common stock in the program.
Holders of fewer than 100 Safeguard shares will not be eligible to participate
in this program.
You may not transfer your subscription offer
The offer to purchase shares in this program may only be transferred by
involuntary operation of law such as death or certain dissolutions.
Number of shares for which you may subscribe
To determine how many shares of our common stock you are eligible to
purchase, divide the number of shares of Safeguard common stock that you owned
as of June 24, 1999 by 20 and round up to the nearest whole number. For example,
if you held between 481 and 500 shares of Safeguard common stock as of this
date, you may subscribe for 25 shares of our common stock. You would have to
have had at least 501 shares of Safeguard common stock to be eligible to
subscribe for 26 shares of our common stock. You may not subscribe for a
fractional share of our common stock.
Minimum Subscription Size
The minimum subscription that we will accept for any account is for 5
shares of our common stock. Therefore, holders of fewer than 100 shares of
Safeguard common stock as of June 24, 1999 will not be able to purchase our
shares under the program. This limit applies to each of your accounts, not the
aggregate of all of your accounts. If as of June 24, 1999 you held 50 shares of
Safeguard common stock in one account and another 50 shares in a different
account, we will not consider you to be the owner of 100 shares of Safeguard
common stock. Since none of your accounts contained at least 100 shares of
Safeguard common stock, you would not be eligible to subscribe.
You are under no obligation to subscribe, but if you subscribe for any
shares it must be for at least 5 shares in each account. For example, if you
held 750 shares of Safeguard common stock in a single account as of June 24,
1999 and you choose to purchase our shares under the program, you may purchase
between 5 and 38 shares.
1
<PAGE>
Subscription Price
The price per share under the program will be the same price that all
investors will pay in our initial public offering. The price per share in the
initial public offering will be determined by negotiations between us and the
underwriters of our offering. The factors that we expect to consider in these
negotiations are described in the attached prospectus under the heading
"Underwriting." We currently anticipate that the offering price will be between
$10.00 and $12.00 per share. We will inform you of the initial public offering
price as described below under "How to Subscribe."
Stock Purchase Agreement with Safeguard Scientifics
We intend to enter into a Stock Purchase Agreement with Safeguard. This
agreement will provide that if all 1,750,000 of the shares offered under the
program are not purchased by Safeguard stockholders, then Safeguard will
purchase the remaining shares at our initial public offering price.
How to Subscribe
TO PURCHASE SHARES UNDER THE PROGRAM, YOU MUST ADHERE TO THE FOLLOWING
PROCEDURES:
o Subscriptions and payments will only be accepted after we have
determined our initial public offering price. Any subscriptions or
payments received before then will be returned to you. We expect to
determine the initial public offering price in early August 1999, but
various factors could hasten or delay us. We will close the initial
public offering and stop accepting subscriptions four business days
after we determine the initial public offering price.
o Time will not permit us to notify you directly of our initial public
offering price and closing date. Instead, Safeguard will take the
following actions:
o publicize the offering price and the closing date on its Web site
(www.safeguard.com) and through a press release;
o make every effort to notify each broker, bank, trust company or
other nominee that holds shares on behalf of Safeguard stockholders
of the offering price and closing date;
o make available an automated investor relations line (888-SFE-1200)
on a 24-hour basis;
o make available an information agent (877-460-4356); and
o through its Web site, provide you with an opportunity to request
e-mail notification (either directly to you or your designated
representative).
You will have to monitor these media to know when to place your order
and deliver payment.
Also, if you do not hold your Safeguard shares directly, you will
need to keep in close contact with your broker, bank, trust company
or other nominee that holds your Safeguard shares on your behalf
since they will need to process the subscription for our shares
and payment on your behalf.
o We will stop accepting orders under the program at 5:00 p.m. New York
City time on the fourth business day after we determine the initial
public offering price. Subscriptions and payments that have not been
received by ChaseMellon Shareholder Services, L.L.C. by this deadline
will not be honored. For example, if we determine the initial public
offering price on a Thursday, ChaseMellon must receive all orders and
payments by 5:00 p.m. New York City time on the following Wednesday.
This deadline would be extended to the following Thursday if there was
an intervening holiday on which the Nasdaq National Market was
closed.
o To place an order for our shares under this program, you will have to
take the following actions:
2
<PAGE>
o If you hold your Safeguard shares in your own name, you must
complete and sign the subscription form included with this
prospectus and return it with full payment to ChaseMellon. Your
subscription form and payment must be received by ChaseMellon
before 5:00 p.m. New York City time on the fourth business day
after we determine the initial public offering price. We will not
honor any subscription form received by ChaseMellon after that
date.
We suggest, for your protection, that you deliver your subscription
form and payment to ChaseMellon by overnight or express mail
courier (or by facsimile transmission if you intend to wire funds)
as follows:
By Hand Delivery:
ChaseMellon Shareholder Services, L.L.C.
Reorganization Department
120 Broadway - 13th Floor
New York, NY 10271
By Overnight or Express Mail Courier:
ChaseMellon Shareholder Services, L.L.C.
Reorganization Department
85 Challenger Road
Mail Drop Reorg
Ridgefield Park, NJ 07660
By Facsimile Transmission and Wire Transfer:
<TABLE>
<CAPTION>
<S> <C>
ChaseMellon Shareholder Services, L.L.C.
Facsimile Transmission: (201) 296-4293
To confirm fax, call: (201) 296-4860
Wire instructions: Wire to: The Chase Manhattan Bank, New York, NY
ABA #: 021000021
Attention: ChaseMellon Shareholder Services
Account: Reorg Account 323-859577
For: Safeguard Scientifics, Inc./US Interactive
Reference: FBO [insert your name as it appears on the front of
your subscription form]
</TABLE>
o If you hold your Safeguard shares through a broker, bank, trust
company or other nominee, then after we determine the initial
public offering price, you will have to contact the nominee that
holds your Safeguard shares if you wish to place an order and
arrange for payment. We caution you that brokers and other nominees
will require some time to process subscriptions from Safeguard
stockholders. Therefore, they most likely will stop accepting
subscriptions earlier than the fourth business day after we
determine the initial public offering price.
o You must pay the subscription price by valid check or money order
in U.S. dollars payable to "ChaseMellon Shareholder Services,
L.L.C." or by wire transfer. Until this offering has closed, your
payment will be held in escrow by ChaseMellon Shareholder Services,
L.L.C.
o We will provide to each broker, bank, trust company, and other
nominee who holds Safeguard shares for the account of other persons
copies of the preliminary and final prospectus to provide to these
persons. Each of those entities will be responsible for providing you
with a copy of the preliminary and final prospectus. ChaseMellon
Shareholder Services will mail copies of the preliminary and final
prospectus to all record holders of Safeguard common stock as of June
24, 1999.
3
<PAGE>
o Safeguard will decide all questions as to the validity, form and
eligibility (including times of receipt, beneficial ownership and
compliance with minimum exercise provisions). Safeguard also will
determine the acceptance of subscriptions and the aggregate price.
Alternative, conditional or contingent subscriptions will not be
accepted. Safeguard reserves the absolute right to reject any
subscriptions not properly submitted. In addition, Safeguard may
reject any subscription if the acceptance of the subscription would
be unlawful. Safeguard also may waive any irregularities or
conditions in the subscription for our shares, and Safeguard's
interpretation of the terms and conditions of the program will be
final and binding.
o We are not obligated to give you notification of defects in your
subscription. We will not consider a subscription to be made until
all defects have been cured or waived. If your subscription is
rejected, your payment of the exercise price will be promptly
returned by ChaseMellon.
o Sales under the directed share subscription program will close on the
second business day after the closing of the sale of the other shares
offered to the public. If you purchase your shares through a broker,
bank, trust company or similar nominee, we expect that your purchase
will be reflected in your account with the nominee upon the closing
of these sales. Otherwise, ChaseMellon will mail a stock certificate
to you after the closing of these sales.
Cancellation of Initial Public Offering
We may cancel our initial public offering at any time up until the
closing. If the initial public offering is canceled, Safeguard will publicize
the cancellation on its Web site and through a press release. The program gives
you no rights to purchase shares of our common stock if we cancel our initial
public offering and any funds previously submitted by you will be returned
promptly. Safeguard and/or US Interactive also may cancel or modify, in whole or
in part, the directed share subscription program, including the unit investment
trust.
Federal Tax Consequences
We believe that you will not be considered to have received a taxable
distribution of property as a result of your having the opportunity to
participate in this offering. The Internal Revenue Service is not bound by this
position, and you are encouraged to consult with your tax advisors about the
federal, state and other tax consequences of the program.
Stabilization
The underwriters of our initial public offering may engage in certain
transactions that stabilize the price of our common stock. We make no
representation as to the direction or magnitude of any effect that these
transactions may have on the price of our common stock.
4
<PAGE>
Risk Factors
Investing in our common stock involves certain risks which are disclosed
on page of the attached preliminary prospectus.
Certain Restrictions
In managing the program, we and Safeguard will take reasonable steps to
comply with the laws of the different countries in which Safeguard stockholders
live. If compliance is too burdensome in one or more countries, Safeguard
stockholders residing in those countries will not be offered the opportunity to
purchase our shares under the program.
* * *
If you have any questions regarding the Directed Share Subscription
Program, please call Safeguard's automated investor relations line at (888)
SFE-1200 or information agent at (877) 460-4356.
Please do not call US Interactive with any questions regarding this
program. Only Safeguard's automated investor relations line or information agent
will be able to answer your questions.
Sincerely,
Stephen T. Zarrilli
President and
Chief Executive Officer
5
<PAGE>
Exhibit 99.2
[Lehman Brothers letterhead]
, 1999
Dear Safeguard Stockholder:
In connection with the Safeguard Scientifics Directed Share
Subscription Program relating to the U.S. Interactive public offering, you are
receiving:
o a letter from U.S. Interactive explaining the Directed Share
Subscription Program, and
o a copy of U.S. Interactive's prospectus relating to its public
offering and the Directed Share Subscription Program.
Please direct any questions regarding the Directed Share Subscription
Program to Safeguard Scientifics automated investor relations line at (888)
SFE-1200. Please do not call U.S. Interactive with any questions regarding this
program. Only Safeguard's automated investor relations line or representatives
of Safeguard will be able to answer your questions.
Very truly yours,
Lehman Brothers Inc.
<PAGE>
[GRAPHIC OMITTED]
Dear Broker:
As you may know, we are undertaking an initial public offering of our shares of
common stock. We are permitting Safeguard Scientifics, Inc. to use its Directed
Share Subscription Program to offer Safeguard stockholders the opportunity to
buy shares of our common stock at the initial public offering price. The price
per share under this program will be the same price that all investors will pay
in our initial public offering.
The enclosed questions and answers will provide you with the key terms of the
Directed Share Subscription Program.
If you have any questions regarding the Directed Share Subscription Program,
please call Safeguard's automated investor relations line at (888) SFE-1200 or
Corporate Investor Communications, the information agent for this offer, at
(877) 460-4356. Please do not call US Interactive regarding this program. You
also may find information about this program on Safeguard's web site at
www.safeguard.com.
Preliminary prospectuses for distribution to Safeguard stockholders are being
distributed through Corporate Investor Communications, Attention: Processing
Department, 111 Commerce Road, Carlstadt, NJ 07072-2586, telephone number (201)
896-1900. Please call Corporate Investor Communications if you do not receive a
sufficient number of prospectuses for distribution to Safeguard stockholders.
You should provide a copy of the preliminary prospectus to each Safeguard
stockholder on whose behalf you hold shares.
Sincerely,
Stephen T. Zarrilli
President and
Chief Executive Officer
<PAGE>
SAFEGUARD SCIENTIFICS, INC.
DIRECTED SHARE SUBSCRIPTION PROGRAM
FOR US INTERACTIVE
Q: Who is eligible to participate in the directed share subscription
program for US Interactive, Inc.?
A: Only record holders of at least 100 shares of Safeguard stock on June
24, 1999.
Q: How was the opportunity to purchase IPO shares allocated to Safeguard
stockholders?
A: Safeguard stockholders received a subscription offer to purchase 1
share of US Interactive for each 20 shares of Safeguard owned on June
24, 1999, subject to the minimum purchase requirement.
If a Safeguard stockholder owned at least 100 shares of Safeguard
common stock but the number of shares was not evenly divisible by 20,
Safeguard will round up the subscription offer to the next whole
number. The Depository Trust Company will notify its participants of
the date by which the roundup requests must be submitted.
The offer to purchase shares under the directed share subscription
program is nontransferable and cannot be combined among multiple
accounts.
There will not be an oversubscription privilege under this program.
Q: Is there a minimum purchase requirement?
A: The minimum subscription that will be accepted is for 5 shares of
U.S. Interactive common stock. Therefore, holders of fewer than 100
Safeguard shares as of June 24, 1999 will be unable to purchase shares
in the directed share subscription program for U.S. Interactive.
<PAGE>
Q: How will I know when the offering prices and what the expiration date
for the offering will be?
A: When the offering is declared effective by the SEC and the offering
price is set, Safeguard will
o issue a press release to the wire services
o send you an e-mail alert if you signed up for this on its Web page at
www.safeguard.com
o post this information on its Web page
o update its automated investor relations line (888) SFE-1200 through
which you will be able to listen to the text of the press release
announcing the price and the expiration date or request a faxed copy
of the release
o update the information available through its information agent, who
can be reached at (877) 460-4356
o notify the New York Stock Exchange, which will notify all of its
members
o notify the Depository Trust Company, which will electronically notify
all of its participants
Q: When can subscriptions and payment be submitted?
A: Subscriptions and payment will only be accepted by the offering agent
after the initial public offering price of the U.S. Interactive common
stock has been determined. ChaseMellon Shareholder Services, L.L.C. is
the offering agent.
The offering agent will stop accepting subscriptions and payments at
5:00 p.m. New York City time on the fourth business day after the IPO
price has been set.
The Depository Trust Company will handle subscriptions on behalf of its
participants. When you subscribe for shares of U.S. Interactive through
DTC's automated subscription system, you will be required to confirm
that you are subscribing only on behalf of holders that meet the
minimum per account purchase requirement of 5 shares.
<PAGE>
Subscription Number
Shares of US Interactive Share Subscription Offer Record Date Shares
Eligible to Subscribe
SAFEGUARD SCIENTIFICS, INC.
DIRECTED SHARE SUBSCRIPTION PROGRAM
- --------------------------------------------------------------------------------
US INTERACTIVE, INC.
SUBSCRIPTION FORM
The shareholder named above has the right to purchase, pursuant to the terms and
conditions of the Safeguard Scientifics, Inc. Directed Share Subscription
Program, the number of fully paid and non-assessable shares of common stock,
$.001 par value, of US Interactive, Inc. indicated above at a subscription price
that will be determined as outlined below. THE DIRECTED SHARE SUBSCRIPTION
PROGRAM WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME ON THE FOURTH BUSINESS DAY
AFTER THE INITIAL PUBLIC OFFERING PRICE IS DETERMINED. As described in the
preliminary prospectus accompanying this Subscription Form, each holder of at
least 100 shares of Safeguard Scientifics, Inc. common stock may subscribe for
one share of US Interactive common stock for every 20 shares of Safeguard
Scientifics common stock held as of June 24, 1999, in any account, rounded
upwards. The minimum subscription that we will accept is for 25 shares of US
Interactive per any individual account. Therefore, holders with accounts
containing fewer than 100 shares of Safeguard common stock as of June 24, 1999,
will not be able to subscribe for shares of US Interactive. The right to
participate in this program and purchase shares of US Interactive is
nontransferable except involuntarily by operation of law (e.g. death or certain
dissolutions). Should an involuntary transfer occur by operation of law, please
contact ChaseMellon Shareholder Services, L.L.C., the agent for the program, by
telephone at 800-777-3674 for appropriate instructions.
The subscription price per share under the program will be the same price that
all investors will pay in US Interactive's initial public offering. The price
per share will be determined by negotiations between US Interactive and the
underwriters of the offering. The factors to be considered in these negotiations
are described in the preliminary prospectus accompanying this Subscription Form.
US Interactive currently anticipates that its initial public offering price will
be determined in early August 1999 but various factors could hasten or delay
this determination. Time will not permit US Interactive to notify you directly
of the subscription price and the expiration date for this offering, but
Safeguard Scientifics will take the actions described in the accompanying
preliminary prospectus to publicize this information.
No offer to buy securities can be accepted, and no part of the subscription
price can be received, until the initial public offering price has been
determined and the registration statement, of which the preliminary prospectus
accompanying this Subscription Form is a part, has been declared effective. Any
Subscription Forms or payments received before then will be returned to you. All
persons electing to subscribe for shares of US Interactive, Inc. must complete
the Election to Purchase on the reverse side of this Subscription Form and
return the Subscription Form, together with full payment of the subscription
price, to ChaseMellon at the addresses on the back of this Subscription Form. If
you do not properly complete and sign this Subscription Form, it may be
rejected. The Subscription Form and full payment of the subscription price must
be received by ChaseMellon no later than 5:00 p.m. New York City time on the
fourth business day after the initial public offering price is determined.
ChaseMellon will not honor any subscriptions received after that time and date.
If you do not wish to subscribe for shares, you do not need to return this
Subscription Form. Before completing and returning this Subscription Form, you
are urged to read carefully the preliminary prospectus mailed to you with this
Subscription Form for a more complete explanation of the offering and for
information about US Interactive. If US Interactive cancels the initial public
offering, you will have no rights to purchase shares of US Interactive and any
funds previously submitted by you will be returned. US Interactive and/or
Safeguard also may cancel or modify, in whole or part, the directed share
subscription program.
<PAGE>
You should not return this Subscription Form or deliver any payment until after
US Interactive has determined its initial public offering price. Any
subscription forms or payment received before then will be returned to you. Once
the initial public offering price has been determined, Safeguard Scientifics
will take the actions described in the preliminary prospectus to publicize the
subscription price and the date by which you must respond to the offer that has
been made to you under this program. If you wish to subscribe for shares at that
time, you should complete this Subscription Form and deliver payment of the
subscription price to ChaseMellon. ChaseMellon must receive the properly
completed and signed Subscription Form and full payment of the subscription
price by 5:00 p.m. New York City Time on the fourth business day after US
Interactive determines its initial public offering price. ChaseMellon will stop
accepting Subscription Forms after that time and date. We suggest, for your
protection, that you deliver the completed Subscription Form and payment of the
subscription price to ChaseMellon Shareholder Services, L.L.C. by overnight or
express mail courier, or by facsimile transmission and wire transfer. The
addresses for ChaseMellon are as follows:
<TABLE>
<CAPTION>
By Hand Delivery: By Overnight Delivery/ Express Mail Courier
- ----------------- ------------------------------------------
<S> <C>
ChaseMellon Shareholder Services, L.L.C. ChaseMellon Shareholder Services, L.L.C.
Attn: Reorganization Dept. Attn: Reorganization Dept.
120 Broadway, 13th Floor 85 Challenger Road, Mail Drop-Reorg
New York, NY 10271 Ridgefield Park, NJ 07660
By Facsimile Transmission and Wire Transfer:
- --------------------------------------------
ChaseMellon Shareholder Services, L.L.C. Wire to: The Chase Manhattan Bank, New York, NY
Facsimile Transmission: (201) 296-4293 ABA # 021000021
To confirm fax, call: (201) 296-4860 Attention: ChaseMellon Shareholder Services
Account: Reorg Account 323-859577
For: Safeguard Scientifics, Inc./US Interactive
Reference: FBO[insert your name as it appears on the reverse side of this form]
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
SUBSCRIPTION FORM-ELECTION TO PURCHASE
Subject to the terms and conditions of the Directed Share Subscription Program
described in the preliminary prospectus, receipt of which is hereby
acknowledged, the undersigned hereby elects to purchase shares of common stock
of US Interactive, Inc. as indicated below.
Number of shares purchased(l) (NOTE: 25 share minimum required
in each account)(2)
Per share subscription price $
Payment submitted(3) $
(1) You may only purchase up to the number of shares specified on the reverse
side of this form. If the amount submitted is not sufficient to pay the
subscription price for all shares that are stated to be purchased, or if the
number of shares being purchased is not specified, the number of shares
purchased will be assumed to be the maximum number that could be purchased
upon payment of such amount. Any remaining amount will be return to the
purchaser.
(2) Any order for less than the minimum purchase requirement will be rejected.
(3) The subscription price must be paid by valid check or money order in U.S.
dollars payable to ChaseMellon Shareholder Services, L.L.C. or by wire
transfer as described above. The payment submitted should equal the total
shares purchased multiplied by the per share subscription price.
Shares of common stock of US Interactive, Inc. will be issued promptly following
the closing of the direted share subscription program. The shares will be
registered in the same manner set forth on the face of this Subscription Form.
If your shares are held in joint ownership, all joint owners must sign this
election to purchase. When signing as attorney, executor, administrator, trustee
or guardian, please give your full title as such. If signing for a corporation,
an authorized officer must sign and provide title. If signing for a partnership,
an authorized partner must sign and indicate title.
Please provide a telephone number at which you can be reached in the event that
we have questions regarding the information that you have supplied.
Daytime Telephone Number ( )
Evening Telephone Number ( )
(IF JOINTLY OWNED, BOTH MUST SIGN)
SIGNATURE(S):
Dated: , 1999
NOTE: The above signature(s) must
correspond with the name(s) as
written upon the face of this
Subscription Form in every
particular without alteration.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
SUBSTITUTE FORM W-9
Department of the Treasury, Internal Revenue Service--
Payer's Request for Taxpayer Identification Number (TIN)
Failure to complete this form may subject
you to 31% federal income tax withholding.
Part 1: PLEASE PROVIDE YOUR TIN
TAXPAYER IDENTIFICATION NUMBER Social Security or Employer
IN THE SPACE PROVIDED AT RIGHT Identification Number
AND CERTIFY BY SIGNING AND
DATING BELOW Part 2: Check the box if you are
awaiting a TIN
Part 3: CERTIFICATION-UNDER PENALTIES OF PERJURY, I CERTIFY THAT (1) the number
shown on this form is my correct taxpayer identification number (or a TIN has
not issued to me but I have mailed or delivered an application to receive a TIN
or intend to do so in the near future), (2) I am not subject to backup
withholding either because I have not been notified by the Internal Revenue
Service (the "IRS") that I am subject to backup withholding as a result of a
failure to report all interest or dividends or the IRS has notified me that I am
no longer subject to backup withholding, and (3) all other information provided
an this form is true, correct and complete.
Dated: , 1999 SIGNATURE:
You must cross out item (2) above if you have been notified by the IRS that you
are currently subject to backup withholding because of underreporting interest
or dividends on your tax return. However, if after being notified by the IRS
that you were subject to backup withholding, you received another
