<PAGE>
As filed with the Securities and Exchange Commission on August 5, 1999
Registration No. 333-78751
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Amendment No. 5
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. [ ]
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
====================================================================================================================================
Amount to Proposed maximum aggregate Amount of
Title of each class of securities to be registered be registered (1) offering price (1)(2)(3) registration fee
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock,
par value $.001 per share........................ 6,267,500 $75,210,000 $20,908.38
====================================================================================================================================
</TABLE>
(1) Includes shares which the underwriters will have the option to purchase to
cover over-allotments, if any.
(2) $18,070 was previously paid on May 19, 1999.
(3) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(a) under the Securities Act of 1933.
--------------------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
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 August 5, 1999
PROSPECTUS
5,450,000 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 4,423,712 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. 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 is an underwriter with respect
to the shares offered by us to the shareholders of Safeguard. Safeguard is not
an 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 anticipate
that the initial public offering price will be between $10 and $12 per share.
Our common stock has been approved for listing 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.
Underwritten Public Offering
Per Share Total
----------- ------
Public Offering Price ..................... $ $
Underwriting Discount ..................... $ $
Proceeds to U.S. Interactive .............. $ $
Proceeds to Selling Stockholders .......... $ $
Directed Share Subscription Program
Per Share Total
----------- ------
Public Offering Price .................... $ $
Management Fee ........................... $ $
Proceeds to U.S. Interactive ............. $ $
Aggregate Offering Proceeds
<TABLE>
<CAPTION>
Total
------
<S> <C>
Proceeds to U.S. Interactive from underwritten public offering and directed share
subscription program ........................................................... $
</TABLE>
<PAGE>
At our request, the underwriters have reserved 250,000 shares of our common
stock for sale to Intel Corporation at the initial public offering price. Intel
has not committed to purchase these shares. We have a strategic relationship
with Intel. In addition, 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."
Safeguard will purchase any shares of our common stock that are not purchased by
Safeguard shareholders under the directed share subscription program.
We have granted the underwriters a 30-day option to purchase up to 817,500
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>
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
Business ...................................... 32
Page
---
Management .................................... 45
Certain Relationships and Related
Transactions ............................... 52
Principal and Selling Stockholders ............ 54
Description of Capital Stock .................. 58
Shares Eligible for Future Sale ............... 61
Plan of Distribution .......................... 63
Legal Matters ................................. 68
Experts ....................................... 68
Additional Information ........................ 68
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:
1
<PAGE>
o attract and retain customers
o lower sales costs
o improve operational efficiencies
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 $17.0 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 Net Losses
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. We
attribute our revenue growth to sevices delivered to new clients, additional
projects for existing clients and larger average project sizes. 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 $6.7 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 $.74 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. We primarily attribute our increased net losses to
higher project personnel and related expenses, management and administrative
expenses and depreciation and amortization expenses.
2
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by U.S.Interactive .............. 4,423,712 shares
Common stock offered by the selling stockholders ..... 1,026,288 shares
Common stock outstanding after this offering ......... 18,809,446 shares
Use of proceeds ...................................... Capital expenditures, opening of new
offices, repayment of debt, funding of
potential acquisitions and general
corporate purposes. U.S. Interactive will
not receive any proceeds from the sale
of shares by the selling stockholders.
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 2,798,772 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
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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 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
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 stockholders.. $ (15,299) $ (20) $ (2,743) $ (3,316)
========= ======= ======== ========
Net income (loss) per
common share:
Basic and diluted ............ $ (1.73) $ -- $ (.30) $ (.40)
========= ======= ======== ========
Weighted average shares
outstanding used in the
basic and diluted per
common share calculation .... 8,862 4,737 9,121 8,249
</TABLE>
<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 $44,816
Working capital ............................................ 1,596 1,596 45,460
Total assets ............................................... 25,464 25,464 67,953
Mandatorily redeemable convertible preferred stock ......... 17,667 -- --
Total stockholders' equity (deficit) ....................... (2,028) 15,639 60,402
</TABLE>
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RISK FACTORS
You should carefully consider the risks described below and other
information in this prospectus before making an investment decision. If any of
the following risks actually occur, our business, financial condition or
results of operations could be materially adversely affected. As a result, the
trading price of our common stock may decline, and you may lose all or part of
your investment.
Risks Related to U.S. Interactive
Management of Growth -- We may be unable to manage our future growth
effectively.
Our 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 intense competition in our industry for qualified
personnel. There is currently a shortage of
6
<PAGE>
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 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.
8
<PAGE>
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 and Corporate Affairs since June 1999
o Ajit M. 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 $17.0 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.
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
9
<PAGE>
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 may not be successful in retaining our current
relationships or entering into new relationships.
We have strategic relationships with over 20 companies. We have written
agreements with eight companies, and all other strategic relationships rely on
oral agreements. These relationships are non-exclusive and the other parties are
free to enter similar or more favorable relationships with our competitors.
Whether written or oral, the agreements underlying our relationships are general
in nature, do not legally bind the parties, have indefinite terms and may be
ended at the will of either party. We may not be able to maintain our existing
strategic relationships, and may fail to enter into new relationships. If we are
unable to maintain these relationships, the benefits we derive from these
relationships to joint-market or otherwise collaborate and cooperate with these
companies may be lost. If we are unable to maintain our existing strategic
relationships, or fail to enter into new relationships, we may not gain access
to technologies and client opportunities that are important to our business.
This may have a material adverse effect on our business, financial condition and
results of operations.
Intellectual Property -- Our success depends, in part, on intellectual property
which may be difficult to protect. This could affect our ability to compete
effectively.
Existing trade secret and copyright laws give us only limited protection
for our copyrights, trademarks and trade secrets. Third parties may attempt to
disclose, obtain or use our intellectual property without paying us. This is
particularly true in foreign countries where laws or law enforcement practices
may not protect our intellectual property rights as fully as in the United
States. Others may independently develop and obtain patents or copyrights for
technologies that are similar or superior to our technologies.
Year 2000 -- Year 2000 compliance issues may adversely affect either our
clients
or us.
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. As a consequence,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions of operations, including a temporary inability to process
transactions or engage in normal business activities. Computers that properly
recognize the year 2000 are "year 2000 compliant."
We cannot currently predict the extent to which the year 2000 issue will
affect our information systems or those of our existing and prospective
clients. We may be materially adversely affected if many organizations that
have significant exposure to the year 2000 issue dedicate all or a substantial
portion of their information technology expenditures to dealing with year 2000
problems. If this were to occur, these organizations would likely reduce their
planned investments in Internet solutions.
10
<PAGE>
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:
o changing client requirements and preferences
o frequent new product and service introductions embodying new processes
and technologies
11
<PAGE>
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
45.6% of our outstanding common stock. Furthermore, if shareholders of
Safeguard do not choose to subscribe for shares in the directed share
subscription program, this percentage would be 55.8% and Safeguard would own
approximately 20.5% 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 60.0% of the total amount paid by all
investors in U.S. Interactive but will own only 24.0% 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
13
<PAGE>
industries. New issues and securities of Internet-related securities in
particular are often subject to greater fluctuation than the stock markets in
general. The trading prices of our common stock may fluctuate widely. This
volatility may result from many events directly involving us, including our
operating results, potential litigation, strategic 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.
14
<PAGE>
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"
15
<PAGE>
USE OF PROCEEDS
The estimated net proceeds to U.S. Interactive from the sale of the
4,423,712 shares of our common stock in this offering are estimated to be
approximately $44.8 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.
16
<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
4,423,712 shares of common stock by us pursuant to this offering and the
application of the estimated net proceeds of approximately $44.8 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 outstanding -- 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
authorized, 5,341,096 shares issued and outstanding as series
A, series B, series C and series D -- actual; no shares issued
and outstanding pro forma and pro forma, as adjusted .................
Common stock, par value $.001 per share; 90,000,000 shares
authorized, 10,074,699 shares issued of which 9,035,388 are
outstanding -- actual; 15,415,795 shares issued of which
14,376,484 are outstanding -- pro forma; and 19,839,507
shares issued of which 18,800,196 shares are outstanding --
pro forma, as adjusted ............................................... 10 15 19
Additional paid-in capital ............................................ 16,871 34,533 79,292
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 60,402
--------- --------- ---------
Total capitalization ............................................... $ 16,752 $ 16,752 $ 60,615
========= ========= =========
</TABLE>
The foregoing table excludes as of July 5, 1999:
o 2,798,772 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
17
<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 $47.3 million, or $2.52 per
share after:
o giving effect to our sale of 4,423,712 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 $2.35 per share to existing stockholders and an immediate dilution in pro
forma net tangible book value of $8.48 per share to new investors purchasing
shares at the assumed initial public offering price.
The following table illustrates this per share dilution:
<TABLE>
<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 ......................... $ 2.35
-------
Pro forma net tangible book value per share after this offering .......... $ 2.52
--------
Net tangible book value dilution per share to new investors .............. $ 8.48
========
</TABLE>
18
<PAGE>
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 76% $32,203,324 40% $ 2.24
New investors ................. 4,423,712 24 48,660,832 60 $ 11.00
---------- -- ----------- --- --------
Total ...................... 18,800,196 100% $80,864,156 100%
========== === =========== ===
</TABLE>
The foregoing tables exclude 2,868,772 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.
19
<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.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
May 1, 1994
(inception) to
December 31, Year Ended December 31,
---------------- --------------------------------------------------
1994 1995 1996 1997 1998
---------------- ---------- ----------- ----------- ------------
(Unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenue .................... $ 200 $ 935 $ 1,950 $ 6,061 $ 13,636
Operating costs and
expenses:
Project personnel and
related expenses ......... 177 544 945 2,841 7,405
Management and
administrative ........... 17 316 1,012 2,196 7,876
Marketing and sales ....... -- 5 277 1,013 2,054
Depreciation and
amortization ............. 6 17 61 269 4,592
------- ------ ------- ------- --------
Total operating
expenses .............. 200 882 2,295 6,319 21,927
------- ------ ------- ------- --------
Income (loss) from
operations ................ -- 53 (345) (258) (8,291)
Other income (expense),
net ....................... -- (2) 235 (32) (152)
------- -------- ------- ------- --------
Income (loss) before
income tax expense ........ -- 51 (110) (290) (8,443)
Income tax expense ......... -- 13 19 -- --
------- ------- ------- ------- --------
Net income (loss) .......... -- 38 (129) (290) (8,443)
Accretion of mandatorily
redeemable preferred
stock to redemption
value ..................... -- -- -- -- (625)
------- ------- ------- ------- --------
Net income (loss)
attributable to common
stockholders .............. $ -- $ 38 $ (129) $ (290) $ (9,068)
======= ======= ======= ======= ========
Net income (loss) per
common share:
Basic and diluted .......... $ -- $ .01 $ (.03) $ (.06) $ (1.36)
======= ======= ======== ======== =========
Weighted average shares
outstanding used in the
basic and diluted per
common share
calculation ............... 2,813 2,813 4,486 4,737 6,670
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, March 31, (Unaudited)
-------------- ----------------------------------------
1998 1998 1998 1999
-------------- ------------ ------------- -----------
(Pro Forma) (Actual) (Pro Forma) (Actual)
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenue .................... $ 16,446 $2,378 $ 4,178 $ 6,123
Operating costs and
expenses:
Project personnel and
related expenses ......... 9,995 1,249 2,656 3,071
Management and
administrative ........... 9,653 690 1,507 2,683
Marketing and sales ....... 2,392 351 500 723
Depreciation and
amortization ............. 8,704 91 2,141 2,496
--------- ------ -------- --------
Total operating
expenses .............. 30,744 2,381 6,804 8,973
--------- ------ -------- --------
Income (loss) from
operations ................ (14,298) (3) (2,626) (2,850)
Other income (expense),
net ....................... (149) (17) (14) (92)
--------- ------- -------- --------
Income (loss) before
income tax expense ........ (14,447) (20) (2,640) (2,942)
Income tax expense ......... -- -- -- --
--------- ------- -------- --------
Net income (loss) .......... (14,447) (20) (2,640) (2,942)
Accretion of mandatorily
redeemable preferred
stock to redemption
value ..................... (852) -- (103) (374)
--------- ------- -------- --------
Net income (loss)
attributable to common
stockholders .............. $ (15,299) $ (20) $ (2,743) $ (3,316)
========= ======= ======== ========
Net income (loss) per
common share:
Basic and diluted .......... $ (1.73) $ -- $ (.30) $ (.40)
========= ======= ======== ========
Weighted average shares
outstanding used in the
basic and diluted per
common share
calculation ............... 8,862 4,737 9,121 8,249
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1994 1995 1996 1997 1998
------------- ------ --------- --------- ----------
(Unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents .............. $99 $ 13 $ 594 $ 786 $ 3,698
Working capital ........................ 96 105 747 701 1,916
Total assets ........................... 99 238 1,770 4,122 22,262
Mandatorily redeemable
convertible preferred stock ........... -- -- -- -- 17,293
Total stockholders' equity (deficit) -- 73 1,111 1,795 (1,820)
</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 $44,816
Working capital ........................ 1,596 1,596 45,460
Total assets ........................... 25,464 25,464 67,953
Mandatorily redeemable
convertible preferred stock ........... 17,667 -- --
Total stockholders' equity (deficit) (2,028) 15,639 60,402
</TABLE>
21
<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
22
<PAGE>
expected percentage and number of inactive professionals. While we intend to
adjust our professional staff to reflect our active projects, we must maintain
a sufficient number of senior professionals to oversee existing and anticipated
client projects and participate with our sales efforts to secure new client
projects.
Variability of Operating Results. Our operating results have fluctuated
from quarter to quarter and may continue to fluctuate in the future. These
fluctuations may be significant. It is difficult for us to forecast accurately
the frequency and duration of our projects. We incur expenses, which are mainly
fixed expenses, based on our expectations concerning the costs of our future
projects. We may not be able to adjust our spending in a timely manner to
compensate for any shortfall in our projected revenues. In the event of such a
shortfall, our expenses as a percentage of our revenue would increase. 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 Net Losses. 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.
We attribute our revenue growth to sevices delivered to new clients, additional
projects for existing clients and larger average project sizes. 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 $6.7 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 $.74 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. We primarily attribute our increased net losses to
higher project personnel and related expenses, management and administrative
expenses and depreciation and amortization expenses.
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.
23
<PAGE>
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31, (Unaudited)
--------------------------------------- ---------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ------------- -----------
(Pro Forma) (Actual)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
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 to $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.
24
<PAGE>
The increases in office rent and personnel accounted for 25% and 17% 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 $2.8
25
<PAGE>
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 $945,000
26
<PAGE>
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.
27
<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.
28
<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
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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. eMarketer
estimates that the number of Internet users worldwide will grow from
approximately 95 million in 1998 to 350 million in 2003. 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 communication vehicle. This next generation of Internet
business models involved the development and use of transactional websites for
the presentation of catalogued product
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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 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.
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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
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
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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
</TABLE>
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<TABLE>
<CAPTION>
Methodology e-Roadmap
Phase Service Deliverables Service Description
- -------------------- ------------------------------ ---------------------------------------------
<S> <C> <C>
Innovation (cont.) 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
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
</TABLE>
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<TABLE>
<CAPTION>
Methodology e-Roadmap
Phase Service Deliverables Service Description
- ---------------- ------------------------------ ----------------------------------------
<S> <C> <C>
Launch (cont.) Media Plan Analysis and recommendation of Internet
media, placement, distribution and
tracking
Media Placement and Tracking Placing and measuring the effectiveness
of print and Internet promotional
campaigns
</TABLE>
Capture
As part of many of our client 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
at least $190,000 in revenues since January 1, 1998.
AIG Pioneer Electronics
adidas Royal Caribbean International
Dairy Farm International Sprint
Deloitte Consulting LLP Stamford Health Systems
Disney Online Team One/Lexus
GeoCities Thomson Consumer Electronics
Granite Financial Toyota
Microtek Unum
PECO Energy
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.
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Solution: U.S. Interactive developed a strategy for the creation of a new,
separate e-commerce corporation that included a brand identity intended to be
recognized and accepted as a trusted vendor in 15 different countries with
different languages and cultures. We began performing these services in May
1998. U.S. Interactive's strategy included the development of a comprehensive
technical architecture to facilitate secure transactions, supply chain
management and fulfillment. This application allowed Dairy Farm International
to:
o integrate product image/information databases
o track and profile customers
o monitor warehouse inventory
o enhance order fulfillment
o integrate regional data systems
These services provide management with a unified view of the inventories
of 1,350 individual stores. Additionally, these services enable customers to
utilize local currencies and multiple payment methods. We also created a new
brand identity called "I-Go" to be paired with the existing Dairy Farm
International brand. We created an online shopping experience with features to
help customize consumer purchase transactions. These features included
automatic delivery routing for same day service and direct debit payment.
e-Roadmap services delivered:
o business case
o 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.
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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 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
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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 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 provide us with joint
marketing opportunities and 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
some of 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. We have written agreements with eight companies, and all other
strategic relationships rely on oral agreements. These agreements are
non-binding and non-exclusive and normally have an indefinite term that can be
ended at the will of either party. These agreements normally serve as the
starting point for a relationship that evolves over time through working
together. The follow is a brief summary of some of our relationships:
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o Microsoft. We are a Microsoft Certified Solutions Provider. We have
engaged in joint advertising and marketing efforts with Microsoft.
Microsoft provides us with business referrals, education and support for
its products. 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. Our agreement with Vignette allows for a commission in the
form of a finder's fee for assisting them with selling their software as a
reseller.
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 this
relationship 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, suppliers and the home office of a company 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 a "Channel Partner" agreement.
Our relationship involves joint marketing activities whereby we help
BroadVision sell their software and BroadVision helps market our services.
o Digex. Digex is a provider of complex Internet hosting services. We and
Digex have an "Authorized Alliance" agreement. Our relationship with Digex
involves the joint marketing of the services of each company to clients.
o Open Market. Open Market develops Internet commerce and information
publishing software. We and Open Market have an "Enterprise Integrator"
agreement. Our relationship involves the provision of training services by
Open Market regarding the implementation of its software and joint
marketing activities.
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.
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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)
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.
44
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table presents information about each of U.S. Interactive's
executive officers and directors. U.S. Interactive's board of directors is
divided into three classes serving staggered three-year terms.
<TABLE>
<CAPTION>
Year of Annual Meeting that
Name Age Position(s) with Company Term as Director Expires
- ----- ----- -------------------------------- ----------------------------
<S> <C> <C> <C>
Eric Pulier .................. 32 Chairman of the Board 2002
Stephen T. Zarrilli .......... 38 Director, President and Chief 2000
Executive Officer
Philip L. Calamia ............ 36 Vice President, Chief
Financial Officer and Secretary
Lawrence F. Shay ............. 40 General Counsel and Senior Vice
President, Legal and Corporate
Affairs
Ajit M. 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 2002
E. Michael Forgash ........... 41 Director 2002
</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. Digital Evolution performed Internet consulting services
for MCI, Microsoft, AT&T and Intel. Our merger with Digital Evolution was a
merger of equals, involving two businesses of similar size. We retained the name
"U.S. Interactive" for the company surviving the merger. Although Mr. Pulier had
no involvement in the management or ownership of our company prior to the
merger, we consider Mr. Pulier to be a co-founder of our business because of the
continuity of Digital Evolution's business with ours. Mr. Pulier was Chairman
and CEO of Digital Evolution from July 1995 to July 1998 and acted in such
capacities prior thereto. Mr. Pulier is currently a member of the Progressive
Policy Institute's New Economy Task Force, and is leading the health/technology
forum for 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.
Lawrence F. Shay has served as our General Counsel and Senior Vice
President, Legal and Corporate Affairs 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.
45
<PAGE>
Ajit M. 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, Internet Capital Group, Inc., Masterpack International, Inc.,
MultiGenParadigm, Inc., Naviant Technology Solutions, Inc., Sunsource, Inc., and
Whisper Communications, Inc. and is Vice Chairman of the Board of Safeguard, all
of which are privately-held companies, except Cambridge Technology Partners,
Inc., Sunsource, Inc. and 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., all of which are privately-held companies,
except Phar-Mor, Inc., which is publicly-held.
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,
Inc., 4anything.com, Inc., Who? Vision Systems, Inc., XL Vision, Inc. and
Integrated Visions, Inc., all of which are privately-held companies.
The number of directors is presently fixed at nine. Due to the
resignations of Messrs. Masterson and Smith as directors in May 1999, there are
presently four vacancies on our board of directors. We intend to add four
additional directors as promptly as practicable after the completion of the
offering. Two of these directorships will have terms that expire in 2000 and
two of these directorships will have terms that expire in 2001. Each of the
current directors was elected to the board of directors pursuant to an
agreement that terminates upon the consummation of the offering.
Board Committees
Our board of directors has a compensation committee and an audit
committee. The compensation committee is comprised of Robert E. Keith and E.
Michael Forgash. The audit
46
<PAGE>
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.
47
<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(1)
- ------------------------------- ----------- ---------- -------------- ----------------
<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 189,092 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.
Option Grants in Last Fiscal Year(1)
<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 189,092 of our common stock in exchange for
options to purchase shares of common stock of Digital Evolution held by
Mr. Pulier at the time we merged with Digital Evolution.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation of 5% and 10%
compounded annually from the date the respective options were granted to
their expiration date based upon an assumed initial public offering price
of $11.00 per share. These assumptions are not intended to forecast future
appreciation of our stock price. The potential realizable value
computation does not take into account federal or state income tax
consequences of option exercises or sales of appreciated stock.
(3) 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.
48
<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's responsiblities include establishing and directing growth
strategies for us and establishing and maintaining high level strategic client
relationships with companies, organizations and industry leaders. Mr. Pulier is
also responsible for interacting with the financial and industry press and
analysts and for creating exposure with the view to creating business
opportunities for us. Mr. Pulier, as an active executive Chairman, collaborates
with our CEO, Stephen T. Zarrilli, on a regular basis regarding decisions
affecting our business. Mr. Pulier was the President and a member of the board
of directors of Digital Evolution.
Mr. Pulier's 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 have also entered an employment agreement, dated as of July 30, 1999,
with Mr. Zarrilli, our President and Chief Executive Officer. The agreement is
for an initial term ending December 31, 2000, and automatically renews for
additional one-year periods, unless either party provides 30 days notice of
non-renewal. Under the agreement, Mr. Zarrilli 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. Zarrilli the benefits which we
offer our other senior executive officers, including health benefits, 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. Zarrilli. In addition, Mr. Zarrilli may resign by
giving us notice. If the agreement is terminated other than for "cause" or Mr.
Zarrilli's voluntary resignation, we will make severance payments to Mr.
Zarrilli 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. Zarrilli'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.
49
<PAGE>
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
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
50
<PAGE>
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
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
51
<PAGE>
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.
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.
52
<PAGE>
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.
Eric Pulier, Chairman of the Board of U.S. Interactive, indirectly owns a
50% equity interest in Chromazone, LLC, through Digital Evolution, L.P., of
which he is the sole owner. Mr. Pulier is also a director of Chromazone.
Pursuant to a letter agreement dated April 6, 1999, U.S. Interactive provided
certain professional internet development services to Chromazone. The letter
agreement provides that Chromazone will pay a total of approximately $300,000
to U.S. Interactive. U.S. Interactive has agreed to provide additional services
to Chromazone. Through June 30, 1999, services totaling approximately $1.2
million have been invoiced to Chromazone (which includes the $300,000 under the
letter agreement) and it is anticipated that an additional $300,000 in services
for an aggregate of approximately $1.5 million will be provided by U.S.
Interactive to Chromazone. Chromazone has paid a total of approximately $98,000
for the services provided by U.S. Interactive to date.
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<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. In
addition, the shares owned by Safeguard exclude any shares that it purchases as
part of the directed share subscription program. If Safeguard purchases all of
the 1,750,000 shares in the directed share subscription program it will own
3,862,903 shares, or 20.5% of the outstanding capital stock after the offering.
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 Pulier(1) ............................. 3,399,538 23.4% 3,399,538 18.0%
Stephen T. Zarrilli(2) ..................... 576,592 4.0 598,592 3.2
John D. Shulman(3) ......................... 308,429 2.1 308,429 1.6
E. Michael Forgash ......................... -- -- -- --
Robert E. Keith, Jr. ....................... -- -- -- --
All directors and executive officers as a
group (9 persons)(4) ....................... 4,343,009 29.7 4,343,009 22.8
Other Five Percent Holders:
Safeguard Scientifics, Inc.(5) ............. 2,112,903 14.7 2,112,903 11.2
Technology Leaders II(6) ................... 1,184,175 8.2 1,184,175 6.3
Selling Stockholders(7):
Richard J. Masterson(8) .................... 1,189,511 8.3 300,000 855,511 4.5
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 2.9
Trident Capital Management, LLC(11) ........ 692,354 4.8 142,443 549,911 2.9
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>
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<PAGE>
- ------------
(1) Includes 126,062 shares issuable upon exercise of options and 1,069 shares
issuable upon exercise of options held by Heather Pulier, Mr. Pulier's
wife. Excludes 63,031 shares issuable upon exercise of options.
(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 10,692 shares issuable upon exercise of options. Excludes 25,000
shares issuable upon exercise of options.
(4) Includes 212,798 shares issuable upon exercise of options, including 1,069
shares issuable upon exercise of options held by Mr. Pulier's wife.
Excludes 354,081 shares issuable upon exercise of options.
(5) If Safeguard Scientifics, Inc. purchases all of the 1,750,000 shares in the
directed share subscription program it will own 3,862,903 shares, or 20.5%
of the outstanding capital stock after the offering. Includes 2,112,903
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. Excludes __________ shares of common stock, including
1,184,175 shares owned by Technology Leaders II, held by Venture Capital
funds affiliated with Safeguard Scientifics, Inc. 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., Robert Fabbio and Mark J. DeNino, and (iii) four other
corporations (the "TLA Corporations") owned by natural persons, one of
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<PAGE>
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 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
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<PAGE>
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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<PAGE>
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 18,809,446 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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<PAGE>
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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<PAGE>
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 18,809,446 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 5,450,000 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.
Safeguard is an affiliate of U.S. Interactive. As a result, any shares purchased
by it in the directed share subscription program will not be freely tradeable.
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 2,798,772 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); 830,256 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. These shares
include any shares which Safeguard may purchase in the directed share
subscription program.
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:
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
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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.
The holders described above have waived their piggyback registration
rights in connection with this offering.
Safeguard does not have any registration rights for any shares which it
may purchase in the directed share subscription program.
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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 2,798,772 shares of our common
stock were issued and outstanding, of which options to purchase a total of
830,256 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
Of the 5,450,000 shares offered by this prospectus, 3,700,000 shres are
being offered by means of an underwritten public offering and 1,750,000 shares
are being offered by means of a directed share subscription program to
shareholders of Safeguard, one of our principal stockholders.
Underwritten Public Offering
Of the 5,200,000 shares offered by this prospectus, 3,450,000 shres are
being offered by means of an underwritten public offering and 1,750,000 shares
are being offered by means of a directed share subscription program to
shareholders of Safeguard, one of our principal stockholders.
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
Shares
Underwriters ----------
Lehman Brothers Inc. .................
Hambrecht & Quist LLC ................
Adams, Harkness & Hill, Inc. .........
---------
Total .............................. 3,700,000
=========
Of the 3,700,000 shares to be purchased by the underwriters, 2,673,712
shares will be purchased from us and 1,026,288 shares will be purchased from
the selling stockholders. None of the shares offered by the selling
stockholders will be sold in the directed share subscription program.
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
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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.
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>
Total
-------------------
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 total proceeds before expenses to be received by U.S. Interactive from
both the underwritten public offering and the directed share subscription
program will be $-------- .
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 ....................... $12,754
NASD filing fee ............................ 4,644
Transfer agent and registrar fees ..........
Printing and engraving .....................
Legal fees .................................
Nasdaq National Market listing fee .........
Accounting fees ............................
Miscellaneous ..............................
Total ................................... -------
=======
The total expenses for the offering, including the expenses associated with
the directed share subscription program, are estimated at $_____________.
We have granted to the underwriters an option to purchase up to an
aggregate of 817,500 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
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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. These restrictions will also apply to any shares that
Safeguard purchases under the directed share subscription program. 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 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
65
<PAGE>
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.
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 250,000 shares of our common
stock for sale to Intel Corporation at the initial public offering price. Intel
has not committed to purchase these shares. We have a strategic relationship
with Intel. In addition, 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. Under a standby stock purchase agreement,
which is filed as an exhibit to this registration statement relating to this
prospectus, Safeguard will purchase from us any of the shares offered by us
under the program that are not purchased by the shareholders of Safeguard.
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 11.2% of our common stock, assuming that all
66
<PAGE>
1,750,000 shares are purchased by shareholders of Safeguard, and will
beneficially own approximately 20.5% 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 all shares
offered through the directed share subscription program, including any shares
actually purchased by Safeguard. The management fee represents compensation for
the underwriters' role as it relates to due diligence, participation in the
drafting of this prospectus, and general coordination of the overall offering.
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.
The following table shows the per share and total offering price,
management fee to be paid by us to the underwriters and the proceeds before
expenses to us.
<TABLE>
<CAPTION>
Per share Total
----------- ------
<S> <C> <C>
Public offering price ................................. $ $
Management fee ........................................ $ $
Proceeds before expenses to U.S. Interactive .......... $ $
</TABLE>
The total proceeds before expenses to be received by U.S. Interactive from
both the underwritten public offering and the directed share subscription
program will be $-------- .
The expenses of the directed share subscription program, exclusive of the
management fee to be paid to the underwriters, 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 and the NASD filing fee.
SEC registration fee ......... $6,081
NASD filing fee .............. 2,356
Offering agent fees ..........
Miscellaneous ................ ------
The total expenses for the offering, including the expenses associated with
the underwritten public offering, are estimated at $___________.
Safeguard is an underwriter with respect to the shares included in the
directed share subscription program. Safeguard is not an 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.
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
67
<PAGE>
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.
68
<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,
1998 1999
1997 ---------- ------------
(unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 786 $ 3,698 $ 2,327
Accounts receivable (net of allowance of $152 in 1997;
$526 in 1998 and $448 in 1999, unaudited) ................... 2,009 3,388 6,991
Fees and expenditures in excess of billings .................. 101 731 698
Prepaid expenses and other current assets .................... 53 305 292
------ -------- ---------
Total current assets ...................................... 2,949 8,122 10,308
Furniture and equipment, net .................................... 560 1,375 1,814
Goodwill and other intangibles, net ............................. 566 12,542 13,150
Other assets .................................................... 47 223 192
------ -------- ---------
Total Assets .................................................... $4,122 $ 22,262 $ 25,464
====== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable ............................................. $ 951 $ 1,334 $ 1,018
Accrued expenses ............................................. 461 2,354 3,721
Notes payable -- bank ........................................ 38 1,706 1,075
Current portion of long-term debt ............................ 167 162 462
Billings in excess of fees and expenditures .................. 631 650 2,436
------ -------- ---------
Total current liabilities ................................. 2,248 6,206 8,712
LONG-TERM DEBT, net of current portion .......................... 79 583 1,113
------ -------- ---------
Total Liabilities ............................................... 2,327 6,789 9,825
Commitments (Notes 9, 16 and 17)
Mandatorily redeemable convertible preferred stock, $.001
par value, 15,000,000 shares authorized, 5,341,096 issued
and outstanding in 1998 including accreted dividends of
$477 at December 31, 1998 and $851 at March 31, 1999
(unaudited) .................................................... -- 17,293 17,667
------ -------- ---------
STOCKHOLDERS' EQUITY (DEFICIT):
Series A convertible preferred stock $1.00 par value
1,000,000 shares authorized issued and outstanding
($1,053,000 liquidation preference) ............................ 966 -- --
Series B convertible preferred stock $1.68 par value 595,706
shares authorized issued and outstanding ($1,000,000
liquidation preference) ........................................ 974 -- --
Common stock - no par value, 9,000,000 shares authorized
in 1997 4,736,842 shares issued and outstanding 1997;
90,000,000 shares authorized in 1998, $.001 par value
9,124,999 shares issued in 1998 and 10,074,699 shares
issued in 1999 (unaudited) ..................................... 243 9 10
Additional paid-in capital ................................... (21) 12,418 16,871
Deferred stock compensation .................................. -- -- (1,346)
Treasury stock, 1,039,311 shares, at cost .................... -- (4,812) (4,812)
Accumulated deficit .......................................... (367) (9,435) (12,751)
------ -------- ----------
Total Stockholders' Equity (Deficit) ......................... 1,795 (1,820) (2,028)
------ -------- ----------
Total Liabilities and Stockholders' Equity (Deficit) ......... $4,122 $ 22,262 $ 25,464
====== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31, Three Months Ended March 31,
---------------------------------------- ----------------------------
1996 1997 1998 1998 1999
----------- ----------- ------------ ------------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
REVENUE ............................ $ 1,950 $ 6,061 $ 13,636 $2,378 $ 6,123
OPERATING COSTS AND
EXPENSES:
Project personnel and related
expenses ........................ 945 2,841 7,405 1,249 3,071
Management and administrative 1,012 2,196 7,876 690 2,683
Marketing and sales ............... 277 1,013 2,054 351 723
Depreciation and amortization ..... 61 269 4,592 91 2,496
------- ------- -------- ------ --------
Total operating expenses ........ 2,295 6,319 21,927 2,381 8,973
------- ------- -------- ------ --------
OPERATING LOSS ..................... (345) (258) (8,291) (3) (2,850)
OTHER INCOME (EXPENSE):
Interest expense .................. (11) (51) (223) (18) (118)
Interest income ................... 21 19 71 1 26
Gain on sale of investment
(note 11) ....................... 225 -- -- -- --
------- ------- -------- ------- --------
LOSS BEFORE INCOME TAX
EXPENSE ........................... (110) (290) (8,443) (20) (2,942)
Income tax expense ................. 19 -- -- -- --
------- ------- -------- ------- --------
NET LOSS ........................... (129) (290) (8,443) (20) (2,942)
Accretion of mandatorily
redeemable preferred stock to
redemption value .................. -- -- (625) -- (374)
------- ------- -------- ------- --------
NET LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS ............... $ (129) $ (290) $ (9,068) $ (20) $ (3,316)
======= ======= ======== ======= ========
BASIC AND DILUTED LOSS PER
COMMON SHARE ...................... $ (.03) $ (.06) $ (1.36) $ -- $ (.40)
======== ======== ======== ======= ========
Weighted average shares
outstanding used in the loss
per common share
calculation:
Basic and diluted ................. 4,486 4,737 6,670 4,737 8,249
======== ======== ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Mandatorily
Redeemable
Convertible
Preferred Stock Preferred Stock Common Stock
-------------------- ------------------------ -------------------
Shares Amount Shares Amount Shares Amount
-------- ---------- ----------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31,
1995 ............................. -- $ -- -- $ -- 3,403 $ 35
Issuance of common stock in
exchange for services ............ -- -- -- -- 1,096 73
Issuance of Series A preferred
stock, net of $34 in costs ....... -- -- 1,000 966 -- --
Issuance of common stock in
connection with acquisition ...... -- -- -- -- 237 135
Distributions to stockholders ..... -- -- -- -- -- --
Subchapter S Corporation
termination ...................... -- -- -- -- -- --
Net loss .......................... -- -- -- -- -- --
----- ------- ----- --------- ----- -------
BALANCES AT DECEMBER 31,
1996 ............................. -- -- 1,000 966 4,736 243
Issuance of Series B preferred
stock, net of $26 in costs ....... -- -- 595 974 -- --
Net loss .......................... -- -- -- -- -- --
----- ------- ----- --------- ----- -------
BALANCES AT DECEMBER 31,
1997 ............................. -- -- 1,595 1,940 4,736 243
Merger with Digital Evolution ..... 1,573 4,490 -- -- 4,385 4
Conversion of no par common
stock to $0.001 par value ........ -- -- -- -- (238)
Issuance of Series D preferred
stock, net of $25 in costs ....... 2,339 10,807 -- -- -- --
Repurchase of common stock ........ -- -- -- -- -- --
Repurchase of preferred stock ..... (220) (569) -- -- -- --
Issuance of warrants in
connection with debt
financing ........................ -- -- -- -- -- --
Exercise of stock options ......... -- -- -- -- 4 --
Accretion of mandatorily
redeemable preferred stock
to redemption value .............. -- 477 -- -- -- --
Conversion of preferred stock
to mandatorily redeemable
preferred stock .................. 1,649 2,088 (1,595) (1,940) -- --
Net loss .......................... -- -- -- -- -- --
----- ------- ------ --------- ----- -------
Balances at December 31, 1998 5,341 17,293 -- -- 9,125 9
Issuance of common stock in
connection with acquisition ...... -- -- -- -- 585 1
Deferred stock compensation ....... -- -- -- -- 275 --
Amortization of deferred stock
compensation ..................... -- -- -- -- -- --
Exercise of stock options ......... -- -- -- -- 90 --
Accretion of mandatorily
redeemable preferred stock
to redemption value .............. -- 374 -- -- -- --
Net loss (unaudited) .............. -- -- -- -- -- --
----- ------- ------ --------- ----- -------
Balances at March 31, 1999
(unaudited) ...................... 5,341 $17,667 -- $ -- 10,075 $ 10
===== ======= ====== ========= ====== =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Deferred Additional Total
Stock Paid-in Treasury Accumulated Stockholders'
Compensation Capital Stock Deficit Equity (Deficit)
-------------- ------------ ------------ --------------- -----------------
<S> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31,
1995 ............................. $ -- $ -- $ -- $ 38 $ 73
Issuance of common stock in
exchange for services ............ -- -- -- -- 73
Issuance of Series A preferred
stock, net of $34 in costs ....... -- -- -- -- 966
Issuance of common stock in
connection with acquisition ...... -- -- -- -- 135
Distributions to stockholders ..... -- -- -- (7) (7)
Subchapter S Corporation
termination ...................... -- (21) -- 21 --
Net loss .......................... -- -- -- (129) (129)
-------- ------- -------- ---------- ---------
BALANCES AT DECEMBER 31,
1996 ............................. -- (21) -- (77) 1,111
Issuance of Series B preferred
stock, net of $26 in costs ....... -- -- -- -- 974
Net loss .......................... -- -- -- (290) (290)
-------- ------- -------- ---------- ---------
BALANCES AT DECEMBER 31,
1997 ............................. -- (21) -- (367) 1,795
Merger with Digital Evolution ..... -- 12,506 -- -- 12,510
Conversion of no par common
stock to $0.001 par value ........ -- 238 -- -- --
Issuance of Series D preferred
stock, net of $25 in costs ....... -- -- -- -- --
Repurchase of common stock ........ -- -- (4,812) -- (4,812)
Repurchase of preferred stock ..... -- (451) -- -- (451)
Issuance of warrants in
connection with debt
financing ........................ -- 140 -- -- 140
Exercise of stock options ......... -- 6 -- -- 6
Accretion of mandatorily
redeemable preferred stock
to redemption value .............. -- -- -- (477) (477)
Conversion of preferred stock
to mandatorily redeemable
preferred stock .................. -- -- -- (148) (2,088)
Net loss .......................... -- -- -- (8,443) (8,443)
-------- ------- -------- ---------- ---------
Balances at December 31, 1998 -- 12,418 (4,812) (9,435) (1,820)
Issuance of common stock in
connection with acquisition ...... -- 2,923 -- -- 2,924
Deferred stock compensation ....... (1,375) 1,375 -- -- --
Amortization of deferred stock
compensation ..................... 29 -- -- -- 29
Exercise of stock options ......... -- 155 -- -- 155
Accretion of mandatorily
redeemable preferred stock
to redemption value .............. -- -- -- (374) (374)
Net loss (unaudited) .............. -- -- -- (2,942) (2,942)
-------- ------- -------- ---------- ---------
Balances at March 31, 1999
(unaudited) ...................... $ (1,346) $16,871 $ (4,812) $(12,751) $(2,028)
======== ======= ======== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31, Three Months Ended March 31,
-------------------------------------------- ----------------------------
1996 1997 1998 1998 1999
------------- ------------- -------------- ----------- --------------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................... $ (129) $ (290) $(8,443) $ (20) $(2,942)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ................... 61 269 4,592 91 2,496
Non-cash charges ................................ 73 -- 89 -- 77
Changes in operating assets and liabilities,
net of effects of acquisitions:
Increase in accounts receivable ................ (445) (1,340) (113) (589) (3,571)
Increase (decrease) in fees and
expenditures in excess of billings ........... (52) (49) (630) (224) 33
Increase (decrease) in prepaid expenses
and other current assets ..................... (38) (9) (163) (133) (27)
Increase in accounts payable and accrued
expenses ..................................... 78 1,025 1,929 513 984
Increase (decrease) in billings in excess of
fees and expenditures ........................ 244 371 (708) (84) 1,787
------ --------- ------- ------ -------
Net cash used in operating activities ............. (208) (23) (3,447) (446) (1,163)
------ --------- ------- ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment ............... (244) (422) (573) (118) (329)
Acquisitions, net of cash acquired ................ -- (166) (4) -- 36
Other ............................................. (11) (24) (72) -- 23
------ --------- --------- ------ -------
Net cash used in investing activities ............. (255) (612) (649) (118) (270)
------ --------- --------- ------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under bank line
of credit ....................................... 45 (45) 1,700 525 (631)
Net proceeds (repayments) from equipment
financing ....................................... 66 (79) (201) (71) 545
Proceeds from term loan ........................... -- -- 600 -- --
Repayment of stockholder loans .................... (40) (23) (24) (7) (7)
Distributions to stockholders ..................... (7) -- -- -- --
Payment of deferred financing fees ................ -- -- (48) -- --
Net proceeds from issuance of preferred stock 966 974 10,807 -- --
Payments to acquire treasury stock ................ -- -- (4,812) -- --
Payments to repurchase preferred stock ............ -- -- (1,020) -- --
Proceeds from exercise of stock options ........... -- -- 6 -- 155
------ ------- ------- ------- ------
Net cash provided by financing activities ......... 1,030 827 7,008 447 62
------ ------- ------- ------- ------
Net increase (decrease) in cash and cash
equivalents ..................................... 567 192 2,912 (117) (1,371)
Cash and cash equivalents, beginning of
period .......................................... 27 594 786 786 3,698
------ ------- ------- ------- ------
Cash and cash equivalents, end of period .......... $ 594 $ 786 $ 3,698 $ 669 $ 2,327
====== ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to March 31, 1998 and 1999 is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
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>
Year Ended December 31, Three Months Ended March 31,
-------------------------------------- ----------------------------
1996 1997 1998 1998 1999
---------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Numerator: Net loss attributable to to
common stockholders .................... $ (129) $ (290) $ (9,068) $ (20) $ (3,316)
Denominator:
Historical weighted-average shares
outstanding for basic and diluted loss
per common share ..................... 4,486 4,737 6,670 4,737 8,249
Basic and diluted loss per common share $ (.03) $ (.06) $ (1.36) $ -- $ (0.40)
</TABLE>
<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)
Pro forma denominator:
Historical weighted-average shares
outstanding for basic and diluted loss
per common share ...................... 5,012 6,074 9,634 6,074 13,550
Pro forma basic and diluted loss per
common share ............................ $ (.03) $ (.05) $ (.94) $ -- $ (0.24)
</TABLE>
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standard Board (FASB) issued
Reporting Comprehensive Income ("SFAS No. 130"), which established standards
for reporting and display of comprehensive income and its components in the
financial statements. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. SFAS No. 130 offers
alternatives for presentation of disclosure required by the standard. The
adoption of SFAS No. 130 had no impact on the Company's results of operations,
financial position or cash flows, as the amount of comprehensive loss is the
same as the net loss for all periods presented.
In June 1997, the FASB issued Disclosures about Segments of an Enterprise
and Related Information ("SFAS No. 131"), which establishes standards for
reporting information about
F-10
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
operating segments in annual financial statements. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997. The adoption of SFAS No. 131 did not have an impact on the
Company's results of operations, financial position or cash flows.
In February 1998, the FASB issued Employers' Disclosures about Pension and
Other Postretirement Benefits ("SFAS No. 132"), which revises employer's
disclosures about pension and other post retirement benefit plans. SFAS No. 132
does not change the measurement or recognition of those plans. SFAS No. 132 is
effective for fiscal years beginning after December 15, 1997. The adoption of
SFAS No. 132 did not have an impact on the Company's results of operations,
financial position or cash flows.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP
98-1, which is effective for fiscal years beginning after December 15, 1998,
provides guidance on accounting for computer software developed or obtained for
internal use including the requirements to capitalize specified costs and
amortization of such costs. The adoption of this standard did not have a
material effect on the Company's capitalization policy.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-up Activities" ("SOP 98-5"). SOP 98-5, which is effective
for fiscal years beginning after December 15, 1998, provides guidance on the
financial reporting of start-up costs and organization costs. It requires costs
of start-up activities and organization costs to be expensed as incurred. The
Company has adopted SOP 98-5. As the Company has expensed these costs
historically, the adoption of this standard did not have a significant impact
on the Company's results of operations, financial position or cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives
and Hedging Activities" ("SFAS 133"), which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. As the Company
does not currently engage in derivative or hedging activities there will be no
impact to the Company's results of operations, financial position or cash flow
upon the adoption of this standard.
F-11
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
2. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Years Ended December 31, Three Months Ended 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>
<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):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
-------------- -------------
<S> <C> <C>
Equipment ............................................... $510 $1,520
Purchased software ...................................... 80 201
Furniture and fixtures .................................. 153 329
Leasehold improvements .................................. 56 331
---- ------
$799 $2,381
Less: accumulated depreciation and amortization ......... 239 1,006
---- ------
Furniture and equipment -- net .......................... $560 $1,375
==== ======
</TABLE>
5. ACCRUED EXPENSES
Accrued expenses 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>
Years Ended December 31, Three Months Ended 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. If the employees leave the Company during the two-year period all
unvested shares are forfeited. The Company recorded $1,375,000 of deferred stock
compensation in connection with these restricted shares that will be amortized
over the two year period.
Severance Agreement (unaudited)
In May 1999, the Company's President and Chief Operating Officer resigned
as an officer. The Company will record a charge of approximately $170,000 in
connection with a severance agreement in the second quarter of 1999.
F-24
<PAGE>
Report of Independent Accountants
Board of Directors
Digital Evolution, Inc.
Brentwood, California
We have audited the accompanying balance sheets of Digital Evolution, Inc. as
of December 31, 1996 and 1997, and the related statements of operations,
shareholders' equity and cash flows for each of the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Digital Evolution, Inc. as of
December 31, 1996 and 1997 and the results of its operations and cash flows for
each of the years then ended in conformity with generally accepted accounting
principles.
BDO SEIDMAN, LLP
Los Angeles, California
August 28, 1998
F-25
<PAGE>
Digital Evolution, Inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31, June 30
----------------------------- ---------------
1996 1997 1998
------------- ------------- ---------------
(unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................................... $1,414,827 $1,528,301 $ 332,123
Accounts receivable, net of allowance for doubtful
accounts of $0, $165,400, and $150,000 (unaudited) ......... 159,676 1,827,501 1,388,549
Prepaid expenses and other current assets ................... 21,864 58,738 91,673
---------- ---------- ------------
Total current assets ........................................... 1,596,367 3,414,540 1,812,345
PROPERTY AND EQUIPMENT, NET (Note 2) ........................... 327,064 698,894 665,234
OTHER ASSETS ................................................... 21,699 42,939 44,456
---------- ---------- ------------
$1,945,130 $4,156,373 $ 2,522,035
========== ========== ============
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable and accrued expenses ....................... $ 608,093 $ 585,496 $ 372,670
Deferred revenue ............................................ 700,000 160,220 728,000
Loan from shareholders ...................................... 174,729 -- --
Current portion of long-term debt (Note 3) .................. 9,750 9,053 10,307
Current portion of obligations under capital leases
(Note 7) ................................................... 24,174 30,418 25,674
---------- ---------- ------------
Total current liabilities ...................................... 1,516,746 785,187 1,136,651
Obligations under capital leases (Note 7) ...................... 11,968 28,699 20,221
LONG-TERM DEBT (Note 3) ........................................ 43,248 34,195 28,921
---------- ---------- ------------
Total liabilities .............................................. 1,571,962 848,081 1,185,793
---------- ---------- ------------
Series A Redeemable Preferred stock-no par value, 1,366,666
shares authorized; issued and outstanding 250,000 in 1996
and 1,366,666 in 1997 and 1998 (unaudited), and (liquida-
tion value of $4,100,000) (Note 8) ............................ 694,761 4,044,759 4,044,759
---------- ---------- ------------
COMMITMENTS AND CONTINGENCIES (Notes 7, 8, 9, 10,
and 11)
SHAREHOLDERS' DEFICIENCY (Note 8)
Class A -- no par value, common stock, 38,466,665
shares authorized; 20,299,985 shares issued and out-
standing ................................................... 2,000 2,000 2,000
Class B - no par value, common stock, 6,096,000 shares
authorized; none issued and outstanding .................... -- -- --
Accumulated deficit ......................................... (323,593) (738,467) (2,710,517)
---------- ---------- ------------
Total shareholders' deficiency .............................. (321,593) (736,467) (2,708,517)
---------- ---------- ------------
$1,945,130 $4,156,373 $ 2,522,035
========== ========== ============
</TABLE>
See accompanying notes to financial statements
F-26
<PAGE>
Digital Evolution, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Years Ending December 31, Six Months Ending June 30,
------------------------------- --------------------------------
1996 1997 1997 1998
-------------- -------------- ------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues ....................................... $ 2,504,774 $ 7,034,693 $3,662,182 $ 2,809,866
----------- ----------- ----------- ------------
OPERATING EXPENSES
Project personnel and related expenses ......... 1,378,214 4,330,710 1,720,430 2,560,528
Marketing and sales ............................ 8,845 268,083 110,299 372,167
Management and administration .................. 1,337,140 2,794,925 980,279 1,807,666
Depreciation ................................... 48,628 138,591 61,352 80,120
----------- ----------- ----------- ------------
Operating income (loss) ........................ (268,053) (497,616) 789,822 2,010,615
----------- ----------- ----------- ------------
Interest expense ............................... (34,120) (33,335) (13,919) (8,209)
Interest income ................................ 3,410 154,748 83,829 19,884
Assumed loan balance of related party
(Note 5) ...................................... (101,299) -- -- --
Other (expenses) income, net ................... (20,191) (38,671) (16,018) 26,890
----------- ----------- ----------- ------------
Net income (loss) .............................. $ (420,253) $ (414,874) $ 843,714 $ (1,972,050)
=========== =========== =========== ============
Weighted average number of shares
outstanding:
Basic ........................................ 20,299,985 20,299,985 20,299,985 20,299,985
Diluted ...................................... 20,299,985 20,299,985 23,567,873 20,299,985
NET INCOME (LOSS) PER SHARE:
Basic ........................................ $ (.02) $ (.02) $ .04 $ (.10)
=========== =========== =========== ============
Diluted ...................................... $ (.02) $ (.02) $ .03 $ (.10)
=========== =========== =========== ============
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE>
Digital Evolution, Inc.
Statements of Shareholders' Deficiency
<TABLE>
<CAPTION>
Class A Class B Retained
Common Stock Common Stock Earnings/
---------------------- ------------------ Accumulated
Shares Amount Shares Amount (Deficit) Total
------------ -------- -------- -------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 ....... 1,033,078 $2,000 -- $ -- $ 96,660 $ 98,660
Issuance of preferred stock
(Note 8) ........................ -- -- -- -- -- --
Net loss for the year ............ -- -- -- -- (420,253) (420,253)
--------- ------ ---- ---- ------------ ------------
BALANCE AT JANUARY 1, 1997 ....... 1,033,078 $2,000 -- $ -- $ (323,593) $ (321,593)
Stock split 3.93 for 1 ........... 3,026,919 -- -- -- -- --
Stock split 5.00 for 1 ........... 16,239,988 -- -- -- -- --
Net loss for the year ............ -- -- -- -- (414,874) (414,874)
---------- ------ ---- ---- ------------ ------------
BALANCE AT DECEMBER 31, 1997 ..... 20,299,985 $2,000 -- $ -- $ (738,467) $ (736,467)
---------- ------ ---- ---- ------------ ------------
Net loss for the six months
(unaudited) ..................... -- -- -- -- (1,972,050) (1,972,050)
---------- ------ ---- ---- ------------ ------------
BALANCE AT JUNE 30, 1998
(unaudited) ..................... 20,299,985 $2,000 -- -- $ (2,710,517) $ (2,708,517)
========== ====== ==== ==== ============ ============
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE>
Digital Evolution, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ending December 31,
------------------------------ Six Months Ending June 30,
1996 1997 1997 1998
-------------- -------------- --------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ................................... $ (420,253) $ (414,874) $ 843,714 $ (1,972,050)
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating
activities:
Depreciation ..................................... 48,628 138,591 61,352 80,120
Bad debt expense ................................. 71,180 166,314 -- --
Assumed loan from related party .................. 101,299 -- -- --
Changes in assets and liabilities:
Accounts receivable ........................... (113,880) (1,834,139) (1,343,502) 438,952
Prepaid assets and other ...................... (12,165) (36,874) (76,329) (32,540)
Accounts payable and accrued
expenses ..................................... 535,381 (22,676) (304,526) (201,538)
Deferred revenue .............................. 700,000 (539,780) (390,000) 567,780
Other assets and liabilities .................. (14,666) (21,240) (11,083) (1,912)
---------- ------------ ------------ ------------
Net cash (used in) provided by operating activities 895,524 (2,564,678) (1,220,374) (1,121,188)
---------- ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment ................. (236,356) (515,035) (121,508) (57,748)
Disposition of property and equipment ............... -- 4,692 -- --
---------- ------------ ------------ ------------
Net cash used in investing activities .................. (236,356) (510,343) (121,508) (57,748)
---------- ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from loans payable and capital
leases ............................................. 53,707 65,605 -- --
Payments on loans payable and capital leases (50,372) (227,108) (196,046) (17,242)
Proceeds from redeemable preferred stock
issuance ........................................... 694,761 3,349,998 3,349,998 --
---------- ------------ ------------ ------------
Net cash (used in) provided by financing activities 698,096 3,188,495 3,153,952 (17,242)
---------- ------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents ... 1,357,264 113,474 1,812,070 (1,196,178)
Cash and cash equivalents, beginning of year ........... 57,563 1,414,827 1,414,827 1,528,301
---------- ------------ ------------ ------------
Cash and cash equivalents, end of year ................. $1,414,827 $ 1,528,301 $ 3,226,897 $ 332,123
========== ============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes ....................................... $ 800 $ 7,280 $ -- $ 3,156
Interest ........................................... 26,832 40,623 22,901 8,209
========== ============ ============ ============
NON CASH INVESTING AND FINANCING
ACTIVITIES
Purchases of equipment by capital leases ............ $ 23,979 $ 65,604 $ 65,604 $ --
Assumed loan from related party ..................... 101,299 -- -- --
========== ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-29
<PAGE>
DIGITAL EVOLUTION, INC.
NOTES TO FINANCIAL STATEMENTS
(Information with respect to June 30, 1997 and 1998 is unaudited)
NOTE 1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES BUSINESS
Digital Evolution, Inc. (the "Company") was incorporated in California on
May 10, 1994. The Company is a developer of proprietary technologies, with its
principal expertise in large scale inter-and intranet solutions, database and
electronic commerce applications, CD-Rom and interactive kiosk-based networks.
The Company's principal markets are the United States.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with initial
maturities of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method and includes the amortization of capital lease assets.
Equipment is depreciated over a five to seven year useful life. Leasehold
improvements are amortized over the term of the lease or the useful life, if
shorter.
Betterments and major renewals are capitalized and included in property,
plant, and equipment accounts while expenditures for maintenance and repairs
and minor renewals are charged to expense. When assets are retired or otherwise
disposed of, the assets and related allowances for depreciation and
amortization are eliminated from the accounts and any resulting gain or loss is
reflected in income.
Long-Lived Assets
Long-lived assets, such as property and equipment, are evaluated for
impairment when events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable through the estimated undiscounted
future cash flows from the use of these assets. When any such impairment
exists, the related assets will be written down to fair value. No impairment
losses have been recorded through December 31, 1997.
Software Development Costs
Development costs incurred in the research and development of new software
products and enhancements to existing software products are expensed as
incurred until technological feasibility has been established. After
technological feasibility is established, any additional development costs are
capitalized in accordance with Statement of Financial Accounting Standards No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed." Such costs are amortized over the lesser of five years or
the economic life of the related product. No development costs were capitalized
in 1997 and 1996.
Revenue Recognition
Revenues are derived principally from either (a) contracts permitting the
billing of services at amounts equal to actual time and material costs
incurred, or (b) under fixed-fee arrangements. Revenues under fixed fee
arrangements are recognized on the percentage of completion method based on the
ratio of costs incurred to total estimated costs. Fees and
F-30
<PAGE>
DIGITAL EVOLUTION, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information with respect to June 30, 1997 and 1998 is unaudited)
expenditures in excess of billings represent the costs incurred on projects and
anticipated profits earned on projects in excess of amounts billed. Billings in
excess of fees and expenditures represent amounts billed in excess of costs
incurred and estimated profit earned and have been classified as current
liabilities under the caption "deferred revenue."
Taxes on Income
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Statement ("SFAS") No. 109, "Accounting for
Income Taxes." SFAS 109 requires the recognition of deferred tax assets and
liabilities for the expected future income tax consequences of events that have
been recognized in a Company's financial statements or tax return. Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts for income tax purposes using enacted tax rates in effect in the
years in which the temporary differences are expected to reverse.
The Company currently files its federal and state income tax returns as a
cash basis entity.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
Fair Values of Financial Instruments
The carrying amounts reported in the balance sheet for cash equivalents,
accounts receivables, and accounts payable approximate fair value because of
the immediate or short-term maturity of these financial instruments. The fair
value of long-term debt is estimated based on the current borrowing rates for
similar debt which approximates fair value.
Concentrations of Credit Risk and Major Customer
Financial instruments which potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents and accounts
receivables. Cash and cash equivalents consist of deposits and investments in
short-term government securities placed with various high credit quality
financial institutions. The Company generates revenue principally from
customers located in North America, many of which are large multi-national
organizations. During 1997 and 1996, one customer accounted for 53% and 27%,
respectively, in 1997 and 1996 of total revenues. This same customer accounted
for 55% and 0%, respectively, of accounts receivables, in 1997 and 1996,
respectively. Concentrations of credit risk with respect to receivables are
limited due to the Company's geographically diverse customer base. The Company
maintains an allowance for uncollectible receivables based upon the
collectibility of such receivables.
F-31
<PAGE>
DIGITAL EVOLUTION, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information with respect to June 30, 1997 and 1998 is unaudited)
Computation of Earnings Per Shares
For the year ended December 31, 1997, the Company adopted SFAS No. 128,
which requires the presentation of Basic and Dilutive earnings per share, which
replaces primary and fully diluted earnings per share. Basic net loss per share
is computed using the weighted average number of common shares outstanding
during the period. Dilutive net loss per share is computed using the weighted
average number of common shares outstanding during the period, plus the
dilutive effect of common stock equivalents. Shares outstanding for dilutive
earnings per share include preferred stock and stock options. The dilutive
computations do not include preferred stock and stock options for the years
ended December 31, 1997 and 1996 as their inclusion would be antidilutive.
Stock-Based Compensation
The Company accounts for its stock option awards under the intrinsic value
method of accounting, prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Under the intrinsic value based
method, compensation cost is the excess, if any, of the quoted market price of
the stock at grant date or other measurement date over the amount an employee
must pay to acquire the stock. The Company makes pro forma disclosures of net
income and earnings per share as if the fair value based method of accounting
had been applied as required by SFAS No. 123, "Accounting for Stock-based
Compensation."
Unaudited Interim Financial Information
The interim financial statements of the Company for the six months ended
June 30, 1997 and 1998, included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations relating to interim financial statements. In the opinion
of management, the accompanying unaudited interim financial statements reflect
all adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position of the Company at June 30, 1998, and the
results of its operations and its cash flows for the six months ended June 30,
1997 and 1998.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130), which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is
defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures,
SFAS 130 requires that all items that are required to be recognized under
current accounting standards as components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as other
financial statements.
F-32
<PAGE>
DIGITAL EVOLUTION, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information with respect to June 30, 1997 and 1998 is unaudited)
Also, in June 1997, FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" which supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." SFAS No. 131
establishes standards for the way that public companies report information
about operating segments in annual financial statements and requires reporting
of selected information about operating segments in interim financial
statements issued to the public. It also establishes standards for disclosures
regarding products and services, geographic areas and major customers. SFAS No.
131 defines operating segments as components of a company about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance.
SFAS No. 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997 and requires comparative information for
earlier years to be restated. Because of the recent issuance of the standards,
management has been unable to fully evaluate the impact, if any, the standards
may have on future financial statement disclosures. Results of operations and
financial position, however, will be unaffected by implementation of these
standards.
In October 1997, Statement of Position 97-2, Software Revenue Recognition
(SOP 97-2), was issued. The SOP provides guidance on when revenue should be
recognized and in what amounts licensing, selling, leasing, or otherwise
marketing computer software. SOP 97-2 is effective for transactions entered
into in fiscal years after December 15, 1997. Because of the recent issuance of
the SOP, management has been unable to fully evaluate the impact, if any, the
SOP may have on future financial statement disclosure.
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures
about Pensions and Other Postretirement Benefits" which standardizes the
disclosure requirements for pensions and other postretirement benefits and
requires additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis, SFAS No. 132 is
effective for years beginning after December 15, 1997 and requires comparative
information for earlier years to be restated, unless such information is not
readily available. Management believes the adoption of this statement will have
no material impact on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses, depends on the intended use of the derivative and its resulting
designation. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company will adopt SFAS No. 133 by January
1, 2000 and does not expect SFAS No. 133 to have a material impact on its
financial statements.
F-33
<PAGE>
DIGITAL EVOLUTION, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information with respect to June 30, 1997 and 1998 is unaudited)
NOTE 2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, June 30,
--------------------------- ------------
1996 1997 1998
------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
Equipment ................................ $ 364,053 $ 849,455 $907,203
Furniture and fixtures ................... 60,164 71,834 71,834
Leasehold improvements ................... 16,186 29,457 29,457
---------- ---------- ---------
440,403 950,746 1,008,494
Accumulated depreciation and amortization (113,339) (251,852) (343,260)
---------- ---------- ---------
Property and equipment, net .............. $ 327,064 $ 698,894 $665,234
========== ========== =========
</TABLE>
As of December 31, 1997 and 1996, included in equipment is $105,093 and
$39,489 respectively, of equipment with accumulated amortization of $30,024 and
$10,600, respectively, under capital leases.
NOTE 3. LONG-TERM DEBT
Long-term debt consists of the following: erty and equipment consists of
the following:
<TABLE>
<CAPTION>
December 31, June 30,
----------------------- ------------
1996 1997 1998
---------- ---------- ------------
(unaudited)
<S> <C> <C> <C>
Note payable to bank, secured by certain
equipment, monthly payments of $1,128,
interest at 9.34%, matures November 2001 $52,998 $43,248 $39,228
------- ------- -------
52,998 43,248 39,228
Less current maturities ................. 9,750 9,053 10,307
------- ------- -------
$43,248 $34,195 $28,921
======= ======= =======
</TABLE>
NOTE 4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following:
<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>
Outstanding at beginning of year .................... -- --
Granted ............................................. 5,642,785 $ 0.54
Forfeited/canceled .................................. (74,620) $ 0.54
--------- ------
Outstanding at end of year .......................... 5,568,165 $ 0.54
========= ======
Options exercisable at year-end ..................... 1,733,030 $ 0.54
Weighted average fair value of options granted during
the year .......................................... $ 0.15
======
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------ --------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
- ---------------- ------------- ------------- ---------- -------------------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.54 5,417,200 4.3 Yrs. $ 0.54 1,733,030 $ 0.54
$ 0.70 150,965 4.8 Yrs. $ 0.70 -- $ 0.70
--------- ---------
5,568,165 1,733,030
========= =========
</TABLE>
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> <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>
This Page Intentionally Left Blank
<PAGE>
5,450,000 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........................... $20,908
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...................................... $1,302,838
==========
- --------------------
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
1.2 Standby Stock Purchase Agreement, by and between U.S. Interactive and
Safeguard Scientifics, dated August __, 1999+
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 Form of 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 July 30, 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 Lease Agreement, dated March 30, 1999, between U.S. Interactive and Norton Plaza Associates+
10.12 Letter agreement between U.S. Interactive and Chromazone, dated April 6, 1999.
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. 4 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
5th day of August, 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. 5 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 August 5, 1999
- ----------------------------------------- (principal executive officer)
Stephen T. Zarrilli
/s/ Philip L. Calamia Vice President and Chief Financial Officer August 5, 1999
- ----------------------------------------- (principal financial and accounting officer)
Philip L. Calamia
* August 5, 1999
- ----------------------------------------- Director
Eric Pulier
*
- ----------------------------------------- Director August 5, 1999
Robert E. Keith, Jr.
*
- ----------------------------------------- Director August 5, 1999
John Shulman
*
- ----------------------------------------- Director August 5, 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
1.2 Standby Stock Purchase Agreement, by and between U.S. Interactive and Safeguard Scientifics, dated August __, 1999+
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 Form of 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 July 30, 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 Lease Agreement, dated March 30, 1999, between U.S. Interactive and Norton Plaza Associates+
10.12 Letter agreement between U.S. Interactive and Chromazone, dated April 6, 1999.
23.1 Consent of KPMG LLP, independent public accountants
23.2 Form of 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>
EXHIBIT 1.1
5,450,000 shares
U.S. INTERACTIVE, INC.
Common Stock
UNDERWRITING AGREEMENT
August __, 1999
LEHMAN BROTHERS INC.
HAMBRECHT & QUIST LLC
ADAMS, HARKNESS & HILL, INC.
As Representatives of the several
Underwriters named in Schedule 1,
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Ladies and Gentlemen:
U.S. Interactive, Inc., a Delaware corporation (the "Company"), and
certain stockholders of the Company named in Schedule 2 hereto (the "Selling
Stockholders"), propose to sell an aggregate of 5,450,000 shares (the "Firm
Stock") of the Company's common stock (the "Common Stock"). Of the 5,450,000
shares of the Firm Stock, 4,423,712 are being sold by the Company and 1,026,288
by the Selling Stockholders. Of the 5,450,000 shares of Firm Stock, 1,750,000
shares (the "Directed Share Stock") are being sold to certain shareholders of
Safeguard Scientifics, Inc. (or if all of such shares are not so purchased to
Safeguard Scientifics, Inc.) In addition, the Company proposes to grant to the
Underwriters named in Schedule 1 hereto (the "Underwriters") an option to
purchase up to an additional 817,500 shares of the Common Stock on the terms and
for the purposes set forth in Section 3 (the "Option Stock"). The Firm Stock,
the Directed Share Stock, the Intel Stock and the Option Stock, if purchased,
are hereinafter collectively called the "Stock." This is to confirm the
agreement concerning the purchase of the Stock from the Company and the Selling
Stockholders by the Underwriters named in Schedule 1 hereto (the
"Underwriters").
-1-
<PAGE>
1. Representations, Warranties and Agreements of the Company. The
Company represents, warrants and agrees that:
(a) A registration statement on Form S-1, and amendments thereto,
with respect to the Stock have (i) been prepared by the Company in conformity
with the requirements of the United States Securities Act of 1933 (the
"Securities Act") and the rules and regulations (the "Rule and Regulations") of
the United States Securities and Exchange Commission (the "Commission")
gthereunder, (ii) been filed with the Commission under the Securities Act and
(iii) become effective under the Securities Act. Copies of such registration
statement and the amendments thereto have been delivered by the Company to you
as the representatives (the "Representatives") of the Underwriters. As used in
this Agreement, "Effective Time" means the date and the time as of which such
registration statement, or the most recent post-effective amendment thereto, if
any, was declared effective by the Commission; "Effective Date" means the date
of the Effective Time; "Preliminary Prospectus" means each prospectus included
in such registration statement, or amendments thereof, before it became
effective under the Securities Act and any prospectus filed with the Commission
by the Company with the consent of the Representatives pursuant to Rule 424(a)
of the Rules and Regulations; "Registration Statement" means such registration
statement, as amended at the Effective Time, including all information contained
in the final prospectus filed with the Commission pursuant to Rule 424(b) of the
Rules and Regulations in accordance with Section 6(a) hereof and deemed to be a
part of the registration statement as of the Effective Time pursuant to
paragraph (b) of Rule 430A of the Rules and Regulations; and "Prospectus" means
such final prospectus, as first filed with the Commission pursuant to paragraph
(1) or (4) of Rule 424(b) of the Rules and Regulations. The Commission has not
issued any order preventing or suspending the use of any Preliminary Prospectus.
(b) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will, when they become effective or are filed with the Commission, as
the case may be, conform in all material respects to the requirements of the
Securities Act and the Rules and Regulations and do not and will not, as of the
applicable effective date (as to the Registration Statement and any amendment
thereto) and as of the applicable filing date (as to the Prospectus and any
amendment or supplement thereto) contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading; provided that no representation or
warranty is made as to information contained in or omitted from the Registration
Statement or the Prospectus in reliance upon and in conformity with written
information furnished to the Company through the Representatives by or on behalf
of any Underwriter specifically for inclusion therein.
(c) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of Delaware, is duly qualified
to do business and is in good standing as a foreign corporation in each
jurisdiction in which the ownership or lease of property or the conduct of its
business requires such qualification and in which the failure to qualify would
have a materially adverse effect upon the business of the Company, and has all
power and authority necessary to own or hold its properties and to conduct the
business in which it is engaged. The Company has no operating subsidiaries as of
the date hereof and will commence the process of dissolving any subsidiaries in
existence on the date hereof within 10 days following the date hereof.
(d) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company have
been duly and validly authorized and issued, are fully paid and non-assessable
and conform to the description thereof contained in the Prospectus.
-2-
<PAGE>
(e) The unissued shares of the Stock to be issued and sold by the
Company to the Underwriters hereunder have been duly and validly authorized and,
when issued and delivered against payment therefor as provided herein will be
duly and validly issued, fully paid and non-assessable and the Stock will
conform to the description thereof contained in the Prospectus.
(f) This Agreement has been duly authorized, executed and delivered
by the Company.
(g) The execution, delivery and performance of this Agreement by the
Company and the consummation of the transactions contemplated hereby will not
conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which the Company or
any of its subsidiaries is a party or by which the Company or any of its
subsidiaries is bound or to which any of the property or assets of the Company
or any of its subsidiaries is subject, nor will such actions result in any
violation of the provisions of the charter or by-laws of the Company or any of
its subsidiaries or any statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Company or any of its
subsidiaries or any of their properties or assets; and except for the
registration of the Stock under the Securities Act and such consents, approvals,
authorizations, registrations or qualifications as may be required under the
Exchange Act and applicable state securities laws in connection with the
purchase and distribution of the Stock by the Underwriters, no consent,
approval, authorization or order of, or filing or registration with, any such
court or governmental agency or body is required to be made or obtained by the
Company for the execution, delivery and performance of this Agreement by the
Company and the consummation of the transactions contemplated hereby.
(h) Except as described in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person granting such
person the right (other than rights which have been waived or satisfied) to
require the Company to file a registration statement under the Securities Act
with respect to any securities of the Company owned or to be owned by such
person or to require the Company to include such securities in the securities
registered pursuant to the Registration Statement or in any securities being
registered pursuant to any other registration statement filed by the Company
under the Securities Act.
(i) Except as described in the Prospectus, the Company has not sold
or issued any shares of Common Stock during the six-month period preceding the
date of the Prospectus, including any sales pursuant to Rule 144A under, or
Regulations D or S of, the Securities Act, other than shares issued pursuant to
employee benefit plans, stock options plans or other employee compensation plans
or pursuant to outstanding options, rights or warrants.
-3-
<PAGE>
(j) Neither the Company nor any of its subsidiaries has sustained,
since the date of the latest audited financial statements included in the
Prospectus, any material loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by insurance, or from
any labor dispute or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Prospectus; and, since such date, there
has not been any change in the classes or terms of capital stock or long-term
debt of the Company or any of its subsidiaries or any material adverse change,
or any development involving a prospective material adverse change, in or
affecting the general affairs, management, consolidated financial position,
stockholders' equity, results of operations, business or prospects of the
Company and its subsidiaries as a whole (a "Material Adverse Effect"), otherwise
than as set forth or contemplated in the Prospectus.
(k) The financial statements (including the related notes and
supporting schedules) filed as part of the Registration Statement or included in
the Prospectus present fairly the financial condition and results of operations
of the entities purported to be shown thereby, at the dates and for the periods
indicated, and have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved.
(l) KPMG LLP, who have certified certain financial statements of the
Company, whose report appears in the Prospectus and who have delivered the
initial letter referred to in Section 9(h) hereof, are independent public
accountants as required by the Securities Act and the Rules and Regulations.
(m) All real property and buildings held under lease by the Company
and its subsidiaries are held by them under valid, subsisting and enforceable
leases, with such exceptions as are not material and do not interfere with the
use made and proposed to be made of such property and buildings by the Company
and its subsidiaries.
(n) The Company and each of its subsidiaries carry, or are covered
by, insurance in such amounts and covering such risks as is adequate for the
conduct of their respective businesses and the value of their respective
properties and as is customary for companies engaged in similar businesses in
similar industries.
(o) The Company and each of its subsidiaries own or possess adequate
rights to use all material patents, patent applications, trademarks, service
marks, trade names, trademark registrations, service mark registrations,
copyrights and licenses necessary for the conduct of their respective businesses
and have no reason to believe that the conduct of their respective businesses
will conflict with, and, except as disclosed in the Prospectus, have not
received any notice of any claim of conflict with, any such rights of others.
(p) There are no legal or governmental proceedings pending to which
the Company or any of its subsidiaries is a party or of which any property or
assets of the Company or any of its subsidiaries is the subject which, if
determined adversely to the Company or any of its subsidiaries, might have a
Material Adverse Effect and to the best of the Company's knowledge, no such
proceedings are threatened or contemplated by governmental authorities or
threatened by others.
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(q) There are no contracts or other documents which are required to
be described in the Prospectus or filed as exhibits to the Registration
Statement by the Securities Act or by the Rules and Regulations which have not
been described in the Prospectus or filed as exhibits to the Registration
Statement or incorporated therein by reference as permitted by the Rules and
Regulations.
(r) No relationship, direct or indirect, exists between or among the
Company on the one hand, and the directors, officers, stockholders, customers or
suppliers of the Company on the other hand, which is required to be described in
the Prospectus which is not so described.
(s) No labor disturbance by the employees of the Company exists or,
to the knowledge of the Company, is imminent which might be expected to have a
Material Adverse Effect.
(t) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security Act
of 1974, as amended, including the regulations and published interpretations
thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred
with respect to any "pension plan" (as defined in ERISA) for which the Company
would have any liability; the Company has not incurred and does not expect to
incur liability under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal
Revenue Code of 1986, as amended, including the regulations and published
interpretations thereunder (the "Code"); and each "pension plan" for which the
Company would have any liability that is intended to be qualified under Section
401(a) of the Code is so qualified in all material respects and nothing has
occurred, whether by action or by failure to act, which would cause the loss of
such qualification.
(u) The Company has filed all federal, state and local income and
franchise tax returns required to be filed through the date hereof and has paid
all taxes due thereon, and no tax deficiency has been determined adversely to
the Company or any of its subsidiaries which has had (nor does the Company have
any knowledge of any tax deficiency which, if determined adversely to the
Company or any of its subsidiaries, might have) a Material Adverse Effect.
(v) Since the date as of which information is given in the
Prospectus through the date hereof, and except as may otherwise be disclosed in
the Prospectus, the Company has not (i) issued or granted any securities (other
than securities issued pursuant to employee benefit plans, stock option plans or
other employee compensation plans or pursuant to outstanding options issued
under such plans), (ii) incurred any liability or obligation, direct or
contingent, other than liabilities and obligations which were incurred in the
ordinary course of business, (iii) entered into any transaction not in the
ordinary course of business or (iv) declared or paid any dividend on its capital
stock.
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(w) The Company (i) makes and keeps accurate books and records and
(ii) maintains internal accounting controls which provide reasonable assurance
that (A) transactions are executed in accordance with management's
authorization, (B) transactions are recorded as necessary to permit preparation
of its financial statements and to maintain accountability for its assets, (C)
access to its assets is permitted only in accordance with management's
authorization and (D) the reported accountability for its assets is compared
with existing assets at reasonable intervals.
(x) Neither the Company nor any of its subsidiaries (i) is in
material violation of its charter or by-laws, (ii) is in default in any material
respect, and no event has occurred which, with notice or lapse of time or both,
would constitute such a default, in the due performance or observance of any
term, covenant or condition contained in any material indenture, mortgage, deed
of trust, loan agreement or other agreement or instrument to which it is a party
or by which it is bound or to which any of its properties or assets is subject
or (iii) is in violation in any material respect of any law, ordinance,
governmental rule, regulation or court decree to which it or its property or
assets may be subject or has failed to obtain any material license, permit,
certificate, franchise or other governmental authorization or permit necessary
to the ownership of its property or to the conduct of its business.
(y) Neither the Company nor any of its subsidiaries, nor any
director, officer, agent, employee or other person associated with or acting on
behalf of the Company or any of its subsidiaries, has used any corporate funds
for any unlawful contribution, gift, entertainment or other unlawful expense
relating to political activity; made any direct or indirect unlawful payment to
any foreign or domestic government official or employee from corporate funds;
violated or is in violation of any provision of the Foreign Corrupt Practices
Act of 1977; or made any bribe, rebate, payoff, influence payment, kickback or
other unlawful payment.
(z) There has been no storage, disposal, generation, manufacture,
refinement, transportation, handling or treatment of toxic wastes, medical
wastes, hazardous wastes or hazardous substances by the Company or any of its
subsidiaries (or, to the knowledge of the Company, any of their predecessors in
interest) at, upon or from any of the property now or previously owned or leased
by the Company or its subsidiaries in violation of any applicable law,
ordinance, rule, regulation, order, judgment, decree or permit or which would
require remedial action under any applicable law, ordinance, rule, regulation,
order, judgment, decree or permit, except for any violation or remedial action
which would not have, or could not be reasonably likely to have, singularly or
in the aggregate with all such violations and remedial actions, a Material
Adverse Effect; there has been no material spill, discharge, leak, emission,
injection, escape, dumping or release of any kind onto such property or into the
environment surrounding such property of any toxic wastes, medical wastes, solid
wastes, hazardous wastes or hazardous substances due to or caused by the Company
or any of its subsidiaries or with respect to which the Company or any of its
subsidiaries have knowledge, except for any such spill, discharge, leak,
emission, injection, escape, dumping or release which would not have or would
not be reasonably likely to have, singularly or in the aggregate with all such
spills, discharges, leaks, emissions, injections, escapes, dumpings and
releases, a Material Adverse Effect. The terms "hazardous wastes", "toxic
wastes", "hazardous substances" and "medical wastes" shall have the meanings
specified in any applicable local, state, federal and foreign laws or
regulations with respect to environmental protection.
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(aa) Neither the Company nor any subsidiary is an "investment
company" within the meaning of such term under the Investment Company Act of
1940 and the rules and regulations of the Commission thereunder.
2. Representations, Warranties and Agreements of the Selling
Stockholders. Each Selling Stockholder severally represents, warrants and agrees
that:
(a) The Selling Stockholder has, and immediately prior to the First
Delivery Date (as defined in Section 5 hereof) the Selling Stockholder will have
good and valid title to the shares of Stock to be sold by the Selling
Stockholder hereunder on such date, free and clear of all liens, encumbrances,
equities or claims (except for such rights and encumbrances created by the
Amended and Restated Articles of Incorporation of the Company, the Amended and
Restated Shareholders' Agreement dated ___________, 19___ and the Amended and
Restated Investors' Rights Agreement dated ____________, 19__, all of which
rights and encumbrances shall terminate immediately prior to the First Delivery
Date); and upon delivery of such shares and payment therefor pursuant hereto,
good and valid title to such shares, free and clear of all liens, encumbrances,
equities or claims, will pass to the several Underwriters.
(b) The Selling Stockholder has placed in custody under a custody
agreement (the "Custody Agreement" and, together with all other similar
agreements executed by the other Selling Stockholders, the "Custody Agreements")
with ChaseMellon Shareholder Services, LLC, as custodian (the "Custodian"), for
delivery under this Agreement, certificates in negotiable form (with signature
guaranteed by a commercial bank or trust company having an office or
correspondent in the United States or a member firm of the New York or American
Stock Exchanges) representing the shares of Stock to be sold by the Selling
Stockholder hereunder.
(c) The Selling Stockholder has duly and irrevocably executed and
delivered a power of attorney (the "Power of Attorney" and, together with all
other similar agreements executed by the other Selling Stockholders, the "Powers
of Attorney") appointing the Custodian and one or more other persons, as
attorneys-in-fact, with full power of substitution, and with full authority
(exercisable by any one or more of them) to execute and deliver this Agreement
and to take such other action as may be necessary or desirable to carry out the
provisions hereof on behalf of the Selling Stockholder.
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<PAGE>
(d) The Selling Stockholder has full right, power and authority to
enter into this Agreement, the Power of Attorney and the Custody Agreement; the
execution, delivery and performance of this Agreement, the Power of Attorney and
the Custody Agreement by the Selling Stockholder and the consummation by the
Selling Stockholder of the transactions contemplated hereby and thereby will not
conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which the Selling
Stockholder is a party or by which the Selling Stockholder is bound or to which
any of the property or assets of the Selling Stockholder is subject, nor will
such actions result in any violation of the provisions of (i) if the Selling
Stockholder is a corporation, the charter or by-laws of the Selling Stockholder;
(ii) if the Selling Stockholder is a partnership, the partnership agreement of
the Selling Stockholder; and (iii) if the Selling Stockholder is a trust, the
deed of trust of the Selling Stockholder, or any statute or any order, rule or
regulation of any court or governmental agency or body having jurisdiction over
the Selling Stockholder or the property or assets of the Selling Stockholder;
and, except for the registration of the Stock under the Securities Act and such
consents, approvals, authorizations, registrations or qualifications as may be
required under the Exchange Act and applicable state securities laws in
connection with the purchase and distribution of the Stock by the Underwriters,
no consent, approval, authorization or order of, or filing or registration with,
any such court or governmental agency or body is required for the execution,
delivery and performance of this Agreement, the Power of Attorney or the Custody
Agreement by the Selling Stockholder and the consummation by the Selling
Stockholder of the transactions contemplated hereby and thereby.
(e) The Registration Statement and the Prospectus and any further
amendments or supplements to the Registration Statement or the Prospectus will,
when they become effective or are filed with the Commission, as the case may be,
do not and will not, as of the applicable effective date (as to the Registration
Statement and any amendment thereto) and as of the applicable filing date (as to
the Prospectus and any amendment or supplement thereto) contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading;
provided that no representation or warranty is made as to information contained
in or omitted from the Registration Statement or the Prospectus in reliance upon
and in conformity with written information furnished to the Company through the
Representatives by or on behalf of any Underwriter specifically for inclusion
therein.
(f) The Selling Stockholder has no reason to believe that the
representations and warranties of the Company contained in Section 1 hereof are
not materially true and correct, is familiar with the Registration Statement and
the Prospectus (as amended or supplemented) and has no knowledge of any material
fact, condition or information not disclosed in the Registration Statement, as
of the effective date, or the Prospectus (or any amendment or supplement
thereto), as of the applicable filing date, which has adversely affected or may
adversely affect the business of the Company and is not prompted to sell shares
of Common Stock by any information concerning the Company which is not set forth
in the Registration Statement and the Prospectus.
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<PAGE>
(g) The Selling Stockholder has not taken and will not take,
directly or indirectly, any action which is designed to or which has constituted
or which might reasonably be expected to cause or result in the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the shares of the Stock.
3. Purchase of the Stock by the Underwriters; Management Fee. On the
basis of the representations and warranties contained in, and subject to the
terms and conditions of, this Agreement, the Company agrees to sell 2,673,712
shares of the Firm Stock and each Selling Stockholder hereby agrees to sell the
number of shares of the Firm Stock set opposite such Selling Stockholder's name
in Schedule 2 hereto, severally and not jointly, to the several Underwriters and
each of the Underwriters, severally and not jointly, agrees to purchase the
number of shares of the Firm Stock set opposite that Underwriter's name in
Schedule 1 hereto. Each Underwriter shall be obligated to purchase from the
Company, and from each Selling Stockholder, that number of shares of the Firm
Stock which represents the same proportion of the number of shares of the Firm
Stock to be sold by the Company, and by each Selling Stockholder, as the number
of shares of the Firm Stock set forth opposite the name of such Underwriter in
Schedule 1 represents of the total number of shares of the Firm Stock to be
purchased by all of the Underwriters pursuant to this Agreement. The respective
purchase obligations of the Underwriters with respect to the Firm Stock shall be
rounded among the Underwriters to avoid fractional shares, as the
Representatives may determine.
In addition, the Company grants to the Underwriters an option to
purchase up to 817,500 shares of Option Stock. Such option is granted for the
purpose of covering over-allotments in the sale of Firm Stock and is exercisable
as provided in Section 5 hereof. Shares of Option Stock shall, if purchased, be
purchased severally for the account of the Underwriters in proportion to the
number of shares of Firm Stock set opposite the name of such Underwriters in
Schedule 1 hereto. The respective purchase obligations of each Underwriter with
respect to the Option Stock shall be adjusted by the Representatives so that no
Underwriter shall be obligated to purchase Option Stock other than in 100 share
amounts. The price of both the Firm Stock (other than the Directed Share Stock)
and any Option Stock shall be $_____ per share.
On the First Delivery Date, the Company shall pay the Underwriters a
management fee in respect of the Directed Share Stock equal to 2.8% of the
product of (x) 1,750,000 and (y) $______.
The Company and the Selling Stockholders shall not be obligated to
deliver any of the Stock to be delivered on any Delivery Date (as hereinafter
defined), as the case may be, except upon payment for all the Stock to be
purchased on such Delivery Date as provided herein.
4. Offering of Stock by the Underwriters.
Upon authorization by the Representatives of the release of the Firm
Stock purchased by the underwriters hereunder, the several Underwriters propose
to offer such Firm Stock for sale upon the terms and conditions set forth in the
Prospectus.
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<PAGE>
It is understood that 350,000 shares of the Firm Stock (the "Directed
Stock") will initially be reserved by the several Underwriters for offer and
sale upon the terms and conditions set forth in the Prospectus and in accordance
with the rules and regulations of the National Association of Securities
Dealers, Inc. (the "Directed Stock Program") to employees, directors and persons
having business relationships with the Company who have heretofore delivered to
the Representatives offers to purchase shares of Directed Stock in form
satisfactory to the Representatives, and that any allocation of Directed Stock
among such persons will be made in accordance with timely directions received by
the Representatives from the Company; provided, that under no circumstances will
the Representatives or any Underwriter be liable to the Company or to any such
person for any action taken or omitted in good faith in connection with such
offering to employees and persons having business relationships with the Company
and its subsidiaries. It is further understood that any shares of Directed Stock
which are not purchased by such persons will be offered by the Underwriters to
the public upon the terms and conditions set forth in the Prospectus.
5. Delivery of and Payment for the Stock. Delivery of and payment for
the Firm Stock purchased by the underwriters shall be made at the offices of
Brobeck, Phleger & Harrison LLP, 701 Pennsylvania Avenue, N.W., Suite 220,
Washington, D.C. 20004, at 10:00 A.M., Washington, D.C. time, on the fourth full
business day following the date of this Agreement or at such other date or place
as shall be determined by agreement between the Representatives and the Company.
This date and time are sometimes referred to as the First Delivery Date." On the
First Delivery Date, the Company and the Selling Stockholders shall deliver or
cause to be delivered certificates representing the Firm Stock purchased by the
underwriters to the Representatives for the account of each Underwriter against
payment to or upon the order of the Company and the Selling Stockholders of the
purchase price by wire transfer in immediately available funds. Time shall be of
the essence, and delivery at the time and place specified pursuant to this
Agreement is a further condition of the obligation of each Underwriter
hereunder. Upon delivery, the Firm Stock purchased by the underwriters shall be
registered in such names and in such denominations as the Representatives shall
request in writing not less than two full business days prior to the First
Delivery Date. For the purpose of expediting the checking and packaging of the
certificates for the Firm Stock, the Company and the Selling Stockholders shall
make the certificates representing the Firm Stock purchased by the underwriters
available for inspection by the Representatives in New York, New York, not later
than 2:00 P.M., New York City time, on the business day prior to the First
Delivery Date.
The option granted in Section 3 will expire 30 days after the date of
this Agreement and may be exercised in whole or in part from time to time by
written notice being given to the Company by the Representatives. Such notice
shall set forth the aggregate number of shares of Option Stock as to which the
option is being exercised, the names in which the shares of Option Stock are to
be registered, the denominations in which the shares of Option Stock are to be
issued and the date and time, as determined by the Representatives, when the
shares of Option Stock are to be delivered; provided, however, that this date
and time shall not be earlier than the First Delivery Date nor earlier than the
second business day after the date on which the option shall have been exercised
nor later than the fifth business day after the date on which the option shall
have been exercised. The date and time the shares of Option Stock are delivered
are sometimes referred to as a "Second Delivery Date" and the First Delivery
Date and any Second Delivery Date are sometimes each referred to as a "Delivery
Date".
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Delivery of and payment for the Option Stock shall be made at the place
specified in the first sentence of the first paragraph of this Section 5 (or at
such other place as shall be determined by agreement between the Representatives
and the Company) at 10:00 A.M., Washington, D.C. time, on such Second Delivery
Date. On such Second Delivery Date, the Company shall deliver or cause to be
delivered the certificates representing the Option Stock to the Representatives
for the account of each Underwriter against payment to or upon the order of the
Company of the purchase price by wire transfer in immediately available funds.
Time shall be of the essence, and delivery at the time and place specified
pursuant to this Agreement is a further condition of the obligation of each
Underwriter hereunder. Upon delivery, the Option Stock shall be registered in
such names and in such denominations as the Representatives shall request in the
aforesaid written notice. For the purpose of expediting the checking and
packaging of the certificates for the Option Stock, the Company shall make the
certificates representing the Option Stock available for inspection by the
Representatives in New York, New York, not later than 2:00 P.M., New York City
time, on the business day prior to such Second Delivery Date.
6. Further Agreements of the Company. The Company agrees:
(a) To prepare the Prospectus in a form approved by the
Representatives and to file such Prospectus pursuant to Rule 424(b) under the
Securities Act not later than Commission's close of business on the second
business day following the execution and delivery of this Agreement or, if
applicable, such earlier time as may be required by Rule 430A(a)(3) under the
Securities Act; to make no further amendment or any supplement to the
Registration Statement or to the Prospectus except as permitted herein; to
advise the Representatives, promptly after it receives notice thereof, of the
time when any amendment to the Registration Statement has been filed or becomes
effective or any supplement to the Prospectus or any amended Prospectus has been
filed and to furnish the Representatives with copies thereof; to advise the
Representatives, promptly after it receives notice thereof, of the issuance by
the Commission of any stop order or of any order preventing or suspending the
use of any Preliminary Prospectus or the Prospectus, of the suspension of the
qualification of the Stock for offering or sale in any jurisdiction, of the
initiation or threatening of any proceeding for any such purpose, or of any
request by the Commission for the amending or supplementing of the Registration
Statement or the Prospectus or for additional information; and, in the event of
the issuance of any stop order or of any order preventing or suspending the use
of any Preliminary Prospectus or the Prospectus or suspending any such
qualification, to use promptly its best efforts to obtain its withdrawal;
(b) To furnish promptly to each of the Representatives and to
counsel for the Underwriters a signed copy of the Registration Statement as
originally filed with the Commission, and each amendment thereto filed with the
Commission, including all consents and exhibits filed therewith;
(c) To deliver promptly to the Representatives such number of the
following documents as the Representatives shall reasonably request: (i)
conformed copies of the Registration Statement as originally filed with the
Commission and each amendment thereto (in each case excluding exhibits other
than this Agreement and the computation of per share earnings) and (ii) each
Preliminary Prospectus, the Prospectus and any amended or supplemented
Prospectus and, if the delivery of a prospectus is required at any time after
the Effective Time in connection with the offering or sale of the Stock or any
other securities relating thereto and if at such time any events shall have
occurred as a result of which the Prospectus as then amended or supplemented
would include an untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made when such Prospectus is delivered,
not misleading, or, if for any other reason it shall be necessary to amend or
supplement the Prospectus in order to comply with the Securities Act, to notify
the Representatives and, upon their request, to prepare and furnish without
charge to each Underwriter and to any dealer in securities as many copies as the
Representatives may from time to time reasonably request of an amended or
supplemented Prospectus which will correct such statement or omission or effect
such compliance.
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<PAGE>
(d) To file promptly with the Commission any amendment to the
Registration Statement or the Prospectus or any supplement to the Prospectus
that may, in the judgment of the Company or the Representatives, be required by
the Securities Act or requested by the Commission;
(e) Prior to filing with the Commission any amendment to the
Registration Statement or supplement to the Prospectus or any Prospectus
pursuant to Rule 424 of the Rules and Regulations, to furnish a copy thereof to
the Representatives and counsel for the Underwriters and obtain the consent of
the Representatives to the filing;
(f) As soon as practicable after the Effective Date to make
generally available to the Company's security holders and to deliver to the
Representatives an earnings statement of the Company and its subsidiaries (which
need not be audited) complying with Section 11(a) of the Securities Act and the
Rules and Regulations (including, at the option of the Company, Rule 158);
(g) For a period of five years following the Effective Date, to
furnish to the Representatives copies of all materials furnished by the Company
to its shareholders and all public reports and all reports and financial
statements furnished by the Company to the principal national securities
exchange upon which the Common Stock may be listed pursuant to requirements of
or agreements with such exchange or to the Commission pursuant to the Exchange
Act or any rule or regulation of the Commission thereunder;
(h) Promptly from time to time to take such action as the
Representatives may reasonably request to qualify the Stock for offering and
sale under the securities laws of such jurisdictions as the Representatives may
request and to comply with such laws so as to permit the continuance of sales
and dealings therein in such jurisdictions for as long as may be necessary to
complete the distribution of the Stock; provided that in connection therewith
the Company shall not be required to qualify as a foreign corporation or to file
a general consent to service of process in any jurisdiction;
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(i) For a period of 180 days from the date of the Prospectus, not
to, directly or indirectly, (1) offer for sale, sell, pledge or otherwise
dispose of (or enter into any transaction or device which is designed to, or
could be expected to, result in the disposition by any person at any time in the
future of) any shares of Common Stock or securities convertible into or
exchangeable for Common Stock (other than (A) the Stock, (B) shares issued
pursuant to employee benefit plans, qualified stock option plans or other
employee compensation plans existing on the date hereof or pursuant to currently
outstanding options, warrants, rights or in accordance with presently
outstanding convertible securities (all of which shall be automatically
converted to Common Stock on the First Delivery Date), and (C) in connection
with acquisitions of other companies, or their businesses or assets), or sell or
grant options, rights or warrants with respect to any shares of Common Stock or
securities convertible into or exchangeable for Common Stock (other than the
grant of options pursuant to option plans existing on the date hereof), or (2)
enter into any swap or other derivatives transaction that transfers to another,
in whole or in part, any of the economic benefits or risks of ownership of such
shares of Common Stock, whether any such transaction described in clause (1) or
(2) above is to be settled by delivery of Common Stock or other securities, in
cash or otherwise, in each case without the prior written consent of Lehman
Brothers Inc.;
(j) Cause each officer, director and certain stockholders of he
Company to furnish to the Representatives, prior to the First Delivery Date, a
letter or letters, in form and substance satisfactory to counsel for the
Underwriters, pursuant to which each such person shall agree not to, directly or
indirectly, (1) offer for sale, sell, pledge or otherwise dispose of (or enter
into any transaction or device which is designed to, or could be expected to,
result in the disposition by any person at any time in the future of) any shares
of Common Stock or securities convertible into or exchangeable for Common Stock
or (2) enter into any swap or other derivatives transaction that transfers to
another, in whole or in part, any of the economic benefits or risks of ownership
of such shares of Common Stock, whether any such transaction described in clause
(1) or (2) above is to be settled by delivery of Common Stock or other
securities, in cash or otherwise, in each case for a period of 180 days from the
date of the Prospectus, without the prior written consent of Lehman Brothers
Inc. except for gifts of shares of Common Stock or other securities convertible
into, or exchangeable or exercisable for, Common Stock or other derivatives
during the above-referenced lock-up period after the date of the Prospectus if
the donee agrees in writing to be bound by the terms of such agreement for the
remainder of the lock-up period;
(k) Prior to the Effective Date, to apply for the inclusion of the
Stock on the Nasdaq National Market System and to use its best efforts to
complete that listing, subject only to official notice of issuance, prior to the
First Delivery Date;
(l) Prior to filing with the Commission any reports pursuant to Rule
463 of the Rules and Regulations, to furnish a copy thereof to the counsel for
the Underwriters and receive and consider its comments thereon, and to deliver
promptly to the Representatives a signed copy of each report filed by it with
the Commission;
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(m) To apply the net proceeds from the sale of the Stock being sold
by the Company as set forth in the Prospectus;
(n) To take such steps as shall be necessary to ensure that neither
the Company nor any subsidiary shall become an "investment company" within the
meaning of such term under the Investment Company Act of 1940 and the rules and
regulations of the Commission thereunder; and
(o) In connection with the Directed Stock Program, to ensure that
the Directed Stock will be restricted to the extent required by the National
Association of Securities Dealers, Inc. or the rules of such association from
sale, transfer, assignment, pledge or hypothecation for a period of three months
following the date of the effectiveness of the Registration Statement, Lehman
Brothers Inc. will notify the Company as to which Participants will need to be
so restricted. At the request of Lehman Brothers Inc., the Company will direct
the transfer agent to place stop transfer restrictions upon such securities for
such period of time.
7. Further Agreements of the Selling Stockholders. Each Selling
Stockholder agrees:
(a) For a period of 180 days from the date of the Prospectus, not
to, directly or indirectly, (1) offer for sale, sell, pledge or otherwise
dispose of (or enter into any transaction or device which is designed to, or
could be expected to, result in the disposition by any person at any time in the
future of) any shares of Common Stock or Securities convertible into or
exchangeable for Common Stock (other than the Stock) or (2) enter into any swap
or other derivatives transaction that transfers to another, in whole or in part,
any of the economic benefits or risks of ownership of such shares of Common
Stock, whether any such transaction described in clause (1) or (2) above is to
be settled by delivery of Common Stock or other securities, in cash or
otherwise, in each case without the prior written consent of Lehman Brothers
Inc., except for gifts of shares of Common Stock or other securities convertible
into, or exchangeable or exercisable for, Common Stock or other derivatives
during the above-referenced lock-up period after the date of the Prospectus if
the donee agrees in writing to be bound by the terms of such agreement for the
remainder of the lock-up period.
(b) That the Stock to be sold by the Selling Stockholder hereunder,
which is represented by the certificates held in custody for the Selling
Stockholder, is subject to the interest of the Underwriters and the other
Selling Stockholders thereunder, that the arrangements made by the Selling
Stockholder for such custody are to that extent irrevocable, and that the
obligations of the Selling Stockholder hereunder shall not be terminated by any
act of the Selling Stockholder, by operation of law, by the death or incapacity
of any individual Selling Stockholder or, in the case of a trust, by the death
or incapacity of any executor or trustee or the termination of such trust, or
the occurrence of any other event.
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(c) To deliver to the Representatives prior to the First Delivery
Date a properly completed and executed United States Treasury Department Form
W-8 (if the Selling Stockholder is a non-United States person or Form W-9 (if
the Selling Stockholder is a United States person.)
8. Expenses. The Company agrees to pay (a) the costs incident to the
authorization, issuance, sale and delivery of the Stock and any taxes payable in
that connection; (b) the costs incident to the preparation, printing and filing
under the Securities Act of the Registration Statement and any amendments and
exhibits thereto; (c) the costs of distributing the Registration Statement as
originally filed and each amendment thereto and any post-effective amendments
thereof (including, in each case, exhibits), any Preliminary Prospectus, the
Prospectus and any amendment or supplement to the Prospectus, all as provided in
this Agreement; (d) the costs of producing and distributing this Agreement and
any other related documents in connection with the offering, purchase, sale and
delivery of the Stock; (e) the costs of delivering and distributing the Custody
Agreements and the Powers of Attorney; (f) the filing fees incident to securing
any required review by the National Association of Securities Dealers, Inc. of
the terms of sale of the Stock; (g) any applicable listing or other fees; (h)
the fees and expenses of qualifying the Stock under the securities laws of those
provinces of Canada in which the Stock is being offered; (i) all costs and
expenses of the Underwriters, including the fees and disbursements of counsel
for the Underwriters, incident to the Directed Stock Program as described in
Section 4; (j) the costs and expenses of the Company relating to investor
presentations on any "road show" undertaken in connection with the marketing of
the offering of the Stock, including, without limitation, expenses associated
with the production of road show slides and graphics, fees and expenses of any
consultants engaged in connection with the road show presentations with the
prior approval of the Company, travel and lodging expenses of the
representatives and officers of the Company and any such consultants, and the
cost of any aircraft chartered in connection with the road show; and (k) all
other costs and expenses incident to the performance of the obligations of the
Company under this Agreement; provided that, except as provided in this Section
8 and in Section 13, the Underwriters shall pay their own costs and expenses,
including the costs and expenses of their counsel, any transfer taxes on the
Stock which they may sell and the expenses of advertising any offering of the
Stock made by the Underwriters, and the Selling Stockholders shall pay the fees
and expenses of their counsel, the Custodian (and any other attorney-in-fact),
and any transfer taxes payable in connection with their respective sales of
Stock to the Underwriters and reimburse the Company for their pro rata share of
the fees and expenses paid by the Company in connection with the offering of the
Stock.
9. Conditions of Underwriters' Obligations. The respective obligations
of the Underwriters hereunder are subject to the accuracy, when made and on each
Delivery Date, of the representations and warranties of the Company and the
Selling Stockholders contained herein, to the performance by the Company and the
Selling Stockholders of their respective obligations hereunder, and to each of
the following additional terms and conditions:
(a) The Prospectus shall have been timely filed with the Commission
in accordance with Section 6(a); no stop order suspending the effectiveness of
the Registration Statement or any part thereof shall have been issued and no
proceeding for that purpose shall have been initiated or threatened by the
Commission; and any request of the Commission for inclusion of additional
information in the Registration Statement or the Prospectus or otherwise shall
have been complied with.
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(b) No Underwriter shall have discovered and disclosed to the
Company on or prior to such Delivery Date that the Registration Statement or the
Prospectus or any amendment or supplement thereto contains an untrue statement
of a fact which, in the opinion of Brobeck, Phleger & Harrison LLP, counsel for
the Underwriters, is material or omits to state a fact which, in the opinion of
such counsel, is material and is required to be stated therein or is necessary
to make the statements therein not misleading.
(c) All corporate proceedings and other legal matters incident to
the authorization, form and validity of this Agreement, the Custody Agreements,
the Powers of Attorney, the Stock, the Registration Statement and the
Prospectus, and all other legal matters relating to this Agreement and the
transactions contemplated hereby shall be reasonably satisfactory in all
material respects to counsel for the Underwriters, and the Company and the
Selling Stockholders shall have furnished to such counsel all documents and
information that they may reasonably request to enable them to pass upon such
matters.
(d) Dilworth Paxson LLP shall have furnished to the Representatives
its written opinion, as counsel to the Company, addressed to the Underwriters
and dated such Delivery Date, in form and substance reasonably satisfactory to
the Representatives, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware, is duly qualified to do business and is in good standing as a foreign
corporation in each jurisdiction in which the ownership or lease of its property
or the conduct of its businesses requires such qualification and has all power
and authority necessary to own or hold its properties and conduct its business
in which it is engaged; and the Company has no operating subsidiaries;
(ii) The Company has an authorized capitalization as set forth
in the Prospectus, and all of the issued shares of capital stock of the Company
(including the shares of Stock being delivered on such Delivery Date) have been
duly and validly authorized and issued, are fully paid and non-assessable and
conform to the description thereof contained in the Prospectus; and all of the
issued shares of capital stock of each subsidiary of the Company have been duly
and validly authorized and issued and are fully paid, non-assessable and (except
for directors' qualifying shares) are owned directly or indirectly by the
Company, free and clear of all liens, encumbrances, equities or claims;
(iii) There are no preemptive or other rights to subscribe for
or to purchase, nor any restriction upon the voting or transfer of, any shares
of the Stock pursuant to the Company's charter or by-laws or any agreement or
other instrument known to such counsel (except for the rights created by the
Company's Amended and Restated Articles of Incorporation, the Amended and
Restated Shareholders' Agreement dated ___________, 19___ and the Amended and
Restated Investors' Rights Agreement dated ____________, 19__, all of which
rights shall terminate immediately prior to the First Delivery Date);
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(iv) All real property and buildings held under lease by the
Company and its subsidiaries are held by them under valid, subsisting and
enforceable leases, with such exceptions as are not material and do not
interfere with the use made and proposed to be made of such property and
buildings by the Company and its subsidiaries;
(v) To the best of such counsel's knowledge and other than as
set forth in the Prospectus, there are no legal or governmental proceedings
pending to which the Company or any of its subsidiaries is a party or of which
any property or assets of the Company or any of its subsidiaries is the subject
which, if determined adversely to the Company or any of its subsidiaries, might
have a Material Adverse Effect on the consolidated financial position,
stockholders' equity, results of operations, business or prospects of the
Company and its subsidiaries; and, to the best of such counsel's knowledge, no
such proceedings are threatened or contemplated by governmental authorities or
threatened by others;
(vi) To the best of such counsel's knowledge, there are no
contracts or other documents which are required to be described in the
Prospectus or filed as exhibits to the Registration Statement by the Securities
Act or by the Rules and Regulations which have not been described or filed as
exhibits to the Registration Statement or incorporated therein by reference as
permitted by the Rules and Regulations;
(vii) This Agreement has been duly authorized, executed and
delivered by the Company;
(viii) The issue and sale of the shares of Stock being delivered
on such Delivery Date by the Company and the compliance by the Company with all
of the provisions of this Agreement and the consummation of the transactions
contemplated hereby will not conflict with or result in a breach or violation of
any of the terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement or other agreement or instrument known
to such counsel to which the Company or any of its subsidiaries is a party or by
which the Company or any of its subsidiaries is bound or to which any of the
property or assets of the Company or any of its subsidiaries is subject, nor
will such actions result in any violation of the provisions of the charter or
by-laws of the Company or any of its subsidiaries or any statute or any order,
rule or regulation known to such counsel of any court or governmental agency or
body having jurisdiction over the Company or any of its subsidiaries or any of
their properties or assets; and, except for the registration of the Stock under
the Securities Act and such consents, approvals, authorizations, registrations
or qualifications as may be required under the Exchange Act and applicable state
securities laws in connection with the purchase and distribution of the Stock by
the Underwriters, no consent, approval, authorization or order of, or filing or
registration with, any such court or governmental agency or body is required for
the execution, delivery and performance of this Agreement by the Company and the
consummation of the transactions contemplated hereby; and
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(ix) To the best of such counsel's knowledge, there are no
contracts, agreements or understandings between the Company and any person
granting such person the right (other than rights which have been waived or
satisfied) to require the Company to file a registration statement under the
Securities Act with respect to any securities of the Company owned or to be
owned by such person or to require the Company to include such securities in the
securities registered pursuant to the Registration Statement or in any
securities being registered pursuant to any other registration statement filed
by the Company under the Securities Act.
In rendering such opinion, such counsel may (i) state that its opinion
is limited to matters governed by the Federal laws of the United States of
America, the laws of the Commonwealth of Pennsylvania, the General Corporation
Law of the State of Delaware and that such counsel is not admitted in the State
of Delaware. Such counsel shall also have furnished to the Representatives a
written statement, addressed to the Underwriters and dated such Delivery Date,
in form and substance satisfactory to the Representatives, to the effect that
(x) such counsel has acted as counsel to the Company in connection with previous
financing transactions and has acted as co-counsel to the Company in connection
with the preparation of the Registration Statement, and (y) based on the
foregoing, no facts have come to the attention of such counsel which lead it to
believe that the Registration Statement, as of the Effective Date, contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary in order to make the statements therein not
misleading, or that the Prospectus contains any untrue statement of a material
fact or omits to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. The foregoing opinion and statement
may be qualified by a statement to the effect that such counsel does not assume
any responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus except for the
statements made in the Prospectus under the captions "Business - Strategic
Relationships," Management - Employment Agreements," "- Severance Agreements,"
"- Stock Option Plans," and "- Description of Capital Stock" insofar as such
statements relate to the Stock and concern legal matters.
(e) Morgan, Lewis & Bockius LLP shall have furnished to the
Representatives its written opinion, as special securities counsel to the
Company, addressed to the Underwriters and dated such Delivery Date, in form and
substance reasonably satisfactory to the Representatives, to the effect that:
(i) The Registration Statement was declared effective under the
Securities Act as of the date and time specified in such opinion, the Prospectus
was filed with the Commission pursuant to the subparagraph of Rule 424(b) of the
Rules and Regulations specified in such opinion on the date specified therein
and no stop order suspending the effectiveness of the Registration Statement has
been issued and, to the knowledge of such counsel, no proceeding for that
purpose is pending or threatened by the Commission; and
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(ii) The Registration Statement and the Prospectus and any
further amendments or supplements thereto made by the Company prior to such
Delivery Date (other than the financial statements and related schedules
therein, as to which such counsel need express no opinion) comply as to form in
all material respects with the requirements of the Securities Act and the Rules
and Regulations (other than the financial statements and related schedules
therein, as to which such counsel need express no opinion), when they were filed
with the Commission complied as to form in all material respects with the
requirements of the Securities Act and the rules and regulations of the
Commission thereunder.
In rendering such opinion, such counsel may (i) state that its
opinion is limited to matters governed by the Federal laws of the United States
of America, the laws of the Commonwealth of Pennsylvania, the General
Corporation Law of the State of Delaware and that such counsel is not admitted
in the State of Delaware. Such counsel shall also have furnished to the
Representatives a written statement, addressed to the Underwriters and dated
such Delivery Date, in form and substance satisfactory to the Representatives,
to the effect that (x) such counsel has acted as counsel to the Company only in
connection with this financing transaction and has acted as counsel to the
Company in connection with the preparation of the Registration Statement, and
(y) based on the foregoing, no facts have come to the attention of such counsel
which lead it to believe that the Registration Statement, as of the Effective
Date, contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein not misleading, or that the Prospectus contains any untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. The foregoing
opinion and statement may be qualified by a statement to the effect that such
counsel does not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration Statement or the
Prospectus except for the statements made in the Prospectus under the captions
"Business - Strategic Relationships," Management - Employment Agreements," "-
Severance Agreements," "- Stock Option Plans," and "- Description of Capital
Stock" insofar as such statements relate to the Stock and concern legal matters.
(f) The respective counsel for each of the Selling Stockholders
shall each have furnished to the Representatives its written opinion, as counsel
to each of the Selling Stockholders for whom it is acting as counsel, addressed
to the Underwriters and dated the First Delivery Date, in form and substance
reasonably satisfactory to the Representatives, to the effect that:
(i) Such Selling Stockholder has full right, power and authority
to enter into this Agreement, the Power of Attorney and the Custody Agreement;
the execution, delivery and performance of this Agreement, the Power of Attorney
and the Custody Agreement by such Selling Stockholder and the consummation by
such Selling Stockholder of the transactions contemplated hereby will not
conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any statute, any indenture,
mortgage, deed of trust, loan agreement or other agreement or instrument known
to such counsel to which such Selling Stockholder is a party or by which such
Selling Stockholder is bound or to which any of the property or assets of such
Selling Stockholder is subject, nor will such actions result in any violation of
the provisions of the charter or by-laws of such Selling Stockholder or the
partnership agreement of any Selling Stockholder (as the case may be) or any
statute or any order, rule or regulation known to such counsel of any court or
governmental agency or body having jurisdiction over such Selling Stockholder or
the property or assets of such Selling Stockholder; and, except for the
registration of the Stock under the Securities Act and such consents, approvals,
authorizations, registrations or qualifications as may be required under the
Exchange Act and applicable state securities laws in connection with the
purchase and distribution of the Stock by the Underwriters, no consent,
approval, authorization or order of, or filing or registration with, any such
court or governmental agency or body is required for the execution, delivery and
performance of this Agreement, the Power of Attorney or the Custody Agreement by
such Selling Stockholder and the consummation by such Selling Stockholder of the
transactions contemplated hereby;
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(ii) This Agreement has been duly authorized, executed and
delivered by or on behalf of such Selling Stockholder;
(iii) A Power-of-Attorney and a Custody Agreement have been duly
authorized, executed and delivered by such Selling Stockholder and constitute
valid and binding agreements of such Selling Stockholder, enforceable in
accordance with their respective terms;
(iv) Immediately prior to the First Delivery Date, such Selling
Stockholder had good and valid title to the shares of Stock to be sold by such
Selling Stockholder under this Agreement, free and clear of all liens,
encumbrances, equities or claims, and full right, power and authority to sell,
assign, transfer and deliver such shares to be sold by such Selling Stockholder
hereunder; and
(v) Good and valid title to the shares of Stock to be sold by
such Selling Stockholder under this Agreement, free and clear of all liens,
encumbrances, equities or claims, has been transferred to each of the several
Underwriters.
In rendering such opinion, such counsel may (i) state that its opinion
is limited to matters governed by the Federal laws of the United States of
America, the laws of the jurisdiction in which such counsel practices law of
the jurisdiction in which the selling stockholder is organized and that such
counsel is not admitted in the jurisdiction in which the selling stockholder is
organized (e.g., "the State of Delaware") and (ii) in rendering the opinion in
Section 9(f)(iv) above, rely upon a certificate of such Selling Stockholder in
respect of matters of fact as to ownership of and liens, encumbrances, equities
or claims on the shares of Stock sold by such Selling Stockholder, provided that
such counsel shall furnish copies thereof to the Representatives and state that
it believes that both the Underwriters and it are justified in relying upon such
certificate. Such counsel shall also have furnished to the Representatives a
written statement, addressed to the Underwriters and dated the First Delivery
Date, in form and substance satisfactory to the Representatives, to the effect
that (x) such counsel has acted as counsel to such Selling Stockholder on a
regular basis and has acted as counsel to such Selling Stockholder in connection
with the preparation of the Registration Statement, and (y) based on the
foregoing, no facts have come to the attention of such counsel which lead it to
believe that the Registration Statement, as of the Effective Date, contained any
untrue statement of a material fact relating to such Selling Stockholder or
omitted to state such a material fact required to be stated therein or necessary
in order to make the statements therein not misleading, or that the Prospectus
contains any untrue statement of a material fact relating to such Selling
Stockholder or omits to state such a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The foregoing opinion
and statement may be qualified by a statement to the effect that such counsel
does not assume any responsibility for the accuracy, completeness or fairness of
the statements contained in the Registration Statement or the Prospectus.
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(g) The Representatives shall have received from Brobeck, Phleger &
Harrison LLP, counsel for the Underwriters, such opinion or opinions, dated such
Delivery Date, with respect to the issuance and sale of the Stock, the
Registration Statement, the Prospectus and other related matters as the
Representatives may reasonably require, and the Company shall have furnished to
such counsel such documents as they reasonably request for the purpose of
enabling them to pass upon such matters.
(h) At the time of execution of this Agreement, the Representatives
shall have received from KPMG LLP a letter, in form and substance satisfactory
to the Representatives, addressed to the Underwriters and dated the date hereof
(i) confirming that they are independent public accountants within the meaning
of the Securities Act and are in compliance with the applicable requirements
relating to the qualification of accountants under Rule 2-01 of Regulation S-X
of the Commission, (ii) stating, as of the date hereof (or, with respect to
matters involving changes or developments since the respective dates as of which
specified financial information is given in the Prospectus, as of a date not
more than five days prior to the date hereof), the conclusions and findings of
such firm with respect to the financial information and other matters ordinarily
covered by accountants' "comfort letters" to underwriters in connection with
registered public offerings.
(i) With respect to the letter of KPMG LLP referred to in the
preceding paragraph and delivered to the Representatives concurrently with the
execution of this Agreement (the "initial letter"), the Company shall have
furnished to the Representatives a letter (the "bring-down letter") of such
accountants, addressed to the Underwriters and dated such Delivery Date (i)
confirming that they are independent public accountants within the meaning of
the Securities Act and are in compliance with the applicable requirements
relating to the qualification of accountants under Rule 2-01 of Regulation S-X
of the Commission, (ii) stating, as of the date of the bring-down letter (or,
with respect to matters involving changes or developments since the respective
dates as of which specified financial information is given in the Prospectus, as
of a date not more than five days prior to the date of the bring-down letter),
the conclusions and findings of such firm with respect to the financial
information and other matters covered by the initial letter and (iii) confirming
in all material respects the conclusions and findings set forth in the initial
letter.
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(j) The Company shall have furnished to the Representatives a
certificate, dated such Delivery Date, of its Chairman of the Board, its
President or a Vice President and its Chief Financial Officer stating that:
(i) The representations, warranties and agreements of the
Company in Section 1 are true and correct as of such Delivery Date; the Company
has complied with all its agreements contained herein; and the conditions set
forth in Sections 9(a) and 9(l) have been fulfilled; and
(ii) They have carefully examined the Registration Statement and
the Prospectus and, in their opinion (A) as of the Effective Date, the
Registration Statement and Prospectus did not include any untrue statement of a
material fact and did not omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, and (B)
since the Effective Date no event has occurred which should have been set forth
in a supplement or amendment to the Registration Statement or the Prospectus.
(k) Each Selling Stockholder (or the Custodian or one or more
attorneys-in-fact on behalf of the Selling Stockholders) shall have furnished to
the Representatives on the First Delivery Date a certificate, dated the First
Delivery Date, signed by, or on behalf of, the Selling Stockholder (or the
Custodian or one or more attorneys-in-fact) stating that the representations,
warranties and agreements of the Selling Stockholder contained herein are true
and correct as of the First Delivery Date and that the Selling Stockholder has
complied with all agreements contained herein to be performed by the Selling
Stockholder at or prior to the First Delivery Date.
(l) (i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements included in
the Prospectus any loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise than as set
forth or contemplated in the Prospectus or (ii) since such date there shall not
have been any change in the capital stock or long-term debt of the Company or
any of its subsidiaries or any change, or any development involving a
prospective change, in or affecting the general affairs, management,
consolidated financial position, stockholders' equity or results of operations
of the Company and its subsidiaries, otherwise than as set forth or contemplated
in the Prospectus, the effect of which, in any such case described in clause (i)
or (ii), is, in the judgment of the Representatives, so material and adverse as
to make it impracticable or inadvisable to proceed with the public offering or
the delivery of the Stock being delivered on such Delivery Date on the terms and
in the manner contemplated in the Prospectus.
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(m) Subsequent to the execution and delivery of this Agreement there
shall not have occurred any of the following: (i) trading in securities
generally on the New York Stock Exchange or the American Stock Exchange or in
the over-the-counter market, or trading in any securities of the Company on any
exchange or in the over-the-counter market, shall have been suspended or minimum
prices shall have been established on any such exchange or such market by the
Commission, by such exchange or by any other regulatory body or governmental
authority having jurisdiction, (ii) a banking moratorium shall have been
declared by Federal or state authorities, (iii) the United States shall have
become engaged in hostilities, there shall have been an escalation in
hostilities involving the United States or there shall have been a declaration
of a national emergency or war by the United States or (iv) there shall have
occurred such a material adverse change in general economic, political or
financial conditions (or the effect of international conditions on the financial
markets in the United States shall be such) as to make it, in the judgment of a
majority in interest of the several Underwriters, impracticable or inadvisable
to proceed with the public offering or delivery of the Stock being delivered on
such Delivery Date on the terms and in the manner contemplated in the
Prospectus.
(n) The Nasdaq National Market System shall have approved the Stock
for inclusion, subject only to official notice of issuance and evidence of
satisfactory distribution.
(o) The Company shall have received payment in full for the Directed
Share Stock at or prior to the purchase of the Firm Stock.
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably
satisfactory to counsel for the Underwriters.
10. Indemnification and Contribution.
(a) The Company shall indemnify and hold harmless each Underwriter,
its officers and employees and each person, if any, who controls any Underwriter
within the meaning of the Securities Act, from and against any loss, claim,
damage or liability, joint or several, or any action in respect thereof
(including, but not limited to, any loss, claim, damage, liability or action
relating to purchases and sales of Stock), to which that Underwriter, officer,
employee or controlling person may become subject, under the Securities Act or
otherwise, insofar as such loss, claim, damage, liability or action arises out
of, or is based upon, (i) any untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus or in any amendment or supplement thereto, (ii) the
omission or alleged omission to state in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or in any amendment or supplement
thereto, or in any Blue Sky Application any material fact required to be stated
therein or necessary to make the statements therein not misleading or (iii) any
act or failure to act or any alleged act or failure to act by any Underwriter in
connection with, or relating in any manner to, the Stock or the offering
contemplated hereby, and which is included as part of or referred to in any
loss, claim, damage, liability or action arising out of or based upon matters
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covered by clause (i) or (ii) above (provided that the Company shall not be
liable under this clause (iii) to the extent that it is determined in a final
judgment by a court of competent jurisdiction that such loss, claim, damage,
liability or action resulted directly from any such acts or failures to act
undertaken or omitted to be taken by such Underwriter through its gross
negligence or willful misconduct), and shall reimburse each Underwriter and each
such officer, employee or controlling person promptly upon demand for any legal
or other expenses reasonably incurred by that Underwriter, officer, employee or
controlling person in connection with investigating or defending or preparing to
defend against any such loss, claim, damage, liability or action as such
expenses are incurred; provided, however, that the Company shall not be liable
in any such case to the extent that any such loss, claim, damage, liability or
action arises out of, or is based upon, any untrue statement or alleged untrue
statement or omission or alleged omission made in any Preliminary Prospectus,
the Registration Statement or the Prospectus, or in any such amendment or
supplement, in reliance upon and in conformity with written information
concerning such Underwriter furnished to the Company through the Representatives
by or on behalf of any Underwriter specifically for inclusion therein which
information consists solely of the information specified in Section 10(f). The
foregoing indemnity agreement is in addition to any liability which the Company
may otherwise have to any Underwriter or to any officer, employee or controlling
person of that Underwriter.
The Company agrees to indemnify and hold harmless Lehman Brothers
Inc. (including its officers and employees) and each person, if any, who
controls Lehman Brothers Inc. within the meaning of the Securities Act ("Lehman
Brothers Entities") from and against any loss, claim, damage or liability or any
action in respect thereof to which any of the Lehman Brothers Entities may
become subject, under the Securities Act or otherwise, insofar as such loss,
claim, damage, liability or action arises out of, or is based upon (i) the
failure of any Participant to pay for and accept delivery of the Directed Stock
sold pursuant to the Directed Stock Program which, immediately following the
effectiveness of the Registration Statement, were subject to a properly
confirmed agreement to purchase or (ii) the Directed Stock Program, provided
that the Company shall not be responsible under this subparagraph (ii) for any
loss, claim, damage, liability or action that is finally judicially determined
to have resulted from the gross negligence or willful misconduct of the Lehman
Brothers Entities. The Company shall reimburse the Lehman Brothers Entities
promptly upon demand for any legal or other expenses reasonably incurred by them
in connection with investigating or defending or preparing to defend against any
such loss, claim, damage, liability or action as such expenses are incurred.
(b) The Selling Stockholders, severally and not jointly in
proportion to the number of shares of Stock to be sold by each of them
hereunder, shall indemnify and hold harmless each Underwriter, its officers and
employees, and each person, if any, who controls any Underwriter within the
meaning of the Securities Act, from and against any loss, claim, damage or
liability, joint or several, or any action in respect thereof (including, but
not limited to, any loss, claim, damage, liability or action relating to
purchases and sales of Stock), to which that Underwriter, officer, employee or
controlling person may become subject, under the Securities Act or otherwise,
insofar as such loss, claim, damage, liability or action arises out of, or is
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based upon, (i) any untrue statement or alleged untrue statement of a material
fact contained in any Preliminary Prospectus, the Registration Statement or the
Prospectus or in any amendment or supplement thereto or (ii) the omission or
alleged omission to state in any Preliminary Prospectus, Registration Statement
or the Prospectus, or in any amendment or supplement thereto, any material fact
required to be stated therein or necessary to make the statements therein not
misleading, and shall reimburse each Underwriter, its officers and employees and
each such controlling person for any legal or other expenses reasonably incurred
by that Underwriter, its officers and employees or controlling person in
connection with investigating or defending or preparing to defend against any
such loss, claim, damage, liability or action as such expenses are incurred;
provided, however, that the Selling Stockholders shall not be liable in any such
case to the extent that any such loss, claim, damage, liability or action arises
out of, or is based upon, any untrue statement or alleged untrue statement or
omission or alleged omission made in any Preliminary Prospectus, the
Registration Statement or the Prospectus or in any such amendment or supplement
in reliance upon and in conformity with written information concerning such
Underwriter furnished to the Company through the Representatives by or on behalf
of any Underwriter specifically for inclusion therein which information consists
solely of the information specified in Section 10(f). In no event, however,
shall the liability of any Selling Stockholder for indemnification under this
Section 10(b) exceed the net proceeds received by such Selling Stockholder from
the Underwriters in this offering. The foregoing indemnity agreement is in
addition to any liability which the Selling Stockholders may otherwise have to
any Underwriter or any officer, employee or controlling person of that
Underwriter.
(c) Each Underwriter, severally and not jointly, shall indemnify and
hold harmless the Company, its officers and employees, each of its directors,
the Selling Stockholders and each person, if any, who controls the Company or
any Selling Stockholder within the meaning of the Securities Act, from and
against any loss, claim, damage or liability, joint or several, or any action in
respect thereof, to which the Company or any such director, officer, Selling
Stockholder or controlling person may become subject, under the Securities Act
or otherwise, insofar as such loss, claim, damage, liability or action arises
out of, or is based upon, (i) any untrue statement or alleged untrue statement
of a material fact contained (A) in any Preliminary Prospectus, the Registration
Statement or the Prospectus or in any amendment or supplement thereto, or (B) in
any Blue Sky Application or (ii) the omission or alleged omission to state in
any Preliminary Prospectus, the Registration Statement or the Prospectus, or in
any amendment or supplement thereto, or in any Blue Sky Application any material
fact required to be stated therein or necessary to make the statements therein
not misleading, but in each case only to the extent that the untrue statement or
alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information concerning such Underwriter
furnished to the Company through the Representatives by or on behalf of that
Underwriter specifically for inclusion therein, and shall reimburse the Company
and any such director, officer, Selling Stockholder or controlling person for
any legal or other expenses reasonably incurred by the Company or any such
director, officer, Selling Stockholder or controlling person in connection with
investigating or defending or preparing to defend against any such loss, claim,
damage, liability or action as such expenses are incurred. The foregoing
indemnity agreement is in addition to any liability which any Underwriter may
otherwise have to the Company or any such director, officer, employee, Selling
Stockholder or controlling person.
-25-
<PAGE>
(d) Promptly after receipt by an indemnified party under this
Section 10 of notice of any claim or the commencement of any action, the
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under this Section 10, notify the indemnifying party in
writing of the claim or the commencement of that action; provided, however, that
the failure to notify the indemnifying party shall not relieve it from any
liability which it may have under this Section 10 except to the extent it has
been materially prejudiced by such failure and, provided further, that the
failure to notify the indemnifying party shall not relieve it from any liability
which it may have to an indemnified party otherwise than under this Section 10.
If any such claim or action shall be brought against an indemnified party, and
it shall notify the indemnifying party thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it wishes, jointly with
any other similarly notified indemnifying party, to assume the defense thereof
with counsel reasonably satisfactory to the indemnified party. After notice from
the indemnifying party to the indemnified party of its election to assume the
defense of such claim or action, the indemnifying party shall not be liable to
the indemnified party under this Section 10 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than reasonable costs of investigation; provided, however, that
the Representatives shall have the right to employ counsel to represent jointly
the Representatives and those other Underwriters and their respective officers,
employees and controlling persons who may be subject to liability arising out of
any claim in respect of which indemnity may be sought by the Underwriters
against the Company or any Selling Stockholder under this Section 10 if, in the
reasonable judgment of the Representatives, it is advisable for the
Representatives and those Underwriters, officers, employees and controlling
persons to be jointly represented by separate counsel, and in that event the
fees and expenses of such separate counsel shall be paid by the Company or
Selling Stockholders. Notwithstanding anything contained herein to the contrary,
if indemnity may be sought pursuant to Section 10(a) hereof in respect of such
claim or action, then in addition to such separate firm for the indemnified
parties, the indemnifying party shall be liable for the fees and expenses of not
more than one separate firm (in addition to any local counsel) for the Lehman
Brothers Entities for the defense of any loss, claim, damage, liability or
action arising out of the Directed Stock Program. No indemnifying party shall
(i) without the prior written consent of the indemnified parties (which consent
shall not be unreasonably withheld), settle or compromise or consent to the
entry of any judgment with respect to any pending or threatened claim, action,
suit or proceeding in respect of which indemnification or contribution may be
sought hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action) unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all liability
arising out of such claim, action, suit or proceeding, or (ii) be liable for any
settlement of any such action effected without its written consent (which
consent shall not be unreasonably withheld), but if settled with the consent of
the indemnifying party or if there be a final judgment of the plaintiff in any
such action, the indemnifying party agrees to indemnify and hold harmless any
indemnified party from and against any loss or liability by reason of such
settlement or judgment.
-26-
<PAGE>
(e) If the indemnification provided for in this Section 10 shall for
any reason be unavailable to or insufficient to hold harmless an indemnified
party under Section 10(a), 10(b) or 10(c) in respect of any loss, claim, damage
or liability, or any action in respect thereof, referred to therein, then each
indemnifying party shall, in lieu of indemnifying such indemnified party,
contribute to the amount paid or payable by such indemnified party as a result
of such loss, claim, damage or liability, or action in respect thereof, (i) in
such proportion as shall be appropriate to reflect the relative benefits
received by the Company and the Selling Stockholders on the one hand and the
Underwriters on the other from the offering of the Stock or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company and
the Selling Stockholders on the one hand and the Underwriters on the other with
respect to the statements or omissions which resulted in such loss, claim,
damage or liability, or action in respect thereof, as well as any other relevant
equitable considerations. The relative benefits received by the Company and the
Selling Stockholders on the one hand and the Underwriters on the other with
respect to such offering shall be deemed to be in the same proportion as the
total net proceeds from the offering of the Stock purchased under this Agreement
(before deducting expenses) received by the Company and the Selling
Stockholders, on the one hand, and the total underwriting discounts and
commissions received by the Underwriters with respect to the shares of the Stock
purchased under this Agreement, on the other hand, bear to the total gross
proceeds from the offering of the shares of the Stock under this Agreement, in
each case as set forth in the table on the cover page of the Prospectus. The
relative fault shall be determined by reference to whether the untrue or alleged
untrue statement of a material fact or omission or alleged omission to state a
material fact relates to information supplied by the Company, the Selling
Stockholders or the Underwriters, the intent of the parties and their relative
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company, the Selling Stockholders and the
Underwriters agree that it would not be just and equitable if contributions
pursuant to this Section 10 were to be determined by pro rata allocation (even
if the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take into account the equitable
considerations referred to herein. The amount paid or payable by an indemnified
party as a result of the loss, claim, damage or liability, or action in respect
thereof, referred to above in this Section shall be deemed to include, for
purposes of this Section 10(e), any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 10(e), no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Stock underwritten by it and distributed
to the public was offered to the public exceeds the amount of any damages which
such Underwriter has otherwise paid or become liable to pay by reason of any
untrue or alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section 10(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. The Underwriters' obligations
to contribute as provided in this Section 10(e) are several in proportion to
their respective underwriting obligations and not joint.
-27-
<PAGE>
(f) The Underwriters severally confirm and the Company acknowledges
that the statements with respect to the public offering of the Stock by the
Underwriters set forth on the cover page of, and the concession and reallowance
figures appearing under the caption "Plan of Distribution" in, the Prospectus
are correct and constitute the only information concerning such Underwriters
furnished in writing to the Company by or on behalf of the Underwriters
specifically for inclusion in the Registration Statement and the Prospectus.
11. Defaulting Underwriters.
If, on either Delivery Date, any Underwriter defaults in the
performance of its obligations under this Agreement, the remaining
non-defaulting Underwriters shall be obligated to purchase the Stock which the
defaulting Underwriter agreed but failed to purchase on such Delivery Date in
the respective proportions which the number of shares of the Firm Stock set
opposite the name of each remaining non-defaulting Underwriter in Schedule 1
hereto bears to the total number of shares of the Firm Stock set opposite the
names of all the remaining non-defaulting Underwriters in Schedule 1 hereto;
provided, however, that the remaining non-defaulting Underwriters shall not be
obligated to purchase any of the Stock on such Delivery Date if the total number
of shares of the Stock which the defaulting Underwriter or Underwriters agreed
but failed to purchase on such date exceeds 9.09% of the total number of shares
of the Stock to be purchased on such Delivery Date, and any remaining
non-defaulting Underwriter shall not be obligated to purchase more than 110% of
the number of shares of the Stock which it agreed to purchase on such Delivery
Date pursuant to the terms of Section 3. If the foregoing maximums are exceeded,
the remaining non-defaulting Underwriters, or those other underwriters
satisfactory to the Representatives who so agree, shall have the right, but
shall not be obligated, to purchase, in such proportion as may be agreed upon
among them, all the Stock to be purchased on such Delivery Date. If the
remaining Underwriters or other underwriters satisfactory to the Representatives
do not elect to purchase the shares which the defaulting Underwriter or
Underwriters agreed but failed to purchase on such Delivery Date, this Agreement
(or, with respect to the Second Delivery Date, the obligation of the
Underwriters to purchase, and of the Company to sell, the Option Stock) shall
terminate without liability on the part of any non-defaulting Underwriter or the
Company or the Selling Stockholders, except that the Company will continue to be
liable for the payment of expenses to the extent set forth in Sections 8 and 13.
As used in this Agreement, the term "Underwriter" includes, for all purposes of
this Agreement unless the context requires otherwise, any party not listed in
Schedule 1 hereto who, pursuant to this Section 11, purchases Firm Stock which a
defaulting Underwriter agreed but failed to purchase.
Nothing contained herein shall relieve a defaulting Underwriter of
any liability it may have to the Company and the Selling Stockholders for
damages caused by its default. If other underwriters are obligated or agree to
purchase the Stock of a defaulting or withdrawing Underwriter, either the
Representatives or the Company may postpone the Delivery Date for up to seven
full business days in order to effect any changes that in the opinion of counsel
for the Company or counsel for the Underwriters may be necessary in the
Registration Statement, the Prospectus or in any other document or arrangement.
-28-
<PAGE>
12. Termination. The obligations of the Underwriters hereunder may be
terminated by the Representatives by notice given to and received by the
Company and the Selling Stockholders prior to delivery of and payment for the
Firm Stock if, prior to that time, any of the events described in Sections 9(l)
or 9(m), shall have occurred or if the Underwriters shall decline to purchase
the Stock for any reason permitted under this Agreement.
13. Reimbursement of Underwriters' Expenses. If the Company or any
Selling Stockholder shall fail to tender the Stock for delivery to the
Underwriters by reason of any failure, refusal or inability on the part of the
Company or the Selling Stockholder(s) to perform any agreement on its part to be
performed, or because any other condition of the Underwriters' obligations
hereunder required to be fulfilled by the Company or the Selling Stockholder(s)
is not fulfilled, the Company and the Selling Stockholder(s) will reimburse the
U.S. Underwriters for all reasonable out-of-pocket expenses (including fees and
disbursements of counsel) incurred by the Underwriters in connection with this
Agreement and the proposed purchase of the Stock, and upon demand the Company
and the Selling Stockholder(s) shall pay the full amount thereof to the
Representative(s). If this Agreement is terminated pursuant to Section 11 by
reason of the default of one or more Underwriters, neither the Company nor any
Selling Stockholder shall be obligated to reimburse any defaulting Underwriter
on account of those expenses.
14. Notices, etc. All statements, requests, notices and agreements
hereunder shall be in writing, and:
(a) if to the Underwriters, shall be delivered or sent by mail,
telex or facsimile transmission to Lehman Brothers Inc., Three World Financial
Center, New York, New York 10285, Attention: Syndicate Department (Fax:
212-526-6588), with a copy, in the case of any notice pursuant to Section 10(d),
to the Director of Litigation, Office of the General Counsel, Lehman Brothers
Inc., 3 World Financial Center, 10th Floor, New York, NY 10285;
(b) if to the Company, shall be delivered or sent by mail, telex or
facsimile transmission to the address of the Company set forth in the
Registration Statement, Attention: Stephen T. Zarrilli, Fax: (610) 382-8908;
(c) if to any Selling Stockholders, shall be delivered or sent by
mail, telex or facsimile transmission to such Selling Stockholder at the address
set forth on Schedule 2 hereto;
provided, however, that any notice to an Underwriter pursuant to Section 10(d)
shall be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its acceptance telex to the
Representatives, which address will be supplied to any other party hereto by the
Representatives upon request. Any such statements, requests, notices or
agreements shall take effect at the time of receipt thereof. The Company and the
Selling Stockholders shall be entitled to act and rely upon any request,
consent, notice or agreement given or made on behalf of the Underwriters by
Lehman Brothers Inc. on behalf of the Representatives and the Company and the
Underwriters shall be entitled to act and rely upon any request, consent, notice
or agreement given or made on behalf of the Selling Stockholders by the
Custodian.
-29-
<PAGE>
15. Persons Entitled to Benefit of Agreement. This Agreement shall
inure to the benefit of and be binding upon the Underwriters, the Company, the
Selling Stockholders and their respective personal representatives and
successors. This Agreement and the terms and provisions hereof are for the sole
benefit of only those persons, except that (A) the representations, warranties,
indemnities and agreements of the Company and the Selling Stockholders contained
in this Agreement shall also be deemed to be for the benefit of the person or
persons, if any, who control any Underwriter within the meaning of Section 15 of
the Securities Act, and (B) the indemnity agreement of the Underwriters
contained in Section 10(c) of this Agreement shall be deemed to be for the
benefit of directors of the Company, officers of the Company who have signed the
Registration Statement and any person controlling the Company or any Selling
Stockholder within the meaning of Section 15 of the Securities Act. Nothing in
this Agreement is intended or shall be construed to give any person, other than
the persons referred to in this Section 15, any legal or equitable right, remedy
or claim under or in respect of this Agreement or any provision contained
herein.
16. Survival. The respective indemnities, representations, warranties
and agreements of the Company, the Selling Stockholders and the Underwriters
contained in this Agreement or made by or on behalf on them, respectively,
pursuant to this Agreement, shall survive the delivery of and payment for the
Stock and shall remain in full force and effect, regardless of any investigation
made by or on behalf of any of them or any person controlling any of them.
17. Definition of the Terms "Business Day" and "Subsidiary". For
purposes of this Agreement, (a) "business day" means each Monday, Tuesday,
Wednesday, Thursday or Friday which is not a day on which banking institutions
in New York are generally authorized or obligated by law or executive order to
close and (b) "subsidiary" has the meaning set forth in Rule 405 of the Rules
and Regulations.
18. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of New York.
19. Counterparts. This Agreement may be executed in one or more
counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
20. Headings. The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
-30-
<PAGE>
If the foregoing correctly sets forth the agreement among the Company,
the Selling Stockholders and the Underwriters, please indicate your acceptance
in the space provided for that purpose below.
Very truly yours,
U.S. INTERACTIVE, INC.
By:
---------------------------------------------
Title:
------------------------------------------
The Selling Stockholders named in Schedule 2 to
this Agreement
By:
---------------------------------------------
Attorney-in-Fact
-31-
<PAGE>
Accepted:
LEHMAN BROTHERS INC.
HAMBRECHT & QUIST LLC
ADAMS, HARKNESS & HILL, INC.
For themselves and as Representatives
of the several Underwriters named
in Schedule 1 hereto
By: LEHMAN BROTHERS INC.
By:
--------------------------------
Authorized Representative
-32-
<PAGE>
SCHEDULE 1
Number
Underwriters of Shares
- ------------ ---------
Lehman Brothers Inc.................................................
---------
Hambrecht & Quist LLC...............................................
---------
Adams, Harkness & Hill, Inc.........................................
---------
---------
Total
=========
-33-
<PAGE>
SCHEDULE 2
Number of Shares
Name and address of Selling Stockholder of Firm Stock
- --------------------------------------- ----------------
Information Associates, CV.................................. 3,868
- ---------------------------
- ---------------------------
Information Associates, L.P................................. 138,575
- ---------------------------
- ---------------------------
Richard J. Masterson........................................ 300,000
- ---------------------------
- ---------------------------
Larry W. Smith.............................................. 400,000
- ---------------------------
- ---------------------------
Thurston Interests, LLC..................................... 33,173
- ---------------------------
- ---------------------------
Thurston Bridge Fund, L.P................................... 8,229
- ---------------------------
- ---------------------------
Vulcan Ventures, Inc........................................ 142,442
--------
- ---------------------------
- ---------------------------
Total
========
-34-
<PAGE>
EXHIBIT 1.2
STANDBY STOCK PURCHASE AGREEMENT
by and between
SAFEGUARD SCIENTIFICS, INC.
AND
U.S. INTERACTIVE, INC.
Dated August __, 1999
<PAGE>
STANDBY STOCK PURCHASE AGREEMENT
THIS STANDBY STOCK PURCHASE AGREEMENT (the "Agreement") is made and
entered into on this August __, 1999, by and between SAFEGUARD SCIENTIFICS,
INC., a Delaware corporation ("Safeguard"), and U.S INTERACTIVE, INC., a
Delaware corporation (the "Company").
BACKGROUND
A. The Company is contemplating an initial public offering (the "Public
Offering") of its common stock, par value $.001 per share (the "Common Stock"),
through an underwritten public offering lead by Lehman Brothers Inc., as the
representative of the several underwriters (the "Underwriters").
B. In connection with the Public Offering the Company will offer
1,750,000 shares of its common stock (the "DSSP Shares") directly to the
shareholders of Safeguard pursuant to a directed share subscription program (the
"DSSP").
C. If and to the extent any of the DSSP Shares are not subscribed for
or, if subscribed for, are not purchased by the shareholders of Safeguard under
the DSSP, Safeguard has agreed to purchase all such DSSP Shares (the "Backstop
Shares") directly from the Company for its own account for investment purposes
only on the terms and subject to the conditions set forth herein.
D. Chase Mellon Shareholder Services, L.L.C. will act as the offering
agent for the DSSP and as the Company's transfer agent. The offering agent will
determine the record date shareholders eligible to participate in the DSSP and
will collect subscriptions and subscription payments from eligible Safeguard
shareholders until 5:00 p.m. on the fourth business day following the date the
Company determines the initial public offering price for the Common Stock.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and for good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, intending to be legally bound hereby, the parties
hereto hereby agree as follows:
ARTICLE 1
THE TRANSACTION
1.1. Purchase Price.
(a) Purchase Price. The purchase price for the Backstop Shares (the
"Purchase Price") shall be equal to the product of multiplying (i) the aggregate
number of Backstop Shares, by (ii) the price per share of Common Stock sold
pursuant to the Public Offering (the "IPO Price").
(b) Transfer of Funds on the Public Offering Closing Date. At the closing
for the Public Offering Safeguard shall transfer, or cause the offering agent to
pay out of subscription funds received, to the Company in immediately available
funds an amount equal to the product of the IPO price multiplied by 1,750,000.
<PAGE>
1.2. Closing.
(a) Time and Place. The closing under this Agreement (the "Closing") will
take place at _________., Washington, DC time, at the time of the closing of the
Public Offering, at the offices of Brobeck, Phleger & Harrison LLP, or at such
other time, date or place as the parties shall mutually agree. The date on which
the Closing occurs is sometimes referred to herein as the "Closing Date."
(b) Deliveries and Proceedings.
(i) Escrow of Stock Certificates. On the Closing Date, the Company
shall instruct its transfer agent and offering agent to hold the certificates
representing DSSP Shares in escrow and to release such shares to the purchasers
upon transfer to Safeguard of the amounts received by the offering agent
therefor and to release the Backstop Shares to Safeguard.
(ii) Release of Payment and DSSP Shares. Following the Closing the
Company shall authorize its transfer agent and offering agent to accept
instructions from Deirdre Blackburn, or her designee at Safeguard, with a copy
of such instructions to the Company, to release all payments received from
Saferguard's shareholders who subscribed for DSSP Shares to Safeguard on a
reasonably prompt basis.
(iii) DSSP Purchasers. Safeguard and the Company shall cause to be
delivered to the transfer agent a list indicating the names, addresses and
denominations for which certificates representing the DSSP Shares are to be
completed. Any person other than Safeguard for whom certificates are to be
prepared is referred to herein as a "DSSP Purchaser." The Company will instruct
its transfer agent and registrar to accept instructions from Deirdre Blackburn,
or her designee at Safeguard, with a copy of such instructions to the Company,
to prepare certificates in accordance with such instructions and deliver to each
DSSP certificates evidencing the DSSP Shares purchased by such DSSP Purchaser
and the Backstop Shares to Safeguard, if any, as soon as practical. The Company
agrees to cooperate with Safeguard, including providing instructions to the
transfer and offering agents, such that certificates are released to the
purchasers of the DSSP Shares.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Safeguard as follows:
2.1 Organization. The Company is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Delaware.
2.2. Power and Authority. The Company has full corporate power and authority to
make, execute, deliver and perform this Agreement and the transactions
contemplated hereby.
2.3. Authorization and Enforceability. The execution, delivery and performance
of this Agreement by the Company have been duly authorized by all necessary
corporate action on the part of the Company, and this Agreement constitutes the
legal, valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms.
-2-
<PAGE>
ARTICLE 3
REPRESENTATION AND WARRANTIES OF SAFEGUARD
Safeguard represents and warrants to the Company as follows:
3.1 Organization. Safeguard is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Delaware.
3.2. Power and Authority. Safeguard has full corporate power and authority to
make, execute, deliver and perform this Agreement and the transactions
contemplated hereby.
3.3. Authorization and Enforceability. The execution, delivery and performance
of this Agreement by Safeguard have been duly authorized by all necessary
corporate action on the part of Safeguard, and this Agreement constitutes the
legal, valid and binding obligation of Safeguard, enforceable against Safeguard
in accordance with its terms.
3.4 Investment Intent. Safeguard represents, warrants and covenants that it is
acquiring the Backstop Shares for its own account, as a long-term investment,
and not with the view to resale or redistribution. To that end, Safeguard agrees
it will retain and not sell, pledge, hypothecate or otherwise transfer, directly
or indirectly, any interest (beneficial or otherwise) in the Backstop Shares for
a period of one year from the date of the Closing.
ARTICLE 4
CONDITIONS TO CLOSING; TERMINATION
4.1 Conditions Precedent to Obligations of Safeguard. The obligations of
Safeguard to proceed with the Closing are subject to the fulfillment prior to or
at Closing of the following conditions (any one or more of which may be waived
in whole or in part by Safeguard at Safeguard's option):
(a) Bringdown of Representations and Warranties. The representations and
warranties of the Company contained in this Agreement shall be true and correct
on and as of the time of Closing, with the same force and effect as though such
representations and warranties had been made on, as of and with reference to
such time, and Safeguard shall have received a certificate, signed by an
executive officer of the Company, to such effect.
(b) Performance and Compliance. The Company shall have performed all of the
covenants and complied with all of the provisions required by this Agreement to
be performed or complied with by it on or before the Closing, and Safeguard
shall have received a certificate, signed by any vice president of the Company,
to such effect.
-3-
<PAGE>
(c) Public Offering. The Closing of the Public Offering shall have
occurred.
4.2. Conditions Precedent to the Obligations of the Company. The obligations of
the Company to proceed with the Closing hereunder are subject to the fulfillment
prior to or at Closing of the following conditions (any one or more of which may
be waived in whole or in part by the Company at the Company's option):
(a) Bringdown of Representations and Warranties. The representations and
warranties of Safeguard contained in this Agreement shall be true and correct on
and as of the time of Closing, with the same force and effect as though such
representations and warranties had been made on, as of and with reference to
such time, and Safeguard shall have delivered to the Company a certificate,
signed by an executive officer of Safeguard, to such effect.
(b) Performance and Compliance. Safeguard shall have performed all of the
covenants and complied with all the provisions required by this Agreement to be
performed or complied with by it on or before the Closing and Safeguard shall
have delivered to the Company a certificate, signed by any vice president of
Safeguard, to such effect.
(c) Public Offering. The closing of the Public Offering shall have
occurred.
4.3. Termination.
(a) When Agreement May Be Terminated. This Agreement may be terminated at
any time prior to Closing:
(i) by mutual consent of Safeguard and the Company; or
(ii) by Safeguard or the Company, if the Company shall have withdrawn
its Registration Statement on Form S-1 relating to the Public Offering (Reg. No.
333-78751).
-4-
<PAGE>
(b) Effect of Termination. In the event of termination of this Agreement by
either Safeguard or the Company, as provided above, this Agreement shall
forthwith terminate and there shall be no liability on the part of either
Safeguard or the Company, except for liabilities arising from a breach of this
Agreement prior to such termination; provided, however, that the obligations set
forth in Article 5 hereof shall survive such termination.
ARTICLE 5
CERTAIN ADDITIONAL COVENANTS
5.1 Indemnification.
(a) Safeguard hereby agrees to indemnify the Company and its underwriters,
affiliates, officers, employees, representatives and directors (the "Indemnified
Persons") against, and hold them harmless from, any loss, liability, claim,
damage or expense, joint or several ("Losses"), arising directly or indirectly,
out of or in connection with, the DSSP, including, without limitation, (i) costs
and expenses associated with the failure of any shareholders of Safeguard to
consummate purchases of DSSP Shares for which they have subscribed, (ii) any
claims by shareholders of Safeguard or other persons arising from the DSSP, and
(iii) other costs and expenses, including printing costs and reasonable legal
fees and expenses, arising from the establishment, execution and performance of
the DSSP. Notwithstanding the foregoing, Safeguard shall not indemnify the
Company against liabilities arising from any untrue or allegedly untrue
statement of a material fact, or omission or alleged omission of a material fact
required to be stated to make the statements not misleading, in the prospectus
contained in the Company's Registration Statement on Form S-1 (Reg. No.
333-78751 (the "Prospectus"), except for statements or omissions regarding the
DSSP and except for any materials related to the DSSP delivered to Safeguard's
shareholders and not to other recipients of the Prospectus generally. Safeguard
agrees to reimburse the Indemnified Persons, as incurred, for any reasonable
legal or other expenses reasonably incurred by them in connection with
investigating or defending any Losses.
(b) Promptly after receipt by an Indemnified Person of notice of the
commencement of any action for which indemnification or contribution may be
sought hereunder, such Indemnified Person will notify Safeguard in writing of
the commencement thereof. The failure to so notify Safeguard will not relieve
Safeguard from liability under Section 5.1(a) above unless and to the extent
that Safeguard did not otherwise learn of such action and such failure results
in the forfeiture of substantial rights and defenses. Safeguard shall be
entitled to appoint counsel at Safeguard's expense to represent the Indemnified
Person in any action for which indemnification is sought (in which case
Safeguard shall not thereafter be liable for the fees and expenses of separate
counsel retained by the Indemnified Person except as set forth below); provided,
however, that such counsel shall be reasonably satisfactory to the Indemnified
Person. Notwithstanding Safeguard's election to appoint counsel to represent the
Indemnified Person in an action, the Indemnified Person shall have the right to
employ separate counsel (including local counsel), and Safeguard shall bear the
reasonable fees, costs and expenses of such counsel if (i) the use of counsel
chosen by Safeguard to represent the Indemnified Person would present such
counsel with a conflict of interest, (ii) the actual or potential defendants in,
or targets of, any such action include both Safeguard and the Indemnified Person
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<PAGE>
and the Indemnified Person shall have reasonably concluded that there may be
legal defenses available to it that are different from or in addition to those
available to Safeguard, (iii) Safeguard shall not have employed counsel
reasonably satisfactory to the Indemnified Person within a reasonable time after
notification of the commencement of such action or (iv) Safeguard shall have
authorized the Indemnified Person to employ separate counsel at the expense of
Safeguard.
(c) Safeguard shall not, without the prior written consent of the relevant
Indemnified Person, settle or compromise or consent to the entry of any judgment
with respect to any pending or threatened claim, action, suit or proceeding in
respect of which indemnification or contribution may be sought hereunder unless
such settlement, compromise or consent includes an unconditional release of such
Indemnified Person from all liability arising from such claim, action, suit or
proceeding. An Indemnified Person may not settle or compromise or consent to the
entry of any judgment with respect to any pending or threatened claim, action,
suit or proceeding in respect of which indemnification or contribution may be
sought hereunder without the consent of Safeguard, such consent not to be
unreasonably withheld.
(d) In the event that the indemnity provided for in this Article 5 is
unavailable to or insufficient to hold harmless an Indemnified Person for any
reason, the Indemnified Persons and Safeguard shall contribute to the Losses
(including the legal and other expenses attributable to investigating or
defending same) to which the Indemnified Person may be subject in such
proportion as is appropriate to reflect the relative fault of the Indemnified
Person and Safeguard in connection with the statements or omissions that
resulted in such Losses as well as any other relevant equitable considerations,
including that the Company performed the DSSP as an accommodation to Safeguard
without any legal obligation to do so. Relative fault shall be determined by
reference to, among other things, whether any untrue or allegedly untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information provided by the Indemnified Person or
Safeguard, the intent of the Indemnified Person and Safeguard, and their
relative knowledge, access to information and opportunity to correct or prevent
such untrue statement or omission. The parties agree that it would not be just
and equitable if contribution was determined by any method of allocation that
does not take into account the equitable considerations discussed above.
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<PAGE>
ARTICLE 6
MISCELLANEOUS
6.1. Nature and Survival of Representations. The representations, warranties,
covenants and agreements of Safeguard and the Company contained in this
Agreement, and all statements contained in this Agreement or any exhibit hereto
or any certificate or other document delivered pursuant to this Agreement or in
connection with the transactions contemplated hereby, shall be deemed to
constitute representations, warranties, covenants and agreements of the
respective party delivering the same. All such representations, warranties,
covenants and agreements shall survive the Closing.
6.2. Notices. All notices, requests, demands and other communications hereunder
shall be in writing and shall be deemed to have been duly given if personally
delivered or, if mailed, when mailed by United States first-class, certified or
registered mail, postage prepaid, to the other party at the following addresses
(or at such other address as shall be given in writing by any party to the
other):
(a) If to Safeguard, to:
Safeguard Scientifics, Inc.
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087
Attention: James A. Ounsworth, Esq.
(b) If to the Company, to:
U.S. Interactive, Inc.
2012 Renaissance Blvd.
King of Prussia, PA 19406
Attention: Lawrence F. Shay, Esquire
With a required copy to:
Dilworth Paxson LLP
3200 Mellon Bank Center
1735 Market Street
Philadelphia, PA 19103-7595
Attention: Michael D. Ecker, Esquire
6.3. Third Party Beneficiaries. Safeguard acknowledges that each of the
Underwriters of the Public Offering shall be a third party beneficiary entitled
to exercise the rights and remedies provided for herein directly against
Safeguard. The Company shall cooperate with and assist each of the Underwriters
of the Public Offering with respect to any action such Underwriters take to
exercise such rights and remedies directly against Safeguard.
-7-
<PAGE>
6.4. Successors and Assigns. This Agreement, and all rights and powers granted
hereby, will bind and inure to the benefit of the parties hereto and their
respective successors and permitted assigns but shall not be assignable or
delegable by any party without the prior written consent of the other party.
6.5. Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of Pennsylvania, without giving effect to its
principles of conflicts of laws or choice of forum.
6.6. Headings. The headings preceding the text of the sections and subsections
hereof are inserted solely for convenience of reference, and shall not
constitute a part of this Agreement, nor shall they affect its meaning,
construction or effect.
6.7. Counterparts. This Agreement may be executed in two counterparts, each of
which shall be deemed an original, but which together shall constitute one and
the same instrument. Each such copy shall be deemed an original and it shall not
be necessary in making proof of this Agreement to produce or account for more
than one such counterpart.
6.8. Further Assurances. Each party shall cooperate and take such action as may
be reasonably requested by the other party in order to carry out the provisions
and purposes of this Agreement and the transactions contemplated hereby.
6.9. Amendment and Waiver. The parties may by mutual agreement amend this
Agreement in any respect, and either party, as to such party, may (a) extend the
time for the performance of any of the obligations of the other party, (b) waive
any inaccuracies in representations by the other party, (c) waive compliance by
the other party with any of the agreements contained herein and performance of
any obligations by the other party, and (d) waive the fulfillment of any
condition that is precedent to the performance by such party of any of its
obligations under this Agreement. To be effective, any such amendment or waiver
must be in writing and be signed by the party against whom enforcement of the
same is sought.
6.10. Entire Agreement. This Agreement sets forth all of the promises,
covenants, agreements, conditions and undertakings between the parties hereto
with respect to the subject matter hereof, and supersedes all prior and
contemporaneous agreements and understandings, inducements or conditions,
express or implied, oral or written.
6.11. Interpretations. No party to this Agreement shall be considered the
draftsman. This Agreement has been reviewed, negotiated and accepted by all
parties and their attorneys and shall be construed and interpreted according to
the ordinary meaning of the words used so as fairly to accomplish the purposes
and intentions of all parties hereto.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first above written.
SAFEGUARD SCIENTIFICS, INC.
By:
----------------------------------
Name:
Title:
U.S. INTERACTIVE, INC.
By:
----------------------------------
Name:
Title:
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<PAGE>
Exhibit 5.1
August 5, 1999
The Board of Directors
U.S. Interactive, Inc.
2012 Renaissance Boulevard
King of Prussia, PA 19406
RE: Issuance and Sale of Common Stock pursuant to
Registration Statement on Form S-1
---------------------------------------------
Dear Sirs:
We have acted as corporate counsel for U.S. Interactive, Inc., a
Delaware corporation (the "Company"), in connection with the preparation of the
Registration Statement on Form S-1 (Registration No. 333-7875) filed by the
Company with the Securities and Exchange Commission pursuant to the Securities
Act of 1933, as amended, relating to the underwritten, public offering (the
"Offering") of up to a total of 6,267,500 shares (including certain shares
issuable upon exercise of an over-allotment option) (the "Shares"), of the
Company's Common Stock, par value $.001 per share. The Registration Statement
was initially filed on May 19, 1999. (The Registration Statement, as amended to
date, most recently by Amendment No. 5 dated August 5, 1999, including all
exhibits thereto, is referred to below as the "Registration Statement".)
The Shares consist of: (i) 2,673,712 previously unissued Shares to be
sold by the Company to underwriters whose representatives are named in the
Prospectus constituting a part of the Registration Statement (the "Underwriters'
Shares"); (ii) 1,750,000 previously unissued Shares to be sold by the Company
directly to shareholders of Safeguard Scientifics, Inc. ("Safeguard"), or to
Safeguard (the "Directed Shares"); (iii) a total of 1,026,288 presently
outstanding Shares to be sold by the Selling Stockholders named in the
Registration Statement (the "Secondary Shares"); and (iv) up to a total of
817,500 Shares issuable upon exercise of a thirty-day option to be granted by
the Company to the underwriters (the "Over-allotment Shares") solely for the
purpose of covering over-allotments.
In this connection, we have examined: (i) the Company's Amended and
Restated Certificate of Incorporation and Amended and Restated By-laws, each as
in effect on the date hereof; (ii) the resolutions and related minutes of the
Company's Board of Directors authorizing the Offering, the preparation and
filing of the Registration Statement, and the issuance of the Underwriters'
Shares, the Directed Shares and the Over-allotment Shares; (iii) the
Registration Statement, including, among other exhibits, the form of
Underwriting Agreement and the form of Standby Stock Purchase Agreement between
the Company and Safeguard; and (iv) certain officers' certificates, corporate
records and such other records and documents as we have deemed appropriate or
necessary for purposes of rendering the opinions hereinafter expressed.
In rendering the opinions expressed below, we have assumed the
authenticity of all documents and records examined, the conformity with the
original documents of all documents submitted to us as copies and the
genuineness of all signatures.
Based upon and subject to the foregoing, we are of the opinion that:
1. The Underwriters' Shares have been duly authorized for
issuance and, when sold, paid for and delivered in accordance
with the terms of the Underwriting Agreement, will be legally
issued, fully paid and non-assessable;
2. The Directed Shares have been duly authorized for issuance
and, when sold, paid for and delivered in accordance with the
terms of the Standby Stock Purchase Agreement, will be
legally issued, fully paid and non-assessable;
3. The Secondary Shares are, and when sold, paid for and
delivered in accordance with the terms of the Underwriting
Agreement, will be, legally issued, fully paid and
non-assessable; and
4. The Over-allotment Shares have been duly authorized for
issuance and, if and when sold, paid for and delivered in
accordance with the terms of the Underwriting Agreement, will
be, legally issued, fully paid and non-assessable.
We are admitted to practice in the Commonwealth of Pennsylvania. We
have made such investigation of the General Corporate Law of the State of
Delaware (the "Delaware GCL") as we have considered appropriate for the purpose
of rendering the opinions expressed above. This opinion is limited to the
Delaware GCL.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference made to this Firm under the caption
"Legal Matters" in the Prospectus constituting a part of the Registration
Statement.
Sincerely yours,
DILWORTH PAXSON LLP
<PAGE>
EXHIBIT 10.7
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and
entered into this 30th day of July, 1999 by and between U.S. Interactive, Inc.,
a corporation (the "Company") and Stephen T. Zarrilli (the "Executive").
RECITALS
WHEREAS, the Company engages in the business information
technology services, principally web-based technologies associated with,
internet, intranet and extranet design, consultation, installation and
maintenance professional services (the "Business");
WHEREAS, the Executive possesses an intimate knowledge of the
business and affairs of the Company and its policies, procedures, methods and
personnel; and
WHEREAS, the Company desires to continue to employ the
Executive as its Chief Executive Officer and President on the terms and
conditions hereinafter set forth and the Executive desires to accept such
continued employment on such terms and conditions.
NOW, THEREFORE, in consideration of the premises and the
mutual covenants and agreements contained herein, and for other good and
valuable consideration, the receipt and sufficiency of which hereby are
acknowledged, the parties agree as follows:
1. Employment. Subject to and pursuant to the terms of this
Agreement, effective as of the date of this Agreement (the "Effective Date"),
the Company shall employ the Executive, and the Executive shall be employed by
and shall serve the Company, in the capacity of Chief Executive Officer and
President, reporting directly to the Board of Directors (the "Board") pursuant
to the terms and conditions of this Agreement.
2. Term and Renewals. Subject to the provisions for earlier
termination provided herein, the term of this Agreement (the "Initial Term")
shall commence on the Effective Date and shall terminate on December 31, 2000.
The Initial Term shall be renewed for a one (1)-year period (the "Initial
Renewal Term") if at least thirty (30) days prior to the expiration of the
Initial Term either party hereto shall not have given the other party written
notice not to renew this Agreement. The Initial Renewal Term and each "Renewal
Term" (as defined in this Section 2) shall be renewed for successive one
(1)-year periods (each, a "Renewal Term") if at least thirty (30) days prior to
the expiration of the Initial Renewal Term or a Renewal Term, as the case may
be, either party hereto shall not have given the other party written notice not
to renew this Agreement. The Initial Term, together with any Initial Renewal
Term and all Renewal Terms, if any, is referred to herein as the "Term." Nothing
in this Agreement shall be construed to require either party hereto to renew
this Agreement and either party hereto has the sole discretion not to renew this
Agreement.
<PAGE>
3. Duties. During the Term, the Executive shall be employed at
the offices of the Company in Gulph Mills, Pennsylvania, and shall serve as and
have the title of Chief Executive Officer and President of the Company reporting
directly to the Board, and shall have all duties and responsibilities
customarily associated with such positions, including duties determined by the
Board and appropriate for persons in such positions, as limited or expanded
pursuant to this Agreement. The Executive shall also serve as a member of the
Board of Directors, subject to removal pursuant to the terms of the Company's
Certificate of Incorporation and Bylaws. The Executive shall devote
substantially all of his working time and effort during normal business hours to
the business and affairs of the Company, and shall use his reasonable best
efforts to perform his duties and responsibilities hereunder faithfully and
efficiently. Notwithstanding the foregoing, the Executive may devote a portion
of his working time and effort during normal business hours to charitable
activities, the management of his investments, other business activities that do
not compete with the Business, and to such other matters as the Executive may
determine, so long as such activities do not prevent the Executive from
performing his duties hereunder.
4. Compensation. For services rendered by the Executive during
the Term pursuant to this Agreement, the Company shall pay or award compensation
to the Executive as follows:
(a) Base Compensation. The Company shall pay to the
Executive a base salary ("Base Compensation") of $235,000 per annum, payable in
accordance with the Company's customary payroll practices for its officers. The
amount of Base Compensation shall be reviewed by the Board annually; provided,
however, that Base Compensation may not be decreased.
(b) Bonus Compensation. In addition to the Base
Compensation, the Board of Directors of the Company (or the Compensation
Committee of the Board) may in its discretion award the Executive a performance
bonus (the "Performance Bonus") in cash or stock options commensurate with the
Executive's performance as Chief Executive Officer and President. An Executive
Committee, comprised of the Chairman of the Board, the Executive, and Chief
Financial Officer of the Company, the purpose of which, in part, will be to
create a Management Compensation Incentive Program in which the Executive and
other management personnel will be participants, will be formed. The Management
Compensation Incentive Program will be administered by the Compensation
Committee of the Board of Directors.
(c) Withholding. The Company shall deduct and withhold from
the compensation payable to the Executive hereunder any and all applicable
federal, state and local income and employment withholding taxes and any other
amounts required to be deducted or withheld by the Company under applicable
statute or regulation.
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5. Additional Benefits.
(a) Fringe Benefits; Reimbursement; Vacation. In addition
to Base Compensation and Performance Bonus provided for in Section 4 above, in
connection with the Executive's employment by the Company, the Executive shall
be entitled to receive:
(i) all fringe benefits customarily offered by the
Company to its senior executive officers, including without limitation, health
plan benefits, expense accounts, participation in any Company stock compensation
plan and the various employee benefit plans or programs (collectively, the
"Benefit Plans") provided to the employees of the Company in general, subject to
the eligibility requirements with respect to each such Benefit Plan, and to such
other benefits or perquisites as may be approved by the Board during the Term;
(ii) reimbursement from the Company for all customary,
ordinary and necessary business expenses incurred by the Executive in the
performance of his duties and responsibilities hereunder;
(iii) four (4) weeks' paid vacation benefits, or such
greater amount as may be available under the Company's vacation policy in effect
for its senior executive officers, which may not be carried over to the
following year;
(iv) annual membership dues for a country club not to
exceed $4500, and such other annual membership dues for professional or business
organizations (not to include social clubs) reasonably requested by Executive
and approved by the Compensation Committee in an aggregate amount up to $5,500
per year;
(v) a monthly automobile allowance in the amount of
$500.00; and
(vi) use of up-to-date computer equipment and facsimile
machine for Executive's home office and connectivity to the Company's offices
and the Internet.
6. Termination of Employment.
(a) Termination. Except as otherwise provided in this
Agreement, the Executive's employment by the Company hereunder shall terminate
upon the earliest to occur of the dates specified below (as applicable, the
"Termination Date"):
(i) The close of business on the date of expiration of
the Term.
(ii) The close of business on the date of the
Executive's death ("Death").
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(iii) The close of business on the date specified as
the effective date of termination of the Executive's employment in a "Notice of
Termination" (as defined below) delivered by the Company to the Executive due to
the Executive's "Disability" (as defined below). For purposes of this Agreement,
the term "Disability" shall mean the inability or incapacity of the Executive,
due to any medically determined physical or mental impairment, to perform his
duties and responsibilities for the Company for a total of one hundred eighty
(180) calendar days in any consecutive twelve (12) month period during the Term,
that has been verified in a written opinion from a physician.
(iv) The close of business on the date specified as the
effective date of termination of the Executive's employment by the Executive in
a Notice of Termination delivered by the Executive to the Company (a "Voluntary
Termination").
(v) The close of business on the date specified as the
effective date of termination of the Executive's employment by the Company for
"Cause" (as defined below) in a Notice of Termination delivered by the Company
to the Executive. For purposes of this Agreement, the term "Cause" shall mean
termination based on
(A) the Executive's material breach of this
Agreement which, if capable of cure, is not cured fully within thirty (30) days
after written notice from the Board to the Executive identifying such breach,
provided, that such thirty (30)-day period shall be extended to sixty (60) days
if such breach is not reasonably susceptible to cure within thirty (30) days and
the Executive shall have commenced to cure within such thirty (30) day period
and is then proceeding with due diligence to cure such breach;
(B) conviction of the Executive for (x) any crime
constituting a felony in the jurisdiction in which committed, (y) any crime
involving moral turpitude (whether or not a felony) or (z) any other criminal
act against the Company involving dishonesty whether or not a felony or willful
misconduct intended to injure the Company;
(C) substance abuse (including drunkenness) by the
Executive which is repeated after written notice from the Board to the Executive
identifying such abuse;
(D) the failure or the refusal of the Executive to
follow lawful and proper directives of the Board, which is not corrected within
thirty (30) days after written notice from the Board to the Executive
identifying such failure or refusal;
(E) willful malfeasance or gross misconduct by the
Executive which discredits or damages the Company; or
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<PAGE>
(F) conviction of the Executive for a violation of
the federal securities laws.
(vi) The close of business on the date specified as the
effective date of termination of the Executive's employment by the Company other
than for Death, Disability or Cause in a Notice of Termination delivered by the
Company to the Executive.
(b) Notice of Termination. Any termination of the
Executive's employment hereunder (other than termination as a result of Death)
by the Company or by the Executive shall be communicated by a Notice of
Termination to the other party hereto given in accordance with the provisions of
Section 9(c) below. For purposes of this Agreement, a "Notice of Termination"
shall mean a written notice which (i) indicates the specific termination
provision in this Agreement relied upon, and (ii) if applicable, sets forth the
facts and circumstances claimed to provide a basis for termination of the
Executive's employment, including, in the case of a Voluntary Termination,
whether such Voluntary Termination constitutes a "Constructive Voluntary
Termination" (as defined below).
7. Payment Upon Termination of Employment.
(a) Voluntary Termination, Termination for Cause or
Expiration of Term. If the Executive's employment is terminated pursuant to a
Voluntary Termination, a termination for Cause or the expiration of the Term,
then, without limiting any other rights or remedies available to the Company at
law or in equity, the Company shall pay or provide to the Executive, his legal
representatives, heirs, eligible dependents, if any, or permitted assigns, as
applicable,
(i) on the Termination Date, all Base Compensation
earned but unpaid as of the Termination Date; and
(ii) all benefits to which such persons may be entitled
under any of the Benefit Plans which provide for benefits after termination of
employment, in accordance with the terms thereof or as otherwise required by
law.
(b) Other Terminations. Subject to the provisions of
Section 7(c) below, if the Executive's employment is terminated other than
pursuant to a Voluntary Termination, a termination for Cause or the expiration
of the Term:
(i) the Company shall pay to the Executive, his legal
representatives, heirs or permitted assigns, on the Termination Date, all Base
Compensation (in the event of Disability, less any disability payments made to
Executive pursuant to a Company disability plan or policy, and Performance Bonus
(other than the Performance Bonus, if any, for the fiscal year in which the
Termination Date occurs, the payment of which is governed by clause (iv) of this
Section 7(b)) earned but unpaid as of the Termination Date;
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(ii) during the period beginning on the Termination
Date and extending until the date this Agreement otherwise would have terminated
had the employment of the Executive not been earlier terminated (such period is
referred to herein as the "Remaining Term"), the Company shall provide to the
Executive, his legal representatives, heirs, eligible dependents, if any, or
permitted assigns, as applicable, all benefits to which such persons may be
entitled under any of the Benefit Plans, and specifically, without limitation,
shall provide the Executive and his eligible dependents, if any, with life,
disability, accident and group health insurance benefits substantially similar
to those which the Executive and his dependents were receiving immediately prior
to the Notice of Termination, provided that the Executive or his legal
representatives, heir or permitted assigns pay the regular premium required of
active employees for such coverage, and provided further that following the
expiration of the Remaining Term, the Executive shall be eligible to purchase
health insurance benefits in accordance with applicable federal law;
(iii) during the Remaining Term, the Company shall pay
the Executive the Base Compensation that would have been payable had the
Executive's employment not been terminated, and such Base Compensation shall be
payable in accordance with the Company's customary payroll practices for its
officers, less the amount, if any, of monthly disability income paid to the
Executive pursuant to any Company-sponsored long-term disability plan;
(iv) on the Termination Date the Company shall pay to
the Executive, his legal representatives, heirs or permitted assigns, a pro-rata
portion of his Performance Bonus for such fiscal year (the "Pro Rata Bonus"),
such payment to be made within thirty (30) days following the date on which a
bonus is declared in which the Executive would have participated but for his
termination; and
(v) all stock options, warrants, rights and other
Company stock-related awards granted to the Executive by the Company
(collectively, the "Stock Awards") that otherwise would have vested and become
exercisable during the Remaining Term, shall become upon the Termination Date
fully vested and nonforfeitable, all restrictions (except for restrictions
required by law), if any, thereon shall lapse, all performance goals, if any,
associated therewith shall be deemed met in full, and the Executive shall be
entitled to exercise any or all such Stock Awards in accordance with the terms
of the documentation pursuant to which such Stock Awards were granted (as such
Stock Awards are amended by this clause (v)).
Notwithstanding any other provision of this Agreement to the contrary,
the Executive shall not be required to mitigate the amount of any payment
provided for in this Section 7(b) by seeking other employment or otherwise, and
the amount of any payment provided for in this Section 7(b) shall not be reduced
by any compensation earned by the Executive as a result of his employment by
another employer after the Termination Date or otherwise.
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(c) Termination Following the Effective Date or a Change in
Control. Notwithstanding any other provision of this Agreement to the contrary,
if within six (6) months following the Effective Date or a "Change in Control"
(as defined below) of the Company, as applicable, the employment of the
Executive terminates pursuant to a "Constructive Involuntary Termination" (as
defined below), the Executive shall be entitled to the compensation and benefits
described in Section 7(b) above (including the vesting of Stock Awards and the
proration of a Performance Bonus) as if the Executive's employment had been
terminated other than pursuant to a Voluntary Termination, a termination for
Cause or the expiration of the Term, during the period beginning on the date of
termination by the Executive and extending through the Remaining Term.
Notwithstanding any other provision of this Agreement to the contrary, the
Executive shall not be required to mitigate the amount of any payment provided
for in this Section 7(c) by seeking other employment or otherwise, and the
amount of any payment provided for in this Section 7(c) shall not be reduced by
any compensation earned by the Executive as a result of his employment by
another employer after the Termination Date or otherwise.
For purposes of this Section 7(c), the following terms shall have the following
meanings:
(i) "Change in Control" shall mean and be determined to
have occurred if (i) any person (as such term is used in Sections 13(b) and
14(b) of the Securities Exchange Act of 1934, as amended) (the "Exchange Act")
is or becomes the beneficial owner (as defined in Rule 13d-3 promulgated under
the Exchange Act), directly or indirectly, of securities of the Company
representing 40% or more of the combined voting power of the then outstanding
securities of the Company; (ii) during any period of twenty-four (24) months, a
majority of the members of the Board who are elected by the holders of the
Company's Common Stock are replaced by directors who were not nominated and
approved by the directors previously elected by such holders of the Common
Stock; (iii) the Company, or substantially all of the assets of the Company on a
consolidated basis, shall be combined with or acquired by another company,
entity or individual; or (iv) a majority of the members of the Board are
represented by, or appointed by or affiliated with, any person (as such term is
used in Sections 13(b) and 14(b) of the Exchange Act) whom the Board has
determined is seeking to effect a Change in Control of the Company of the type
described in clauses (i), (ii) or (iii) of this definition.
(ii) "Constructive Involuntary Termination" shall mean
voluntary termination of employment by the Executive as a result of a
significant reduction or adverse change in the duties, responsibilities,
reporting relationship, job description, compensation, perquisites, office or
location of employment of the Executive without the written consent of the
Executive, which is not cured fully within thirty (30) days after written notice
from Executive to the Board identifying such significant reduction or adverse
change, provided, that such thirty (30) day period shall be extended to sixty
(60) days if such significant reduction or adverse change is not reasonably
susceptible to cure within thirty (30) days and the Company shall have commenced
cure within such thirty (30) day period and is then proceeding with due
diligence to cure such breach.
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(d) Exclusive Payments. The payments upon termination made
by the Company to the Executive pursuant to Sections 7(b) and (c) above shall
constitute the exclusive payments due to the Executive upon termination under
this Agreement.
(e) The Board of Directors of the Company have approved
this Agreement and the Company shall submit to the stockholders of the Company
for approval any payments to be made hereunder that would be parachute payments
(as defined in Section 280G of the Internal Revenue Code) to the extent such
approval avoids the characterization of such payments as excess parachute
payments. Notwithstanding any such submission for stockholders approval, or if
such approval is not obtained, if any payments required under this Agreement are
not deductible by the Company as a result of Section 280G of the Internal
Revenue Code, and any regulations thereunder (or any successor statute or
regulation), then such amounts will be reduced to the extent the payments will
be deductible by the Company.
8. Executive Covenants.
(a) Unauthorized Disclosure. The Executive agrees and
understands that due to the Executive's position with the Company, the Executive
has been and will be exposed to, and will receive confidential and proprietary
information relating to the businesses of the Company, including but not limited
to technical information, computer software (including source and object code
data and related documentation), research and development results, know-how,
product information, formulae, processes, business and marketing plans,
strategies, customer information, other information concerning the Company's
products, promotions, development, financing, expansion plans, business policies
and practices (collectively, the "Trade Secrets"). The Executive agrees that
during the Term and at all times thereafter the Executive will keep such Trade
Secrets confidential and will not disclose such Trade Secrets, either directly
or indirectly, to any third person or entity without the prior written consent
of the Company. This confidentiality covenant has no geographical or territorial
restriction. On the Termination Date, the Executive promptly will return to the
Company such Trade Secrets. Disclosure of Trade Secrets by the Executive shall
not be construed to be unauthorized when disclosure is made in the course of
performance of the Executive's duties and responsibilities, in the course of
employment, in compliance with instructions of the Board, in compliance with
law, or as may be required by the government.
Notwithstanding the foregoing, the Executive's obligation of
confidentiality shall not apply to any information, whether or not it is within
the meaning of Trade Secret, if such information (i) was known to the Executive
prior to his employment by the Company, or (ii) was or becomes generally
available to the public other than as a result of a disclosure by the Executive
in violation of the provisions of this Section 8(a), or (iii) was or is
disclosed to third parties by the Company without the obligation of
confidentiality, except in connection with the Business of the Company.
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(b) Prohibited and Competitive Activities. The Executive
and the Company recognize that due to the nature of the Executive's engagement
hereunder and the relationship of the Executive to the Company, subsequent to
the Effective Date, the Executive will have access to, and will acquire, and may
assist in developing Trade Secrets. The Executive acknowledges that Trade
Secrets will be of central importance to the Company and its affiliates and that
disclosure of it to, or its use by, others could cause substantial loss to the
Company. If the disclosure by the Executive is not within the exceptions
enumerated in the Section 8(a) above, the Executive accordingly agrees as
follows:
(i) Prohibited Activities. The Executive will not at
any time during the Term and at all times thereafter, other than in the course
of his employment with the Company, disclose or furnish to any other person or,
directly or indirectly, use for his own account or the account of any other
person, any Trade Secrets, and he shall retain all such Trade Secrets in trust
for the benefit of the Company, its affiliates and the successors and assigns;
(ii) Non-Competition. By and in consideration of the
Company's entering into this Agreement and providing the compensation and
benefits to be provided by the Company to the Executive, and further in
consideration of the Executive's continued exposure to Trade Secrets, the
Executive agrees that he will not, from the Effective Date until the Termination
Date, engage in any "Competitive Activity" as defined below. For purposes of
this Agreement, the term "Competitive Activity" shall mean engaging in any of
the following activities: (A) serving as a director of any "Competitor" (as
defined below); (B) directly or indirectly through one or more intermediaries,
either (x) controlling any Competitor or (y) owning any equity or debt interests
in any Competitor (other than equity or debt interests which are publicly traded
and, at the time of any acquisition, when combined with other holdings, do not
exceed 5% of the particular class of interests outstanding) (it being understood
that, if interests in any Competitor are owned by an investment vehicle or other
entity in which the Executive owns an equity interest, a portion of the
interests in such Competitor owned by such entity shall be attributed to the
Executive, such portion determined by applying the percentage of the equity
interest in such entity owned by the Executive to the interests in such
Competitor owned by such entity); (C) employment by (including serving as an
officer or partner of), providing consulting services to (including, without
limitation, as an independent contractor), or managing or operating the business
or affairs of, any Competitor; or (D) participating in the ownership,
management, operation or control of or being connected in any manner with any
Competitor. For purposes of this Agreement, the term "Competitor" shall mean any
person (other than the Company or any wholly-owned subsidiary of the Company)
that engages in the Business (as determined at the time of termination of
employment) at the time of determination, in any "Restricted Area" (as defined
below) in competition with the Company. For purposes of this Agreement, the term
"Restricted Area" shall mean the United States and any territory thereof.
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(iii) In the event of termination of Executive's
employment hereunder pursuant to a Voluntary Termination (other than in
connection with a Constructive Involuntary Termination) or for Cause, the
Executive agrees that he will not, from the Termination Date to the scheduled
expiration of the Term, engage in any Competitive Activity;
(iv) In the event of termination of Executive's
employment hereunder for any reason (other than a termination by the Company
prior to expiration of the then current term, which termination is not pursuant
to Section 6(a)(ii) or 6(a)(v) hereof), the Company shall have the option to
extend the obligation of the Executive not to engage in any Competitive Activity
for a period of twelve (12) months beyond the Termination Date (or twelve (12)
months beyond the scheduled expiration of the Term if Executive is subject to
(iii) above) by payment to Executive of Executive's Base Compensation and
providing to Executive the benefits to be provided to Executive hereunder, all
in accordance with the terms of this Agreement.
(v) Inventions and Patents. Executive acknowledges that
all inventions, innovations, improvements, developments, methods, designs,
analyses, drawings, reports and all similar or related information, if
patentable, which relate to the Business and which have been or are made by
Executive while employed by the Company ("Work Product") belong to the Company.
(vi) Non-solicitation. The Executive agrees that during
the Term and for a period of three (3) years thereafter, Executive shall not
directly through another entity (i) induce or attempt to induce any key employee
of the Company to leave the employ of the Company, or in any way interfere with
the relationship between the Company and any employee thereof, or (ii) induce or
attempt to induce any customer, supplier, licensee, licensor, franchisee or
other business relation of the Company to cease doing business with the Company,
or in any way interfere with the relationship between any such customer,
supplier, licensee or business relation and the Company. For purposes of this
Agreement, a customer, supplier, licensee, licensor, franchisee or business
relation means any person or entity which at the time of determination is, or
has been within two (2) years prior to such time, a customer, supplier,
licensee, licensor, franchisee or business relation of the Company or Digital
Evolution, Inc.
9. Miscellaneous.
(a) Prior Agreement. This Agreement replaces and supersedes
the Employee Non-Disclosure, Assignment of Developments, Non-Solicitation and
Non-Competition Agreement in favor of the Company executed by the Executive on
June 28, 1996.
(b) Binding Effect; Assignment. Except as otherwise
provided herein, the terms and conditions of this Agreement shall inure to the
benefit of and be binding upon the respective successors and assigns of the
parties. Nothing in this Agreement, express or implied, is intended to confer
upon any party other than the parties hereto or their respective successors and
assigns any rights, remedies, obligations, or liabilities under or by reason of
this Agreement, except as expressly provided in this Agreement. The Executive,
or any beneficiary or legal representative of the Executive, shall not assign
all or any portion of the Executive's rights or obligations under this Agreement
without the prior written consent of the Company.
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(c) Notices. Any notice, request, instruction or other
document to be given hereunder by any party to any other party shall be in
writing and shall be deemed to have been given (i) if mailed with the United
States Postal Service by prepaid, first class, certified mail, return receipt
requested, at the time of receipt by the intended recipient, or (ii) if sent by
facsimile transmission, when so sent and receipt acknowledged by an appropriate
telephone or facsimile receipt (followed by a hard copy mailed in accordance
with clause (i) of this Section 9(c)) addressed as follows:
If to the Company, addressed to:
U.S. Interactive, Inc.
2012 Renaissance Boulevard
King of Prussia, PA 19406
Phone: (610) 313-9700
Fax: (610) 382-8908
Attn: Chairman
If to the Executive:
Mr. Stephen T. Zarrilli
314 Jefferson Drive
Malvern, Pennsylvania 19355
or such other address as may be given from time to time under the terms of this
notice provision.
(d) Entire Agreement. This Agreement and the documents
referred to herein constitute the entire agreement among the parties and no
party shall be liable or bound to any other party in any manner by any
warranties, representations, or covenants except as specifically set forth
herein or therein.
(e) Amendments and Waivers. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto. No amendment or waiver may be charged against a party without
that party's prior written consent. Any amendment or waiver effected in
accordance with this paragraph shall be binding upon each transferee of any
party hereto.
(f) Titles and Subtitles. The titles and subtitles used in
this Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
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(g) Counterparts. This Agreement may be executed in one or
more counterparts, all of which shall be considered one and the same agreement
and each of which shall be deemed an original.
(h) Severability. If one or more provisions of this
Agreement are held to be unenforceable under applicable law, such provision
shall be excluded from this Agreement and the balance of this Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
(i) Governing Law. This Agreement shall be governed by and
construed under the laws of the state of incorporation of the Company as applied
to agreements among residents entered into and to be performed entirely within
such state.
(j) Mediation and Arbitration. Any dispute (except for
disputes with respect to the Executive's obligations under Section 8 hereof)
which may arise between the parties hereto as to the construction,
interpretation or effect of this Agreement which is not resolved by mutual
agreement between the parties, shall first be submitted to nonbinding mediation
on terms and conditions to be mutually agreed upon by the parties. In the event
that a dispute is not resolved by nonbinding mediation, the disputing party may
give the other party notice of such party's intention to cause the same to be
submitted to arbitration. After fifteen (15) days have elapsed from the giving
of such notice, but not before such time, the party who gave such notice may
cause any such dispute which then remains unresolved to be submitted to
arbitration by submitting the same to the office of the American Arbitration
Association (the "AAA") acting in the state of incorporation of the Company as
determined by the Company (or any successor thereto, but if no organization is
then performing a function reasonably similar to the AAA, then to a court of
competent jurisdiction in accordance with the rules of such court) with a
request for arbitration to be conducted in accordance with the rules thereof by
one (1) arbitrator to be jointly selected by the parties. The Company shall pay
the reasonable travel expenses of the Executive to attend the arbitration
hearing. The prevailing party's expenses, including without limitation
attorneys' fees, in connection with such arbitration shall be borne by the
losing party; provided, however, that if liability is allocated by the
arbitrator between the parties, the expenses of such arbitration, including
without limitation the parties' attorneys' fees, shall be borne by the parties
in proportion to their respective percentages or proportions of liability
assessed by the arbitrator. The decision of the arbitrator as to all matters
properly submitted to such arbitrator and as to the apportionment of expenses of
arbitration shall be conclusive and binding upon the parties and judgment upon
any award may be entered in any court of competent jurisdiction.
[END OF PAGE]
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first written above.
U.S. INTERACTIVE, INC.
By: /s/ Lawrence F. Shay
----------------------------
Lawrence F. Shay
Senior Vice-President Legal
and Corporate Affairs
/s/ Stephen T. Zarrilli
--------------------------------
Name: Stephen T. Zarrilli
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Exhibit 10.8
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.
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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
7
<PAGE>
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.
8
<PAGE>
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.
9
<PAGE>
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]
10
<PAGE>
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>
Portions of this document have been omitted pursuant to a request for
confidential treatment. The confidential portion has been filed separately with
the Commission.
[ ] - Denotes material has been deleted.
Juggernaut Web Site Development - Launch 1
US Interactive Statement of Work
Created for Juggernaut Partners
Revised March 27, 1999
<PAGE>
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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
[ ].................................................11
[ ].................................................12
Transaction...................................................12
Accounting....................................................12
Category Management...........................................13
Product/Service Management....................................13
Fulfillment...................................................13
Promotions and Advertisement..................................14
[ ].............................................14
Business Rules Module.........................................14
[ ] Tool Set......................................15
Profile / Personalization.....................................15
Error and Logging.............................................15
Messaging / Email.............................................16
Customer Support..............................................16
Internal System Task Scheduler................................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
<PAGE>
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Payment schedule........................................................29
RISKS / CRITICAL PATH DEADLINES.........................................31
PRODUCTION PLAN / BUDGET CONTINGENCIES..................................35
AGREEMENT...............................................................38
<PAGE>
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- -------------------------------------------------------------------------------
Introduction
Juggernaut's mission is to provide a global-exchange platform, enabling buyers
and sellers to effectively and easily exchange products over the Internet with
the help of innovative technologies, an intuitive interface, and a [ . ]
The following features are a part of the vision for the Juggernaut Web Site:
o Full buying and [ ] capabilities
o Access to new [ ] products
o Visual navigation of Product Database (via a "Brain"-like interface)
o Powerful search feature
o Full [ ] system
o System to [ ]
o Full Business-to-Consumer and Business-to-Business capabilities
o Product [ ] Tool Suite
o Global [ ] infrastructure
o [ ] marketplace presence
o Market-tested interface usability
o [ ] Brand / Logo strategy
o [ ] capabilities
o [ ] selection process
o Full Product Image Database System
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.
<PAGE>
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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 company(ies)
o Hosting/Site Maintenance company(ies)
* Additional Statements of Work will also be created between Juggernaut and any
necessary third-party vendor, such as [ ] Call Center companies, and Data Center
companies. USI is not responsible for these contracts.
<PAGE>
(GRAPHIC OMITTED)
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
Basic user and technical specifications to be designed for:
o IE 4.0 and Netscape 4.0 and above
o Screen resolution: 600 x 800
o HTML
o Modem speed: 56.6 and above
Product [ ]
o Users can [ ]
o [ ] picture
o [ ] name and Profile
o [ ] System (filled with user input viewable by Launch 2)
o Information on becoming a [ ]
o Email [ ]
Navigator (New "Brain")
o Navigation through relational database
o Related items list
Other:
o Buy capabilities (Full purchase process)
o Product list - sortable by:
o Brand
o Description
o [ ]
o Price
o Product screen:
o product picture
o product info
o related links
o product characteristics (user can choose product specifics)
o [ ] for individuals and small businesses
o [ ]
o Shopping Cart - generating information automatically from user's
profile
o [ ] - shows all the [ ] the user is participating in
o Key word search with customized filters based on user's needs
<PAGE>
(GRAPHIC OMITTED)
Scope for Launch 1 Development (Continued)
- --------------------------------------------------------------------------------
User Application (Continued)
o My Profile containing:
o Personal information
o billing addresses
o shipping addresses
o credit card information
o payment preferences
o Lists of favorite products
o FAQ Help section
[ ] Interface - External Application
o [ ]
o Ability to send the following to a customer: product list, product
information
o Scratch pad tool
o [ ] - reference tool for [ ]
o [ ] profile, including: [ ]
Global Management Application
o Product/Service Management (add products, delete products,
change product information, change promotional information,
meta-data information management...)
o User Management (Add/Delete/Modify users, security levels)
o [ ] Management (Add/Delete/Modify [ ]
o Navigator Management
o Product Category management
o Product Relationship management
o [ ] Management
o Template Management
o Reporting:
o User Statistics
o Accounting
o Financials
o Products and Inventory
o User Feedback
o Sales
o [ ] Statistics
o [ ] Log Analysis
o [ ]
o [ ] Usage
o Shipping & Tracking
<PAGE>
(GRAPHIC OMITTED)
Scope for Launch 1 Development: Continued
- --------------------------------------------------------------------------------
Interface Scope: (Continued)
Global Management Application (Continued)
o Vendor Management
o Transaction Management
o [ ] Management
o Email Notifier System
o Juggernaut Points Management
o Default Values Management
o Help Section Management
<PAGE>
(GRAPHIC OMITTED)
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
<PAGE>
(GRAPHIC OMITTED)
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.
This will be the repository for all production data needed to serve our
customers, [ ], and the management team. The database will house data
such as user profile, past purchases, billing information, shipping
addresses, user session information, category information, product
information for new [ ] goods, [ ] information, service information, [
] profile, [ ] information, purchases, inventory, transaction history,
[ ], financials, pricing models, and system parameters.
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
This module will provide programmatic interfaces for registering new
users, [ ], and management accounts. It will have provisions to verify
the email address of users as a means of authenticating the user's
identity. The registration module will request information such as
user-name, password, full name, and email address. Additional
information such as credit card number, address and birth-date may also
be requested from the user.
For Launch 1, the creation and management of business group accounts
will not be provided. Businesses wanting to transact on Juggernaut will
have to create an individual user account and use that account to
transact. In later phases of the project support will be provided for
business group accounts (as described in the Scope Contingencies
section).
<PAGE>
(GRAPHIC OMITTED)
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. Once the user is authenticated, the Login module will set
the appropriate security settings for the user so that s/he has access
to the appropriate areas within the system. For security reasons the
login module will lock the user account if the user fails to provide a
valid user-name and password for a predetermined number of times.
6) Navigation
The Navigator tool and the associated functionality will be part of
this module. The navigation tool will allow the user to visually see
the relational product data within the Juggernaut central database. The
user will be able to navigate the products categories listed within the
Juggernaut database and see a list of all the items that belong in that
category. The navigation tool will also allow the user to restrict the
number of associated product relationships that are visible.
7) Search
The search mechanism is tightly integrated with the navigation tool.
The user is able to perform sophisticated keyword searches with the
help of a 3rd party search engine integrated within the Juggernaut
framework. The search tool will generate a list of products matching
the search request. They system will automatically generate a pull-down
list of appropriate choices based on the user's initial request in the
search field, in order to avoid too many results.
8) [ ]
During the user's visit to the Juggernaut web-site, s/he may [ ] The
function of this module is to keep track of the [ ] the system and
available to [ ]. Depending on the [ ] required by the user, this
module would determine which [ ] is the most [ ] the user and [ ] The
algorithm that determines which is the most [ ] will take into account
variables such as: [ ]
This module will also log information that will assist in [ ]
The logged information will [ ] Information such as the
[ ] will be recorded.
<PAGE>
(GRAPHIC OMITTED)
Scope for Launch 1 Development: Continued
- --------------------------------------------------------------------------------
Technical Scope Launch 1: (Continued)
9) [ ]
The purpose of the [ ] module is to [ ] Logging functions will also be
included as part of the [ ] module. The main programmatic interfaces
provided by the [ ] module will be: create a [ ] will be responsible
for development of the [ ] Module. USI is responsible for integrating
the [ ] module into the system.
10) Transaction
This module is the key to the purchase process. The main functions
provided by this module would include: inventory checking, temporary
product holding, calculation of total and sub-totals, taxes and
shipping costs, payment authentication (credit-card authentication,
Juggernaut points authentication), inventory update, fulfillment
notification, transaction completion, financials update, and [ ]
update.
Initially the only methods of payment available to users will be credit
cards, pre-payments and Juggernaut points. During later phases other
payment methods such as virtual checks, CODs, and checks can be
incorporated into the system.
The Transaction module will determine whether there is enough inventory
within our system to decide what shipping options to show to the user.
If the inventory is insufficient, then the system will only show
shipping options that take into consideration the delay necessary to
obtain the products by the fulfillment center. Also, once the user
decides to pay for those products and goes to the credit card payment
screen, the transaction module will put on hold the quantity of
products chosen by the user.
If after a pre-determined amount of time the user still has not
completed the transaction, the transaction module will remove the
temporary hold on the product. Once the user has decided to pay for the
product and has chosen the shipping address, the transaction module
will determine the tax and shipping costs associated with purchase and
present a final total amount bill with the appropriate line items.
11) Accounting Interface
This module will provide programmatic interfaces to accounting packages
and tools that are used by management and partners. Several key
functions that this module provides are: Juggernaut points management,
[ ], product sales, returns, refunds, partner commissions, and partner
product sales. The module needs to communicate with several other
modules in order to collect the information necessary to provide data
for regular accounting reports.
Billing, collections, accounts payable, accounts receivable, and other
general ledger items are not a part of this module.
<PAGE>
(GRAPHIC OMITTED)
- --------------------------------------------------------------------------------
Scope for Launch 1 Development: Continued
Technical Scope Launch 1: (Continued)
12) Category Management
The Category Management module will be the primary interface between
the management and the underlying data that is being used by the
navigation tool. Programmatic interfaces to functionality such as
category creation, category linking, category description, category
activation, and category inactivation will be supported by this module.
13) Product Management
The Product Management module will be one of the most important modules
of the application. This module will provide programmatic interfaces
for [ ] of product information from partners as well as [ ] Thus,
whenever a partner wants to [ ] in order to make it available to users.
Also, programmatic interfaces for [ ] will be available to allow for
insertion of information about [ ], update information about [ ]
entered into the system, and delete information about [ ] entered into
the system. The [ ] that allows [ ] information about the products [ ]
will work in tandem with the interfaces provided by this module.
14) Fulfillment
The fulfillment module will be tightly coupled with the Transactions
module. Once a user has ordered a product, information about the order
has to be sent to the appropriate vendor or fulfillment center so that
the transaction can move forward. The purpose of this module will be to
establish that channel of communication between the vendor or
fulfillment center. This module will not only pass information to the
vendor or fulfillment center but also receive information about the
shipping status of the product(s). This module will capture all the
necessary information about the delivery of the product(s) so that it
can update the database to reflect the status of the shipment.
Implementation of this module is highly dependent on the level of
automation of each partner's system. The desired level of information
from each partner may not be available online. Thus, the programmatic
interfaces that this module needs to support are: send order
information (quantity, SKU#, shipping address, shipping method,
authorization code, order date), receive shipping information (shipping
date, shipping method, quantity shipped, shipping ID#) and update user
transaction status in the database.
Depending on the number of fulfillment centers or vendors that
Juggernaut needs to integrate with a custom fulfillment process will
have to be developed. Thus, it is possible that the scope of this
module might change based on the partnerships that are established.
<PAGE>
(GRAPHIC OMITTED)
Scope for Launch 1 Development: Continued
- --------------------------------------------------------------------------------
Technical Scope Launch 1: (Continued)
15) Promotions & Advertisement
Juggernaut Management may want to have promotions on certain products
on a seasonal basis or at random because of advertising partnerships
developed with manufacturers. In cases like this, it is necessary to
provide mechanisms through which a product or a group of products can
be associated with discount percentages. This module will allow the
management to create new promotions, modify the parameters of existing
promotions, or inactivate/activate existing promotions.
16) [ ]
The [ ] module will be integrated with the Product module.
The [ ] module will support a [ ]. The programmatic
interfaces that the [ ] module needs to support are:
[ ]
The [ ] module will be integrated with the product classification
scheme used by the Product module. Thus, when a user navigates or
searches for products, the [ ] items will be part of the item list that
the user sees. Obviously there will be a way to distinguish an [ ] item
versus a [ ] on the user interface.
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. These business rules
will most likely be in the form of [ ]
The business rules module will encapsulate individual business rules
and provide an interface to those individual business rules. Thus,
there will be as many programmatic interfaces that the business rules
module exposes as there are business rules.
The business rules module will be developed in such a way so as not to
[ ] within the business rule. All the [ ] will be stored in a
Juggernaut system table so that it is easier to [ ]
This module is dependent on several third-party software packages.
Based on the implementation requirements of these packages, it may not
be possible to create a separate Business Rules module. If this is the
case, Business Rules may already be built into the specific functional
modules themselves.
<PAGE>
(GRAPHIC OMITTED)
Scope for Launch 1 Development: Continued
- --------------------------------------------------------------------------------
Technical Scope Launch 1: (Continued)
18) [ ] Tool Set
The following programmatic interfaces will be supported for the
internal [ ] system: login, logout, [ ] user's profile and transaction
history, [ ] user's profile, all the functionality supported by the
Navigation and Search modules, [ ], create a temporary work area, add
product items from the search result list to the work area, remove
items from the work area, and [ ] from the work area to the [ ]
19) Profile/Personalization
The profile/personalization module will start to become useful once the
Juggernaut system has a critical mass of information in terms of
products, users, and transactions. Until then the amount of
personalization that can be accomplished is minimal. As a result, the
purpose of this module will be to put into place underlying data
structures to support personalization in [future phases] of the
project. Several 3rd party products are available that will be
evaluated before implementing the personalization module. The purpose
of the personalization module will be to collect as much user
information as possible through active (user registration, surveys,
comments, etc.) and passive (click-through analysis, purchase history,
etc.) data gathering techniques, and, based on that information,
provide product recommendations and advertisements to the user.
The functions provided by this module will be: modify profile,
recommend product/service, generate user affinity groups, and match
user with affinity group.
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. This module will be coupled with the data access
layer in order to capture the state-information and the process/task
information before the information is logged. There will only be one
programmatic interface provided by this module which will capture all
the necessary information about the error or the process and log it to
an appropriate table in the database.
<PAGE>
(GRAPHIC OMITTED)
- --------------------------------------------------------------------------------
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. For
example, users will be sent an email once they register on Juggernaut,
after they make a purchase, to remind them about their Juggernaut
points, to remind them of special promotions, etc. The email portion of
this module will allow for creation of mailing lists, messages, and
schedule the sending of those messages. The module will incorporate a
communication interface to a farm of SMTP servers so that fast delivery
of emails is ensured.
The messaging portion of the module will have interfaces to create
static messages on pre-determined portions of the user interface so
that the user can be notified of important information. For example,
the messaging module will communicate with the accounting module to
collect information about the user's Juggernaut points and pass it on
to the user interface module to be displayed appropriately. Other
instances of messaging would be to let the user know of any system
level changes that were about to be made or additional functionality
that have been added to the system that we want to highlight.
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.
The programmatic interfaces supported by the Customer Support module
are: create a new user, modify existing user profile (after verifying
that the user is who they claim to be), activate/inactivate user
account, look-up transaction status, cancel product delivery, process
product returns/refunds, enter comments, view user's transaction
history, view user's Juggernaut points, and modify user's Juggernaut
points.
The customer support module will interface with the login and
registration modules in order to provide the same level of security as
the User web-site.
23) Internal System Task Scheduler
The System Scheduler will support the execution of recurring tasks
within the system, based on management decisions. For example, it will
be the Scheduler module's responsibility to do a backup of the database
at a predetermined time. Certain utilities built into the operating
system (such as [ ]) will be used to assist in the development of this
module.
<PAGE>
(GRAPHIC OMITTED)
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 [ ].
25) System Monitor
The System Monitor module will provide the heartbeat of the system. The
complex network system, large-scale database, and production servers
will be constantly monitored by this module with the help of tools
available for companies such as BMC Software, Platinum Software, and/or
Computer Associates.
The main function of this module will be to keep a tab on various
aspects of the system resources such as disk space, network traffic,
database services, web-server services, hardware systems, security
services (hacks, denial of service attacks), etc. If the module detects
any problems it will warn and alert appropriate operators/managers
based on the priority of the problem. These alarms will either be sent
via email or pagers based, once again, on the priority of the problem.
<PAGE>
(GRAPHIC OMITTED)
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. [ ] system
o For Launch 1, we will be focusing on individuals and small/home
businesses.
o We will prepare for [ ] now, and a full implementation of this
feature will be a part of future site releases.
2. [ ]
o [ ]
o [ ]
3. Call-Center / Help Desk Module
o USI is not responsible for the creation of the call-center, and this
module will be outsourced to a third-party.
o For Launch 1, the call center will be used for general customer
support only.
o The [ ]
4. Purchasing Escrow
o We will be designing the system to support purchasing escrow.
o Escrow will be outsourced to a third-party for Launch 1.
5. Recurring Purchases / Scheduling Tool
o Product tracking for Launch 1 will be implemented by linking to the
UPS or FedEx site, provided the necessary partnership with UPS or
FedEx is established 2 months prior to the Launch 1 date.
o A calendar with a recursive purchasing feature, personal dates, and
reminders will be implemented during future launches of the site.
6. [ ]
o For Launch 1:
o Database fields will be built to accept [ ] information
o Technical architecture is being built to prepare for [ ]
o Delivery and logistics will be outsourced to a third party
o In the future:
o [ ] content will be offered and marketed
o Choice of [ ] on Home Page
7. Fulfillment
o Implementation of the fulfillment module is highly dependent on the
level of automation of each partner's system. The desired level of
information from each partner may not be available online.
8. Services
o Services will be offered through our database during future site
releases.
<PAGE>
(GRAPHIC OMITTED)
- --------------------------------------------------------------------------------
Scope Contingencies: Continued
9. Product Image Database
o A Product Image Database, defined as being a database of images
supplied by vendors [ ] will be created for Launch 1.
o Pending an appropriate number of images is collected from vendor
partnerships, the Product Image Database [ ] on Launch 2.
10. [ ]
o The concept of purchasing a [ ] will be explored in qualitative and
quantitative surveying of [ ] during the development of Launch 1.
o If the concept is proven feasible and desirable among the user-base,
[ ] will be phased in for certain products on a case-by-case basis
starting 2-4 months after the hard launch date.
11. Hosting / Site Maintenance
o The USI Production Team will interface with a third-party (new
Juggernaut venture or other) to integrate the data-warehousing of
the Juggernaut site.
12. Business Rules Module
o The Business Rules module is dependent on several third-party
software packages. Based on the implementation requirements of these
packages, it may not be possible to create a separate Business Rules
module.
13. [ ]
o Offering consumers the choice of [ ] per product will be
tested in Market Research during the development of Launch 1.
o If the concept is proven desirable by the user-base, [ ] will be
recruited after [ ] are in place.
<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 1of 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.
<PAGE>
(GRAPHIC OMITTED)
- --------------------------------------------------------------------------------
Production Team:
Total people: 38
Technical: 21
Creative: 10
Other: 7 (Project Managers, Taxonomist, Asset Manager, Copywriters,
etc.)
Total Team:
1. Alise Spinella, Senior Project Manager
2. Owen Gottleib, Project Manager
3. Ashley Matsui, Project Coordinator
4. Robert Strong, Asset Manager
5. Library Scientist, Ed Pai
6. Dean Hollander, Copywriter
7. Gadi Dechter, Copywriter
8. Ajit Prabhu, Lead Technical Consultant
9. Pranav Parekh, Lead System Architect
10. Henrik Javin, System Architect
11. Lishin Lin, Lead System Architect
12. Paul Krzyzanowski, Software Engineer
13. Bob Fahey, Database Modeling and Design
14. Eoin Hyden, Network and Systems Architect
15. Zhurong Jin, QA Specialist
16. Karl Siil, Security Specialist
17. Jay Ball, Software Engineer
18. Josh Capitanio, Programmer
19. John Busfield, Software Engineer
20. Mitch Galo, Software Engineer
21. Bala Venkatesan, Financial Application
22. Bidhu Das, Online Catalog Systems
23. Software Engineer ([ ] / Promotions), TBD
24. Software Engineer (Category Management), TBD
25. Software Engineer ([ ] Module), TBD
26. Software Engineer (Personalization Module), TBD
27. Software Engineer (Fulfillment / Shipping), TBD
28. Technical Writer, TBD
29. Dave Wright, Lead Art Director
30. Bronson Smith, Marketing Strategist
31. Chum Wongrassamee, Art Director
32. Felix Haro, Lead Graphic Designer
33. Joanne Minarbi, Lead Graphic Designer
34. Bob Yothers, Graphic Designer
35. Amanda Jesters, Graphic Designer
36. Kristin Binning, Production Artist
37. Jay Sosnicki, Production Artist
38. Jordan Berg, Information Architect Consultant
<PAGE>
(GRAPHIC OMITTED)
- --------------------------------------------------------------------------------
Production Team: Continued
Team Structure:
(people are spread across multiple teams... Please refer to Team Org Chart for
more detail)
Overall Management Team:
o Alise Spinella
o Ajit Prabhu
o Pranav Parekh
o Dave Wright
Cross-Functional Integration Team:
o Alise Spinella
o Robb Kempken
o Bronson Smith
o Dave Wright
o Owen Gottlieb
o Pranav Parekh
Internal Market Research Team:
o Owen Gottlieb
o Ashley Matsui
o Bob Yothers
o Josh Capitanio
Brand / Logo Management:
o Owen Gottleib
o Ashley Matsui
o Dave Wright
All Site Copy:
o Dave Wright
o Bronson Smith
o Gadi Dechter
o Dean Hollander
Information Architecture Development:
o Tommy Wong
o Jordan Berg
o Ed Pai
o Felix Haro
o Joanne Minarbi
o Bob Yothers
o Robert Strong
<PAGE>
(GRAPHIC OMITTED)
Production Team: Continued
- --------------------------------------------------------------------------------
Database Module Team:
o Pranav Parekh
o Bob Fahey
o Karl Siil
Application Development Team:
o Login Module / Registration Module: Paul Krzyzanowski
o [ ] Module: Software Engineer #1
o Search Integration Module: Mitch Galo
o Product Category Navigation Module: Software Engineer #4
o Category Management Module: Software Engineer #2
o Product Info / Pricing Calculation Module: Software Engineer #1
o [ ] Module: Paul Krzyzanowski
o Transaction Module: Lishin Lin
o Financial / billing Module: Bala Venkatesan
o Accounting / [ ]: Software Engineer #8
o [ ] Module: John Busfield
o Mail / Messaging Module: Bidhu Das
o Promotions Module: Software Engineer #1
o Profile / Personalization Module: Bidhu Das
o [ ] Tool Set: Henrik Javin
o Decision Support / Data Warehousing: Bidhu Das
o Customer Support Module: Software Engineer #2
o Scheduler: Software Engineer #4
o System Monitor Module: Pranav Parekh
o Online Help: Software Engineer #5
o Security: Karl Siil
o Fulfillment and Shipping Feedback Module: Software Engineer #9
o Error Module:
o Lishin Lin
o Jay Ball
o User Interface Integration: Josh Capitanio
o Infrastructure Development: Eoin Hyden
o Database Administration: Vladimir Bruha
<PAGE>
(GRAPHIC OMITTED)
- --------------------------------------------------------------------------------
Production Team: Continued
User Application Interface Design:
o Jordan Berg
o Chum Wongrassamee
o Felix Haro
o Joanne Minarbi
o Bob Yothers
o Amanda Jesters
o Kristin Binning
o Jay Sosnicki
o Josh Capitanio
Quality Assurance Team:
o (All team for each responsible module)
o Zhurong Lin
o QA2 - maybe needed
Technical Documentation Team:
o Full-time Technical Writer
o Pranav Parekh
o Henrik Javin
o Lishin Lin
o Paul Krzyzanowski
o Bob Fahey
o Eoin Hyden
o Zhurong Jin
o Karl Siil
o Jay Ball
o Technical Writer
[ ] Application Interface Design:
o Tommy Wong
o Chum Wongrossamee
o Joanne Minarbi
o Jay Sosnicki
Interface Design Production Team:
o Chum Wongrassamee
o Amanda Jesters
o Kristin Binning
o Jay Sosnicki
<PAGE>
(GRAPHIC OMITTED)
- --------------------------------------------------------------------------------
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:
Start Date: [ ]
Beta Launch Date: [ ]
- functioning system, Full QA on whole system begins
Launch 1 Date: July 30, 1999 *
- Fully functioning system, access given to the
public
Next Steps toward Launch2:
(The following Next Steps are outside the scope of Launch 1, and would
require a separate Statement of Work agreement between Juggernaut and
USI.)
Continued Focus Group / Marketing Research
Additions/modifications to site's feature set
User Tracking / Reporting
Additional Supplier Partnerships established
Launch 2 Date: [ ]
- Full promotional/marketing/advertising campaign push
* If USI is fully involved in the Quality Assurance of the Juggernaut Web Site
by the launch date of July 30, 1999, 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, not to exceed 2 weeks.
<PAGE>
(GRAPHIC OMITTED)
Milestone Schedule:
- --------------------------------------------------------------------------------
(Please refer to the Production Schedule for additional details)
Focus Group Round 1 Report [ ]
Focus Group Round 2 Report [ ]
Technical Design Document Presented [ ]
Focus Group Round 3 Report [ ]
Buy vs. Build Technical Analysis Report [ ]
Brand Name Presentation [ ]
Final Screen Layouts Approved [ ]
Focus Group Round 4 Report [ ]
Copy Review 1 [ ]
Usability Test Report [ ]
User Interface Design Review 1 [ ]
Quantitative Research Report [ ]
Data Dictionary/Product Categorization Complete [ ]
Technical Integration Report 1 [ ]
All Assets from Partners Delivered [ ]
Copy Review 2 [ ]
User Interface Design Review 2 [ ]
Master Design Doc Complete [ ]
[ ] Review [ ]
Logo Presentation [ ]
Technical Integration Report 2 [ ]
Final Copy Review [ ]
User Interface Design Complete [ ]
Technical Integration Report 3 [ ]
Controlled Launch Date [ ]
Technical Integration Report 4 [ ]
Beta Launch Date: [ ]
Launch 1 Date 7/30
<PAGE>
(GRAPHIC OMITTED)
- --------------------------------------------------------------------------------
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:
----------------------------------------------------------------------
Product Categorization [ ]
----------------------------------------------------------------------
Technical / Creative Integration [ ]
----------------------------------------------------------------------
Database [ ]
----------------------------------------------------------------------
Database Access Layer [ ]
----------------------------------------------------------------------
Login Module [ ]
----------------------------------------------------------------------
Registration Module [ ]
----------------------------------------------------------------------
Profile/Personalization module [ ]
----------------------------------------------------------------------
[ ] Module (outsourced to [ ])
----------------------------------------------------------------------
Search Integration Module [ ]
----------------------------------------------------------------------
Customer Support Module [ ]
----------------------------------------------------------------------
Category Management Module [ ]
----------------------------------------------------------------------
Mail/Messaging Module [ ]
----------------------------------------------------------------------
Product Info/Pricing Calculations Module [ ]
----------------------------------------------------------------------
[ ] Module [ ]
----------------------------------------------------------------------
Transaction Module [ ]
----------------------------------------------------------------------
Financial/Billing Module [ ]
----------------------------------------------------------------------
Accounting / Commission Module [ ]
----------------------------------------------------------------------
Online Help [ ]
----------------------------------------------------------------------
[ ] Module (outsourced to [ ])
----------------------------------------------------------------------
System scheduler module [ ]
----------------------------------------------------------------------
Promotion module [ ]
----------------------------------------------------------------------
[ ] Tool Set [ ]
----------------------------------------------------------------------
System Monitor Module [ ]
----------------------------------------------------------------------
Security [ ]
----------------------------------------------------------------------
Fulfillment and Shipping Feedback [ ]
----------------------------------------------------------------------
Error Module [ ]
----------------------------------------------------------------------
User Interface Programming [ ]
----------------------------------------------------------------------
Infrastructure Development [ ]
----------------------------------------------------------------------
Quality Assurance [ ]
----------------------------------------------------------------------
Documentation [ ]
----------------------------------------------------------------------
SUBTOTAL [$ ]
----------------------------------------------------------------------
<PAGE>
(GRAPHIC OMITTED)
Production Cost Estimate for Launch 1: Continued
- --------------------------------------------------------------------------------
Creative Development Costs:
-------------------------------------------------- --------------------
Development / Integration Effort: Estimated Cost:
-------------------------------------------------- --------------------
Focus Group driven Design Revisions [ ]
-------------------------------------------------- --------------------
Information Architecture Development [ ]
-------------------------------------------------- --------------------
Interface Design [ ]
User Interface
[ ] Interface
Global Management 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
-------------------------------------------------- --------------------
Marketing Research Company Management [ ]
-------------------------------------------------- --------------------
Logo/Brand Company Management [ ]
-------------------------------------------------- --------------------
Copywriting [ ]
-------------------------------------------------- --------------------
SUBTOTAL [$ ]
-------------------------------------------------- --------------------
ESTIMATED TOTAL [$ ]
NEGOTIATED TOTAL $3,600,000
<PAGE>
(GRAPHIC OMITTED)
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
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.
<PAGE>
(GRAPHIC OMITTED)
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.
<PAGE>
(GRAPHIC OMITTED)
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 (Keith Skelton) Hiring Plan due by [ ]
------------------------------------------- -------------------------------- ------------------------------
Juggernaut Management Hiring Juggernaut (Keith Skelton) [ ]
Immediate Needs:
- Supplier Devlopment and
Mangement Team
- [ ] Manager
- Other Business Strategists
------------------------------------------- -------------------------------- ------------------------------
Juggernaut Management Hiring Juggernaut (Keith Skelton) [ ]
Secondary Needs:
- VP Finance
- Customer Support Director
- [ ] System Manager
------------------------------------------- -------------------------------- ------------------------------
Supplier Partnerships Identified Juggernaut (John Gamba) [ ]* *
------------------------------------------- -------------------------------- ------------------------------
Technical Due Diligence for Supplier USI Development Team (Ajit [ ] after Supplier
Partnerships * * * Prabhu) with assistance from Partnerships are identified,
Juggernaut (John Gamba, Randy or within a similar
Ahrens) reasonable timeframe. (Not
to exceed [ ] total.)
(Upon completion of the
technical due diligence as
approved by USI, USI will be
given [ ] of development
time for each partner.
Integration development will
happen concurrently across
partners.)
------------------------------------------- -------------------------------- ------------------------------
</TABLE>
<PAGE>
(GRAPHIC OMITTED)
Risks / Critical Path Deadlines: Continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
------------------------------------------- -------------------------------- ------------------------------
Bank Partnership Juggernaut (John Gamba, Keith [ ]
Skelton, VP of Finance)
------------------------------------------- -------------------------------- ------------------------------
Accounting Software Package Decision Juggernaut (John Gamba) [ ]
(Allowing at least [ ] of
development time before
launch)
------------------------------------------- -------------------------------- ------------------------------
Legal Questions Juggernaut (John Shulman) [ ]
------------------------------------------- -------------------------------- ------------------------------
Business Strategy: Juggernaut and USI Business [ ]
- [ ] details Development Team
- [ ] (John Gamba, Robb Kempken, TBD
- Customer Care Strategy Business Strategists)
- Privacy/Security Strategy
- Promotional Strategy/Juggernaut
Points
- Default Values
------------------------------------------- -------------------------------- ------------------------------
Location for [ ] Center, Call Juggernaut (John Shulman) [ ]
Center and Hosting Facility
------------------------------------------- -------------------------------- ------------------------------
Privacy / Security Compliance Information USI Production Team [ ]
to production team (Owen Gottlieb)
(Trust E, ISCA, BBBOnline)
------------------------------------------- -------------------------------- ------------------------------
</TABLE>
* * This supplier partnership deadline will be fulfilled when Juggernaut
delivers the following information per partner to USI:
1. Supplier Name and general contact information
2. Technical contact information
3. Contract status, interest level and time estimates for contract
signing and integration
4. Category
5. Potential quantity of SKUs
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
<PAGE>
(GRAPHIC OMITTED)
Risks / Critical Path Deadlines: Continued
- --------------------------------------------------------------------------------
* * * Technical Due Diligence is defined as answers to the following questions:
(Continued on next page...)
1. File format Information:
o Sample Products
o Pricing
o Inventory Files
o Additional fields per product (manufacturer information, warranty
data, specials, promos, etc.)
o Product information display concerns
2. Category Information:
o Organization of data
o Organizational structure protocols
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 Protocol for inventory, pricing, and time-to-ship
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
<PAGE>
(GRAPHIC OMITTED)
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 Firewall (if Internet) configuration requirements
o Data encryption requirements
<PAGE>
(GRAPHIC OMITTED)
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 1of 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 1of this document.
o Upon receipt of a Change Request, USI will present an updated Budget
Estimate and Production Schedule for Juggernaut review. Signed approval of
the updated Budget Estimate and Production Schedule will mark the beginning
of production efforts toward the new scope.
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.
<PAGE>
(GRAPHIC OMITTED)
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 For the Launch 1 deadline, USI is responsible for integrating [ ] if
Juggernaut establishes these partnership contracts prior to the Critical
Path Date of [ ]
o The time/budget estimates are dependent on the number of partnerships
Juggernaut establishes for Launch 1. If more than [ ] are established for
Launch 1, a Change Order may be required from Juggernaut.
o If USI can not move forward with technical due diligence during the
integration of the [ ] because of partnerships issues such as contract
agreements or other political reasons, the [ ] time-limit count down will
be halted until the contract or political issue is resolved between
Juggernaut and the [ ]. Once the issue is resolved and USI can continue
with the technical due diligence process, the [ ] time limit count-down
will commence.
o If Juggernaut identifies at least [ ], and 1) those [ ] can be reasonably
integrated, 2) Juggernaut supplies the appropriate technical contact
information by [ ] and contracts are finalized to the point where technical
due diligence is possible during the technical due-diligence process, 3)
technical due diligence is done within the Critical Path Deadline described
above, 3) USI can not fully integrate each of the [ ] within [ ], and 4) no
change order regarding or relating to integration efforts is agreed to by
both parties, then USI will continue to work beyond the July 30, 1999
launch date at no additional cost to Juggernaut.
o The Production Cost Estimate does not include costs for the following,
which will be billed separately with prior approval from Juggernaut:
- All costs associated with [ ] (Focus Group / Market Research
companies) relating directly to Market Research efforts
- All costs associated with [ ] (assisting with Partnership Strategy)
- All costs associated with [ ] (Branding company)
- All costs associated with Juggernaut Logo development
- All costs associated with [ ]
- Any and all fees associated with the Trademark process for the
Juggernaut brand and logo
- All Business Plan and Juggernaut operational infrastructure costs -
All partnership development costs
- All costs associated with Site Hosting and Maintenance
- All costs associated with building/creating a Help Desk call center
- USI MIS employees consulting with Juggernaut, to be billed on a Time &
Material basis
- All costs associated with the hiring of Juggernaut employees,
including recruiting fees
- Ongoing [ ] Application Development.
- Any and all other development costs for future site launches.
<PAGE>
(GRAPHIC OMITTED)
Production Plan / Budget Contingencies: Continued
- --------------------------------------------------------------------------------
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.
<PAGE>
(GRAPHIC OMITTED)
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.
<PAGE>
Stu Levin
Chromosome, LLC
2901 W. Alameda Avenue
7th Floor
Burbank, CA 91505
April 6, 1999
Dear Stu :
As discussed, we need written confirmation for Chromosome LLC's
agreement to pay for services provided and to be provided by US Interactive on
Citigroup projects, the small business project ("Small Business") and Citigroup
CLA ("CLA").
To date approximately $95,000.00 (estimate) of professional services
and out of pocket expenses have been incurred on Small Business and $60,000.00
on CLA.
Chromosome LLC hereby agrees to continue to pay for time and materials
on these projects not to exceed a limit of $300,000.00. If that amount is
reached, US Interactive and Chromosome will mutually establish new targets and
maximums for review before going forward. USI will send biweekly reports, adding
and subtracting resources as requested by Chromosome.
Please provide me with your written authorization below.
Thank you,
Dena Kendros
VP Business Operations
Agreed:
--------------------------
Stu Levin
Chromosome, LLC
<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
August 4, 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.
-------------------------------
BDO Seidman, LLP
Los Angeles, California
August 5, 1999
