<PAGE>
As filed with the Securities and Exchange Commission on May 19, 1999
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
REGISTRATION STATEMENT
on Form S-1
Under
THE SECURITIES ACT OF 1933
U.S. INTERACTIVE, INC.
(Exact name of registrant as specified in its charter)
Delaware 7379 22-3316696
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code No.) Identification No.)
2012 Renaissance Boulevard
King of Prussia, PA 19406
(610) 313-9700
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
-----------------------
Stephen T. Zarrilli
Chief Executive Officer
U.S. INTERACTIVE, INC.
2012 Renaissance Boulevard
King of Prussia, PA 19406
(610) 313-9700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------------
<TABLE>
<CAPTION>
Copies of all communications to:
<S> <C> <C> <C>
James A. Ounsworth, Esq. N. Jeffrey Klauder, Esq. Lawrence F. Shay, Esq. Stephen A. Riddick, Esq.
Safeguard Scientifics, Inc. Morgan, Lewis & Bockius LLP Dilworth Paxson LLP Brobeck, Phleger &
800 The Safeguard Building 1701 Market Street 3200 Mellon Bank Center Harrison LLP
435 Devon Park Drive Philadelphia, Pennsylvania 1735 Market Street 701 Pennsylvania Avenue, N.W.
Wayne, Pennsylvania 19087 19103-2921 Philadelphia, PA 19103-7595 Washington, DC 20004
(610) 293-0600 (215) 963-5694 (215) 575-7036 (202) 737-6625
</TABLE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement. If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
====================================================================================================================================
Proposed maximum aggregate Amount of
Title of each class of securities to be registered offering price (1) (2) registration fee
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock,
par value $.001 per share..................... $65,000,000 $18,070
====================================================================================================================================
</TABLE>
(1) Includes shares which the underwriters will have the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) 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>
Explanatory Note
This Registration Statement contains two forms of prospectus. One will
be used in connection with an offering of the registrant's common stock to the
general public and the other will be used in the Directed Share Subscription
Program offering of the registrant's common stock to shareholders of Safeguard
Scientifics, Inc. The prospectuses will be identical except that a letter to
shareholders of Safeguard Scientifics, Inc. detailing the procedures for the
Directed Share Subscription Program will be bound to the cover of the prospectus
used in that program. The letter to shareholders of Safeguard Scientifics, Inc.
is filed as Exhibit 99.1 to this Registration Statement.
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to Completion
May 19, 1999
_________ Shares
U.S. INTERACTIVE, INC.
Common Stock
We are a leading provider of Internet professional services helping
companies take advantage of the business opportunities presented by the
Internet.
We and our selling stockholders are offering ___________ shares of our
common stock in an initial public offering. We anticipate that the initial
public offering price will be between $_________ and $_________ per share. We
intend to apply for quotation of our common stock on the Nasdaq National Market
under the symbol "USIT." The market price of our shares of common stock after
this offering may be higher or lower than the initial public offering price.
Investing in our common stock involves risks. See "Risk Factors"
beginning on page 9.
-----------------------
Per Share Total
--------- -----
Public Offering Price............................. $ $
Underwriting Discount............................. $ $
Proceeds to U.S. Interactive...................... $ $
Proceeds to Selling Stockholders.................. $ $
At our request, the underwriters have reserved _____________ shares of
our common stock for sale at the public offering price to our employees,
directors and other persons with relationships with us. See "Plan of
Distribution." As part of this offering, we are offering __________________
shares of our common stock at the public offering price to certain shareholders
of Safeguard Scientifics, Inc. See "The Directed Share Subscription Program."
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
We have granted the underwriters a 30-day option to purchase up to
____________ additional shares of our common stock at the initial public
offering price to cover any over-allotments.
We expect to issue these shares on ____________________________, 1999.
BT Alex. Brown
Lehman Brothers
Adams, Harkness & Hill, Inc.
___________, 1999
<PAGE>
[Artwork appears here]
<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.
The Company
Our Business
We are a leading 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:
o better service customers and increase revenue opportunities
o target, attract and communicate with prospective customers more
effectively
o increase operational efficiencies and reduce costs
o better utilize the intellectual capital of its organization
o streamline processes between the enterprise and its trading
partners
We deliver our services through the application of our proprietary
development plan, e-Roadmap(TM). Our e-Roadmap development plan incorporates the
appropriate combination of skill sets that enable us to offer defined service
offerings. Our defined service offerings are primarily delivered across our four
practice areas to create a customized solution for each of our clients. Our
practice areas include:
o Electronic Commerce
o Digital Marketing
o Enterprise Relationship Management
o Knowledge Management
These services utilize our three-phase IVL Methodology(TM) and our
client-specific extranet, which we call "CAPTURE." IVL, which stands for
Innovation, Validation and Launch, provides the implementation phases necessary
to ensure efficient, high quality delivery of Internet business solutions.
CAPTURE serves as the communications center for our client engagements and
enables our clients to monitor and modify an engagement's direction and scope on
a real-time, iterative basis. We believe this provides our clients with a higher
degree of confidence that the ultimate deliverables will meet their
expectations.
We have performed over 400 client engagements to date for clients such
as adidas, Deloitte Consulting LLP, Disney Online, GeoCities, Royal Caribbean
International, Sprint and Toyota.
Our Market Opportunity
The rapid emergence and widespread adoption of the Internet are
changing the way consumers and organizations communicate, share information and
conduct business. Businesses are attempting to utilize innovative Internet
strategies to develop a competitive advantage to:
o attract and retain profitable customers
o lower sales costs
o improve operational efficiencies
o strengthen supply chain partner relationships
o improve communications
However, many of these 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 $7.4 billion in
1998 to $43.7 billion in 2002.
<PAGE>
Our Strategy
Our strategy is to strengthen our position as a leading provider of
Internet-based business solutions. Key elements of this strategy include:
o increasing the size and number of engagements with our clients
o enhancing our knowledge management and distribution capabilities
o hiring and retaining the industry's most skilled professionals in
the areas of strategic business consulting, digital marketing and
Internet technology
o strengthening Internet technology and infrastructure relationships
with leading companies such as Microsoft, BroadVision, Digex,
Trilogy and Vignette
o expanding geographically into targeted metropolitan markets, both
domestically and internationally
Additional Information
We were formed in August 1991 and commenced our operations in May 1994.
We changed our name 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.
5
<PAGE>
The Offering
Common stock offered by U.S. Interactive...................
Common stock offered by the selling stockholders ..........
Common stock outstanding after this offering...............
Use of proceeds............................................ Capital investments,
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.
Proposed Nasdaq National Market symbol..................... "USIT"
Common stock outstanding after this offering:
o is based on the number of shares outstanding as of May 1, 1999
o assumes the conversion of all outstanding shares of series A, B, C
and D preferred stock into an aggregate of 5,341,096 shares of
common stock at the closing of this offering
o excludes 2,275,254 shares of common stock issuable upon the
exercise of stock options outstanding at May 1, 1999, at a
weighted average exercise price of $3.58 per share
o excludes 3,635,440 shares of common stock reserved for future
grant under U.S. Interactive's employee benefit plans
o excludes 70,000 shares of common stock issuable upon the exercise
of a warrant outstanding at May 1, 1999, at an exercise price of
$3.50 per share
The Directed Share Subscription Program
As part of this offering, we are offering shares of our common stock to
certain shareholders of Safeguard Scientifics, Inc. in a directed share
subscription program. The program is described in greater detail below under the
heading "The Directed Share Subscription Program."
--------------------
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.
--------------------
6
<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.
Digital Evolution was a professional services company that provided development
services for Internet, intranet and extranet applications. 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 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 $_________ and the application of the net proceeds as
described in "Use of Proceeds," after deducting the underwriting discount and
estimated offering expenses.
<TABLE>
<CAPTION>
Year
May 1, 1994 Ended
(inception) to December Three Months Ended
December 31, Year Ended December 31, 31, March 31, (unaudited)
------------- -------------------------------------- ---------- ---------------------------
1994 1995 1996 1997 1998 1998 1998 1998 1999
------ ------ ------ ------ ----- ------ ---- ------ -----
(Unaudited) (Pro Forma) (Actual) (Pro Forma) (Actual)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(in thousands, except per share data)
Consolidated Statements of
Operations Data:
Revenue...................... $200 $935 $1,950 $6,061 $13,636 $16,446 $2,378 $4,178 $6,123
Operating costs and expenses:
Project personnel and related
expense................... 177 544 945 2,841 7,405 9,995 1,249 2,656 3,071
Management and administrative 17 316 1,012 2,196 7,876 9,653 690 1,507 2,683
Marketing and sales....... -- 5 277 1,013 2,054 2,392 351 500 723
Depreciation and amortization 6 17 61 269 4,592 8,704 91 2,141 2,496
-------- --------- ------- ------ -------- -------- ------ ------ ------
Total operating expenses... 200 882 2,295 6,319 21,927 30,744 2,381 6,804 8,973
-------- ------- ----- ----- ------ -------- ------ ------ ------
Income (loss) from operations -- 53 (345) (258) (8,291) (14,298) (3) (2,626) (2,850)
Other income (expense), net.. -- (2) 235 (32) (152) (149) (17) (14) (92)
-------- -------- -------- -------- ----- -------- ------ ------ ------
Income (loss) before income tax
expense...................... -- 51 (110) (290) (8,443) (14,447) (20) (2,640) (2,942)
Income tax expense........... -- 13 19 -- -- -- -- -- --
-------- ------ ------- -------- ------- --------- ------ ------ ------
Net income (loss)............ -- 38 (129) (290) (8,443) (14,447) (20) (2,640) (2,942)
Accretion of mandatorily
redeemable preferred stock to
redemption value............. -- -- -- -- (625) (852) -- (103) (374)
-------- -------- -------- -------- ----- -------- ------ ------- ------
Net income (loss) attributable
to common stockholders....... $ -- $ 38 $ (129) $ (290) $(9,068) $(15,299) $ (20) $(2,743) $(3,316)
======= ======== ======== ======== ======= ========= ====== ======== ========
Net income (loss) per
common share:
Basic and diluted............ $ -- $ .01 $(.03) $(.06) $(1.36) $(1.73) $ -- $(.30) $(.40)
======= ======== ======== ======= ======= ========= ====== ======== ========
Weighted average shares
outstanding used in the loss
per common share calculation:
Basic and diluted............ 2,813 2,813 4,486 4,737 6,670 8,862 4,737 9,121 8,249
</TABLE>
7
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<TABLE>
<CAPTION>
March 31, 1999
-------------------------------------
Pro Forma,
Actual Pro Forma As Adjusted
------ --------- ------------
<S> <C> <C> <C>
Consolidated Balance Sheets Data: (in thousands)
Cash and cash equivalents ....................................................... $ 2,327 $ 2,327 $
Working capital.................................................................. 1,596 1,596
Total assets..................................................................... 25,464 25,464
Mandatorily redeemable convertible preferred stock............................... 17,667 ---
Total stockholders' equity (deficit)............................................. (2,028) 15,639
</TABLE>
8
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making
an investment decision. The risks and uncertainties described below are not the
only ones facing our company. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business
operations.
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 rapid revenue growth has placed significant demands on our
resources. A key part of our strategy is to increase our revenues, both by
hiring more personnel and by acquiring additional companies, which may continue
to place a strain on our resources. Our success depends on our ability to
effectively manage our future growth. To manage any future growth effectively,
we must, among other things, do the following:
o hire, train and retain highly qualified employees
o estimate our project costs and requirements accurately
o efficiently match employees with client engagements
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, as necessary
If we do not effectively manage any future growth, our revenues and
profitability will be materially adversely affected.
Hiring and Retaining Key Personnel and Other Employees -- Our success is
dependent on our personnel, who we may not be able to retain.
Our success depends on the continued employment of our executive
management team. The employment of any of our senior executives could cease at
any time. If one or more members of our executive management team cease to be
employed by U.S. Interactive, we could be materially adversely affected. We are
the beneficiary of key-man life insurance policies with respect to two of our
executive officers.
Additionally, our success depends on our ability to identify, hire,
train and retain individuals who are highly skilled in the Internet and its
rapidly changing technology. There is intense competition in our industry for
qualified personnel. There is currently a shortage of such personnel due to the
rapid growth of the Internet. This shortage is likely to continue for the
foreseeable future. We have had difficulty hiring a sufficient number of
technical employees with certain skills. 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 36.0% of our
9
<PAGE>
revenues, and for the quarter ended March 31, 1999, our five largest clients by
dollar volume accounted for approximately 48% of our revenues. Two of these
clients accounted for 14% and 13% of our revenues in this quarter. We may be
unable to sustain the volume of work we perform for these clients from year to
year. There is a risk that 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. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Overview" and
"Business--Clients" for more information relating to our clients.
Variability of Operating Results -- The variability of our operating results may
adversely affect our stock price.
Our revenue and operating results may continue to fluctuate in the
future. These fluctuations may be significant. We obtain our revenue primarily
from our consulting engagement fees. It is difficult for us to forecast
accurately the frequency and duration of these engagements. We incur expenses,
which are mainly fixed expenses, based on our expectations concerning the costs
of our future engagements. We may not be able to adjust our spending in a timely
manner to compensate for any shortfall in our projected consulting engagements.
In the event of such a shortfall, our expenses as a percentage of our revenue
would increase. Our revenue and 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 the level of demand for our services
o our ability to hire, train and retain qualified personnel
o the amount and timing of client expenditures for our consulting
services
o the amount and timing of our capital expenditures and other costs
relating to the expansion of our operations
o the amortization of goodwill relating to acquisitions
o the introduction of new services and products by us or our
competitors
o our ability to utilize our employees in a cost efficient manner
o our adequacy of loss provisions
o the number of billable days in a quarter
o general economic conditions
We also have experienced seasonality with respect to our revenues that
have 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 engagement or a significant number of
other client engagements are terminated or reduced, we may have a large number
of employees who are not generating revenue.
Most of our client engagements 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 engagement or a significant number of client engagements are
terminated or materially reduced. When a client engagement is completed,
terminated, postponed or materially reduced, we must shift our employees to
other client engagements or they will not be generating revenue. If we do not
use these employees efficiently on other engagements, our revenues and
profitability will decrease.
10
<PAGE>
Fixed-Price Contracts -- We have many fixed-price contracts which creates a risk
that the costs we incur in performing these contracts will exceed the revenues
we will receive for these contracts.
For the three months ended March 31, 1999, approximately 83% of our
revenue was derived from fixed-price contracts. There are many risks and
difficulties associated with fixed-price contracts. To achieve profitability
from fixed-price contracts, we must, among other things:
o accurately estimate the resources required to perform these contracts
o complete our engagement on a timely basis
o effectively manage our client's expectations
o complete the engagement within budget and to our client's
satisfaction
If we do not successfully accomplish these goals, we could be exposed
to cost overruns and penalties. If this were to occur in connection with a large
engagement or a sufficient number of engagements, our revenues and profitability
would decrease.
Client Expectations -- If we fail to meet our clients' expectations, we could
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 damaged if we fail to meet a
client's expectations. This could adversely affect our ability to attract new
business from that client or others. In addition, some clients might sue us in
an attempt to collect monetary damages. If these events were to occur, our
revenues, profitability and financial condition may be materially adversely
affected.
Limited Management History -- We have experienced recent significant changes in
our senior management team, and our current senior mangement team is unproven.
Our success depends on the ability of our management team to work
together efficiently. We have experienced significant recent changes in our
senior management team. Larry Smith, one of our co-founders, resigned as Chief
Executive Officer in January 1999 and as a director in May 1999. Richard
Masterson, one of our co-founders, resigned as President and director in May
1999.
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. Philip L. Calamia, who has been with U.S.
Interactive since December 1996, most recently as Corporate Controller, was
promoted to Chief Financial Officer in April 1999. Michael M. Carter, who has
been with U.S. Interactive since April 1998, most recently as Director of
Corporate Marketing, was promoted to Vice President of Marketing in December
1998. Our business, revenues, profitability and financial condition will be
materially adversely affected if our new management team does not manage our
company effectively.
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History of Losses -- We have a history of losses, and we may never achieve
significant or sustained profitability.
Since our inception, we have incurred significant losses. As of March
31, 1999, we had accumulated losses of approximately $11.8 million. We incurred
net losses of $2.9 million for the three months ended March 31, 1999 and $8.4
million for the year ended December 31, 1998. Our revenue may never be
sufficient for us to recognize a profit. We intend to continue to make
significant investments in:
o the development of our infrastructure
o marketing and sales
o geographic expansion
As a result, we may continue to incur substantial losses even if our revenues
increase. We may never achieve significant or sustained profitability.
Acquisitions -- We may be unable to effectively solve the financial and other
challenges or avoid unanticipated liabilities arising from our acquisitions.
We merged with Digital Evolution in July 1998, and acquired InVenGen
LLC in March 1999. The process of integrating the operational, managerial and
financial aspects of these and other acquired companies may divert our resources
from our core business. Our ability to complete existing client engagements and
obtain new client engagements 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 Alliances -- We are dependent on strategic alliances, and we may not
be successful in retaining our current alliances or entering into new alliances.
We have established strategic alliances with a number of companies
which give us access to these companies' technology, training and support.
Additionally, these alliances create cooperative marketing opportunities. A
significant portion of our revenue has come, and we expect will continue to
come, from leads generated by these alliances. The agreements or other
understandings underlying these alliances are general in nature and insufficient
to bind the parties. As a result, these alliances can only be expected to
continue for so long as there is a mutual business opportunity and the parties
maintain good working relationships. We may not be able to enter into future
alliances that would afford us access to new technologies that we need to remain
competitive in our industry. If we lose any one of our existing strategic
alliances, or fail to enter into new relationships, our business, financial
condition and results of operations may be materially adversely affected.
Proprietary Technology -- 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 proprietary 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. If that happens,
we may not be able to license those technologies on reasonable terms, or at all.
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 easily 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.
12
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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 interactive agencies
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 profitability will be adversely affected if we do not
compete successfully.
Market Acceptance -- Market acceptance of our industry is uncertain.
Widespread market acceptance of the outsourcing of the design,
development and maintenance of intranets, extranets, e-commerce applications and
web sites 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 intranets, extranets, e-commerce applications or web
sites 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.
13
<PAGE>
Rapid Technological Change -- Our industry is characterized by rapid
technological change, a pace which we may not be able to match.
The market for Internet professional services is characterized by rapid
technological change, including:
o changing client requirements and preferences
o frequent new product and service introductions embodying new
processes and technologies
o evolving industry standards and practices
These changes could render our existing service practices and
methods out-of-date. Our success will depend, in large part, on our ability
to:
o improve on the performance and reliability of existing services
o develop new services and solutions that address increasingly
sophisticated and varied client needs
o respond to technological advances
o respond to emerging industry standards and practices
o respond to the innovations of our competitors
If we do not respond effectively to these developments, our business,
financial condition and results of operations would be materially adversely
affected.
Decline in Internet Usage -- Lack of growth or decline in Internet usage could
cause our business to suffer.
We have derived most of our revenue from projects involving the
Internet. The Internet is rapidly evolving. 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, 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.
14
<PAGE>
Risks Related to the Offering
Shares Eligible for Future Sale -- If our current stockholders sell additional
shares of our common stock, our stock price may decline.
The market price of our common stock could decline as a result of sales
of a large number of shares in the market after this offering, or the perception
that such sales could occur. This may make it more difficult for us to raise
funds through future offerings of our common stock. The shares of our common
stock currently outstanding will become eligible for sale without registration
pursuant to Rule 144 under the Securities Act, subject to certain conditions of
Rule 144. Certain holders of shares of our common stock and all the holders of
our preferred stock outstanding immediately prior to the offering will also have
certain demand and piggyback registration rights enabling them to register their
shares under the Securities Act for sale in certain circumstances. In connection
with the offering, our executive officers and directors and certain of our
stockholders, who will hold a total of ____ shares outstanding after the
offering, have agreed, subject to certain exceptions, not to sell shares of our
common stock for 180 days after the date of this prospectus without the consent
of BT Alex. Brown Incorporated.
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 98 Capital, L.P., collectively, will
own approximately __% of our outstanding common stock. If our controlling
stockholders chose to act together, they may be able to exert considerable
influence over us, including in the election of directors and the approval of
actions submitted to our stockholders. In addition, without the consent of these
stockholders, we may be prevented from entering into certain 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 ___% of the total amount paid by all
investors in U.S. Interactive but will own only ___% of the shares outstanding.
Market Price - The price per share of our common stock in the offering may not
be indicative of the market price that will prevail after the offering.
Since our stock has not yet traded publicly, our management and the
underwriters negotiated the initial public offering price per share of our
common stock. The price they determined may not reflect the market price that
will prevail after the offering. As a result, you could suffer a loss if the
market price of our common stock after the offering is less than the price you
paid per share.
15
<PAGE>
Volatility of Stock Price -- Our common stock price is likely to be highly
volatile.
The public markets often experience extreme price and volume
fluctuations. In some cases these fluctuations are unrelated to the operating
performance of particular companies or industries. New issues and securities of
Internet-related securities in particular are often subject to greater
fluctuation than the stock markets in general. The trading prices of our common
stock may fluctuate widely. This volatility may result from many events directly
involving us, including our operating results, potential litigation, strategic
alliance developments and analysts' statements. Volatility may also result from
developments not directly involving us such as general economic, industry and
market conditions and competitive developments.
Anti-takeover Mechanisms -- Our charter and bylaws and Delaware law contain
provisions that could discourage a takeover.
Our charter and bylaws and Delaware law contain provisions that could
make it more difficult for a third-party to obtain control of U.S. Interactive.
In addition, the Delaware General Corporation Law contains provisions which
impose restrictions on stockholder actions.
16
<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 rapid 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 actions of competitors
o the extent to which we are able to expand our business into new
markets
o our inability to effectively manage our growth
o the level of demand for our services
o changes in our business strategies
o our inability to obtain financing when required
o other factors discussed under "Risk Factors"
17
<PAGE>
USE OF PROCEEDS
The estimated net proceeds to U.S. Interactive from the sale of the
_________ shares of our common stock in this offering are estimated to be
approximately $____ million. This is based on an assumed initial offering price
of $________ per share, after deducting underwriting discounts and estimated
offering expenses payable by us. We will not receive any proceeds from the sale
of our common stock by our selling stockholders.
We intend to use approximately $__ million for various capital
investment activities and the balance of the net proceeds to repay the
outstanding balance under our revolving credit agreement and for general
corporate purposes. In addition, we may use a portion of the net proceeds from
this offering for acquisitions. We currently are not, however, engaged in any
negotiations regarding any acquisition. Pending such uses, we will invest the
net proceeds of this offering in short-term, investment grade securities. The
outstanding balance under our revolving credit agreement was $1.1 million on May
1, 1999. Borrowings under the revolving credit agreement bear interest at
variable rates which averaged 9.0% at May 1, 1999. We may reborrow amounts under
our revolving credit agreement, which will be available for future borrowings
through June 30, 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. We may also face legal
restrictions on the payment of dividends.
THE DIRECTED SHARE SUBSCRIPTION PROGRAM
As part of this offering, we are offering shares of our common stock in
a directed share subscription program to shareholders of Safeguard Scientifics,
Inc., one of our principal stockholders. Only persons who owned at least ___
shares of Safeguard Scientifics, Inc. common stock as of _________, 1999 are
eligible to participate in the program. These shareholders may subscribe for one
share of our common stock for every ___ shares of Safeguard Scientifics, Inc.
common stock held by them, and may not transfer the opportunity to subscribe to
another person except involuntarily by operation of law. Sales under the program
will close on the same day as other sales under this offering. If any of the
shares offered under the program are not purchased by the shareholders of
Safeguard Scientifics, Inc., then Safeguard Scientifics, Inc. or one or more of
its designees will purchase these shares. The purchase price under the program,
whether paid by Safeguard Scientifics, Inc., its shareholders or one of its
designees, will be the same price per share as set forth on the cover page of
this prospectus.
18
<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 upon the consummation
of this offering
o our pro forma capitalization, as adjusted to give effect to the sale
of _____ shares of common stock by us pursuant to this offering and
the application of the estimated net proceeds of approximately $____
million therefrom.
You should read this information together with the consolidated
financial statements and notes to those consolidated financial statements
appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of March 31, 1999
-------------------------------------
Pro Forma,
Pro As
Actual Forma Adjusted
------ ----- --------
(in thousands, except share data)
<S> <C> <C> <C>
Long-term debt and capital lease obligations, current portion.................. $ 462 $ 462
====== ====== ========
Long-term debt and capital lease obligations, net of current portion........... 1,113 1,113
------- ------- --------
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 $0.001 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 ________ shares issued of which _________ shares are outstanding -
pro forma as adjusted...................................................... 10 15 --
Additional paid-in capital..................................................... 16,892 34,554
Deferred stock compensation.................................................... (1,346) (1,346)
Treasury stock; 1,039,311 shares, at cost...................................... (4,812) (4,812)
Accumulated deficit............................................................ (12,772) (12,772) ______
-------- --------
Total stockholders' (deficit) equity................................ (2,028) 15,639 ______
------- ------
Total capitalization................................................ $16,752 $16,752
======= ======= ========
</TABLE>
The foregoing table excludes as of May 1, 1999:
19
<PAGE>
o 2,345,254 shares of common stock issuable upon the exercise of
outstanding warrants and stock options at a weighted average exercise
price of $3.58 per share
o 3,633,441 shares of common stock reserved for future grant under U.S.
Interactive's employee benefit plans.
20
<PAGE>
DILUTION
The net tangible book value of our common stock at March 31, 1999 was
$2.5 million or $.17 per share (assuming the conversion of all shares of
convertible preferred stock into common stock in connection with this offering).
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 for the period immediately prior to this offering.
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. After giving effect to our
sale of __________ shares of common stock offered by this prospectus at the
assumed initial public offering price of $____ per share, after deducting
underwriting discounts and commissions and estimated offering expenses and
giving effect to the conversion of __________ shares of outstanding convertible
preferred stock to be converted in connection with this offering, our net
tangible book value as of March 31, 1999 would have been $__ million, or $__ per
share. This represents an immediate increase in net tangible book value of $__
per share to existing stockholders and an immediate dilution in net tangible
book value of $____ per share to new investors purchasing shares at the assumed
initial public offering price. The following table illustrates this per share
dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial offering price per share........................................ $
Net tangible book value per share as of March 31, 1999.......................... $2,489,000
Increase per share attributable to new investors................................ $
------------
Net tangible book value per share after this offering............................ $
------------
Net tangible book value dilution per share to new investors..................... $
============
</TABLE>
The following table sets forth, as of March 31, 1999, the difference
between the number of shares of common stock purchased from U.S. Interactive,
the total consideration paid and the average price per share paid by the
existing stockholders and by the new investors at the assumed initial public
offering price of $____ 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................................... % $ % $
New investors........................................... _____ _____ _____ _____
Total.......................................... 100.0% $ 100.0%
===== ===== ===== =====
</TABLE>
The foregoing tables assume no exercise of outstanding stock options
and warrant. The tables exclude 2,345,254 shares of common stock issuable upon
exercise of the outstanding warrant and options at a weighted average exercise
price of $3.58 per share, and 3,635,440 shares reserved for future grants under
our employee benefit plans. To the extent that the outstanding warrant and
options are exercised, there will be further dilution to new investors.
21
<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.
<TABLE>
<CAPTION>
May 1, 1994
(inception) to Year Ended Three Months Ended
December 31, Year Ended December 31, December 31, March 31, (unaudited)
-------------- ----------------------------------- ------------- ----------------------------
1994 1995 1996 1997 1998 1998 1998 1998 1999
------ ------ ------ ------ ------ ---- ------ ------ -----
(Unaudited) (Pro Forma) (Actual) (Pro Forma) (Actual)
Consolidated Statement of
Operations Data:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(in thousands, except per share data)
Revenue................................ $200 $935 $1,950 $6,061 $13,636 $16,446 $2,378 $4,178 $6,123
Operating costs and expenses:
Project personnel and related
expenses............................ 177 544 945 2,841 7,405 9,995 1,249 2,656 3,071
Management and administrative....... 17 316 1,012 2,196 7,876 9,653 690 1,507 2,683
Marketing and sales................. -- 5 277 1,013 2,054 2,392 351 500 723
Depreciation and amortization....... 6 17 61 269 4,592 8,704 91 2,141 2,496
---- ---- ------ ------ ------- ------- ------ ------ -----
Total operating expenses............ 200 882 2,295 6,319 21,927 30,744 2,381 6,804 8,973
---- ---- ------ ------ ------- ------- ------ ------ -----
Income (loss) from operations.......... -- 53 (345) (258) (8,291) (14,298) (3) (2,626) (2,850)
Other income (expense), net............ -- (2) 235 (32) (152) (149) (17) (14) (92)
---- ---- ------ ------ ------- ------- ------ ------ -----
Operating income (loss)................ 51 (110) (290) (8,443) (14,447) (20) (2,640) (2,942)
Income tax expense..................... -- 13 19 -- -- -- -- -- --
---- ---- ------ ------ ------- ------- ------ ------ -----
Net income (loss)...................... -- 38 (129) (290) (8,443) (14,447) (20) (2,640) (2,942)
Accretion of mandatorily redeemable
preferred stock to redemption value.... -- -- -- -- (625) (852) -- (103) (374)
---- ---- ------ ------ ------- ------- ------ ------ -----
Net income (loss) attributable to
common stockholders.................... $ -- $ 38 $(129) $ (290) $(9,068) $(15,299) $(20) $(2,743) $(3,316)
==== ===== ====== ====== ======= ======== ======= ======= =======
Net income (loss) per common share:
Basic and diluted...................... $ -- $ .01 $ (.03) $ (.06) $ (1.36) $(1.73) $ -- $(.30) $(.40)
===== ====== ====== ====== ======= ======== ======= ======= =======
Weighted average shares outstanding.... 2,813 2,813 4,486 4,737 6,670 8,862 4,737 9,121 8,249
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
December 31,
1994 1995 1996 1997 1998 March 31, 1999
------- --------- ---------- --------- ------- ---------------------------------
(unaudited) Pro-Forma,
Actual Pro Forma As Adjusted
------ --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents ......... $99 $13 $594 $786 $ 3,698 $ 2,327 $2,327
Working capital ................... 96 105 747 701 1,916 1,596 1,596
Total assets ...................... 99 238 1,770 4,122 22,262 25,464 25,464
Mandatorily redeemable convertible
preferred stock ................... -- -- -- -- 17,293 17,667 --
Total stockholders' equity (deficit) -- 73 1,111 1,795 (1,820) (2,028) 15,639
</TABLE>
23
<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
Our revenue is derived primarily from providing Internet professional
services to clients who are adopting or enhancing electronic enterprise
solutions. We offer services in four general practice areas:
o Electronic Commerce
o Digital Marketing
o Enterprise Relationship Management
o Knowledge Management
Revenue. Our revenue principally is derived from either contracts that
permit the billing of services at amounts equal to actual time and material
costs incurred by us or fixed-fee arrangements. Revenue 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 expenditures in
excess of billings represent the costs incurred on projects and anticipated
profits earned on projects in excess of amounts billed to date. These amounts
are recorded as an asset. Billings in excess of fees and expenditures represent
amounts billed in excess of costs incurred and estimated profit earned. These
amounts are recorded as a liability. Revenues exclude reimbursable expenses
charged to clients. Losses on projects in progress are recognized when known.
Approximately 83% of our revenue for the three months ended March 31,
1999, was derived from fixed-fee arrangements. We anticipate that the percentage
of our revenue that is derived from fixed-fee arrangements may increase in the
future. Substantially all of our client engagements 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
24
<PAGE>
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 engagement schedules closely and
staffing requirements for new engagements. Most of our client engagements are,
and may in the future be, terminated by the client without penalty. As a result,
an unanticipated termination of a client project could require us to maintain
underutilized employees, resulting in a higher than expected percentage and
number of inactive professionals. While we intend to adjust our professional
staff to reflect our active engagements, we must maintain a sufficient number of
senior professionals to oversee existing and anticipated client engagements and
participate with our sales efforts to secure new client assignments.
Variability of Operating Results. Our financial results may fluctuate
from quarter to quarter based on such factors as the number, complexity, size,
scope and lead time of projects in which we are engaged. More specifically,
these fluctuations can result from:
o the contractual terms and degree of completion of projects
o delays incurred in connection with projects
o employee utilization rates
o the adequacy of provisions for losses
o the accuracy of estimates of resources required to complete on-going
projects
o general economic conditions
In addition, revenue from a large client engagement may constitute a significant
portion of our total revenue in a particular quarter.
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 that provided
development services for Internet, intranet and extranet applications. 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 LLC. InVenGen was 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, which was accounted for using the purchase
method of accounting.
Results of Operations
The following table sets forth, as a percentage of revenue, the results
of our operations for the years ended December 31, 1996, 1997 and 1998 and the
three months ended March 31, 1999. The results of operations for the three
months ended March 31, 1998 is presented on a pro forma basis to reflect the
Digital Evolution merger as if this merger had occurred on January 1, 1998.
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, ended March 31,
1996 1997 1998 1998 1999
------------ ------------ ------------ ------------ --------------
(Actual) (Pro Forma) (Actual)
<S> <C> <C> <C> <C> <C>
Revenue.................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Operating costs and expenses
Project personnel and related expenses... 48.5 46.9 54.3 63.6 50.2
Management and administrative............ 51.9 36.2 57.8 36.1 43.8
Marketing and sales...................... 14.2 16.7 15.1 12.0 11.8
Depreciation and amortization............ 3.1 4.5 33.6 51.2 40.7
-------- -------- -------- -------- --------
Total operating expenses............. 117.7 104.3 160.8 162.9 146.5
-------- -------- -------- -------- --------
Operating loss ............................ (17.7) (4.3) (60.8) (62.9) (46.5)
Other income (expense), net................ 12.1 (.5) (1.1) (.3) (1.5)
-------- -------- -------- -------- --------
Loss before income tax expense............. (5.6) (4.8) (61.9) (63.2) (48.0)
Income tax expense......................... (1.0) -- -- -- --
-------- -------- -------- -------- --------
Net loss................................... (6.6) (4.8) (61.9) (63.2) (48.0)
Accretion of mandatorily redeemable
preferred stock to redemption value........ -- -- (4.6) (2.5) (6.1)
-------- -------- -------- -------- --------
Net loss attributable to common (6.6)% (4.8)% (66.5)% (65.7)% (54.1)%
stockholders............................... ======== ======== ======== ======== ========
</TABLE>
- ---------------------------
25
<PAGE>
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 Expense. 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 certain office facilities and the
increased costs of certain management and administrative personnel and other
general operating expenses in the areas of accounting, human resources and
general operations. Office rent expense increased $500,000 for the three months
ended March 31, 1999 from $200,000 for the three months ended March 31, 1998.
Management and administrative headcount increased to 51 as of March 31, 1999
from 32 as of March 31, 1998. The increases in office rent and personnel
accounted for 50% and 22% of the overall increase. As a percentage of revenue,
management and administrative expenses were 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 certain other marketing programs. As a percentage of revenue,
marketing and sales costs were 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 along with leasehold improvements
necessary to properly outfit our professional staff. 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 an aggregate of
$2.8 million during the three months ended March 31, 1999, as compared with an
aggregate of $268,000 and $0 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 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.
Net Loss. As a result of the factors described above, our net loss
increased $302,000, or 12%, to $2.9 million for the three months ended March 31,
1999, from $2.6 million for the three months ended March 31, 1998.
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1998 Compared to 1997
Revenue. Revenue increased by $7.5 million, or 123%, to $13.6 million
for the year ended December 31, 1998 from $6.1 million for the year ended
December 31, 1997. The increase is primarily attributable to the Digital
Evolution merger as well as an increase in the volume of services delivered to
new clients and additional work delivered for existing clients. Approximately
23% of the increase was attributable to the Digital Evolution client base and
77% was attributable to overall increases in project sizes.
Project Personnel and Related Expenses. Project personnel and related
expenses increased by $4.6 million, or 164%, to $7.4 million for the year ended
December 31, 1998 from $2.8 million for the year ended December 31, 1997. The
absolute increase was attributable to the hiring of additional project personnel
associated with the increase in the volume of services delivered to clients.
Direct salary expense increased $4.2 million as a result of 58 new hires and
overall increases in market rates for various skill sets. As a percentage of
revenue, project personnel and related expense was 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 certain 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 expenses were 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 an investment by us in our marketing and sales programs. The
additional expenses primarily related 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 with nine as
of December 31, 1997. As a percentage of revenue, marketing and sales expense
was 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.
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.
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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.
Net Loss. As a result of the factors described above, our net loss was
$8.4 million for the year ended December 31, 1998 and $290,000 for the year
ended December 31, 1997.
1997 Compared to 1996
Revenue. Revenue increased by $4.1 million, or 205%, to $6.1 million
for the year ended December 31, 1997, from $2.0 million for the year ended
December 31, 1996. This reflected an increase in the volume of services
delivered to new clients, additional projects for existing clients and larger
average project sizes.
Project Personnel and Related Expenses. Project personnel and related
expenses increased by $1.9 million, or 201%, to $2.8 million for the year ended
December 31, 1997 from $945,000 for the year ended December 31, 1996. The
absolute increase was attributable to the hiring of 24 additional project
personnel associated with the increase in service revenue generated by us. As a
percentage of revenue, project personnel and related expense was 47% for the
year ended December 31, 1997 and 49% for the year ended December 31, 1996.
Management and Administrative. Management and administrative increased
by $1.2 million, or 120%, to $2.2 million for the year ended December 31, 1997
from $1.0 million for the year ended December 31, 1996. The absolute increase
was primarily attributable to expenses incurred to accommodate our current and
anticipated growth, including the expansion of certain of our office facilities
and the increased costs of certain 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 expenses were 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 an investment by us in our marketing and sales programs. The
additional expenses were primarily related 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 resulted from the increase in
personnel related to our growth.
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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 our 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. Income tax expense of $19,000 for the year ended December 31, 1996
was for state taxes.
Net Loss. As a result of the factors described above, our net loss for
the years ended December 31, 1997 and 1996 were $290,000 and $129,000.
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Our Unaudited Quarterly Operating Results
The following table presents our unaudited historical quarterly results
of operations. We believe that all necessary adjustments, consisting only of
normal recurring adjustments, have been included in the amounts stated below to
present fairly such quarterly information. The operating results for any quarter
are not necessarily indicative of results for any subsequent period.
The results of operations of Digital Evolution have been consolidated
with our results since the beginning of the quarter ended September 30, 1998.
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------------------------
Jun. 30, Sept. 30, Dec. 31, Mar. 31, Jun. 30, Sept. 30, Dec. 31, Mar. 31,
1997 1997 1997 1998 1998 1998 1998 1999
-------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(in thousands)
Consolidated Statements of
Operations Data:
Revenue.............................. $1,186 $1,618 $2,287 $2,378 $2,546 $ 4,554 $ 4,158 $ 6,123
Operating costs and expenses:
Project personnel and related
expenses .......................... 646 774 937 1,249 1,424 2,412 2,320 3,071
Management and administrative ..... 507 580 683 690 1,200 2,747 3,239 2,683
Marketing and sales................ 202 306 358 351 490 623 590 723
Depreciation and amortization...... 64 69 91 91 123 2,181 2,197 2,496
------ ------ ------ ------ ------ ------- ------- -------
Total operating expenses............. 1,419 1,729 2,069 2,381 3,237 7,963 8,346 8,973
------ ------ ------ ------ ------ ------- ------- -------
Operating income (loss).............. (233) (111) 218 (3) (691) (3,409) (4,188) (2,850)
Other income (expense), net.......... (8) (11) (14) (17) (12) (76) (47) (92)
------ ------ ------ ------ ------ ------- ------- -------
Net income (loss).................... (241) (122) 204 (20) (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.................. $ (241) $ (122) $ 204 $ (20) $ (703) $(3,736) $(4,609) $(3,316)
====== ====== ====== ====== ====== ======= ======= =======
As a Percentage of Revenue:
Revenue.............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Operating costs and expenses:
Project personnel and related
expenses .......................... 54.5 47.8 41.0 52.5 55.9 53.0 55.8 50.2
Management and administrative...... 42.7 35.8 29.9 29.0 47.1 60.3 77.9 43.8
Marketing and sales................ 17.0 18.9 15.7 14.8 19.3 13.7 14.2 11.8
Depreciation and amortization...... 5.4 4.3 3.9 3.8 4.8 47.9 52.8 40.7
------ ------ ------ ------ ------ ------- ------- -------
Total operating expenses........... 119.6 106.8 90.5 100.1 127.1 174.9 200.7 146.5
------ ------ ------ ------ ------ ------- ------- -------
Operating income (loss) from
operations........................... (19.6) (6.8) 9.5 (.1) (27.1) (74.9) (100.7) (46.5)
Other income (expense), net.......... (.7) (.7) (.6) (.7) (.5) (1.6) (1.1) (1.5)
Income (loss) before income tax
expenses.............................
------ ------ ------ ------ ------ ------- ------- -------
Net income (loss).................... (20.3) (7.5) 8.9 (.8) (27.6) (76.5) (101.8) (48.0)
Income tax expense...................
Accretion of mandatorily redeemable
preferred stock to redemption
value................................ -- -- -- -- -- (5.5) (9.0) (6.1)
------ ------ ------ ------ ------ ------- ------- -------
Net income (loss) attributable to
common stockholders.................. (20.3)% (7.5)% 8.9% (.8)% (27.6)% (82.0)% (110.8)% (54.1)%
====== ====== ====== ====== ====== ======= ======= =======
</TABLE>
Liquidity and Capital Resources
Since inception, we have financed our operations primarily from sales
of preferred stock and borrowings under bank credit facilities. To date, we have
raised approximately $12.7 million, net of offering expenses, through the sale
of our preferred stock. At March 31, 1999, we had approximately $2.3 million in
cash and cash equivalents.
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
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receivable and fees and expenditures in excess of billings, partially offset by
increases in accounts payable and accrued expenses.
Net cash used in investing activities for the years ended December 31,
1996, 1997 and 1998 and for the three months ended March 31, 1998 and 1999 was
$255,000, $612,000, $649,000, $118,000 and $270,000, respectively. Cash used in
investing activities in each period consisted primarily of purchases of
furniture and equipment and to a lesser extent in 1997 the acquisition of an
Internet professional services firm.
Net cash provided by financing activities for the years ended December
31, 1996, 1997 and 1998 and for the three months ended March 31, 1998 and 1999
was $1.0 million, $827,000, $7.0 million, $447,000 and $62,000, respectively. In
1996 and 1997 the cash provided by financing activities was almost entirely from
the sale of our preferred stock. In 1998 the cash provided by our financing
activities was from the sale of our preferred stock and borrowings under our
credit facility, offset by our repurchase of common stock and preferred stock
from certain of our stockholders.
As of March 31, 1999, our principal commitments consisted of
obligations under equipment leases and notes payable that funded our purchases
of furniture and equipment. The equipment leasing arrangements consist primarily
of U.S. Interactive paying rental fees to third party leasing providers at
interest rates between 9% and 10.5%. Although we have no material commitments
for capital expenditures, we anticipate an increase in our capital expenditures
consistent with anticipated growth in our operations, infrastructure and
personnel.
As of March 31, 1999 U.S. Interactive had a $3.3 line of credit and a
$1.2 term loan with a commercial bank. Under the terms of the line of credit,
borrowings are subject to a limit of 75% of eligible accounts, as defined in the
line of credit. The line of credit bears interest at a rate of prime plus 1.25%
(9% at March 31, 1999). There was $1.1 million outstanding and $1.6 million
available under the line of credit as of March 31, 1999. The term loan bears
interest at a rate of prime plus 1.75% (9.5% at March 31, 1999) and had $1.2
million outstanding as of March 31, 1999. The commercial bank waived our
non-compliance with our financial covenants under the line of credit and the
term loan as of March 31, 1999 and we are currently working with the commercial
bank to amend such financial covenents.
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 18 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 compliance. These clients and
potential clients may have fewer funds available to purchase our services. Also,
we may experience operations difficulties caused by
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undetected errors or defects in the technology we use in our internal systems.
We may also become involved in disputes regarding year 2000 problems involving
solutions we developed or implemented or the interaction of our Internet
solutions with other applications for our clients. Year 2000 problems could
require us to incur delays and unanticipated expenses. We have formulated an
approach to address our exposure to these risk factors.
Approach. We are assessing the impact of the year 2000 issue on our
current and future client projects and internal information systems. We have
performed a preliminary assessment of the year 2000 readiness of our internal
information systems, including the hardware and software we use to provide and
deliver our Internet solutions. We have engaged a consulting firm to further
assess the year 2000 readiness of our internal software and information systems.
Currently, we expect the consulting firm to provide us with the results of their
assessment in June 1999. We plan to perform a year 2000 simulation on our
software and information systems during the second and third quarters of 1999.
Based on the results, we will revise our internal software and systems as
necessary. Based on our preliminary assessment, we do not anticipate any
requirement for material modification.
We will require all vendors who provide material hardware or software
for our information systems to provide assurances of their year 2000 compliance.
We will also 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 completely to evaluate
whether our systems will need to be revised or replaced.
We also performed a preliminary assessment of the impact of the year
2000 issue involving solutions we have developed or implemented for our clients.
Our consulting firm is also further assessing this impact. From this evaluation,
we expect to perform certain year 2000 simulation tests on the solutions we
developed for our clients.
Status. Our testing to date has included our major infrastructure
items, hardware platforms and operating systems in our offices. Desktop
computing, servers, switching and routing platforms have been inventoried, with
only minor modifications required to the network and routing platforms.
We have largely completed the implementation of year 2000 compliant
internal computer applications for our main financial and internal management
information systems.
Cost. Based on the work done to date, we expect the cost for work,
material and upgrades needed to complete our year 2000 process will not exceed
approximately $200,000. This includes the cost of upgrades, software
modification and related consulting fees.
Contingency Plans. As discussed above, we are engaged in an ongoing
year 2000 assessment and have not yet developed any contingency plans. We will
assess the results of our year 2000 simulation testing and third-party vendor
and service provider responses to determine the nature and extent of any
contingency plans.
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BUSINESS
Overview
We are a leading 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.
We deliver our services through our e-Roadmap development plan which
incorporates the appropriate combination of skill sets that enable us to offer
defined service offerings. Our defined service offerings are primarily delivered
across our four practice areas to create a customized solution for each of our
clients. Our practice areas include:
o Electronic Commerce
o Digital Marketing
o Enterprise Relationship Management
o Knowledge Management
These services utilize our IVL Methodology and our client-specific
extranet, which we call "CAPTURE." IVL provides the implementation phases
necessary to ensure efficient, high quality delivery of Internet business
solutions. CAPTURE serves as the communications center for our client
engagements and enables our clients to monitor and modify an engagement's
direction and scope on a real-time, iterative basis. We believe this provides
our clients with a higher degree of confidence that the ultimate deliverables
will meet their expectations.
Industry
The rapid emergence and widespread adoption of the Internet are
changing the way consumers and organizations communicate, share information and
conduct business. IDC estimates that the number of Internet users worldwide will
grow from approximately 70 million in 1997, to 320 million in 2002. Forrester
Research estimates that 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 virtually every business regardless of industry.
Early adoption of the Internet as a business tool generally consisted
of advertising and promotional web sites. These sites provided marketing
material that largely replicated traditional paper-based marketing messages in a
static web page environment, sometimes referred to as brochure-ware. Businesses
generally relied on in-house information technology personnel, Internet
advertising firms or web design companies to develop and deploy these web sites.
As the Internet continued to gain 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 generally involved the development and use of transactional web
sites for the presentation of catalogued product information combined with basic
transaction and communication capabilities layered on top of advertising and
marketing messages. However, these sites provided only basic features and
processing capabilities with little or no integration with the business's
technology systems. Moreover, these sites generally replicated traditional
business models and functioned as additional distribution channels for their
core business strategies similar to a direct mail catalogue program. Though
these systems required some level of integration with traditional mainframe and
client/server systems, businesses generally utilized in-house IT resources or
their traditional third-party IT service providers to build and maintain these
sites.
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Today, businesses are realizing that the Internet offers much greater
potential than being merely an extension of their traditional core businesses.
As businesses feel the effect 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 lower costs
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, 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. Management consulting firms
generally 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, year
2000 compliance and the implementation of traditional business applications such
as enterprise resource planning. Interactive agencies, which include web page
design firms and advertising agencies, have considerable expertise in Internet
marketing and creative development, but lack deep technology and business
strategy capabilities. Thus, businesses have begun to seek third-party providers
that can provide them with 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 $7.4 billion in 1998, to
$43.7 billion in 2002.
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 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 proprietary service offerings
o Internet-focused delivery methodology
o an integrated, client-focused delivery model
Proprietary Service Offerings. Our proprietary development plan,
e-Roadmap, serves as a blueprint to define and create a tailored solution for an
organization's specific Internet initiative. Our e-Roadmap development plan
incorporates the appropriate combination of defined service offerings from our
four practice areas to create a customized solution for each client. The
application of our defined service offerings enables the rapid development and
deployment of Internet business solutions that align with a client's business
objectives and provide measurable return on investment. Examples of our defined
service offerings include business case development, enterprise architecture
audits, digital brand positioning strategies, digital prototyping and enterprise
software design and development. These service offerings are utilized across our
four primary practice areas in:
o Electronic Commerce
o Digital Marketing
o Enterprise Relationship Management
o Knowledge Management
Given the rapid pace of development within the Internet professional services
industry, we believe that our focus on innovation within the structure of our
e-Roadmap development plan is critical to our clients' long-term satisfaction
and success.
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Internet-focused Delivery Methodology. Since our inception, we have
been focused exclusively on delivering Internet-based business solutions. To
provide rapid development with the highest levels of quality and
cost-efficiency, we employ our service offerings in phases in accordance with
our IVL Methodology. Under this approach, each engagement is comprised of an
"Innovation" phase of high level strategic direction, a "Validation" phase of
prototyping and testing, and a "Launch" phase of final development and
integration. We employ our IVL Methodology whether completing discrete projects
or designing and implementing an entire electronic enterprise for a client. Our
end-user focused approach provides iterative development and prototyping of our
services making it possible to incorporate important feedback from multiple
client operating groups in every stage of the engagement. This increases
satisfaction with and acceptance of the final deliverable by the end-user.
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 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. We also provide client-specific extranets for most of our client
relationships. These extranets, which we call CAPTURE, allow for the sharing
of:
o detailed work plans
o project updates
o team communication
o creative and technical prototypes of expected solutions
o new business proposals
o other pertinent project information
CAPTURE serves as the communication center for all of our engagements. We
believe that by enabling our clients to monitor and modify an engagement's
direction and scope on a real-time, iterative basis, CAPTURE provides our
clients with a higher degree of confidence that the ultimate deliverables will
meet their expectations.
Our Strategy
U.S. Interactive's strategy is to strengthen its position as a leading
provider of Internet-based business solutions.
Expand Client Relationships. We use our client-focused service
delivery approach to increase the number and size of engagements with our
clients. Our client service personnel enable us to partner with our clients and
identify additional service opportunities based on their knowledge of and
relationships with our clients. Additionally, the application of our proprietary
e-Roadmap development plan provides us with valuable insight into potential
opportunities to expand our clients' Internet initiatives. We are also extending
the use of our client-specific extranets beyond the term of particular
engagements 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 Distribution Capabilities. We are
continuing the development and evolution of a corporate knowledge management
system. U.S. Interactive seeks to increase the utility of the combined knowledge
of its professionals and the experience gained in over 400 client engagements.
Our intranet provides us with a communication network and knowledge repository
which includes:
o reusable templates for new business presentations
o project management tools
o reusable software code
o creative libraries
We are continuing to make substantial investments in our intranet to improve
access to and use of our reusable solutions and software. This enables our
service delivery professionals to utilize our best practices 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 an attractive
and rewarding corporate culture through employee stock ownership, by promoting
from within and by providing advanced training, challenging assignments and
involvement in many facets of our business.
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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 Internet Technology and Infrastructure Relationships.
We seek to enter into relationships with world-class companies that are well
positioned to take advantage of current and future electronic enterprise
opportunities. We have established and maintain over 20 strategic alliances with
software and infrastructure firms, such as Microsoft, BroadVision, Digex,
Trilogy and Vignette. We believe that these non-exclusive relationships enable
us to deliver more effective solutions to our clients with greater efficiency
due to the advanced training and earlier product release knowledge provided to
us by our alliance partners. These relationships have also been an important
source for identifying new client engagement 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 targeted metropolitan markets. This phased approach
begins with the founding of local sales offices and the establishment of
additional delivery personnel based on the growth of our business within a
particular market. Additionally, we will from time to time evaluate the
acquisition of other Internet professional service businesses to accelerate our
growth in particularly attractive geographic markets.
Services, Clients, Strategic Alliances and Marketing and Sales
Services
Electronic enterprise solutions harness Internet-based technology in
order to integrate an organization's business objectives, processes and systems.
These solutions align an enterprise with its various customers, suppliers and
partners. We deliver these solutions in an integrated manner utilizing our
e-Roadmap development plan. Our e-Roadmap development plan incorporates the
appropriate combination of defined service offerings from our four primary
practice areas to create a customized solution for our clients. These four
practice areas are:
o Electronic Commerce
o Digital Marketing
o Enterprise Relationship Management
o Knowledge Management
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 and ultimately to generate greater
volumes of "virtual foot traffic."
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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. Services provided include:
o customer care audits
o software evaluation workshops
o customer care application design
o overall systems development and integration
Knowledge Management. We believe that employee knowledge and the wealth
of knowledge an enterprise amasses over time are principal components of an
organization's capital and critical to the success of the overall enterprise. We
provide services that allow a company to gather, organize and present knowledge
in electronic form in a manner that is accessible to their enterprise.
Components of knowledge management include:
o intranet development
o data warehousing design and development
o document management
IVL Methodology. Our IVL Methodology is a process designed for Internet
solution delivery that unites a client's organization to create consensus for a
proposed solution. We believe this methodology ensures that the goals of a
project are clearly defined and delivered quickly. We group our services within
our three IVL Methodology phases:
o Innovation
o Validation
o Launch
The "Innovation" phase focuses on high level strategic planning and
development of the proposed electronic enterprise solution. We seek to foster
non-traditional thinking and business objective alignment by using a series of
techniques including facilitated workshops, interviews and end-user requirement
gathering methods to provide for both innovative thinking and proper project
definition.
The "Validation" phase focuses on providing and proving the concepts or
strategies developed during the Innovation phase. Validation can be achieved
through extended market research and concept prototype development.
The "Launch" phase consists of the final development, integration and
presentation across Internet, extranet and intranet implementations. We
accomplish this through a series of iterative design and development reviews and
checkpoints with the client. The service deliverables we offer within each of
our IVL Methodology phases are explained below.
<TABLE>
<CAPTION>
Methodology e-Roadmap
Phase Service Deliverables Service Description
- ----------- -------------------- --------------------
<S> <C> <C>
Innovation Business Case Strategy development, cost-benefit analysis, return on investment
evaluations and agreement on engagement objectives
Knowledge Audit Documenting the forms and methods of access and storage of
knowledge capital
Customer Care Audit Providing a framework for customer service
offerings, detailed analysis of current consumer attitudes
Enterprise Architecture Audit Aligning current technology infrastructures to the Internet
Channel Audit Identifying new and existing Internet distribution channels
Competitive Analysis Rating existing web presence against competitors' ease of
navigation, design, technology and presentation
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Validation Digital Prototyping Visual demonstration of the proposed solution
Digital Brand Positioning Generating guidelines for brand development through
Strategy competitive product, service and/or consumer research
analysis
Digital Channel Strategy Strategic analysis of client's value chain
Software Evaluation Workshop Bypasses the Request for Proposal (RFP) process to identify
the most effective software application
Creative Concepts Creating brand logos, banner advertisements and layout and design of
websites
Systems Architecture Establishing dynamic guidelines for technology architecture
Usability Testing Testing a preliminary solution through a target market
sampling
Development Implementation Using client's priorities to create project phases for "Launch"
Plan
Launch Enterprise Design and Iterative construction and definition of requirements,
Development 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 application providers
Implementation to integrate e-commerce, digital marketing, enterprise
relationship management and knowledge management
solutions
Systems Integration Integration of a client's existing technologies to
new Internet enterprise systems
Media Plan Analysis and recommendation of Internet media, placement,
distribution and tracking
Media Placement and Tracking Placing and measuring the effectiveness of print and Internet
promotional campaigns
</TABLE>
CAPTURE
As part of many of our client engagements, we create client-specific
extranets, which we call CAPTURE, to facilitate communication throughout the
project. Our system allows our clients to continuously monitor the progress of
the engagement. Additionally, it provides an important tool for our clients to
communicate within their organization about various elements of the engagement.
CAPTURE also allows us to gather instant feedback from key decision-makers
within a client's organization regarding specific elements of a engagement. This
feedback allows us to address client issues during the development phase and
deliver more customized and valuable solutions. We intend to continue to expand
the features of CAPTURE over time.
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Clients
Set forth below is a selected list of our customers that generated
significant revenues for us since December 31, 1997.
adidas Royal Caribbean International
Dairy Farm International Sprint
Deloitte Consulting LLP Stamford Health Systems
Disney Online Starbright Foundation
GeoCities TVN Bank
Granite Financial Team One/Lexus
International Gaming Technology Thomson Consumer Electronics
Microtek Toyota
PECO Energy Unum
Pioneer Electronics
Selected Case Studies
e-commerce
Challenge: Dairy Farm International, a Hong Kong-based food retailer
and Asia's largest supermarket holding company, engaged us to create an
e-commerce business for their holdings across Asia, Australia and New Zealand.
Solution: U.S. Interactive developed a strategy for the creation of a
new, separate e-commerce corporation that included a brand identity intended to
be recognized and accepted as a trusted vendor in 15 different countries with
different languages and cultures. U.S. Interactive's strategy included the
development of a comprehensive technical architecture to facilitate secure
transactions, supply chain management and fulfillment. This application allowed
Dairy Farm International to:
o integrate product image/information databases
o track and profile customers
o monitor warehouse inventory
o enhance order fulfillment
o integrate regional data systems
These services provide management with a unified view of the
inventories of 1,350 individual stores. Additionally, these services enable
customers to utilize local currencies and multiple payment methods. We also
created a new brand identity called "I-Go" to be paired with the existing Dairy
Farm International brand. We created an online shopping experience with features
to help customize consumer purchase transactions. These features included
automatic delivery routing for same day service and direct debit payment.
e-Roadmap services delivered:
o business case
o enterprise architecture audit
o brand audit
o digital brand positioning strategy
o customer care audit
o creative concepts
o digital channel strategy
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o systems architecture
o development implementation plan
o enterprise design and development
o enterprise software implementation
o custom commerce solution
o custom software development
o systems integration
Digital Marketing
Challenge: Royal Caribbean International, the second largest cruise
vacation company in the world, decided to build an Internet presence that would
permit the company to sell cruise vacations and provide travel information on
the Internet, without jeopardizing its relationships with authorized travel
agents, its primary distribution channel. Working with U.S. Interactive, Royal
Caribbean developed a comprehensive Internet initiative focused on building
market share, increasing brand awareness and creating new channels of
distribution.
Solution: U.S. Interactive 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 engagement by creating "vacation planner," a web site that
allows consumers to shop for and plan vacation packages. Selected vacation
packages are routed to authorized travel agents to encourage and secure their
participation in the selling process. Upon the successful deployment of vacation
planner, Royal Caribbean had us build and launch an Internet-based direct
marketing component called "brochure builder." Over the course of the last three
years, Royal Caribbean has been able to attract more potential buyers, increase
consumer brand awareness and minimize travel agents' resistance to an
Internet-based selling process. In addition, the information generated by this
site has allowed Royal Caribbean to create over 150,000 customer profiles.
e-Roadmap services delivered:
o business case
o brand audit
o channel audit
o competitive analysis
o digital brand positioning strategy
o creative concepts
o digital channel strategy
o enterprise software implementation
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: U.S. Interactive worked with Toyota to develop and implement
TCMS (Toyota Customer Management System). TCMS was built around a large-scale
intranet system incorporating product, pricing and manufacturing information.
These components can be customized by Toyota to meet its specific needs. This
application automates many aspects of the sales process to allow an individual
consumer, while visiting a dealership, to identify, view and track their desired
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automobile online. Additionally, TCMS allows Toyota to enhance its consumer
profiles and demographics, linking that data directly to its manufacturing
process.
e-Roadmap services delivered:
o systems architecture
o systems integration
o digital prototyping
o custom software development
o usability testing
o development implementation plan
Knowledge Management
Challenge: Deloitte Consulting LLP engaged U.S. Interactive to
integrate its Internet presence with its overall corporate initiatives to
continue to be consistently recognized as one of the three best consulting firms
in the world. Recruiting is among the most critical functions to the firm due to
the competitive nature of attracting qualified IT and business consultants. As
part of this initiative, Deloitte Consulting sought to leverage the Internet to
develop an Internet recruiting application to support its on-going global
recruiting needs.
Solution: Working with Deloitte Consulting LLP, U.S. Interactive
designed and deployed a worldwide Internet recruiting application supporting
global recruiting efforts for 24 countries within 60 days. U.S. Interactive
developed an application that scans resumes and translates them into a
standardized digital format that is accessible across multiple technology
platforms. Resumes are entered into Deloitte Consulting's knowledge management
intranet and automatically routed to the appropriate human resource
professionals in various business units around the world.
e-Roadmap services delivered:
o brand audit
o business case execution
o digital creative execution
o usability testing
o enterprise design and development
o enterprise software implementation
o systems integration
Strategic Alliances
We seek to enter into relationships with world-class companies that are
well positioned to take advantage of current and future electronic enterprise
opportunities. We believe that these non-exclusive relationships enable us to
deliver more effective solutions to our clients with greater efficiency due to
advanced training and earlier product release provided to us by our alliance
partners. In order to facilitate this exchange, U.S. Interactive has developed a
preferred partner extranet.
These relationships have also been an important source for new client
engagement opportunities. We currently maintain strategic relationships with
over 20 companies across the many Internet services disciplines. Some of these
strategic alliances include:
o Microsoft: U.S. Interactive and Microsoft have entered into a joint
marketing and technical partner program. U.S. Interactive and
Microsoft team to solve e-commerce challenges for organizations of
all sizes in many industries.
o Vignette: Vignette is a leading provider of broadband Internet access
solutions and content. U.S. Interactive and Vignette Corporation have
a "Solution Provider" agreement whereby both parties team to provide
complete Internet Relationship Management (IRM) solutions for
companies building businesses on-line.
o Trilogy Software: Trilogy is a leading architect and provider of
enterprise software solutions for sales, marketing and customer
relationship management automation. U.S. Interactive and Trilogy
Software have an "Authorized Service Provider" agreement whereby both
parties team to provide sales,
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marketing and business-to-business e-commence solutions. These
services enable sales representatives, channel partners and the home
office to work together to serve customers more efficiently by
changing the way their products are bought and sold.
o Open Market: Open Market is a market-share leader in Internet
commerce and information publishing software. U.S. Interactive and
Open Market have a "Partner Agreement" in place whereby both parties
allow their clients to engage in business-to-consumer and
business-to-business Internet commerce, information commerce, and
commercial publishing.
o Digex: Digex is a leading provider of complex Internet hosting
services, principally to Fortune 2000 companies with
Internet-intensive needs. U.S. Interactive and Digex share an
"Authorized Alliance" agreement whereby both parties deliver
sophisticated managed services enabling companies to use their
Internet presence as integral, strategic business tools, throughout
the electronic enterprise.
o BroadVision: U.S. Interactive and BroadVision have an "Integrator
Alliance" by which both organizations provide clients with
"one-to-one" Internet business applications for extended relationship
management.
Marketing and Sales
Our marketing efforts are focused on increasing our brand awareness and
market share through:
o defining our services as deliverable products
o entering into and managing strategic alliances
o public relations
o marketing communications
o seminar and forum development and direct mail
All information pertaining to these activities, including industry research and
development trends, is distributed internally through the use of the marketing
section of our intranet. As of May 1, 1999, our marketing department consisted
of six full-time employees encompassing both field and corporate marketing.
We primarily market and sell our services through a direct sales force.
As of May 1, 1999, our direct sales force consisted of ten full-time sales
professionals whose primary responsibilities are to close new business
opportunities marketed to senior executives of large, 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 interactive agencies (such as Modem.Poppe Tyson and Razorfish)
o management consulting firms (such as Diamond Technology Partners,
Bain & Co. and Andersen Consulting)
o computer hardware and software vendors (such as IBM)
In addition, we face competition with the in-house technology and
marketing departments of our clients and potential clients.
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We believe that the principal criteria considered by our prospective
clients include:
o integrated Internet strategy, marketing and technology
o reliability
o client service
o vertical industry knowledge
o cost certainty
o referenceable customer base
There are relatively low barriers to entry into our business. We expect
that we will face additional competition from new entrants into the market in
the future. Existing or future competitors may develop or offer services that
provide significant performance, price, creative or other advantages over those
offered by us.
Employees
We believe our culture offers our employees attractive professional and
financial opportunities. Our employees are intellectually challenged by applying
leading-edge technology in the rapidly growing and changing Internet arena.
Also, employees are rewarded financially through competitive compensation and
benefits packages, which includes participation in our stock ownership.
As of May 1, 1999, we employed 232 people in five offices, consisting
of 164 project personnel, 19 marketing and sales personnel and 49 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. We have not experienced any work
stoppages and believe our relationships with our employees are good.
Facilities
U.S. Interactive's principal administrative, finance, marketing and
sales offices are located in approximately 28,000 square feet of leased office
space in King of Prussia, Pennsylvania. The lease for this office space is for a
term of seven years and expires on May 14, 2005. U.S. Interactive also leases
office space in:
o Los Angeles, California
o New York, New York
o Murray Hill, New Jersey
o Washington D.C.
We lease all of our facilities and believe our current facilities are adequate
to meet our needs for the foreseeable future.
Legal Proceedings
U.S. Interactive is not a party to any material legal proceedings.
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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,
Chief Technology Officer 1999
and Director
Stephen T. Zarrilli....................... 38 Director, President and Chief 2000
Executive Officer
Philip L. Calamia......................... 36 Vice President and Chief
Financial Officer
Michael M. Carter......................... 26 Vice President of Marketing
Robert E. Keith, Jr....................... 57 Director 2001
John D. Shulman........................... 36 Director 1999
E. Michael Forgash........................ 41 Director 1999
</TABLE>
- ------------------
Eric Pulier is one of our co-founders and has been the Chairman of the
Board and Chief Technology Officer since July 1998. Mr. Pulier was the founder
of Digital Evolution and served as the President and a director of Digital
Evolution from May 1994 to July 1998, which performed consulting services for
MCI Telecommunications, Microsoft and Rand Corporation. Mr. Pulier is currently
a technology advisor to the Vice President of the United States.
Stephen T. Zarrilli served as our director from August 1995 until July
1998, and began his current term as a director in April 1999. He has served as
President since May 1999 and as Chief Executive Officer since March 1999, and
prior thereto as acting Chief Operating Officer from December 1998 until March
1999. Mr. Zarrilli served as our Senior Executive Vice President and Chief
Financial Officer from August 1998 through December 1998, as our Executive Vice
President of Finance and Administration from September 1996 until July 1998, and
as Secretary, Treasurer and Chief Financial Officer from January 1995 until
September 1996. From May 1994 to December 1994, Mr. Zarrilli served as Director
of Finance for American Gaming Corporation, a publicly held development stage
gaming company. From July 1983 to April 1994, Mr. Zarrilli was employed by
Deloitte & Touche LLC, an international accounting and consulting firm, where he
attained the position of Senior Manager in 1990.
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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.
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 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, Inc., a publicly-held
information technology services company. Mr. Carter graduated from St. Joseph's
University in May 1995, with a B.S. in Marketing and in May 1996, with a Masters
in International Marketing. While at St. Joseph's, Mr. Carter served as Market
Representative/Retail Specialist from May 1995 to May 1996, for Nabisco Foods
Group, and as Market Development Associate from May 1993 to April 1995, for
Amerisource Corporation.
Robert E. Keith, Jr. has been our director since June 1996. Since July
1989, Mr. Keith has held a number of positions with several privately-held
venture capital funds, including as a member of the executive committee of
Radnor Venture Management Company (the general partner of Radnor Venture
Partners, L.P.) since July 1989, as a Managing Director since December 1991, and
a general partner since 1995, of Technology Leaders Management L.P., as a
Managing Director and general partner of Technology Leaders Management II L.P.
since December 1994, as President and Chief Operating Officer from July 1991,
until February 1996, and as President and Chief Executive Officer since February
1996, of Technology Leaders Management, Inc. and as a member of the executive
committee of Technology Leaders Management L.P. since December 1991. Mr. Keith
served as Vice Chairman of Fidelity Bank, N.A., a subsidiary of First Fidelity
Bancorp (now part of First Union, N.A.) from February 1987 to July 1989. Mr.
Keith is the Vice Chairman of Safeguard Scientifics and a director of Cambridge
Technology Partners, Inc. and SunSource Inc.
John D. Shulman has been our director since July 1998. Mr. Shulman has
served as President & Chief Executive Officer of ONYX International, LLC, a
merchant banking and venture capital firm, since 1995. Prior to this, Mr.
Shulman was Director of Development for the Tower Companies, a diversified real
estate and investment firm from 1988 to 1994. Mr. Shulman also serves as a
director of Juggernaut Partners, LLC, Interactive Video Technologies, Inc.,
Phar-Mor, Inc., ChemLink Laboratories, LLC, Taiwan Mezzanine Fund I, and
Performance Distribution, Inc.
E. Michael Forgash has been our director since October 1998. Mr.
Forgash has been Vice President, Operations of Safeguard Scientifics, since
January 1998. Prior to joining Safeguard Scientifics, Mr. Forgash was President
and Chief Executive Officer of Creative Multimedia from August 1996, to October,
1997. Prior to that, Mr. Forgash was President at Continental HealthCare Systems
from November 1994 to July 1996. Mr. Forgash also serves as a director of
Internet Capital Group, 4anything.com, Inc., Who? Vision Systems, Inc., XL
Vision, Inc. and Integrated Visions, Inc., all of which are privately-held
companies.
The number of directors is presently fixed at nine. Due to the
resignations of Messrs. Masterson and Smith as directors in May 1999, there are
presently four vacancies on our board of directors. We intend to add four
additional directors as promptly as practicable after the completion of the
offering. Each of the current directors was elected to the board of directors
pursuant to an agreement that terminates upon the consummation of the offering.
Board Committees
Our board of directors has a compensation committee and an audit
committee. The compensation committee is comprised of Robert E. Keith and
Michael Forgash. The audit committee is comprised of Robert E. Keith and Michael
Forgash. The compensation committee is responsible for the administration of all
salary and incentive compensation plans for our officers, including bonuses and
options granted under our option plans. The audit committee is responsible for
reviewing with management our financial controls and accounting and 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.
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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.
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Compensation of Directors
U.S. Interactive does not pay fees to directors for serving on our
board of directors. Outside directors are reimbursed for their reasonable
out-of-pocket expenses incurred in attending the meetings of the board of
directors and committees thereof.
Executive Compensation
The following table sets forth certain information concerning
compensation paid or accrued during the fiscal year ended December 31, 1998 with
respect to our Chief Executive Officer and our other executive officers. Larry
W. Smith resigned as the Chief Executive Officer on February 26, 1999 and as a
director on May 18, 1999. Richard J. Masterson resigned as President and as a
director on May 18, 1999. Mr. Zarrilli was named Chief Executive Officer on
March 1, 1999 and President on May 18, 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Awards
---------------------
Annual Compensation Securities
Name and --------------------- Underlying All Other
Principal Position(s) Salary Bonus Options Compensation(1)
- --------------------- -------- ------- ---------- ---------------
<S> <C> <C> <C> <C>
Eric Pulier,
Chairman of the Board and
Chief Technology Officer................ $223,000 $50,000 190,961 $ 530
Larry W. Smith,
Former director and former Chief
Executive Officer....................... 175,000 -- -- 1,030
Richard J. Masterson,
Former President and former Chief
Operating Officer....................... 175,000 -- -- 1,250
Stephen T. Zarrilli,
Chief Executive Officer and President... 175,000 $100,000 -- 2,197
</TABLE>
- -------------------------
(1) Represents premiums paid for life insurance.
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
<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
Options Employees in Exercise Expiration ------------------------
Name Granted (#) Fiscal Year Price Date 10% 5%
- ---- ------------ ------------- -------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Larry W. Smith 63,051 7.8% $3.85 6/15/08 $386,875 $152,662
Richard J. Masterson 63,051 7.8 3.85 6/15/08 386,875 152,662
Stephen T. Zarrilli 31,525 3.9 3.85 6/15/08 193,435 76,330
- -------------------
</TABLE>
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Employment Agreements
When we merged with Digital Evolution, Inc. in July 1998, we entered
into an employment agreement with Eric Pulier whereby he became our Chairman and
Chief Technology Officer. Mr. Pulier was the President and a member of the board
of directors of Digital Evolution. The agreement is for a term of one year, and
automatically renews for additional one-year periods, unless one party gives the
other at least 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.
U.S. Interactive and Mr. Zarrilli intend to execute an employment
agreement with Mr. Zarrilli providing for his employment as Chief Executive
Officer and President. We expect his agreement to be similar to the agreement
for Mr. Pulier. We expect Mr. Zarrilli's agreement to have a one-year term that
automatically renews for additional one-year terms unless U.S. Interactive or
Mr. Zarrilli gives the other party at least 30 days notice of non-renewal.
Severance Agreements
Larry W. Smith resigned as our Chief Executive Officer effective as of
February 26, 1999 and as a director in May 1999. We entered into a severance
agreement, effective as of February 26, 1999, in connection with his
resignation. Under the severance agreement Mr. Smith is entitled to receive from
us:
o a severance payment of $131,250 payable in nine equal monthly
installments
o accrued but unused vacation time of $12,115, which we paid to him
in March 1999
o health, life and disability insurance and other benefits for the
nine-month period commencing February 26, 1999, including auto
reimbursement expenses up to a maximum of $700 per month until the
severance payment is paid in full
In addition, all of Mr. Smith's unvested stock options to purchase a total of
11,103 shares of our common stock were fully vested. Mr. Smith also reaffirmed
his non-disclosure and non-competition agreements which expire in February 2000.
Richard Masterson resigned as our President and as a director on May
18, 1999. We entered into a severance agreement, effective as of May 18, 1999,
in connection with his resignation. Under the severance agreement Mr. Masterson
is entitled to receive from us:
o a severance payment of $131,250 payable in nine equal monthly
installments
o health, life and disability insurance and other benefits for the
nine month period commencing May 18, 1999, including auto
reimbursement expenses up to a maximum of $500 per month until the
severance payment is paid in full
In addition, all of Mr. Masterson's unvested stock options to purchase
a total of 11,103 shares of our common stock were fully vested. Mr. Masterson
also reaffirmed his non-disclosure and non-competition agreements which expire
in February 2000. Mr. Masterson has the right to require us to register not less
than 100,000 shares but no more than 500,000 shares of his common stock in this
offering or, if this offering is not effected, in any subsequent offering of our
common stock. Mr. Masterson must notify us of the number of his shares to be
registered before June 3, 1999.
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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, and who are "non-employee directors" as defined under Rule 16b-3 of the
Securities Exchange Act of 1934. The compensation committee presently consists
of Messrs. Keith and Forgash. No stock options or other benefits have been
awarded or granted under the 1998 Performance Incentive Plan.
The terms of options granted under the 1998 Performance Incentive Plan
are as follows:
o the option price per share for any non-qualified stock option or
incentive stock option shall not be less than the fair market
value of the common stock at the time of the grant
o if an incentive stock option is granted to a person who owns more
than 10% of the total combined voting power of all our classes of
stock, the exercise price shall not be less that 110% of the fair
market value on the date of grant
o the term of each stock option may not exceed ten years, and in the
case a person who owns more than 10% of the total combined voting
power of all our classes of stock, the term of each stock option
may not exceed five years
o payment for the exercise of an option shall be made in cash, or,
as shall be otherwise approved in advance by the option plan
committee, in shares of common stock already owned by the option
holder, valued at the fair market value of the common stock on the
date of exercise
o the option plan committee may also allow, in its sole discretion,
a "cashless exercise" for the exercise of stock options
Upon the occurrence of events constituting of a change in control
within the meaning of the 1998 Performance Incentive Plan, in the sole
discretion of the board of directors,
o all outstanding stock options and stock appreciation rights may
become fully exercisable
o all conditions and restrictions of all restricted stock grants may
be deemed satisfied
o all performance grants may be deemed fully earned
1998 Stock Option Plan. The 1998 Stock Option Plan provides for the issuance to
key executives and other employees of incentive stock options and non-qualified
stock options to purchase up to a total of 1,397,236 shares of common stock. The
1998 Stock Option Plan is administered by the compensation committee of the
board of directors. As of May 1, 1999, options issued under the 1998 Stock
Option Plan to purchase a total of 945,133 shares of common stock at a weighted
average exercise price per share of $4.92 were outstanding, of which options to
purchase 65,000 shares at a weighted average exercise price of $4.94 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 452,103
shares of common stock available for future grant under this plan. No options
are issuable under the 1998 Stock Option Plan after September 2008.
The terms of options granted under the 1998 Stock Option Plan are as
determined by the option plan committee, subject to the following:
o the option price per share for any non-qualified stock option or
incentive stock option shall not be less than the fair market
value of the common stock at the time of the grant
o if an incentive stock option is granted to a person who owns more
than 10% of the total combined voting power of all our classes of
stock, the exercise price shall not be less that 110% of the fair
market value on the date of grant
o the term of each stock option may not exceed ten years, and in the
case a person who owns more than 10% of the total combined voting
power of all our classes of stock, the term of each stock option
may not exceed five years
o payment for the exercise of an option shall be made in cash, or,
as shall be otherwise approved in advance by the option plan
committee, in shares of common stock already owned by the option
holder, valued at the fair market value of the common stock on the
date of exercise
o the option plan committee may also allow, in its sole discretion,
a "cashless exercise" for the exercise of stock options
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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 May 1, 1999, options
issued under the 1997 Stock Option Plan to purchase a total of 418,662 shares of
common stock at a weighted average exercise price per share of $3.05 were
outstanding, of which options to purchase 203,046 shares were fully vested and
exercisable. As of that date, we had 181,338 shares at a weighted average
exercise price of $2.47 of common stock available for future grant under this
plan. No options are issuable under the 1997 Stock Option Plan after September
2008.
1996 Stock Option Plan. Digital Evolution had historically granted stock
options to its officers and key employees under a stock plan. As part of our
merger with Digital Evolution, all of these options which were outstanding at
the time of the merger were converted into stock options to acquire common stock
at the ratio of .99 shares of U.S. Interactive for each Digital Evolution
option. No further stock options will be granted under this former Digital
Evolution plan.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In September 1998, we purchased a total of 1,039,311 shares of our
common stock from nine of our stockholders and a total of 220,403 shares of our
preferred stock from four of our stockholders. The sellers of such shares
included:
o Richard Masterson -- 153,608 shares of common stock
o Eric Pulier -- 169,916 shares of common stock
o John Shulman -- 40,600 shares of common stock
o Larry Smith -- 159,368 shares of common stock
o Stephen Zarrilli -- 73,646 shares of common stock
o Churchill MegaSOFT -- 315,558 shares of common stock
All shares were purchased at $4.63 per share.
In September 1998, we sold 2,339,628 shares of our series D preferred
stock to Safeguard 98 Capital, L.P. for $10.8 million, or $4.63 per share.
In July and October 1997, we sold an aggregate of 595,706 shares of our
series C preferred stock to Technology Leaders II L.P., Technology Leaders II
Offshore C.V., and Internet Capital Group, L.L.C. at a purchase price of $1.68
per share.
In July 1998, Richard J. Masterson sold 78,100 shares of our common
stock, Larry W. Smith sold 44,327 shares of our common stock, and Stephen T.
Zarrilli sold 37,995 shares of our common stock to Technology Leaders II L.P. or
Technology Leaders II Offshore C.V. at a price of $3.50 per share.
Eric Pulier, Chairman of the Board and Chief Technology Officer of U.S.
Interactive, and John Shulman, a director of U. S. Interactive, are members of
Juggernaut Partners, LLC, and own, in the aggregate, 41.6% of the equity
interest in Juggernaut Partners. Mr. Shulman is the Chairman, Chief Executive
Officer and a manager of Juggernaut Partners. Pursuant to a professional
services and consulting agreement dated January 6, 1999, U. S. Interactive is
providing professional services to Juggernaut Partners, including strategic
design and development, in connection with Juggernaut Partners' development of
an Internet global exchange platform. The agreement provides that Juggernaut
Partners will pay a total of approximately $3.6 million for the services
provided by U. S. Interactive. The professional services and consulting
agreement dated January 6, 1999 replaces a prior agreement pursuant to which
Juggernaut Partners paid a total of approximately $900,000 for the similar
services provided by U.S. Interactive. Juggernaut represented more than 13% of
our revenues for the three months ended March 31, 1999.
In July 1998, we entered into an employment agreement with Eric Pulier,
as described under "Management," pursuant to which Mr. Pulier is our Chairman of
the Board and Chief Technology Officer.
Stephen T. Zarrilli is our Chief Executive Officer and President. The
Company and Mr. Zarrilli anticipate that they will enter into an employment
agreement in the near future.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock by:
o our chief executive officer, our four other most highly
compensated executive officers and our directors
o all directors and executive officers as a group
o each person known to us to own beneficially more than 5% of our
outstanding shares
o each selling stockholder
A person has beneficial ownership of shares if the individual has the
power to vote or dispose of the shares. This power can be exclusive or shared,
direct or indirect. In addition, a person beneficially owns shares underlying
options that are presently exercisable or will become exercisable within 60 days
of the date of this prospectus.
The address for all directors and executives is 2012 Renaissance
Boulevard, King of Prussia, Pennsylvania 19406.
As of May 1, 1999, there were 9,035,388 shares of our common stock,
outstanding and 5,341,096 shares of common stock issuable upon conversion of
all outstanding preferred stock.
To calculate a stockholder's percentage of beneficial ownership, we
must include in the numerator and denominator those shares underlying options
beneficially owned by that stockholder. Options held by other stockholders,
however, are disregarded in this calculation. Therefore, the denominator used in
calculating beneficial ownership among our stockholders may differ.
The table below assumes that the underwriters have not exercised their
over-allotment option. In addition, the symbol "*" means that the percentage is
less than 1.0%.
<TABLE>
<CAPTION>
Beneficial Ownership Beneficial Ownership
Prior to Offering After Offering(1)
-------------------------------- --------------------------
Name Number Percentage Shares Percentage
- ---- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Executive Officers and Directors:
Eric Pulier 3,698,171(1) 25.5% 3,698,171
Stephen T. Zarrilli 576,592(2) 4.0 594,592
John D. Shulman 301,337(3) 2.1 301,337
Philip L. Calamia 49,000(4) * 49,000 *
E. Michael Forgash
Robert E. Keith, Jr. -- -- -- --
All directors and executive
officers as a group (6 persons) 4,640,975(5) 31.8
Other Five Percent Holders:
Safeguard Scientifics, Inc. 2,339,628(6) 16.3
Technology Leaders II 1,184,175(7) 8.2
Selling Stockholders:
Richard J. Masterson 1,178,408(8) 8.2
Larry W. Smith 1,220,649(9) 8.5
</TABLE>
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- --------
1 Includes 127,308 shares issuable upon exercise of options, 720 shares
issuable upon exercise of options held by Heather Pulier, Mr. Pulier's wife,
2,314,094 shares owned by Churchill MegaSoft, a California partnership in
dissolution, of which Mr. Pulier is co-general partner and with respect to
which Mr. Pulier has sole authority for all investments, voting and
disposition decisions. Upon distribution of the partnership's assets, Mr.
Pulier will beneficially own 2,016,358 of the shares formerly held by the
partnership. The remaining 297,736 shares will be distributed to Mr.
Pulier's brother, Greg Pulier.
2 Includes 31,525 shares issuable upon exercise of options, 17,142 shares held
as Custodian under the Uniform Transfers to Minors act for the benefit of
Mr. Zarrilli's three children, and 5,000 shares held as Voting Trustee for
the benefit of Mr. Pulier's minor son under a certain Voting Trust
Agreement, which trust shall automatically terminate upon completion of this
offering, at which time the 5,000 shares will be distributed to Mr. Zarrilli
as Custodian under the California Uniform Transfers to Minors Act. Does not
include a total of 18,000 shares which will be distributed to Mr. Zarrilli
as Custodian under certain states' Uniform Transfers to Minors Act upon the
dissolution of certain Voting Trust Agreements upon completion of the
offering, as noted in notes 2 and 3, above.
3 Includes 3,600 shares issuable upon exercise of options.
4 Includes 34,000 shares issuable upon exercise of options, of which 25,000
will become exercisable upon completion of the offering.
5 Includes 313,324 shares issuable upon exercise of options, including 720
shares issuable upon exercise of options held by Mr. Pulier's wife.
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6 Includes 2,339,628 shares of series D preferred stock issued to Safeguard 98
Capital L.P. Safeguard Delaware, Inc., a wholly-owned subsidiary of
Safeguard Scientific, Inc., is the sole general partner of Safeguard 98
Capital L.P. and has sole authority and responsibility for all investments,
voting and disposition decisions regarding such shares. Safeguard Delaware,
Inc. holds approximately a 91.2% general partnership interest in Safeguard
98 Capital L.P. Safeguard Scientific, Inc. disclaims beneficial ownership of
shares of U.S. Interactive's common stock and preferred stock held by the
various other entities referred to in note 9, below. Robert E. Keith, a
director of U.S. Interactive, is a director of Safeguard. The address of
Safeguard is Safeguard Scientifics, Inc., 800 The Safeguard Building, 435
Devon Park Drive, Wayne, Pennsylvania 19087.
7 Includes 93,445 shares of common stock issued to Technology Leaders II
Offshore C.V, 117,635 shares of common stock, 293,316 shares of series B
convertible preferred stock and 248,990 shares of series C convertible
preferred stock issued to Technology Leaders II L.P., and 233,000 shares of
series B convertible preferred stock and 197,789 shares of series C
convertible preferred stock issued to TL Ventures Third Corp. Technology
Leaders II consists of Technology Leaders II L.P. and Technology Leaders II
Offshore C.V., TL Ventures Third Corp. is wholly-owned by Technology Leaders
II Offshore C.V., Technology Leaders II Management, L.P., is the sole
general partner of Technology Leaders II L.P. and co-general partner of
Technology Leaders II Offshore C.V., Technology Leaders II L.P. and
Technology Leaders II Offshore C.V. are venture capital funds that are
required by their governing documents to make all investment, voting and
disposition actions in tandem. Technology Leaders II Management L.P. has
sole authority and responsibility for all investments, voting and
disposition decisions for Technology Leaders II.
The general partners of Technology Leaders II Management L.P. are: (i)
Technology Leaders Management, Inc., a wholly-owned subsidiary of Safeguard,
(ii) Robert E. Keith, a director of U. S. Interactive, Gary J. Anderson,
M.D., Ira M. Lubert and Mark J. DeNino, and (iii) four other corporations
(the "TLA Corporations") owned by natural persons, one of whom is a director
of Safeguard. Technology Leaders II Management L.P. is managed by an
executive committee, by whose decisions the general partners have agreed to
be bound, which consists of ten voting members including: (i) Warren V.
Musser, who is a designee of Technology Leaders Management, Inc., (ii) Mr.
Keith, Dr. Anderson, Mr. DeNino, and Christopher Moller, Ph.D.,
individually, and (iii) one designee of each of the TLA Corporations and (as
a non-voting member) Clayton S. Rose. There is currently one vacancy on the
executive committee. Technology Leaders Management, Inc. is the
administrative manager of Technology Leaders II, subject to the control and
direction of the executive committee of Technology Leaders II Management
L.P. Mr. Keith is a director of Safeguard. Technology Leaders Management,
Inc. holds a 34.0% general partnership interest in Technology Leaders II
Management L.P. The address of Technology Leaders II is 800 The Safeguard
Building, 435 Devon Park Drive, Wayne, Pennsylvania 19087.
8 Includes 51,948 shares issuable upon exercise of options, 34,000 shares held
as voting trustee for the benefit of others under a certain Voting Trust
Agreement, which trust shall automatically terminate upon completion of this
offering, at which time 34,000 of the shares held by the trust will be
distributed to beneficiaries of the trust (3,000 of such shares will be
distributed to Stephen Zarrilli as Custodian under the New Jersey Uniform
Gifts to Minors Act for the benefit of certain unrelated minor children.)
9 Includes 51,948 shares issuable upon exercise of options, and 45,000 shares
held as voting trustee for the benefit of others under a certain Voting
Trust Agreement, which trust shall automatically terminate upon completion
of this offering, at which time 45,000 of the shares held by the trust will
be distributed to beneficiaries of the trust (15,000 of such shares will be
distributed to Stephen Zarrilli as Custodian under certain states' Uniform
Transfers to Minors Acts for the benefit of certain minor children.)
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DESCRIPTION OF CAPITAL STOCK
Our Authorized Capital Stock
o 90 million shares of common stock, par value $0.001 per share
o 15 million shares of preferred stock, par value $0.001 per share
o immediately after the sale of the shares of common stock in this
offering, we will have _______ shares of common stock outstanding
and no shares of preferred stock outstanding
Common Stock
Voting:
o one vote for each share held of record on all matters submitted to
a vote of stockholders
o no cumulative voting rights
o election of directors by plurality of votes cast
o all other matters by majority of the votes cast
Dividends:
o subject to preferential dividend rights of outstanding shares of
preferred stock, common stockholders are entitled to receive
ratably declared dividends
o the board of directors may only declare dividends out of legally
available funds
Additional Rights:
o subject to the preferential liquidation rights of outstanding
shares of preferred stock, common stockholders are entitled to
receive ratably net assets, available after the payment of all
debts and liabilities, upon our liquidation, dissolution or winding
up
o no preemptive rights
o no subscription rights
o no redemption rights
o no sinking fund rights
o no conversion rights
The rights and preferences of common stockholders are subject to the
rights of any series of preferred stock we may issue in the future.
Preferred Stock
We may, by resolution of our board of directors, and without any further
vote or action by our stockholders, authorize and issue, subject to certain
limitations prescribed by law, up to an aggregate of 15 million shares of
preferred stock. The preferred stock may be issued in one or more classes or
series of shares of any class or series. With respect to any classes or
series, the board of directors may determine the designation and the number of
shares, preferences, limitations and special rights, including dividend
rights, conversion rights, voting rights, redemption rights and liquidation
preferences. Because of the rights that may be granted, the 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
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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 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.
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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 _______ shares of our common stock, assuming no exercise of the
underwriters' over-allotment option and no exercise of outstanding options. Of
these shares, all of the shares sold in the offering will be freely tradeable
without restriction or further registration under the Securities Act, unless
such shares are purchased by "affiliates" as that term is defined in Rule 144
under the Securities Act. The remaining _______ 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 May 1, 1999, subject to the contractual restrictions described
below, additional shares may be sold without registration under to the
Securities Act as follows:
o 1,583,114 shares of our common stock currently outstanding will be
available for sale into the public market following the
effectiveness of the registration statement
o 2,275,254 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); 938,047 of such options were exercisable at May
1, 1999. At that date, there were a total of approximately
3,636,440 shares of our common stock reserved for issuance upon
exercise of options which may be granted in the future under our
employee benefit plans
o 70,000 shares of our common stock issuable upon exercise of a
warrant
o 3,962,250 shares of our common stock currently outstanding will be
eligible for sale under Rule 144 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 consent of BT Alex.
Brown Incorporated, any shares of our common stock or any securities
convertible into or exchangeable or exercisable for shares of our common stock
for a period of 180 days following the date of this prospectus.
Transfers or dispositions can be made during the lock-up periods in the
case of gifts for estate planning purposes where the donee signs a lock-up
agreement.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days
after the date of this prospectus, a person who has beneficially owned shares
of our common stock for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
o 1% of the number of shares of our common stock then outstanding,
which will equal approximately _____ shares immediately after this
offering
o the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing
of a notice on Form 144 with respect to such sale
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information
about us.
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Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, "144(k) shares" may be sold immediately upon the
completion of this offering.
Rule 701
In general, under Rule 701 of the Securities Act as currently in effect,
any of our employees, consultants or advisors who purchase shares from us in
connection with a compensatory stock or option plan or other written agreement
are eligible to resell such shares 90 days after the effective date of this
offering in reliance on Rule 144, but without compliance with some
restrictions, including the holding period, contained in Rule 144.
Registration Rights
Some holders of our common stock, and all holders of shares of our
common stock issuable upon exercise of warrants and preferred stock, have been
granted registration rights under an investors' rights agreement with U.S.
Interactive. 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. All holders are also entitled under the
investors' rights agreement to an aggregate of four shelf registrations on a
registration statement on Form S-3 provided that the number of shares to be
covered by each shelf registration has an aggregate price to the public of not
less than $2.0 million. Registration of shares of our common stock pursuant to
an exercise of demand registration rights, piggyback registration rights or
shelf registration rights would result in such shares becoming freely tradable
without restriction under the Securities Act of 1933 upon the effectiveness of
such registration and may adversely affect our stock price.
We intend to seek a waiver of the piggyback registration rights of the
holders described above in connection with this offering.
Stock Options
Shortly after completion of this offering, we plan to file a
registration statement on Form S-8 under the Securities Act covering shares of
common stock reserved for issuance under the four stock option plans and our
incentive plan. May 1, 1999, options to purchase 2,275,254 shares of our common
stock were issued and outstanding, 938,047 of which are vested. This
registration statement is expected to be filed and become effective as soon as
practicable after the date of this prospectus. Accordingly, shares registered
under such registration statement will, subject to lock-up agreements, vesting
provisions and Rule 144 volume limitations applicable to our affiliates, be
available for sale in the open market immediately after the registration
statement becomes effective.
58
<PAGE>
PLAN OF DISTRIBUTION
Subject to the terms and conditions of the underwriting agreement, the
underwriters, named below through their representatives BT Alex. Brown
Incorporated, Lehman Brothers Inc. and Adams, Harkness & Hill, Inc. have
severally agreed to purchase from us the following respective numbers of
shares of our common stock at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
prospectus.
Number of
Underwriter Shares
----------- ---------
BT Alex. Brown Incorporated
Lehman Brothers Inc.
Adams, Harkness & Hill, Inc.
Total =========
The underwriting agreement provides that the obligations of the
underwriters are subject to conditions precedent and that the underwriters
will purchase all of the shares of our common stock offered hereby if any of
such shares are purchased.
We have been advised by the representatives of the underwriters that the
underwriters propose to offer the shares of our common stock to the public at
the initial public offering price set forth on the cover page of this
prospectus and to certain dealers at such price less a concession not in
excess of $___ per share. The underwriters may allow, and such dealers may
reallow, a concession not in excess of $___ per share to certain other
dealers. After the initial public offering, the offering price and other
selling terms may be changed by the representatives of the underwriters.
We have granted the underwriters an option, exercisable not later than
30 days after the date of this prospectus, to purchase up to __________
additional shares of our common stock at the initial public offering price
less the underwriting discounts and commissions set forth on the cover page of
this prospectus. To the extent that the underwriters exercise such option,
each of the underwriters will have a firm commitment to purchase approximately
the same percentage thereof that the number of shares of our common stock to
be purchased by it in the above table bears to _____________, and we will be
obligated, pursuant to the option to sell such shares to the underwriters. The
underwriters may exercise such option only to cover over-allotments made in
connection with the sale of our common stock offered hereby. If purchased, the
underwriters will offer such additional shares on the same terms as those on
which the _____________ shares are being offered.
We have agreed to indemnify the underwriters against specified
liabilities, including liabilities under the Securities Act.
We have agreed not to offer, sell, sell short, transfer, hypothecate,
pledge or otherwise dispose of any shares of our common stock or other
securities convertible into or exchangeable or exercisable for shares of our
common stock or derivatives of our common stock (or agreement for such) for a
period of 180 days after the date of this prospectus, directly or indirectly,
by us or otherwise, except as consideration for business acquisitions, on
exercise of currently outstanding stock options or on the issuance of options
to key employees and directors under our stock option plans and the exercise
of such options, without the prior written consent of BT Alex. Brown
Incorporated.
All of our officers and directors and certain of our stockholders have
entered into lock-up agreements under which they agreed not to offer, sell,
sell short, transfer, hypothecate, pledge or otherwise dispose of any shares
of our common stock or other securities convertible into or exchangeable or
exercisable for shares of our common stock or derivatives of our common stock
(or agreement for such) for a period of 180 days after the date
59
<PAGE>
of this prospectus, directly or indirectly, without the consent of BT Alex.
Brown Incorporated. Transfers or dispositions can be made during the lock-up
period in the case of gifts for estate planning purposes where the donee signs
a lock-up agreement.
The representatives of the underwriters have advised us that the
underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority. To facilitate this offering, the
underwriters may engage in transactions that stabilize, maintain or otherwise
affect the market price of our common stock. Specifically, the underwriters
may over-allot shares of our common stock in connection with this offering,
thereby creating a short position in the underwriters' syndicate account.
Additionally, to cover such over-allotments or to stabilize the market price
of our common stock, the underwriters may bid for, and purchase, shares of our
common stock in the open market. Any of these activities may maintain the
market price of our common stock at a level above that which might otherwise
prevail in the open market. The underwriters are not required to engage in
these activities, and, if commenced, any such activities may be discontinued
at any time. The representatives of the underwriters, on behalf of the
syndicate of underwriters, also may reclaim selling concessions allowed to an
underwriter or dealer, if the syndicate repurchases shares distributed by that
underwriter or dealer.
Prior to this offering, there has been no public market for our
common stock. Consequently, the initial public offering price for our common
stock will be determined by negotiations between us and the representatives of
the underwriters. Among the factors to be considered in such negotiations will
be prevailing market conditions, the results of our operations in recent
periods, the market capitalizations and stages of development of other
companies which we and the representatives of the underwriters believe to be
comparable to us, estimates of our business potential, the present state of
our development and other factors deemed relevant.
At our request, the underwriters have reserved approximately ____ shares
of our common stock for sale at the initial public offering price to our
employees, directors and certain other persons with relationships to U.S.
Interactive. The number of shares of our common stock available for sale to
the general public will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares which are not so orally confirmed for
purchase within one day of the pricing of the offering will be offered by the
underwriters to the general public on the same basis as the other shares
offered by this prospectus.
LEGAL MATTERS
The validity of the shares of our common stock offered hereby will be
passed upon for us by Dilworth Paxson LLP, Philadelphia, Pennsylvania. Stephen
Harmelin, a member of Dilworth Paxson LLP, is the owner of 112,500 shares
of our common stock. Certain other members of Dilworth Paxson LLP have an
interest in these shares. Certain legal matters in connection with this
offering are being passed upon for Safeguard Scientifics, Inc. by Morgan,
Lewis & Bockius LLP, Philadelphia, Pennsylvania. Certain legal matters in
connection with this offering are being passed upon for the underwriters by
Brobeck, Phleger & Harrison LLP, Washington, D.C.
EXPERTS
Our consolidated financial statements and schedule as of December 31,
1997, and 1998, and for each of the years in the three-year period ended
December 31, 1998, have been 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
60
<PAGE>
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 in Washington,
D.C., 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.
61
<PAGE>
U.S. Interactive, Inc. and Subsidiaries
Index to Financial Statements
<TABLE>
<CAPTION>
<S> <C>
Financial Statements Page
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.
Independent Auditors' Report..............................................................F-20
Balance Sheets, December 31, 1996 and 1997................................................F-21
Statements of Operations, Years ended December 31, 1996 and 1997..........................F-22
Statements of Stockholders' Equity, Years ended December 31, 1996 and 1997................F-23
Statements of Cash Flows, Years ended December 31, 1996 and 1997..........................F-24
Notes to Financial Statements.............................................................F-26
Unaudited Pro Forma Financial Statements
Unaudited Pro Forma Financial Information.................................................F-36
Unaudited Pro Forma Combined Statement of Operations, Year ended December 31, 1998........F-37
Unaudited Pro Forma Combined Statement of Operations, Three Months ended March 31, 1998 ..F-38
Notes to Unaudited Pro Forma Combined Financial Statements................................F-39
</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,
Assets 1997 1998 1999
- ------ (unaudited)
------- ------- -----------
<S> <C> <C> <C>
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 - 12,439 16,892
Deferred stock compensation - - (1,346)
Treasury stock, 1,039,311 shares, at cost - (4,812) (4,812)
Accumulated deficit (388) (9,456) (12,772)
------- ------- --------
Total Stockholders' Equity (Deficit) 1,795 (1,820) (2,028)
------- ------- --------
Total Liabilities and Stockholders' Equity (Deficit) $4,122 $22,262 $ 25,464
====== ======= ========
</TABLE>
F-3
See accompanying notes to consolidated financial statements
<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>
F-4
See accompanying notes to consolidated financial statements
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
(In thousands, except per share data)
Mandatorily |
Redeemable |
Convertible |
Preferred Stock | Preferred Stock Common Stock Deferred Additional
--------------------|---------------------------------------------- Stock Paid-in
Shares Amount | Shares Amount Shares Amount Compensation Capital
| ------ ------ ------ ------ ------------ -------
|
<S> <C> <C> | <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 - $- | $- 3,403 $35 $- $-
|
Issuance of common stock in | - - 1,096 73 - -
exchange for services - - |
|
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 - - | - - - - - -
|
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 - 12,506
|
Conversion of no par common |
stock to $0.001 par value - - | - - - (238) - 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) | - - - - - (451)
|
Issuance of warrants in - - | - - - - - 140
connection with debt financing |
|
Exercise of stock options - - | - - 4 - - 6
|
Accretion of mandatorily |
redeemable preferred |
stock to redemption value - 477 | - - - - - -
</TABLE>
<PAGE>
[RESTUBED TABLE FOR ABOVE]
<TABLE>
<CAPTION>
Total
Treasury Accumulated Stockholders'
Stock Deficit Equity (Deficit)
----- ------- ---------------
<S> <C> <C> <C>
Balances at December 31, 1995 $- $38 $73
Issuance of common stock to - - 73
principal stockholders
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)
Net loss - (129) (129)
-------------------------------------
Balances at December 31, 1996 - (98) 1,111
Issuance of Series B preferred
stock, net of $26 in costs - - 974
Net loss - (290) (290)
-------------------------------------
Balances at December 31, 1997 - (388) 1,795
Merger with Digital Evolution - - 12,510
Conversion of no par common
stock to $0.001 par value - - -
Issuance of Series D
preferred stock, net of $25
in costs - - -
Repurchase of common stock (4,812) - (4,812)
Repurchase of preferred stock - - (451)
Issuance of warrants in - - 140
connection with debt financing
Exercise of stock options - - 6
Accretion of mandatorily
redeemable preferred stock
to redemption value - (477) (477)
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 | 0 0 9,125 9 - 12,439
--------------------------------------------------------------------------------------------
|
Issuance of common stock in |
connection with acquisition - - | - - 585 1 - 2,923
|
|
Deferred stock compensation - - | - - 275 - (1,375) 1,375
|
Amortization of deferred |
stock compensation | - - - 29 -
|
Exercise of stock options | 90 - - 155
|
Accretion of mandatorily |
redeemable preferred |
stock to redemption value - 374 |
|
Net loss (unaudited) | - - - - - -
|
--------------------------------------------------------------------------------------------
Balances at March 31, 1999 |
(unaudited) 5,341 $17,667 | 0 $0 10,075 $10 $(1,346) $16,892
============================================================================================
</TABLE>
[RESTUBED TABLE FOR ABOVE]
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Conversion of preferred to
mandatorily redeemable
preferred stock - (148) (2,088)
Net loss - (8,443) (8,443)
----------------------------------------
Balances at December 31,
1998 (4,812) (9,456) (1,820)
----------------------------------------
Issuance of common stock in
connection with acquisitiion - - 2,924
Deferred stock compensation - - 0
Amortization of deferred
stock compensation - - 29
Exercise of stock options - - 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) $(4,812) $(12,772) $(2,028)
========================================
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31, Three Months Ended March 31,
------------------------------- ----------------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(unaudited)
----------------------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (129) $ (290) $(8,443) $(20) $(2,942)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 61 269 4,592 91 2,496
Non-cash charges 73 - 89 - 77
Changes in operating assets and liabilities, net of
effects of acquisitions:
Increase in accounts receivable (445) (1,340) (113) (589) (3,571)
Increase (decrease) in fees and expenditures in
excess of billings (52) (49) (630) (224) 33
Increase (decrease) in prepaid expenses and other
current assets (38) (9) (163) (133) (27)
Increase in accounts payable and accrued expenses 78 1,025 1,929 513 984
Increase (decrease) in billings in excess of fees
and expenditures 244 371 (708) (84) 1,787
------ ------- ------- ----- -------
Net cash used in operating activities (208) (23) (3,447) (446) (1,163)
------ ------- ------- ----- -------
Cash flows from investing activities:
Purchase of furniture and equipment (244) (422) (573) (118) (329)
Acquisitions, net of cash acquired - (166) (4) - 36
Other (11) (24) (72) - 23
------ ------- ------- ----- -------
Net cash used in investing activities (255) (612) (649) (118) (270)
------ ------- ------- ----- --------
Cash flows from financing activities:
Net borrowings (repayments) under bank line of credit 45 (45) 1,700 525 (631)
Net proceeds (repayments) from equipment financing 66 (79) (201) (71) 545
Proceeds from term loan - - 600 - -
Repayment of stockholder loans (40) (23) (24) (7) (7)
Distributions to stockholders (7) - - - -
Payment of deferred financing fees - - (48) - -
Net proceeds from issuance of preferred stock 966 974 10,807 - -
Payments to acquire treasury stock - - (4,812) - -
Payments to repurchase preferred stock - - (1,020) - -
Proceeds from exercise of stock options - - 6 - 155
------ ------- ------- ----- -------
Net cash provided by financing activities 1,030 827 7,008 447 62
------ ------- ------- ----- -------
Net increase (decrease) in cash and cash equivalents 567 192 2,912 (117) (1,371)
Cash and cash equivalents, beginning of period 27 594 786 786 3,698
====== ======= ======= ===== =======
Cash and cash equivalents, end of period $ 594 $ 786 $ 3,698 $669 $ 2,327
====== ======= ======= ===== =======
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to March 31, 1998 and 1999 is unaudited)
1) Summary of Significant Accounting Policies
Description of Business:
US. Interactive, Inc. (the Company) is a leading provider of Internet
professional services helping companies take advantage of the business
opportunities presented by the Internet. The Company provides
integrated Internet strategy consulting, marketing and technology
services that enable clients to align their people, processes and
systems to form an electronic enterprise.
Principles of Consolidation
The accompanying consolidated financial statements include the
financial statements of the Company and its two wholly-owned
subsidiaries, Web Access, Inc., and Digital Bindery, LLC. All
significant intercompany balances and transactions have been eliminated
in consolidation. Digital Bindery, LLC had no meaningful assets or
operations during the periods presented.
The Company has sustained significant net losses and negative cash
flows from operations since its inception. The Company's ability to
meet its obligations in the ordinary course of business is dependent
upon its ability to establish profitable operations or raise additional
financing through public or private equity financing, bank financing or
other sources of capital. During 1998, the Company sold approximately
$10.8 million of its preferred stock. Management believes that its
current funds combined with other available sources of funding will be
sufficient to enable the Company to meet its planned expenditures
through at least December 31, 1999. The Company may require additional
capital to finance its future operations beyond 1999. Additional
financing may not be available when needed and, if such financing is
available, it may not be available on terms favorable to the Company.
Unaudited Interim Financial Information
The interim consolidated financial statements of the Company for the
three months ended March 31, 1998 and 1999, included herein have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations relating to interim financial statements. In the opinion of
management, the accompanying unaudited interim consolidated financial
statements reflect all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position of the
Company at March 31, 1999, and the results of its operations and its
cash flows for the three months ended March 31, 1998 and 1999.
Cash Equivalents
Cash equivalents consist primarily of money market accounts. The
Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
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 continually
evaluates goodwill and other intangible assets for indications of
impairment based on the forecasted undiscounted cash flow from the
related business activity.
F-7
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to March 31, 1998 and 1999 is unaudited)
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.
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.
F-8
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to March 31, 1998 and 1999 is unaudited)
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 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 $(129) $(290) $(9,068) $ (20) $(3,316)
to common stockholders
Denominator:
Historical weighted-average shares
outstanding for basic and diluted
loss per common share 4,486 4,737 6,670 4,737 8,249
Basic and diluted loss per common share $ (.03) $ (.06) $ (1.36) $ - $ (0.40)
Year Ended December 31, Three Months Ended March 31,
----------------------- ----------------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
Numerator: Net loss attributable to
to common stockholders $(129) $ (290) $(9,068) $ (20) $(3,316)
Pro forma denominator:
Historical weighted-average shares
outstanding for basic and diluted
loss per common share 5,012 6,074 9,634 6,074 13,550
Pro forma basic and diluted
loss per common share $ (.03) $ (.05) $ (.94) $ - $ (0.24)
</TABLE>
Recent Accounting Pronouncements
In June 1997 the Financial Accounting Standard Board (FASB) issued
Reporting Comprehensive Income ("SFAS No. 130"), which established
standards for reporting and display of comprehensive income and its
components in the financial statements. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. Reclassification of
financial statements for earlier periods provided for comparative
purposes is required. SFAS No. 130 offers alternatives for presentation
of disclosure required by the standard. The adoption of SFAS No. 130
had no impact on the Company's results of operations, financial
position or cash flows, as the amount of comprehensive loss is the same
as the net loss for all periods presented.
<PAGE>
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 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.
F-9
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to March 31, 1998 and 1999 is unaudited)
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.
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.
<PAGE>
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 1,044,247 options to 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.
F-10
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to March 31, 1998 and 1999 is unaudited)
The Merger was accounted for under the purchase method of accounting.
The results of operations of DE have been included in the Company's
consolidated financial statements since July 1, 1998.
The excess of the purchase price over the fair value of the net
identifiable assets acquired of $16,128,000 has been recorded as
goodwill and other intangible assets and is amortized on a
straight-line basis over its estimated life of two years.
The purchase price was allocated as follows (in thousands):
Fair value of assets acquired
(Primarily accounts receivable and fixed assets) $ 2,064
Goodwill and related intangible assets 15,283
Assembled workforce 845
Fair value of liabilities acquired (1,192)
-------
$17,000
=======
The following table reflects unaudited pro forma combined results of
operations of the Company and DE on the basis that the acquisition had
taken place at the beginning of 1997 (in thousands, except per share
data).
December 31,
---------------------- March 31,
1997 1998 1998
-------- --------- ----------
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)
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.
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>
F-11
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to March 31, 1998 and 1999 is unaudited)
5) Accrued Expenses
Accrued expenses consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998 1999
--------------------------------- ---------
<S> <C> <C> <C>
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
============ ============ =========
</TABLE>
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 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 were $1,700,000 outstanding
under the Line and $600,000 outstanding under the Loan as of December
31, 1998. There were $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-12
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(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 - 600 1,200
2002
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.
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.
<PAGE>
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.
F-13
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to March 31, 1998 and 1999 is unaudited)
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.
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.
F-14
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to March 31, 1998 and 1999 is unaudited)
9) Leases
The Company maintains operating and administrative offices in
California, New York, Pennsylvania and Washington D.C. The Company also
leases certain equipment under operating and capital leases. Total rent
expense under operating leases amounted to $103,000, $213,000 and
$1,239,000 for the years ended December 31, 1996, 1997 and 1998,
respectively.
Future minimum payments under non-cancelable leases are as follows (in
thousands):
Capital Operating
Year Ending December 31 Leases Leases
--------------------------------- ------------ -------------
1999 $64 $1,558
2000 23 970
2001 - 811
2002 - 660
2003 - 487
Thereafter - 2,389
------------ -------------
Total minimum lease payments 87 $6,875
------------ -------------
Amount representing interest (8)
------------
Present value of minimum lease
payments $79
============
At December 31, 1998, equipment included assets under capitalized lease
obligations of $72,000 less accumulated amortization of $36,000.
10) Income Taxes
The Company utilized the asset and liability method of accounting for
income taxes as set forth in Statement No. 109, Accounting for Income
Taxes, Under the asset and liability method, deferred taxes are
determined based on the differences between the financial statement and
tax bases of assets and liabilities using enacted tax rates.
F-15
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to March 31, 1998 and 1999 is unaudited)
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):
<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.
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.
<PAGE>
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.
F-16
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to March 31, 1998 and 1999 is unaudited)
13) Stock Option Plan
The Company has three stock option plans currently in effect under
which future grants may be issued: the 1998 Stock Option Plan (the
"1998 Plan"), the 1997 Stock Option Plan (the "1997 Plan") and the 1996
Stock Option Plan (the "1996 Plan"), collectively the Plans.
The Company adopted the 1998 Plan effective July 2, 1998 and amended
September 22, 1998. The 1998 Plan authorizes the grants of options to
purchase up to 1,397,236 shares of authorized but unissued common
shares. At December 31, 1998 156,850 options under the 1998 Plan have
been granted to employees of the Company at prices ranging between
$3.50 and $4.63, the estimated fair value of the Company's common stock
at the date of grant. Of these options 7,500 have been cancelled and
none are currently exercisable. The options will become exercisable in
1999 through 2002.
The Company adopted the 1997 Plan effective January 1, 1997 and amended
on September 22, 1998. The 1997 Plan authorizes the grants of option to
purchase up to 600,000 shares of authorized but unissued common shares.
At December 31, 1997 and 1998, 224,275 and 581,757 options,
respectively, have been granted to employees of the Company at prices
ranging between $1.50 and $4.63, the estimated fair value of the
Company's common stock at the date of grant. Of these options, 4,203
were exercised, 37,392 have expired and been cancelled, 251,169 are
currently exercisable and the remaining options will become exercisable
in 1999 through 2001.
As a result of the Company's merger with Digital Evolution, Inc. as
discussed in Note 3, the Company adopted the 1996 Plan effective July
2, 1998 and amended September 22, 1998. Outstanding Digital Evolution
stock options were converted into options to acquire approximately
1,043,945 Company shares at price of $2.50 to $3.24 per share. The 1996
Plan authorized the grants of options to purchase up to 1,054,688
shares of authorized but unissued 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 fair value
of each option grant is estimated by using the minimum value method.
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>
F-17
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to March 31, 1998 and 1999 is unaudited)
The following summarizes information about the Company's stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
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
- ------------------ -------------------- --------------------- ----------------- ------------------ -----------------
$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):
<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 As reported $ (.06) $ (1.36)
common share
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:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Dividend yield 0% 0%
Expected volatility 0% 0%
Average expected option life 5 years 5 years
Risk-free interest rate 6.00% 5.25%
</TABLE>
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.
F-18
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to March 31, 1998 and 1999 is unaudited)
The Company performs their 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>
North America $1,950 $6,061 $12,535 $2,378 $5,156
Asia-Pacific - - 1,001 - 831
Europe - - 100 - 136
</TABLE>
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
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 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.
<PAGE>
Acquisition (unaudited)
In March 1999, the Company acquired certain assets and assumed certain
liabilities of InVenGen LLC, a regional Internet professional service
firm, in exchange for 584,800 shares of the Company's common stock,
having an estimated fair market value of $2,924,000 at the time of the
transaction. The acquisition will be accounted for using the purchase
method of accounting. Accordingly, a portion of the purchase price will
be allocated to the net assets acquired and liabilities assumed. The
balance of the purchase price will be recorded as goodwill and
amortized over two years.
The Company also issued 275,200 shares of restricted common stock in
connection with the transaction. The former employees of InVenGen LLC
who became employees of the Company are required to be employed by the
Company during the next two year period in order for the restricted
shares to be released to them. If the employees leave the Company
during the two-year period all unvested shares are forfeited. The
Company recorded $1,375,000 of deferred stock compensation in
connection with these restricted shares that will be amortized over the
two year period.
Severance Agreement (unaudited)
In May 1998, 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-19
<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-20
<PAGE>
Digital Evolution, Inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $1,414,827 $1,528,301
Accounts receivable, net of allowance for doubtful
accounts of $0, $165,400, and $150,000 (unaudited) 159,676 1,827,501
Prepaid expenses and other current assets 21,864 58,738
- -------------------------------------------------------------------------------------
Total current assets 1,596,367 3,414,540
Property and equipment, net (Note 2) 327,064 698,894
Other assets 21,699 42,939
- -------------------------------------------------------------------------------------
$1,945,130 $4,156,373
=====================================================================================
Liabilities and Shareholders' Deficiency
Current liabilities
Accounts payable and accrued expenses $ 608,093 $ 585,496
Deferred revenue 700,000 160,220
Loan from shareholders 174,729 -
Current portion of long-term debt (Note 3) 9,750 9,053
Current portion of obligations under capital
leases (Note 7) 24,174 30,418
- -------------------------------------------------------------------------------------
Total current liabilities 1,516,746 785,187
Obligations under capital leases (Note 7) 11,968 28,699
Long-term debt (Note 3) 43,248 34,195
- -------------------------------------------------------------------------------------
Total liabilities 1,571,962 848,081
- -------------------------------------------------------------------------------------
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 (liquidation
value of $4,100,000) (Note 8) 694,761 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
outstanding 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)
- -------------------------------------------------------------------------------------
Total shareholders' deficiency (321,593) (736,467)
- -------------------------------------------------------------------------------------
$1,945,130 $4,156,373
=====================================================================================
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE>
Digital Evolution, Inc.
Statements of Operations
Years Ending December 31,
---------------------------
1996 1997
- -----------------------------------------------------------------------
Revenues $ 2,504,774 $ 7,034,693
- -----------------------------------------------------------------------
Operating expenses
Project personnel and related expenses 1,378,214 4,330,710
Marketing and sales 8,845 268,083
Management and administration 1,337,140 2,794,925
Depreciation 48,628 138,591
- -----------------------------------------------------------------------
Operating income (loss) (268,053) (497,616)
- -----------------------------------------------------------------------
Interest expense (34,120) (33,335)
Interest income 3,410 154,748
Assumed loan balance of related
party (Note 5) (101,299) -
Other (expenses) income, net (20,191) (38,671)
- -----------------------------------------------------------------------
Net income (loss) $ (420,253) $ (414,874)
=======================================================================
Weighted average number of shares
outstanding:
Basic and diluted 20,299,985 20,299,985
Net income (loss) per share:
Basic and diluted $ (.02) $ (.02)
=======================================================================
See accompanying notes to financial statements.
F-22
<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)
=============================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE>
Digital Evolution, Inc.
Statements of Cash Flows
Years Ending December 31,
-------------------------
1996 1997
- ---------------------------------------------------------------------
Cash flows from operating activities
Net income (loss) $(420,253) $ (414,874)
Adjustments to reconcile net
income (loss) to net cash (used
in) provided by operating
activities:
Depreciation 48,628 138,591
Bad debt expense 71,180 166,314
Assumed loan from related 101,299 -
party
Changes in assets and
liabilities:
Accounts receivable (113,880) (1,834,139)
Prepaid assets and other (12,165) (36,874)
Accounts payable and
accrued expenses 535,381 (22,676)
Deferred revenue 700,000 (539,780)
Other assets and liabilities (14,666) (21,240)
- ---------------------------------------------------------------------
Net cash (used in) provided by operating
activities 895,524 (2,564,678)
- ---------------------------------------------------------------------
Cash flows from investing activities
Purchases of property and
equipment (236,356) (515,035)
Disposition of property and
equipment - 4,692
- ---------------------------------------------------------------------
Net cash used in investing activities (236,356) (510,343)
- ---------------------------------------------------------------------
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)
Proceeds from redeemable preferred
stock issuance 694,761 3,349,998
- ---------------------------------------------------------------------
Net cash (used in) provided by
financing activities 698,096 3,188,495
- ---------------------------------------------------------------------
Net (decrease) increase in cash and
cash equivalents 1,357,264 113,474
Cash and cash equivalents,
beginning of year 57,563 1,414,827
- ---------------------------------------------------------------------
Cash and cash equivalents,
end of year $1,414,827 $ 1,528,301
=====================================================================
F-24
<PAGE>
Digital Evolution, Inc.
Statements of Cash Flows
Years Ending December 31,
-------------------------
1996 1997
- ---------------------------------------------------------------------
Supplemental cash flow information
Cash paid during the year for:
Income taxes $ 800 $ 7,280
Interest 26,832 40,623
=====================================================================
Noncash investing and financing
activities
Purchases of equipment by capital
leases $ 23,979 $ 65,604
Assumed loan from related party 101,299 -
=====================================================================
See accompanying notes to financial statements.
F-25
<PAGE>
Digital Evolution, Inc.
Notes to Financial Statements
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.
F-26
<PAGE>
Digital Evolution, Inc.
Notes to Financial Statements
Note 1. Business and Significant Accounting Policies Business (Continued)
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 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.
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,
F-27
<PAGE>
Digital Evolution, Inc.
Notes to Financial Statements
Note 1. Business and Significant Accounting Policies (Continued)
Concentrations of Credit Risk and Major Customer (Continued)
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.
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."
F-28
<PAGE>
Digital Evolution, Inc.
Notes to Financial Statements
Note 1. Business and Significant Accounting Policies (Continued)
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.
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.
F-29
<PAGE>
Digital Evolution, Inc.
Notes to Financial Statements
Note 1. Business and Significant Accounting Policies (Continued)
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.
Note 2. Property and Equipment
Property and equipment consists of the following:
December 31,
---------------------------
1996 1997
- ------------------------------------------------------------------------
Equipment $ 364,053 $ 849,455
Furniture and fixtures 60,164 71,834
Leasehold improvements 16,186 29,457
- ------------------------------------------------------------------------
440,403 950,746
Accumulated depreciation and
amortization (113,339) (251,852)
- ------------------------------------------------------------------------
Property and equipment, net $ 327,064 $ 698,894
========================================================================
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.
F-30
<PAGE>
Digital Evolution, Inc.
Notes to Financial Statements
Note 3. Long-Term Debt
Long-term debt consists of the following:
December 31,
----------------------
1996 1997
- -------------------------------------------------------------------
Note payable to bank, secured by
certain equipment, monthly
payments of $1,128, interest at
9.34%, matures November 2001 $52,998 $43,248
- -------------------------------------------------------------------
52,998 43,248
Less current maturities 9,750 9,053
- -------------------------------------------------------------------
$43,248 $34,195
===================================================================
Note 4. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consists of the following:
December 31,
----------------------
1996 1997
- -------------------------------------------------------------------
Accounts payable $ 85,954 $162,699
Accrued payroll 79,242 214,672
Incentive bonus 300,000 -
Accrued vacation 16,371 81,062
Other - accrued expenses 126,526 127,063
- ---------------------------------------------------------------------
$608,093 $585,496
=====================================================================
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-31
<PAGE>
Digital Evolution, Inc.
Notes to Financial Statements
Note 6. Income Taxes
The components of the income tax benefit are as follows:
December 31, 1996 1997
- --------------------------------------------------------------------------------
Deferred:
Federal $ 305,000 $ 141,000
State 54,000 25,000
- --------------------------------------------------------------------------------
359,000 166,000
Increase in valuation allowance (359,000) (166,000)
- --------------------------------------------------------------------------------
$ - $ -
================================================================================
The difference between the Federal statutory tax rate and the effective tax rate
resulted from the following:
December 31, 1996 1997
- --------------------------------------------------------------------------------
Federal statutory tax benefit rate (34%) (34%)
State income taxes (net of federal benefit) (6%) (6%)
Increase in valuation allowance 40% 40%
- --------------------------------------------------------------------------------
0% 0%
================================================================================
Deferred taxes are recorded based on differences between the financial statement
and tax basis of assets and liabilities. Temporary differences which give rise
to a significant portion of deferred tax assets and liabilities consist of the
following:
December 31, 1996 1997
- --------------------------------------------------------------------------------
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 $ - $ -
================================================================================
F-32
<PAGE>
Digital Evolution, Inc.
Notes to Financial Statements
Note 6. Income Taxes (Continued)
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.
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 $275,717 for the year
ended December 31, 1997.
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-33
<PAGE>
Digital Evolution, Inc.
Notes to Financial Statements
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.
Years Ending December 31,
--------------------------
1996 1997
- ------------------------------------------------------------------------
Net (loss) income $(420,252) $(414,874)
Less: Preferred dividends (45,000) (193,687)
- ------------------------------------------------------------------------
Income (loss) available to common
stockholder $(465,252) $(608,561)
========================================================================
Note 10. Employee Retirement Plans
The Company has sponsored a defined contribution retirement plan (the "Plan")
which cover all employees meeting minimum service requirements. The Plan
qualifies as a deferred salary arrangement under Section 401(k) of the Internal
Revenue Code. Employee's make contributions from 1% - 20% of their eligible
compensation. The Company may elect to make matching contributions, but as of
December 31, 1997 has not elected to do so.
Note 11. Stock Option Plan
In November 1996, the Board of Directors adopted and the Company's shareholders
approved the 1996 Stock Option Plan (the "1996 Plan"). The 1996 Plan provides
for the grant of options which qualify as incentive stock options ("Incentive
Options") under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"), to officers and employees of the Company and options which do not
so qualify ("Non-Qualified Options") to officers, directors, employees and
consultants of the Company. Under the 1996 Plan, the Company may grant options
to purchase up to 6,096,000 shares of Class B common stock. Options to purchase
5,642,785 shares of common stock at an exercise price per share of $.54-$.70
(the estimated fair value of the shares on the date of grant) were granted to
certain employees in 1997. The options granted vest incrementally from one to
five years and are exercisable over a period of five years.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") and related interpretations in accounting
for its employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the fair value of the underlying stock
on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income is required by SFAS No. 123, and has
been determined as if the Company had accounted for its employee stock options
under the fair value method of SFAS No. 123. The fair value of these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted average assumption for 1997; risk-free interest rates of
6.57%; with no volatility factor; and a weighted average expected life of the
option of 5 years. The absence of a volatility factor in the pricing model is
permitted by SFAS No. 123, for non-public companies.
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)
==============================================================================
F-34
<PAGE>
Digital Evolution, Inc.
Notes to Financial Statements
A summary of the Company's stock option plan as of and for the year ended
December 31, 1997 is presented below:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at beginning of year - -
Granted 5,642,785 $0.54
Forfeited/canceled (74,620) $0.54
- ----------------------------------------------------------------------------------------------------------
Outstanding at end of year 5,568,165 $0.54
==========================================================================================================
Options exercisable at year-end 1,733,030 $0.54
==========================================================================================================
Weighted average fair value of options granted during
the year $0.15
==========================================================================================================
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- -----------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.54 5,417,200 4.3 Yrs. $0.54 1,733,030 $0.54
$0.70 150,965 4.8 Yrs. $0.70 - $0.70
--------- ---------
5,568,165 1,733,030
========= =========
</TABLE>
Note 12. Employment Agreements
The Company has entered into employment agreements with certain members of
senior management. The agreements have terms from one to three years and
include, among other things, noncompete agreements and salary and benefits
continuation. In some cases, these agreements grant employees equity interest in
ventures which they have largely developed and made viable. In addition, these
agreements generally can be terminated by notice given by the employee or the
Company. Salaries for these employees range from $75,000 to $200,000 per year.
Salary expense for the years ending December 31, 1996 and 1997, respectively,
was $29,444 and $356,140.
Note 13. Subsequent Events
During July 1998, the Company merged with U.S. Interactive Inc.
F-35
<PAGE>
U.S. INTERACTIVE, INC.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
On July 2, 1998, the Company completed a merger with Digital Evolution,
Inc. (DE), a California corporation, which has been accounted for using the
purchase method of accounting. The purchase of DE was completed by the issuance
of 4,383,954 shares of common stock (par value $.001), and the issuance of
1,573,533 Series A mandatorily redeemable convertible preferred stock. The
aggregate purchase price was approximately $17,000,000. The purchase price was
allocated as follows (in thousands):
Fair value of net assets acquired $872
Goodwill and related intangibles assets 15,283
Assembled workforce 845
-------
$17,000
-------
The excess of the purchase price over the fair value of the net
identifiable assets acquired has been recorded as goodwill and other intangibles
and is amortized on a straight-line basis over two years.
The unaudited combined pro forma statements of operations for the year
ended December 31, 1998 and the three months ended March 31, 1998 reflect the
acquisition as if it occurred on January 1, 1998. Since the pro forma financial
statements which follow are based upon the operating results of DE during a
period when it was not under the control or management of the Company the
information presented may not be indicative of the results which would have
actually been obtained had the acquisition been completed on January 1, 1998 nor
are they indicative of future financial or operating results. The unaudited pro
forma financial information does not give effect to any synergies that may occur
due to the integration of the Company and DE. The combined pro forma financial
statements should be read in conjunction with the historical audited
consolidated financial statements and the notes thereto of the Company, as well
as the audited historical financial statements and the notes thereto of DE
included elsewhere in this Prospectus.
F-36
<PAGE>
U.S. INTERACTIVE, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the Year ended December 31, 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31, 1998
----------------------------
Digital Pro Forma Pro Forma
Company (1) Evolution(2) Adjustments Combined
----------- ------------ ----------- --------
<S> <C> <C> <C>
Revenue $ 13,636 $2,810 $16,446
Operating costs and expenses:
Project personnel and related expense 7,405 2,590 9,995
Management and administrative 7,876 1,777 9,653
Selling and marketing 2,054 338 2,392
Depreciation and amortization 4,592 80 4,032(a) 8,704
-------- ------- ------- --------
Total operating expenses 21,927 4,785 4,032 30,744
-------- ------- ------- --------
Operating loss (8,291) (1,975) (4,032) (14,298)
Other income (expense) net (152) 3 - (149)
-------- ------- ------- --------
Net loss (8,443) (1,972) (4,032) (14,447)
Accretion of mandatorily redeemable
preferred stock to redemption value (625) - (227)(b) (852)
---- ------- ------- --------
Net loss attributable to common
stockholders $ (9,068) $(1,972) $(4,259) $(15,299)
======== ======= ------- --------
Pro forma net loss per common share
Basic and diluted $ (1.36) $ (1.73)
======== ========
Weighted average shares outstanding 6,670 8,862(c)
======== ========
</TABLE>
(1) Actual for the year ended December 31, 1998
(2) Actual for the six months ended June 30, 1998
See accompanying notes to Unaudited Pro Forma Combined Financial Statements
F-37
<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>
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-38
<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-39
<PAGE>
================================================================================
You may rely on the information contained in this prospectus. Neither we nor any
of the underwriters or the selling stockholders have authorized anyone to
provide information different from that contained in this prospectus. When you
make a decision about whether to invest in our common stock, you should not rely
upon any information other than the information in this prospectus. Neither the
delivery of this prospectus nor sale of common stock means that information
contained in this prospectus is correct after the date of this prospectus. This
prospectus is not an offer to sell or solicitation of an offer to buy these
shares of common stock in any circumstances under which the offer or
solicitation is unlawful.
----------------------
TABLE OF CONTENTS
Page
Prospectus Summary...............................................
Risk Factors.....................................................
Forward-Looking Statements.......................................
Use of Proceeds..................................................
Dividend Policy..................................................
The Directed Share Subscription Program..........................
Capitalization...................................................
Dilution.........................................................
Selected Consolidated Financial Data.............................
Management's Discussion and Analysis of
Financial Condition and Results of Operations.................
Business.........................................................
Management.......................................................
Certain Relationships and Related Transactions...................
Principal and Selling Stockholders...............................
Description of Capital Stock.....................................
Shares Eligible for Future Sale..................................
Plan of Distribution.............................................
Legal Matters....................................................
Experts..........................................................
Additional Information ..........................................
----------------------
Dealer Prospectus Delivery Obligation:
Until , 1999 (25 days after the commencement of this
offering), all dealers that buy, sell or trade these shares of common stock,
whether or not participating in the offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
================================================================================
<PAGE>
================================================================================
Shares
U.S. INTERACTIVE, INC.
[LOGO]
Common Stock
_______________________
PROSPECTUS
_______________________
BT Alex. Brown
Lehman Brothers
Adams, Harkness & Hill, Inc.
_______________________
, 1999
================================================================================
<PAGE>
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the various expenses, other than
underwriting discounts and commissions, in connection with the issuance and
distribution of the securities being registered. All amounts shown are estimated
except the Securities and Exchange Commission registration fee, the NASD filing
fee and the Nasdaq National Market listing fee.
S.E.C. Registration fee................................. $18,070
NASD filing fee......................................... *
Transfer agent and registrar fees....................... *
Printing and engraving.................................. *
Legal fees.............................................. *
Blue sky fees and expenses.............................. *
Nasdaq National Market listing fee...................... *
Accounting fees......................................... *
Miscellaneous........................................... *
-------
Total......................................... $ *
=======
---------------------
* To be provided by amendment.
Item 14. Indemnification of Directors and Officers.
Under Section 145 of the Delaware General Corporation Law, as amended (the
"DGCL"), a corporation has the power to indemnify directors and officers under
certain prescribed circumstances and subject to certain limitations against
certain costs and expenses, including attorney's fees actually and reasonably
incurred in connection with any action, suit or proceeding, whether civil,
criminal, administrative or investigative, to which any of them is a party by
reason of being a director or officer of the corporation if it is determined
that the director or officer acted in accordance with the applicable standard of
conduct set forth in such statutory provision. Article IX of U.S. Interactive's
Certificate of Incorporation provides that U.S. Interactive will indemnify any
person who was or is a party or is threatened to be made a party to any action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he, or a person for whom he is the legal representative
is or was a director or officer of U.S. Interactive, or is or was serving at the
request of U.S. Interactive as a director, officer, employee or agent of another
entity, against certain liabilities, costs and expenses.
Item 15. Recent Sales of Unregistered Securities.
During the past three years, U.S. Interactive has issued securities, as set
forth below, which were not registered for sale under the Securities Act:
II-1
<PAGE>
Preferred Stock
On July 2, 1996, U.S. Interactive issued and sold a total of 1,000,000
shares of its series A preferred stock (now the series B preferred stock) to
four venture capital entities, Internet Capital Group, L.L.C., Technology
Leaders II L.P., Technology Leaders II Offshore C.V., and RAF Ventures VIII,
L.P. The total purchase price for such shares was $1,000,000 in cash.
On July 3, 1997, U.S. Interactive issued and sold a total of 446,779
shares of its series B preferred stock (now the series C preferred stock) to
three venture capital entities, Internet Capital Group, L.L.C., Technology
Leaders II L.P., and Technology Leaders II Offshore C.V. The total purchase
price for such shares was $750,000 in cash.
On October 6, 1997, U.S. Interactive issued and sold a total of 148,927
additional shares of its series B preferred stock (now the series C preferred
stock) to two venture capital entities, Technology Leaders II L.P., and
Technology Leaders II Offshore C.V. The total purchase price for such shares was
$250,000 in cash.
On September 22, 1998, U.S. Interactive issued and sold a total of
2,339,628 shares of its series D preferred stock to a venture capital
partnership, Safeguard 98 Capital, L.P. The total purchase price for such shares
was $10,832,478 in cash.
Each of these sales of preferred stock was made in reliance on the
exemption provided by Section 4(2) of the Securities Act, as a transaction not
involving a public offering of securities. No underwriting or selling fees or
commissions were paid by U.S. Interactive to any person in connection with the
sale of any of the preferred stock.
Option Exercises
Commencing in October, 1998, U.S. Interactive issued a total of 93,903
shares of its common stock upon the exercise of options granted to employees
under its 1997 Stock Option Plan at exercise prices ranging from $1.50 to $3.50
per share for an aggregate exercise price of $161,854.50.
Acquisitions
In connection with three acquisitions, U.S. Interactive issued shares
of its common stock, shares of its preferred stock and stock options which were
not registered under the Securities Act in reliance upon the exemption provided
by Section 4(2) of the Securities Act. In each acquisition, the resale or other
transfer of the securities issued was restricted as necessary for the
availability of the Section 4(2) exemption. No underwriters or placement agents
were involved in connection with the issuance and sale of U.S. Interactive's
securities in the acquisitions.
a. Web Access, Inc.
U.S. Interactive acquired Web Access, Inc. pursuant to an Agreement and
Plan of Merger dated as of July 25, 1996. The Web Access merger agreement was
privately negotiated among the parties thereto. In connection with the merger,
which became effective as of July 25, 1996, U.S. Interactive became the holder
of all of the outstanding stock of Web Access and U.S. Interactive issued to the
holder of Web Access common stock an aggregate of 236,842 shares of U.S.
Interactive common stock.
II-2
<PAGE>
b. Digital Evolution, Inc.
U.S. Interactive merged with Digital Evolution pursuant to an agreement
and plan of merger dated as of July 2, 1998 which was privately negotiated among
the parties thereto. In connection with the merger, which became effective as of
July 2, 1998, U.S. Interactive issued to the three holders of Digital Evolution
common stock an aggregate of 4,383,954 shares of U.S. Interactive common stock
and to the three holders of Digital Evolution preferred stock an aggregate of
1,573,533 shares of U.S. Interactive series A preferred stock. In addition, U.S.
Interactive assumed the then outstanding options to purchase class B common
stock of Digital Evolution which were held by a total of approximately 118
persons, which options became options to purchase a total of approximately
1,044,247 shares of U.S. Interactive common stock.
U.S. Interactive intends to file a registration statement on Form S-8
under the Securities Act after the completion of its initial public offering of
common stock with respect to the shares of common stock issuable upon exercise
of the options which U.S. Interactive assumed in the merger with Digital
Evolution.
c. InVenGen LLC
On March 12, 1999, U.S. Interactive acquired the assets of InVenGen
LLC, an internet professional services firm, pursuant to an asset purchase
agreement. We issued 584,000 shares of our common stock in this acquisition,
which was accounted for using the purchase method of accounting. Of the shares
delivered, a total of 361,200 are being held under two escrow agreements.
Under one escrow agreement 275,200 shares are being held pending
satisfaction of certain conditions relating to the continued employment of the
former InVenGen employees with U.S. Interactive during the two-year period
following the closing. Twenty-five percent of the shares are to be released
every six months if the conditions under the agreement are met. Under the second
escrow agreement 86,000 shares are being held to satisfy InVenGen's
indemnification obligations under the asset purchase agreement during the
one-year period following the closing.
Other
In July 1998, U.S. Interactive issued a warrant to purchase 70,000
shares of its common stock at a price of $3.50 per share to a commercial bank in
connection with two credit facilities extended by the bank to U.S. Interactive.
U.S. Interactive issued the warrant in reliance on the exemption provided by
Section 4(2) of the Securities Act as a transaction not involving a public
offering of securities. No underwriting or selling fees or commissions were paid
by U.S. Interactive to any person in connection with the issuance of the
warrant.
II-3
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a)Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
1.1 Form of Underwriting Agreement*
3.1 Amended and Restated Certificate of Incorporation*
3.2 Amended and Restated Bylaws
4.1 See exhibits 3.1 and 3.2 for provisions of the Certificate of Incorporation and Bylaws defining rights of holders of
Common Stock
4.3 Second Amended and Restated Investors' Rights Agreement dated as of July 2, 1998
5.1 Opinion of Dilworth Paxson LLP*
10.1 1998 Performance Incentive Plan and forms of stock option agreement*
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.2 1998 Stock Option Plan and forms of Stock Option Agreement and Stock Purchase Agreement*
10.3 1997 Stock Option Plan and forms of Stock Option Agreement and Stock Purchase Agreement*
10.4 1996 Stock Option Plan and forms of Stock Option Agreement and Stock Purchase Agreement*
10.5 Lease Agreement, dated May 14, 1998, between U.S. Interactive and BET Investments II, L.P.*
10.6 Employment Agreement, dated July 2, 1998, between U.S. Interactive and Eric Pulier
10.7 Employment Agreement, dated ___ , 1999, between U.S. Interactive and Stephen T. Zarrilli*
10.8 Professional Services and Consulting Agreement, dated as of January 6, 1999, by and between U.S.
Interactive and Juggernaut Partners, LLC
10.9 Severance Agreement, dated May 18, 1999, between U.S. Interactive and Richard J. Masterson
10.10 Severance Agreement, dated February 26, 1999, between U.S. Interactive and Larry W. Smith
23.1 Consent of KPMG LLP, independent public accountants
23.2 Consent of Dilworth Paxson LLP (contained in its opinion in exhibit 5.1)*
23.3 Consent of BDO Seidman, LLP, independent public accountants
24.1 Power of Attorney (included on page II-7)
27.1 Financial Data Schedule (FOR SEC USE ONLY)
99.1 Form of Letter from U.S. Interactive, Inc. to Safeguard Scientifics, Inc.'s shareholders describing
the Directed Share Subscription Program
99.2 Form of Letter from BT Alex. Brown Incorporated to Safeguard Scientifics, Inc.'s shareholders*
99.3 Form of Letter from U.S. Interactive, Inc. to Brokers describing the Directed Share Subscription Program
99.4 Form of Subscription Form for Directed Share Subscription Program
</TABLE>
- ----------
* To be filed by amendment.
(b)Financial Statement Schedule.
<TABLE>
<CAPTION>
Charged Balance at
Accounts Receivable - Allowance Balance at to Costs Writeoffs/ End of
for doubtful accounts Beginning of Year and Expenses Deductions Year
- ----------------------------- ----------------- ------------ ---------- -------
<S> <C> <C> <C> <C>
For the year ended
December 31, 1996 $ -- $ 47,000 $ (7,000) $ 40,000
For the year ended
December 31, 1997 40,000 157,539 (45,264) 152,275
For the year ended
December 31, 1998 152,275 606,894 (233,133) 526,036
</TABLE>
II-5
<PAGE>
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of U.S.
Interactive pursuant to the foregoing provisions, or otherwise, U.S. Interactive
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by U.S. Interactive of expenses incurred or
paid by a director, officer or controlling person of U.S. Interactive in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, U.S. Interactive will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
U.S. Interactive hereby undertakes to provide to the underwriters at the
closing specified in the underwriting agreement, certificates in such
denomination and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
U.S. Interactive hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by U.S. Interactive pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
U.S. Interactive has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Philadelphia, Commonwealth of Pennsylvania on this 19th day of May, 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 Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
EACH PERSON IN SO SIGNING ALSO MAKES, CONSTITUTES AND APPOINTS STEPHEN T.
ZARRILLI AND PHILIP L. CALAMIA, AND EACH OF THEM ACTING ALONE, HIS OR HER TRUE
AND LAWFUL ATTORNEY-IN-FACT, WITH FULL POWER OF SUBSTITUTION, TO EXECUTE AND
CAUSE TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO THE
REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, ANY AND ALL AMENDMENTS
AND POST-EFFECTIVE AMENDMENTS TO THIS REGISTRATION STATEMENT, AND INCLUDING ANY
REGISTRATION STATEMENT FOR THE SAME OFFERING THAT IS TO BE EFFECTIVE UPON FILING
PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT, WITH EXHIBITS THERETO AND
OTHER DOCUMENTS IN CONNECTION THEREWITH, AND HEREBY RATIFIES AND CONFIRMS ALL
THAT SAID ATTORNEY-IN-FACT OR HIS OR HER SUBSTITUTE OR SUBSTITUTES MAY DO OR
CAUSE TO BE DONE BY VIRTUE HEREOF.
<TABLE>
<CAPTION>
Name Capacity Date
---- -------- ----
<S> <C> <C>
/s/ Eric Pulier Chairman and Chief Technology Officer May 19, 1999
- --------------------------------------- (principal technology officer)
Eric Pulier
/s/ Stephen T. Zarrilli Director, Chief Executive Officer and President May 19, 1999
- --------------------------------------- (principal executive officer)
Stephen T. Zarrilli
/s/ Philip L. Calamia Vice President and Chief Financial Officer May 19, 1999
- --------------------------------------- (principal financial and accounting officer)
Philip L. Calamia
/s/ Robert E. Keith, Jr.
- --------------------------------------- Director May 19, 1999
Robert E. Keith, Jr.
/s/ John Shulman
- --------------------------------------- Director May 19, 1999
John Shulman
/s/ E. Michael Forgash
- --------------------------------------- Director May 19, 1999
E. Michael Forgash
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
1.1 Form of Underwriting Agreement*
3.1 Amended and Restated Certificate of Incorporation*
3.2 Amended and Restated Bylaws
4.1 See exhibits 3.1 and 3.2 for provisions of the Certificate of Incorporation and Bylaws defining rights of holders of
Common Stock
4.3 Second Amended and Restated Investors' Rights Agreement dated as of July 2, 1998
5.1 Opinion of Dilworth Paxson LLP*
10.1 1998 Performance Incentive Plan and forms of stock option agreement*
10.2 1998 Stock Option Plan and forms of Stock Option Agreement and Stock Purchase Agreement*
10.3 1997 Stock Option Plan and forms of Stock Option Agreement and Stock Purchase Agreement*
10.4 1996 Stock Option Plan and forms of Stock Option Agreement and Stock Purchase Agreement*
10.5 Lease Agreement, dated May 14, 1998, between U.S. Interactive and BET Investments II, L.P.*
10.6 Employment Agreement, dated July 2, 1998, between U.S. Interactive and Eric Pulier
10.7 Employment Agreement, dated ___ , 1999, between U.S. Interactive and Stephen T. Zarrilli*
10.8 Professional Services and Consulting Agreement, dated as of January 6, 1999, by and between U.S.
Interactive and Juggernaut Partners, LLC
10.9 Severance Agreement, dated May 18, 1999, between U.S. Interactive and Richard J. Masterson
10.10 Severance Agreement, dated February 26, 1999, between U.S. Interactive and Larry W. Smith
23.1 Consent of KPMG LLP, independent public accountants
23.2 Consent of Dilworth Paxson LLP (contained in its opinion in exhibit 5.1)*
23.3 Consent of BDO Seidman, LLP, independent public accountants
24.1 Power of Attorney (included on page II-7)
27.1 Financial Data Schedule (FOR SEC USE ONLY)
99.1 Form of Letter from U.S. Interactive, Inc. to Safeguard Scientifics, Inc.'s shareholders describing
the Directed Share Subscription Program
99.2 Form of Letter from BT Alex. Brown Incorporated to Safeguard Scientifics, Inc.'s shareholders*
99.3 Form of Letter from U.S. Interactive, Inc. to Brokers describing the Directed Share Subscription Program
99.4 Form of Subscription Form for Directed Share Subscription Program
</TABLE>
- ----------
* To be filed by amendment.
(b)Financial Statement Schedule.
<PAGE>
AMENDED AND RESTATED
BYLAWS
OF
U.S. INTERACTIVE, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
ARTICLE I
OFFICES AND RECORDS
SECTION 1.1 DELAWARE OFFICE. The principal office of the Corporation in
the State of Delaware shall be located in the City of Wilmington, County of New
Castle, and the name and address of its registered agent is Corporation Service
Company, 1013 Centre Road, Wilmington, Delaware.
SECTION 1.2. OTHER OFFICES. The Corporation may have such other
offices, either within or without the State of Delaware, as the Board of
Directors may designate or as the business of the Corporation may from time to
time require.
SECTION 1.3. BOOKS AND RECORDS. The books and records of the
Corporation may be kept at the Corporation's headquarters in Pennsylvania or at
such other locations outside the State of Delaware as may from time to time be
designated by the Board of Directors.
ARTICLE II
STOCKHOLDERS
SECTION 2.1. ANNUAL MEETING. The annual meeting of the stockholders of
the Corporation shall be held at such date, place and/or time as may be fixed by
resolution of the Board of Directors.
SECTION 2.2 SPECIAL MEETING. Subject to the rights of the holders of
any series of preferred stock of the Corporation (the "Preferred Stock") or any
other series or class of stock as set forth in the Amended and Restated
Certificate of Incorporation or a Certificate of Designation to elect additional
directors under specified circumstances, special meetings of the stockholders
may be called only by the Chairman of the Board or by the Board of Directors
pursuant to a resolution adopted by a majority of the total number of directors
which the Corporation would have if there were no vacancies (the "Whole Board").
Notwithstanding the foregoing, as long as any shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, or Series D
Preferred Stock are outstanding, unless otherwise required by the laws of the
State of Delaware (i) any three (3) directors or (ii) any holder or holders of
at least 25% of all of the then outstanding shares of Preferred Stock of the
Company, voting as a separate class, shall have the right to call a meeting of
the Stockholders.
SECTION 2.3. PLACE OF MEETING. The Board of Directors may designate the
place of meeting for any meeting of the stockholders. If no designation is made
by the Board of Directors, the place of meeting shall be the principal office of
the Corporation in Pennsylvania.
SECTION 2.4. NOTICE OF MEETING. Written or printed notice, stating the
place, day and hour of the meeting and the purpose or purposes for which the
meeting is called, shall be prepared and delivered by the Corporation not less
than ten days nor more than sixty days before the date of the meeting, either
personally, or by mail, to each stockholder of record entitled to vote at such
meeting; provided however, as long as that certain Second Amended and Restated
Stockholders' Agreement among all of the stockholders of the Corporation and the
Corporation has not been terminated, the Corporation shall provide the
stockholders with ten (10) days' prior written notice of any intended mailing of
a notice to stockholders for a meeting at which directors are to be elected. If
mailed, such notice shall be deemed to be delivered when deposited in the United
States mail with postage thereon prepaid, addressed to the stockholder at his
address as it appears on the stock transfer books of the Corporation. Such
further notice shall be given as may be required by law. Meetings may be held
without notice if all stockholders entitled to vote are present (except as
otherwise provided by law), or if notice is waived by those not present. Any
previously scheduled meeting of the stockholders may be postponed and (unless
the Amended and Restated Certificate of Incorporation otherwise provides) any
special meeting of the stockholders may be cancelled, by resolution of the Board
of Directors upon public notice given prior to the time previously scheduled for
such meeting of stockholders.
<PAGE>
SECTION 2.5. QUORUM AND ADJOURNMENT. Except as otherwise provided by
law or by the Amended and Restated Certificate of Incorporation, the holders of
a majority of the voting power of the outstanding shares of the Corporation
entitled to vote generally in the election of directors (the "Voting Stock"),
represented in person or by proxy, shall constitute a quorum at a meeting of
stockholders, except that when specified business is to be voted on by a class
or series voting separately as a class or series, the holders of a majority of
the voting power of the shares of such class or series shall constitute a quorum
for the transaction of such business. The chairman of the meeting or a majority
of the shares of Voting Stock so represented may adjourn the meeting from time
to time, whether or not there is such a quorum (or, in the case of specified
business to be voted on by a class or series, the chairman or a majority of the
shares of such class or series so represented may adjourn the meeting with
respect to such specified business). No notice of the time and place of
adjourned meetings need be given except as required by law. The stockholders
present at a duly organized meeting may continue to transact business until
adjournment, notwithstanding the withdrawal of enough stockholders resulting in
less than a quorum.
SECTION 2.6. PROXIES. At all meetings of stockholders, a stockholder
may vote by proxy executed in writing by the stockholder or as may be permitted
by law, or by his duly authorized attorney-in-fact. Such proxy must be filed
with the Secretary of the Corporation or his representative at or before the
time of the meeting.
SECTION 2.7. NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS.
(A) ANNUAL MEETINGS OF STOCKHOLDERS. (1) Nominations of persons for
election to the Board of Directors of the Corporation and the proposal of
business to be considered by the stockholders may be made at an annual meeting
of stockholders (a) pursuant to the Corporation's notice of meeting delivered
pursuant to Section 2.4 of these Bylaws, (b) by or at the direction of the
Chairman of the Board or the Board of Directors or (c) by any stockholder of the
Corporation who is entitled to vote at the meeting, who complied with the notice
procedures set forth in clauses (2) and (3) of this paragraph (A) of this Bylaw
and who was a stockholder of record at the time such notice is delivered to the
Secretary of the Corporation.
(2) For both nominations and other business to be properly brought
before an annual meeting by a stockholder pursuant to clause (c) of paragraph
(A)(1) of this Bylaw, the stockholder must have given timely notice thereof in
writing to the Secretary of the Corporation and such other business must
otherwise be a proper matter for stockholder action. To be timely, a
stockholder's notice shall be delivered to the Secretary at the principal
executive offices of the Corporation not less than seventy days nor more than
ninety days prior to the first anniversary of the preceding year's annual
meeting; PROVIDED, HOWEVER, that in the event that the date of the annual
meeting is advanced by more than twenty days, or delayed by more than seventy
days, from such anniversary date, notice by the stockholder to be timely must be
so delivered not earlier than the ninetieth day prior to such annual meeting and
not later than the close of business on the later of the seventieth day prior to
such annual meeting or the tenth day following the day on which public
announcement of the date of such meeting is first made. Such stockholder's
notice shall set forth (a) as to each person whom the stockholder proposes to
nominate for election or reelection as a director all information relating to
such person that is required to be disclosed in solicitations of proxies for
election of directors in an election contest, or is otherwise required, in each
<PAGE>
case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and Rule 14a-11 thereunder, including such person's
written consent to being named in the proxy statement as a nominee and to
serving as a director if elected; (b) as to any other business that the
stockholder proposes to bring before the meeting, a brief description of the
business desired to be brought before the meeting, the reasons for conducting
such business at the meeting and any material interest in such business of such
stockholder and the beneficial owner, if any, on whose behalf the proposal is
made; and (c) as to the stockholder giving the notice and the beneficial owner,
if any, on whose behalf the nomination or proposal is made (i) the name and
address of such stockholder, as they appear on the Corporation's books, and of
such beneficial owner and (ii) the class and number of shares of the Corporation
which are owned beneficially and of record by such stockholder and such
beneficial owner. In no event shall the public announcement of an adjournment of
an annual meeting commence a new time period for the giving of a stockholder's
notice as described above.
(3) Notwithstanding anything in the second sentence of paragraph (A)(2)
of this Bylaw to the contrary, in the event that the number of directors to be
elected to the Board of Directors of the Corporation is increased and there is
no public announcement naming all of the nominees for director or specifying the
size of the increased Board of Directors made by the Corporation at least eighty
days prior to the first anniversary of the preceding year's annual meeting, a
stockholder's notice required by this Bylaw shall also be considered timely, but
only with respect to nominees for any new positions created by such increase, if
it shall be delivered to the Secretary at the principal executive offices of the
Corporation not later than the close of business on the tenth day following the
day on which such public announcement is first made by the Corporation.
(B) SPECIAL MEETINGS OF STOCKHOLDERS. Only such business shall be
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to the Corporation's notice of meeting pursuant to Section
2.4 of these Bylaws. Nominations of persons for election to the Board of
Directors may be made at a special meeting of stockholders at which directors
are to be elected pursuant to the Corporation's notice of meeting (a) by or at
the direction of the Board of Directors or (b) by any stockholder of the
Corporation who is entitled to vote at the meeting, who complies with the notice
procedures set forth in this Bylaw and who is a stockholder of record at the
time such notice is delivered to the Secretary of the Corporation. In the event
the Corporation calls a special meeting of stockholders for the purpose of
electing one or more directors to the Board of Directors, any such stockholder
may nominate a person or persons (as the case may be), for election to such
position(s) as are specified in the Corporation's Notice of Meeting, if the
stockholder's notice as required by paragraph (A)(2) of this Bylaw shall be
delivered to the Secretary at the principal executive offices of the Corporation
not earlier than the ninetieth day prior to such special meeting and not later
than the close of business on the later of the seventieth day prior to such
special meeting or the tenth day following the day on which public announcement
is first made of the date of the special meeting and of the nominees proposed by
the Board of Directors to be elected at such meeting. In no event shall the
public announcement of an adjournment of a special meeting commence a new time
period for the giving of a stockholder's notice as described above.
<PAGE>
(C) GENERAL. (1) Only persons who are nominated in accordance with the
procedures set forth in this Bylaw shall be eligible to serve as directors and
only such business shall be conducted at a meeting of stockholders as shall have
been brought before the meeting in accordance with the procedures set forth in
this Bylaw. Except as otherwise provided by law, the Amended and Restated
Certificate of Incorporation or these Bylaws, the chairman of the meeting shall
have the power and duty to determine whether a nomination or any business
proposed to be brought before the meeting was made in accordance with the
procedures set forth in this Bylaw and, if any proposed nomination or business
is not in compliance with this Bylaw, to declare that such defective proposal or
nomination shall be disregarded.
(2) For purposes of this Bylaw, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Bylaw, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this Bylaw. Nothing in this Bylaw shall be deemed to affect any rights
of stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.
SECTION 2.8. PROCEDURE FOR ELECTION OF DIRECTORS. Election of directors
at all meetings of the stockholders at which directors are to be elected need
not be by written ballot, and, except as otherwise set forth in the Amended and
Restated Certificate of Incorporation or any Certificate of Designation with
respect to the right of the holders of any series of Preferred Stock or any
other series or class of stock to elect additional directors under specified
circumstances, a plurality of the votes cast thereat shall elect directors.
Except as otherwise provided by law, the Amended and Restated Certificate of
Incorporation or any Certificate of Designation or these Bylaws, all matters
other than the election of directors submitted to the stockholders at any
meeting shall be decided by the affirmative vote of a majority of the voting
power of the outstanding Voting Stock present in person or represented by proxy
at the meeting and entitled to vote thereon.
SECTION 2.9. INSPECTORS OF ELECTIONS; OPENING AND CLOSING THE POLLS.
(A) The Board of Directors by resolution may appoint one or more
inspectors, which inspector or inspectors may include individuals who serve the
Corporation in other capacities, including, without limitation, as officers,
employees, agents or representatives of the Corporation, to act at the meeting
and make a written report thereof. One or more persons may be designated as
alternate inspectors to replace any inspector who fails to act. If no inspector
or alternate has been appointed to act, or if all inspectors or alternates who
have been appointed are unable to act, at a meeting of stockholders, the
chairman of the meeting shall appoint one or more inspectors to act at the
meeting. Each inspector, before discharging his or her duties, shall take and
sign an oath faithfully to execute the duties of inspector with strict
impartiality and according to the best of his or her ability. The inspectors
shall have the duties prescribed by the General Corporation Law of the State of
Delaware.
<PAGE>
(B) The chairman of the meeting shall fix and announce at the meeting
the date and time of the opening and the closing of the polls for each matter
upon which the stockholders will vote at a meeting.
ARTICLE III
BOARD OF DIRECTORS
SECTION 3.1. GENERAL POWERS. The business and affairs of the
Corporation shall be managed by or under the direction of its Board of
Directors. In addition to the powers and authorities by these Bylaws expressly
conferred upon them, the Board of Directors may exercise all such powers of the
Corporation and do all such lawful acts and things as are not by law, by the
Amended and Restated Certificate of Incorporation, any Certificate of
Designation or by these Bylaws required to be exercised or done by the
stockholders.
SECTION 3.2. NUMBER, TENURE AND QUALIFICATIONS. Subject to the rights
of the holders of any series of Preferred Stock as set forth in the Second
Amended and Restated Stockholders' Agreement, or any other series or class of
stock as set forth in the Amended and Restated Certificate of Incorporation, to
elect directors under specified circumstances, the Board of Directors of the
corporation shall consist of such number of directors, not less than six (6) not
more than fifteen (15), as shall from time to time be fixed exclusively by
resolution adopted by a majority of the Whole Board. The directors shall be
divided into three classes in the manner set forth in the Amended and Restated
Certificate of Incorporation of the Corporation, each class to be elected for
the term set forth therein. Directors shall (except as hereinafter provided for
the filling of vacancies and newly created directorships) be elected by the
holders of a plurality of the voting power present in person or represented by
proxy and entitled to vote.
SECTION 3.3. REGULAR MEETINGS. A regular meeting of the Board of
Directors shall be held without notice other than as set forth in this Bylaw,
immediately after, and at the same place as, each annual meeting of
stockholders. The Board of Directors may, by resolution, provide the time and
place for the holding of additional regular meetings without notice other than
such resolution; provided however, as long as that certain Second Amended and
Restated Investors' Rights Agreement among certain of the stockholders of the
Corporation and the Corporation has not been terminated, the Corporation shall
hold meetings of the Corporation's Board of Directors not less than every three
(3) months.
<PAGE>
SECTION 3.4. SPECIAL MEETINGS. Special meetings of the Board of
Directors shall be called at the request of the Chairman of the Board, the Chief
Executive Officer, the President or a majority of the Board of Directors;
provided however, as long as that certain Second Amended and Restated
Stockholders' Agreement among certain stockholders of the Corporation and the
Corporation has not been terminated, any director elected solely by the holders
of Preferred Stock may call a special meeting. The person or persons authorized
to call special meetings of the Board of Directors may fix the place and time of
the meetings.
SECTION 3.5. NOTICE. Notice of any special meeting shall be given to
each director at his business or residence in writing or by telegram or by
telephone communication. If mailed, such notice shall be deemed adequately
delivered when deposited in the United States mails so addressed, with postage
thereon prepaid, at least five days before such meeting. If by telegram, such
notice shall be deemed adequately delivered when the telegram is delivered to
the telegraph company at least twenty-four hours before such meeting. If by
facsimile transmission, such notice shall be transmitted at least twenty-four
hours before such meeting. If by telephone, the notice shall be given at least
twelve hours prior to the time set for the meeting. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting of the Board
of Directors need be specified in the notice of such meeting, except for
amendments to these Bylaws as provided under Section 7.1 of Article VII hereof.
A meeting may be held at any time without notice if all the directors are
present (except as otherwise provided by law) or if those not present waive
notice of the meeting in writing, either before or after such meeting.
SECTION 3.6. CONFERENCE TELEPHONE MEETINGS. Members of the Board of
Directors, or any committee thereof, may participate in a meeting of the Board
of Directors or such committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and such participation in a meeting shall
constitute presence in person at such meeting.
SECTION 3.7. QUORUM. A whole number of directors equal to at least a
majority of the Whole Board shall constitute a quorum for the transaction of
business, but if at any meeting of the Board of Directors there shall be less
than a quorum present, a majority of the directors present may adjourn the
meeting from time to time without further notice. The act of the majority of the
directors present at a meeting at which a quorum is present shall be the act of
the Board of Directors. Notwithstanding the foregoing, as long as any shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, or
Series D Preferred Stock are outstanding, unless otherwise required by the laws
of the State of Delaware, a quorum for a meeting of the Board of Directors or
any committee thereof of which a Preferred Director is a member shall require
the attendance of at least one director nominated by the holders of Preferred
Stock in accordance with the terms of the Second Amended and Restated
Stockholders' Agreement (a "Preferred Director"), except that if any properly
called Board Directors meeting is adjourned for lack of a Preferred Director,
and such meeting is reconvened with proper notice as required for a new special
meeting, a quorum at the reconvened meeting shall require a simple majority of
the directors then holding office.
<PAGE>
SECTION 3.8. VACANCIES. Subject to the rights of the holders of any
series of Preferred Stock, or any other series or class of stock as set forth in
the Amended and Restated Certificate of Incorporation, to elect additional
directors under specified circumstances, and unless the Board of Directors
otherwise determines, vacancies resulting from death, resignation, retirement,
disqualification, removal from office or other cause, and newly created
directorships resulting from any increase in the authorized number of directors,
may be filled only by the affirmative vote of a majority of the remaining
directors, though less than a quorum of the Board of Directors, and directors so
chosen shall hold office for a term expiring at the annual meeting of
stockholders at which the term of office of the class to which they have been
elected expires and until such director's successor shall have been duly elected
and qualified. No decrease in the number of authorized directors constituting
the Whole Board shall shorten the term of any incumbent director; provided
however, that as long as that certain Second Amended and Restated Stockholders
Agreement among certain stockholders of the Corporation and the Corporation has
not been terminated, (i) any vacancy on the Board of Directors resulting from
the resignation, removal, death or any other termination for any reason of a
director nominated by a vote of the holders of a majority of the Common Stock,
voting together as a single class, may be filled by a vote of the holders of a
majority of the shares of Common Stock, voting together as a single class; (ii)
any vacancy on the Board of Directors resulting from the resignation, removal,
death or any other termination for any reason of a director nominated by a vote
of the holders of a majority of the Common Stock and the Preferred Stock (on an
as-converted to Common Stock basis), voting together as a single class may be
filled by a vote of the holders of a majority of the shares of Common Stock and
the Preferred Stock (on an as-converted to Common Stock basis), voting together
as a single class; any vacancy on the Board of Directors resulting from the
resignation, removal, death or any other termination for any reason of a
director nominated by a vote of the holders of a majority of the shares of
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock,
voting together as a single class, may be filled by a vote of the holders of a
majority of the shares of Series A Preferred Stock, Series B Preferred Stock,
and Series C Preferred Stock, voting together as a single class; and any vacancy
on the Board of Directors resulting from the resignation, removal, death or any
other termination for any reason of a director nominated by a vote of the
holders of a majority of the Series D Preferred Stock, voting together as a
single class, may be filled by a vote of the holders of a majority of the shares
of Series D Preferred Stock, voting together as a single class.
SECTION 3.9. COMMITTEES. (A) The Board of Directors may designate one
or more committees, each committee to consist of one or more of the directors of
the Corporation. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee. In the absence or disqualification of a
member of the committee, the member or members thereof present at any meeting
and not disqualified from voting, whether or not he or they constitute a quorum,
may unanimously appoint another member of the Board of Directors to act at the
meeting in place of any such absent or disqualified member. Any such committee,
to the extent permitted by law and to the extent provided in the resolution of
the Board of Directors, shall have and may exercise all the powers and authority
of the Board of Directors in the management of the business and affairs of the
corporation, and may authorize the seal of the Corporation to be affixed to all
papers which may require it.
(B) Unless the Board of Directors otherwise provides, each committee
designated by the Board of Directors may make, alter and repeal rules for the
conduct of its business. In the absence of such rules each committee shall
conduct its business in the same manner as the Board of Directors conducts its
business pursuant to these Bylaws.
<PAGE>
SECTION 3.10. REMOVAL. Subject to the rights of the holders of any
series of Preferred Stock, or any other series or class of stock as set forth in
the Amended and Restated Certificate of Incorporation, to elect additional
directors under specified circumstances, any director, or the entire Board of
Directors, may be removed from office at any time, but only for cause and only
by the affirmative vote of the holders of a majority of the voting power of the
then outstanding Voting Stock, voting together as a single class; provided
however, subject to the Amended and Restated Certificate of Incorporation of the
Corporation, that as long as that certain Second Amended and Restated
Stockholders Agreement among certain stockholders of the Corporation and the
Corporation has not been terminated, (i) any director nominated by a vote of the
holders of a majority of the Common Stock, voting together as a single class may
be removed by a vote of the holders of a majority of the shares of Common Stock,
voting together as a single class, for any reason; (ii) any director nominated
by a vote of the holders of a majority of the Common Stock and the Preferred
Stock (on an as-converted to Common Stock basis), voting together as a single
class may be removed by a vote of the holders of a majority of the shares of
Common Stock and the Preferred Stock (on an as-converted to Common Stock basis),
voting together as a single class, for any reason; and (iii) any director
nominated by a vote of the holders of a majority of the Series A Preferred
Stock, Series B Preferred Stock, and Series C Preferred Stock, voting together
as a single class, may be removed by a vote of the holders of a majority of the
shares of Series A Preferred Stock, Series B Preferred Stock, and Series C
Preferred Stock, voting together as a single class, for any reason; and (iv) any
director nominated by a vote of the holders of a Series D Preferred Stock,
voting together as a single class, may be removed by a vote of the holders of a
majority of the shares of Series D Preferred Stock, voting together as a single
class, for any reason.
ARTICLE IV
OFFICERS
SECTION 4.1. ELECTED OFFICERS. The elected officers of the Corporation
shall be a Chairman of the Board, a Chief Executive Officer, a President, a
Secretary, a Treasurer, and such other officers as the Board of Directors from
time to time may deem proper. The Chairman of the Board shall be chosen from the
directors. All officers chosen by the Board of Directors shall each have such
powers and duties as generally pertain to their respective offices, subject to
the specific provisions of this Article IV. Such officers shall also have powers
and duties as from time to time may be conferred by the Board of Directors or by
any committee thereof.
SECTION 4.2. ELECTION AND TERM OF OFFICE. The elected officers of the
Corporation shall be elected annually by the Board of Directors at the regular
meeting of the Board of Directors held after each annual meeting of the
stockholders. If the election of officers shall not be held at such meeting,
such election shall be held as soon thereafter as convenient. Subject to Section
4.8 of these Bylaws, each officer shall hold office until his successor shall
have been duly elected and shall have qualified or until his death or until he
shall resign.
<PAGE>
SECTION 4.3. CHAIRMAN OF THE BOARD. The Chairman of the Board shall
preside at all meetings of the stockholders and of the Board of Directors. The
Chairman of the Board shall have such powers and perform such duties as directed
by the Board of Directors.
SECTION 4.4. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall
be responsible for the general management of the affairs of the Corporation and
shall perform all duties incidental to his office which may be required by law
and all such other duties as are properly required of him by the Board of
Directors. Except where by law the signature of the Chairman of the Board is
required, the Chief Executive Officer shall possess the power to sign all
certificates, contracts, and other instruments of the Corporation which may be
authorized by the Board of Directors. He shall make reports to the Board of
Directors and the stockholders, and shall perform all such other duties as are
properly required of him by the Board of Directors. He shall see that all orders
and resolutions of the Board of Directors and of any committee thereof are
carried into effect.
SECTION 4.5. PRESIDENT. The President shall act in a general executive
capacity and shall assist the Chairman of the Board and Chief Executive Officer
in the administration and operation of the Corporation's business and general
supervision of its policies and affairs. The President shall, in the absence of
or because of the inability to act of the Chairman of the Board or Chief
Executive Officer, perform all duties of the Chairman of the Board and Chief
Executive Officer and preside at all meetings of stockholders and of the Board
of Directors. The President may sign, alone or with the Secretary, or an
Assistant Secretary, or any other proper officer of the Corporation authorized
by the Board of Directors, certificates, contracts, and other instruments of the
Corporation which may be authorized by the Board of Directors.
SECTION 4.6. SECRETARY. The Secretary shall give, or cause to be given,
notice of all meetings of stockholders and directors and all other notices
required by law or by these Bylaws, and in case of his absence or refusal or
neglect so to do, any such notice may be given by any person thereunto directed
by the Chairman of the Board or the Chief Executive Officer, or the President,
or by the Board of Directors, upon whose request the meeting is called as
provided in these Bylaws. He shall record all the proceedings of the meetings of
the Board of Directors, any committees thereof and the stockholders of the
Corporation in a book to be kept for that purpose, and shall perform such other
duties as may be assigned to him by the Board of Directors, the Chairman of the
Board, the Chief Executive Officer, or the President. He shall have the custody
of the seal of the Corporation and shall affix the same to all instruments
requiring it, when authorized by the Board of Directors, the Chairman of the
Board , Chief Executive Officer or the President, and attest to the same.
<PAGE>
SECTION 4.7. TREASURER. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate receipts and
disbursements in books belonging to the Corporation. The Treasurer shall deposit
all moneys and other valuables in the name and to the credit of the Corporation
in such depositaries as may be designated by the Board of Directors. The
Treasurer shall disburse the funds of the Corporation as may be ordered by the
Board of Directors, the Chairman of the Board, Chief Executive Officer or the
President, taking proper vouchers for such disbursements. The Treasurer shall
render to the Chairman of the Board, Chief Executive Officer, the President and
the Board of Directors, whenever requested, an account of all his transactions
as Treasurer and of the financial condition of the Corporation. If required by
the Board of Directors, the Treasurer shall give the Corporation a bond for the
faithful discharge of his duties in such amount and with such surety as the
Board of Directors may prescribe.
SECTION 4.8. REMOVAL. Any officer elected by the Board of Directors may
be removed by the Board of Directors whenever, in their judgement, the best
interests of the Corporation would be served thereby. No elected officer shall
have any contractual rights against the Corporation for compensation by virtue
of such election beyond the date of the election of his successor, his death,
his resignation or his removal, whichever event shall first occur, except as
otherwise provided in an employment contract or an employee plan.
SECTION 4.9. VACANCIES. A newly created office and a vacancy in any
office because of death, resignation, or removal may be filled by the Board of
Directors for the unexpired portion of the term at any meeting of the Board of
Directors.
ARTICLE V
STOCK CERTIFICATES AND TRANSFERS
SECTION 5.1. STOCK CERTIFICATES AND TRANSFERS.
(A) The interest of each stockholder of the Corporation shall be
evidenced by certificates for shares of stock in such form as the appropriate
officers of the Corporation may from time to time prescribe. The shares of the
stock of the Corporation shall be transferred on the books of the Corporation by
the holder thereof in person or by his attorney, upon surrender for cancellation
of certificates for the same number of shares, with an assignment and power of
transfer endorsed thereon or attached thereto, duly executed, and with such
proof of the authenticity of the signature as the Corporation or its agents may
reasonably require.
<PAGE>
(B) The certificates of stock shall be signed, countersigned and
registered in such manner as the Board of Directors may by resolution prescribe,
which resolution may permit all or any of the signatures on such certificates to
be in facsimile. In case any officer, transfer agent or registrar who has signed
or whose facsimile signature has been placed upon a certificate has ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the Corporation with the same effect as if he were such
officer, transfer agent or registrar at the date of issue.
ARTICLE VI
MISCELLANEOUS PROVISIONS
SECTION 6.1. FISCAL YEAR. The fiscal year of the Corporation shall
begin on the first day of January and end on the thirty-first day of December of
each year.
SECTION 6.2. DIVIDENDS. The Board of Directors may from time to time
declare, and the Corporation may pay, dividends on its outstanding shares in the
manner and upon the terms and conditions provided by law, its Amended and
Restated Certificate of Incorporation and any Designations and Descriptions of
Preferred Stock.
SECTION 6.3. SEAL. The corporate seal shall have inscribed the name of
the Corporation thereon and shall be in such form as may be approved from time
to time by the Board of Directors.
SECTION 6.4. WAIVER OF NOTICE. Whenever any notice is required to be
given to any stockholder or director of the Corporation under the provisions of
the General Corporation Law of the State of Delaware, a waiver thereof in
writing, signed by the person or persons entitled to such notice, whether before
or after the time stated therein, shall be deemed equivalent to the giving of
such notice. Neither the business to be transacted at, nor the purpose of, any
annual or special meeting of the stockholders of the Board of Directors need be
specified in any waiver of notice of such meeting.
SECTION 6.5. AUDITS. The accounts, books and records of the Corporation
shall be audited upon the conclusion of each fiscal year by an independent
certified public accountant selected by the Board of Directors, and it shall be
the duty of the Board of Directors to cause such audit to be made annually.
<PAGE>
SECTION 6.6. RESIGNATIONS. Any director or any officer, whether elected
or appointed, may resign at any time by serving written notice of such
resignation on the Chairman of the Board, the Chief Executive Officer, President
or the Secretary, and such resignation shall be deemed to be effective as of the
close of business on the date said notice is received by the Chairman of the
Board, the Chief Executive Officer, the President, or the Secretary or at such
later date as is stated therein. No formal action shall be required of the Board
of Directors or the stockholders to make any such resignation effective.
SECTION 6.7. CONTRACTS. Except as otherwise required by law, the
Amended and Restated Certificate of Incorporation or these Bylaws, any contracts
or other instruments may be executed and delivered in the name and on the behalf
of the Corporation by such officer or officers of the Corporation as the Board
of Directors may from time to time direct. Such authority may be general or
confined to specific instances as the Board may determine. The Chairman of the
Board, the Chief Executive Officer, the President or any Vice President may
execute bonds, contracts, deeds, leases and other instruments to be made or
executed for or on behalf of the Corporation. Subject to any restrictions
imposed by the Board of Directors or the Chairman of the Board, the Chief
Executive Officer, the President or any Vice President of the Corporation may
delegate contractual powers to others under his jurisdiction, it being
understood, however, that any such delegation of power shall not relieve such
officer of responsibility with respect to the exercise of such delegated power.
SECTION 6.8. PROXIES. Unless otherwise provided by resolution adopted
by the Board of Directors, the Chairman of the Board, the Chief Executive
Officer, the President or any Vice President may from time to appoint an
attorney or attorneys or agent or agents of the Corporation, in the name and on
behalf of the Corporation, to cast the votes which the Corporation may be
entitled to cast as the holder of stock or other securities in any other
corporation or other entity, any of whose stock or other securities may be held
by the Corporation, at meetings of the holders of the stock or other securities
of such other corporation or other entity, or to consent in writing, in the name
of the Corporation as such holder, to any action by such other corporation or
other entity, and may instruct the person or persons so appointed as to the
manner of casting such votes or giving such consent, and may execute or cause to
be executed in the name and on behalf of the Corporation and under its corporate
seal or otherwise, all such written proxies or other instruments as he may deem
necessary or proper in the premises.
ARTICLE VII
AMENDMENTS
SECTION 7.1. AMENDMENTS. These Bylaws may be amended, altered, added
to, rescinded or repealed at any meeting of the Board of Directors or of the
stockholders, provided notice of the proposed change was given in the notice of
the meeting and, in the case of a meeting of the Board of Directors, in a notice
given no less than twenty-four hours prior to the meeting; PROVIDED, HOWEVER,
that, notwithstanding any other provisions of these Bylaws or any provision of
law which might otherwise permit a lesser vote or no vote, but in addition to
any affirmative vote of the holders of any particular class or series of the
stock required by law, the Amended and Restated Certificate of Incorporation,
any Certificate of Designation or these Bylaws, the affirmative vote of the
holders of a majority of the voting power of the then outstanding Voting Stock,
voting together as a single class, shall be required in order for stockholders
to alter, amend or repeal any provision of these Bylaws or to adopt any
additional bylaw.
<PAGE>
SECOND AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
THIS SECOND AMENDED AND RESTATED AMENDED AND RESTATED INVESTORS' RIGHTS
AGREEMENT (this "Agreement") is entered into this day of March 1999, but is
made effective as of the 2nd day of July, 1998 (the "Effective Date"), by and
between U.S. Interactive, Inc., a Delaware corporation (the "Company"), the
investors listed on Schedule A hereto, each of which is herein referred to as a
"DE Investor", the management stockholders (either in a custodial, trustee or
individual capacity) listed on Schedule B hereto, and John Shulman, each of
which is herein referred to as a "Management Stockholder", the investors listed
on Schedule C hereto, each of which is herein referred to as a "USI Investor,"
and the investors listed on Schedule D hereto, each of which is herein referred
to an "InVenGen Investor." The DE Investors, the Management Stockholders, the
USI Investors, and the InVenGen Investors, are sometimes collectively referred
to in this Agreement as the "Stockholders," and each, a "Stockholder."
RECITALS
WHEREAS, as of September 22, 1998, immediately following the issuance
of 2,339,628 shares of Series D Preferred Stock to Safeguard 98 Capital, L.P.,
but prior to the purchase by the Company of any shares held by certain of its
Stockholders as of September 22, 1998, the Company had issued, an aggregate
total of 9,120,796 shares of common stock, $.001 par value (the "Common Stock"),
1,573,533 shares of Series A Preferred Stock, $.001 par value (the "Series A
Preferred Stock"), 1,052,632 shares of Series B Preferred Stock, $.001 par value
(the "Series B Preferred Stock"), 595,706 shares of Series C Preferred Stock,
$.001 par value (the "Series C Preferred Stock") and 2,339,628 shares of Series
D Preferred Stock, $.001 par value (the "Series D Preferred Stock". All shares
of Preferred Stock of the Company are referred to collectively as the "Preferred
Stock".
WHEREAS, on September 22, 1998, the Company, the USI Investors, the DE
Investors, and the Management Stockholders entered into an Amended and Restated
Investors' Rights Agreement;
WHEREAS, pursuant to an Asset Purchase Agreement dated February 26,
1999, the Company has purchased certain assets of InVenGen, LLC and has agreed
to include the InVenGen Investors (which are investors in InVenGen, LLC) as
parties to the Amended and Restated Investors' Rights Agreement;
WHEREAS, the DE Investors, the USI Investors, the Management
Stockholders, the InVenGen Investors, and the Company have agreed to enter into
this Agreement governing the rights of the DE Investors, the USI Investors, the
InVenGen Investors, and the Management Stockholders to cause the Company to
register shares of the Company's Common Stock together with any other common
stock of the Company into which the Preferred Stock of the Company shall be
converted (upon conversion of the Preferred Stock), and certain other matters as
set forth herein;
NOW, THEREFORE, IN CONSIDERATION OF THE MUTUAL COVENANTS CONTAINED
HEREIN AND OTHER GOOD AND VALUABLE CONSIDERATION, THE RECEIPT AND SUFFICIENCY OF
WHICH ARE HEREBY ACKNOWLEDGED, THE PARTIES HEREBY AGREE AS FOLLOWS
<PAGE>
1. Registration Rights
1.1 Definitions. For purposes of this Section 1:
(a) The term "register", "registered", and "registration"
refer to a registration effected by preparing and filing a registration
statement or similar document in compliance with the Securities Act of 1933, as
amended (the "Act"), and the declaration or ordering of effectiveness of such
registration statement or document;
(b) Except as otherwise expressly provided in the applicable
provisions of this Agreement, the term "Registrable DE Investors' Securities"
means (1) the Common Stock issuable or issued upon conversion of the Series A
Preferred Stock, (2) any Common Stock now or hereafter owned by the DE
Investors, and (3) any Common Stock issued as (or issuable upon the conversion
or exercise of any warrant, right, or other security which is issued as) a
dividend or other distribution with respect to, or in exchange for or in
replacement of (other than upon conversion), Series A Preferred Stock, excluding
in all cases, however, any Registrable DE Investors' Securities sold by a person
in a transaction in which such person's rights under this Section 1 are not
assigned;
(c) Except as otherwise expressly provided in the applicable
provisions of this Agreement, the term "Registrable USI Investors' Securities"
means (1) the Common Stock issuable or issued upon conversion of the Series B
Preferred Stock, Series C Preferred Stock or Series D Preferred Stock, (2) any
Common Stock now or hereafter owned by the USI Investors, and (3) any Common
Stock issued as (or issuable upon the conversion or exercise of any warrant,
right, or other security which is issued as) a dividend or other distribution
with respect to, or in exchange for or in replacement of (other than upon
conversion), Series B Preferred Stock, Series C Preferred Stock, or Series D
Preferred Stock excluding in all cases, however, any Registrable USI Investors'
Securities sold by a person in a transaction in which such person's rights under
this Section 1 are not assigned:
(d) Except as otherwise expressly provided in the applicable
provisions of this Agreement, the term "Registrable Individuals' Securities"
shall mean the Common Stock now and hereafter owned by the Management
Stockholders (individually or as custodian for their children or as a trustee of
any trust holding stock of the Company) and John Shulman.
<PAGE>
(e) Except as otherwise expressly provided in the applicable
provisions of this Agreement, the term "Registrable InVenGen Investors'
Securities" shall mean no more than 447,206 shares of Common Stock now or
hereafter owned by the InVenGen Investors.
(f) The term "Registrable Securities" means the Registrable DE
Investors' Securities, the Registrable USI Investors' Securities, the
Registrable InVenGen Investors' Securities, and 20% of the Registrable
Individuals' Securities;
(g) A share of Registrable Securities, shall cease to be a
share of Registrable Securities, when (i) a registration statement covering such
share has been declared effective by the SEC and such share has been disposed of
by a Holder pursuant to such effective registration statement, (ii) such share
is held by the Company or one of its subsidiaries or otherwise ceases to be
outstanding, or (iii) such share may be sold pursuant to paragraph (k) of Rule
144, if applicable.
(h) The term "Registrable Investors' Securities" means the
Registrable DE Investors' Securities, and the Registrable USI Investors'
Securities, and the Registrable InVenGen Investors' Securities.
(i) The term "Holder" means any person owning or having the
right to acquire Registrable Securities or any assignee thereof in accordance
with Section 1.13 hereof; and
(j) The term "Form S-3" means such form under the Act as in
effect on the date hereof or any registration form under the Act subsequently
adopted by the Securities and Exchange Commission ("SEC") which permits
inclusion or incorporation of substantial information by reference to other
documents filed by the Company with the SEC.
<PAGE>
1.2 Request for Registration.
(a) If the Company shall receive at any time after the earlier
of: (i) two (2) years from the Effective Date; (ii) one hundred eighty (180)
days after the first underwritten public offering of Common Stock of the Company
for the account of the Company and offered on a firm commitment or best efforts
basis pursuant to an offering registered under the Securities Act with the SEC
on Form S-1, Form SB-2 or their then equivalents (an "Initial Public Offering");
or (iii) one hundred eighty (180) days after the closing of (A) an underwritten
firm commitment offering pursuant to an effective registration under the
Securities Act of 1933, as amended, covering the offer and sale by the Company
of its Common Stock in which the aggregate gross proceeds to the Company exceed
$15,000,000 and in which the price per share to the public of such Common Stock
equals or exceeds $5.00 (subject to equitable adjustment in the event of any
stock split, stock dividend, combination, reorganization, reclassification or
other similar event, involving the Common Stock which occurs after the date
hereof and prior to such underwritten, firm commitment offering); or (B) an
offering to the holders of the common stock of Safeguard Scientific, Inc.
("SSI"), pursuant to a registration statement, of rights to purchase from the
Company such number of shares of the Common Stock which equals up to 30% (as
determined by SSI) of the sum of (i) all issued shares of Common Stock; (ii) all
shares of Common Stock reserved for issuance, and (iii) all shares of Common
Stock subject to, but not reserved for, issuance pursuant to options, warrants
or other agreements, instruments or understandings, all as of the effective date
of the registration statement (a "Qualified Public Offering") (other than a
registration statement relating either to the sale of securities to employees of
the Company pursuant to a stock option, stock purchase or other employee benefit
plan or an SEC Rule 145 transaction), a written request from (A) the holders of
at least forty percent (40%) of the Registrable Investors' Securities then
outstanding that the Company file a registration statement under the Act
covering the registration of at least twenty percent (20%) of the Registrable
Investors' Securities then outstanding provided however that the aggregate
offering price to the public would equal or exceed $5,000,000 (or such
proportionately lesser number of shares of Common Stock if the aggregate
offering price to the public would equal or exceed $10,000,000), or (B) the
holders of at least twenty percent (20%) of the Registrable Individuals'
Securities then outstanding that the Company file a registration statement under
the Act covering the registration of at least twenty percent (20%) of the
Registrable Individuals' Securities held by the Management Stockholders provided
however that the aggregate offering price to the public would equal or exceed
$5,000,000 (or such proportionately lesser number of shares of Common Stock if
the aggregate offering price to the public would equal or exceed $10,000,000),
then the Company shall use its best efforts to, within ten (10) business days of
the receipt thereof, give written notice of such request to all Holders and
shall, subject to the limitations of Section 1.2(b), effect as soon as
practicable, and in any event within one hundred eighty (180) days after receipt
of such request, the registration under the Act of all Registrable Securities
which the Holders request to be registered within twenty (20) days of the
mailing of such notice by the Company in accordance with Section 3.6.
<PAGE>
(b) If the Holders initiating the registration request
hereunder ("Initiating Holders") intend to distribute the Registrable Securities
covered by their request by means of an underwriting, they shall so advise the
Company as a part of their request made pursuant to this Section 1.2 and the
Company shall include such information in the written notice referred to in
Section 1.2(a). The underwriter will be selected by the Company and be
reasonably acceptable to the Initiating Holders. In such event, the right of any
Holder to include such Holder's Registrable Securities in such registration
shall be conditioned upon such Holder's participation in such underwriting and
the inclusion of such Holder's Registrable Securities in the underwriting
(unless otherwise mutually agreed by a majority in interest of the Initiating
Holders and such Holder) to the extent provided herein. All Holders proposing to
distribute their securities through such underwriting shall (together with the
Company as provided in Section 1.4(e)) enter into an underwriting agreement in
customary form with the underwriter or underwriters selected by the Company and
reasonably acceptable to the Initiating Holders. Notwithstanding any other
provision of this Section 1.2, if the underwriter advises the Initiating Holders
in writing that marketing factors require a limitation of the number of shares
to be underwritten, then the Initiating Holders shall so advise all Holders of
Registrable Securities which would otherwise be underwritten pursuant hereto,
and the number of shares of Registrable Securities that may be included in the
underwriting shall be allocated among all Holders thereof, including the
Initiating Holders, in proportion (as nearly as practicable) to the amount of
Registrable Securities of the Company owned by each Holder; provided, however,
if the Initiating Holders are holders of Registrable Individuals' Securities, at
the election of forty percent (40%) of the Registrable Investors' Securities
requesting such registration a different allocation among all Holders requesting
registration will occur (such new allocation to include up to 80% of their
Registrable Investors' Securities with the balance of the Registrable Securities
to be registered to be allocated on a pro rata basis among the Registrable
Individuals' Securities), in which event the registration shall be deemed to be
a demand registration of the holders of the Registrable Investors' Securities
for purposes of Section 1.2(c) below; provided, however, that the number of
shares of Registrable Securities to be included in such underwriting shall not
be reduced unless all securities other than the Registrable Securities are first
entirely excluded from the underwriting.
(c) The Company is obligated to effect two (2) such
registrations for the holders of the Registrable Investors' Securities and two
(2) such registrations for the holders of the Registrable Individuals'
Securities, with a minimum time period of twelve (12) months between the
demanded registration and any prior registration of the Company's securities.
Notwithstanding the foregoing, the Company shall not be obligated to effect such
registration in any jurisdiction in which the Company would be required to
qualify to do business or execute a general consent to service of process and
any related qualification or compliance in effecting such registration.
<PAGE>
(d) Notwithstanding the foregoing, if the Company shall
furnish to Holders requesting a registration pursuant to this Section 1.2 a
certificate signed by the President of the Company stating that (i) in the good
faith judgment of the Board of Directors of the Company it would be seriously
detrimental to the Company and its shareholders for such registration statement
to be filed and it is therefore essential to defer the filing of such
registration statement, or (ii) the Company intends to file a registration
statement in connection with a public offering of securities for the Company's
account within one hundred eighty (180) days thereafter, then the Company shall
have the right to defer taking action with respect to such filing for a period
of not more than one hundred eighty (180) days after receipt of the request of
the Initiating Holders; provided, however, that the Company may not utilize this
right more than one (1) time in any twelve (12) month period.
1.3 Piggyback Registration. If (but without any obligation to do so)
the Company proposes to register (including for this purpose a registration
effected by the Company for shareholders other than the Holders) any of its
stock or other equity securities under the Act in connection with the public
offering of such securities solely for cash (other than a registration relating
either to the sale of securities to employees of the Company pursuant to a stock
option, stock purchase or other employee benefit plan or an SEC Rule 145
transaction), the Company shall, at such time, promptly give each Holder of
Registrable Securities written notice of such registration. Upon the written
request of each Holder of Registrable Securities given within twenty (20) days
after mailing of such notice by the Company in accordance with Section 3.5, the
Company shall, subject to the provisions of Section 1.8 hereof, use its diligent
best efforts to cause to be registered under the Act all of the Registrable
Securities that each such Holder has requested to be registered. The Company
shall have the right to terminate or withdraw any registration initiated by it
under this Section 1.3 prior to the effectiveness of such registration whether
or not any Holder has elected to include securities in such registration
1.4 Obligations of the Company. Whenever required under this Section 1
to effect the registration of any Registrable Securities, the Company shall use
its diligent best efforts to, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement
with respect to such Registrable Securities and use its best efforts to cause
such registration statement to become effective, and, upon the request of the
Holders of a majority of the Registrable Securities registered thereunder, keep
such registration statement effective for up to ninety (90) days.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Act with respect to the disposition of all securities covered
by such registration statement.
(c) Furnish to the Holders (i) such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as they may reasonably request
in order to facilitate the disposition of Registrable Securities owned by them
and (ii) all material correspondence with the Securities and Exchange Commission
relating to such registration.
<PAGE>
(d) Use its best efforts to (i) register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holders, provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions, and (ii) insure the
obtaining of all necessary approvals from the National Association of Securities
Dealers, Inc. in connection with such registration.
(e) In the event of any underwritten public offering, enter
into and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by
such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act of the happening of any event as a result
of which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing.
(g) Furnish, at the request of any Holder requesting
registration of Registrable Securities pursuant to this Section 1, on the date
that such Registrable Securities are delivered to the underwriters for sale in
connection with a registration pursuant to this Section 1: (i) an opinion, dated
such date, of the counsel representing the Company for the purposes of such
registration, in form and substance as is customarily given to underwriters in
an underwritten public offering, addressed to the underwriters, if any, and to
the Holders requesting registration of Registrable Securities; and (ii) a letter
dated such date, from the independent certified public accountants of the
Company, in form and substance as is customarily given by independent certified
public accountants to underwriters in an underwritten public offering, addressed
to the underwriters, if any, and to the Holders requesting registration of
Registrable Securities.
<PAGE>
1.5 Furnish Information; No Company Obligation
(a) It shall be a condition precedent to the obligations of
the Company to take any action pursuant to this Section 1 with respect to the
Registrable Securities of any selling Holder that such Holder shall furnish to
the Company such information regarding itself, the Registrable Securities held
by it, and the intended method of disposition of such securities as shall be
required to effect the registration of such Holder's Registrable Securities.
(b) The Company shall have no obligation with respect to any
registration requested pursuant to Section 1.2 or Section 1.12 if, due to the
operation of Section 1.5(a) or 1.8, the number of shares or the anticipated
aggregate offering price of the Registrable Securities to be included in the
registration does not equal or exceed the number of shares or the anticipated
aggregate offering price required to originally trigger the Company's obligation
to initiate such registration as specified in Section 1.2(a) or Section
1.12(a)(2), whichever is applicable.
1.6 Expenses of Demand Registration. All expenses, other than
underwriting discounts and commissions, incurred in connection with
registrations, filings or qualifications pursuant to Section 1.2, including
(without limitation) all registration, filing, and qualification fees, printers'
and accounting fees, fees and disbursements of counsel for the Company, and the
reasonable fees and disbursements of one (1) counsel for the selling Holders
(which counsel shall be reasonably acceptable to the Company), shall be borne by
the Company; provided, however, that the Company shall not be required to pay
for any expenses of any registration proceeding begun pursuant to Section 1.2 if
the registration request is subsequently withdrawn at the request of the Holders
of a majority of the Registrable Securities to be registered (in which case all
participating Holders shall bear such expenses), unless one (1) demand
registration is still available to such Holders of Registrable Securities and
the Holders of a majority of the Registrable Securities agree to forfeit their
right to such demand registrations pursuant to Section 1.2; provided, further,
that if at the time of such withdrawal, the Holders have learned of a material
adverse change in the financial condition, business or prospects of the Company
(other than a material adverse change resulting from general economic or
industry conditions) from that known to the Holders at the time of their request
and have withdrawn the request with reasonable promptness following disclosure
by the Company of such material adverse change, or if the registration is not
effected due to a request of the Company or any underwriter to which a majority
of the Holders of the Registrable Securities agree, then the Company shall bear
such expenses and the Holders shall not be required to pay any of such expenses
and shall retain their rights pursuant to Section 1.2.
1.7 Expenses of Piggyback Registration. The Company shall bear and pay
all expenses incurred in connection with any registration, filing or
qualification of Registrable Securities with respect to the registrations
pursuant to Section 1.3 for each Holder, including (without limitation) all
registration, filing and qualification fees, printers and accounting fees
relating or apportionable thereto and the reasonable fees and disbursements of
one (1) counsel for the selling Holders selected by them (which counsel shall be
reasonably acceptable to the Company), but excluding underwriting discounts and
commissions relating to the Registrable Securities.
<PAGE>
1.8 Underwriting Requirements. In connection with any offering
involving an underwriting of shares of the Company's capital stock, the Company
shall not be required under Section 1.3 to include any of the Holders'
securities in such underwriting unless they accept the terms of the underwriting
as agreed upon between the Company and the underwriters selected by it (or by
other persons entitled to select the underwriters), and then only in such
quantity as the underwriters determine in their sole discretion would not be
reasonably likely to jeopardize the success of the offering by the Company. If
the total amount of securities, including Registrable Securities, requested by
stockholders to be included in such offering exceeds the amount of securities
sold other than by the Company that the underwriters determine in their sole
discretion is compatible with the success of the offering, then the Company
shall be required to include in the offering only that number of such
securities, including Registrable Securities, which the underwriters determine
in their sole discretion would not be reasonably likely to jeopardize the
success of the offering (the securities so included to be apportioned, at the
option of a majority of the holders of Registrable Investors' Securities
requesting registration, 80% to the holders of the Registrable Investors'
Securities and 20% to the holders of the Registrable Individuals' Securities, or
in the absence of exercise of such option, pro rata among the selling
shareholders according to the total amount of securities entitled to be included
therein owned by each selling stockholder or in such other proportions as shall
mutually be agreed to by such selling shareholders), but in no event shall (i)
the amount of securities of the selling Holders included in the offering be
reduced below 20% of the total amount of the securities included in such
offering, unless such offering is the Company's Initial Public Offering in which
case the selling stockholders may be excluded if the underwriters make the
determination described above or (ii) notwithstanding(i) above, any shares being
sold by a shareholder exercising a demand registration right similar to that
granted in Section 1.2 shall be excluded from such offering. For purposes of the
preceding parenthetical concerning apportionment, for any selling shareholder
which is a holder of Registrable Securities and which is a partnership or
corporation, the partners, retired partners, and shareholders of such holder, or
the estates and family members of any such partners and retired partners and any
trusts for the benefit of any of the foregoing persons shall be deemed to be a
single "selling shareholder," and any pro-rata reduction with respect to such
"selling shareholder" shall be based upon the aggregate amount of shares
carrying registration rights owned by all entities and individuals included in
such "selling shareholder," as defined in this sentence.
1.9 Delay of Registration. No Holder shall have any right to obtain or
seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 1.
1.10 Indemnification. In the event any Registrable Securities are
included in a registration statement under this Section 1:
<PAGE>
(a) To the extent permitted by law, the Company will indemnify
and hold harmless each Holder, any underwriter (as defined in the Act) for such
Holder and each person, if any, who controls such Holder or underwriter within
the meaning of Section 15 of the Securities Act, against any losses, claims,
damages or liabilities (joint or several) to which they may become subject under
the Act, or the 1934 Act, or other federal or state law, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any of the following statements, omissions or violations by the
Company (collectively a "Violation"): (i) any untrue statement or alleged untrue
statement of a material fact contained in such registration statement, including
any preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading, or (iii) any violation or alleged
violation of the Act, the 1934 Act, any state securities law or any rule or
regulation promulgated under the Act, or the 1934 Act or any state securities
law; and the Company will pay to each such Holder, underwriter or controlling
person, as incurred, any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the indemnity agreement contained
in this Section 1.10(a) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability, or action if such settlement is effected
without the consent of the Company, which consent shall not be unreasonably
withheld, nor shall the Company be liable in any such case for any such loss,
claim, damage, liability or action to the extent that it arises out of or is
based upon a Violation which occurs in reliance upon and in conformity with
written information furnished expressly for use in connection with such
registration by any such Holder, underwriter or controlling person.
(b) To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the registration statement, each person, if any, who
controls the Company within the meaning of the Act, any underwriter, any other
Holder selling securities in such registration statement and any controlling
person of any such underwriter or other Holder, against any losses, claims,
damages or liabilities (joint or several) to which any of the foregoing persons
may become subject, under the Act, or the 1934 Act, or other federal or state
law, insofar as such losses, claims, damages or liabilities (or actions in
respect thereto) arise out of or are based upon any Violation, in each case to
the extent (and only to the extent) that such Violation occurs in reliance upon
and in conformity with written information furnished by such Holder expressly
for use in connection with such registration; and each such Holder will pay, as
incurred, any legal or other expenses reasonably incurred by any person intended
to be indemnified pursuant to this Section 1.10(b), in connection with
investigating or defending any such loss, claim, damage, liability, or action;
provided, however, that the indemnity agreement contained in this Section
1.10(b) shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability or action if such settlement is effected without the consent
of the Holder, which consent shall not be unreasonably withheld; provided,
further, that, in no event shall any indemnity under this Section 1.10(b) exceed
the net proceeds from the offering received by such Holder.
<PAGE>
(c) Promptly after receipt by an indemnified party under this
Section 1.10 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 1.10, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties which may be represented without
conflict by one (1) counsel) shall have the right to retain one separate
counsel, with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if materially prejudicial to its ability to defend such action, shall
relieve such indemnifying party of any liability to the indemnified party under
this Section 1.10, but the omission so to deliver written notice to the
indemnifying party will not relieve it of any liability that it may have to any
indemnified party otherwise than under this Section 1.10.
(d) If the indemnification provided for in this Section 1.10
is held by a court of competent jurisdiction to be unavailable (by entry of a
final decree and expiration of the time to appeal or denial of the last appeal
permitted) to an indemnified party with respect to any loss, liability, claim,
damage or expense referred to therein, then the indemnifying party, in lieu of
indemnifying such indemnified party hereunder, shall contribute to the amount
paid or payable by such indemnified party as a result of such loss, liability,
claim, damage or expense in such proportion as is appropriate to reflect the
relative fault of the indemnifying party on the one hand and of the indemnified
party on the other in connection with the statements or omissions that resulted
in such loss, liability, claim, damage or expense as well as any other relevant
equitable considerations; provided, however, that in no event shall the
contribution by any selling Holder exceed the net proceeds from the offering
received by such Holder. The relative fault of the indemnifying party and of the
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
<PAGE>
(e) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
(f) The obligations of the Company and Holders under this
Section 1.10 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Section 1, and otherwise.
1.11 Reports Under Securities Exchange Act of 1934. With a view to
making available to the Holders the benefits of Rule 144 promulgated under the
Act and any other rule or regulation of the SEC that may at any time permit a
Holder to sell securities of the Company to the public without registration or
pursuant to a registration on Form S-3, the Company agrees to:
(a) use its best efforts to file with the SEC in a timely
manner all reports and other documents required of the Company under the Act and
Section 13(a) or 15(d) of the 1934 Act;
(b) take such action (to the extent the Company is then
eligible to take such action), including the voluntary registration of its
Common Stock under Section 12 of the 1934 Act, as is necessary to enable the
Holders to utilize Form S-3 for the sale of their Registrable Securities, such
action to be taken as soon as practicable after the end of the fiscal year in
which the first registration statement filed by the Company for the offering of
its securities to the general public is declared effective.
(c) if the Company shall cease to be required to file reports
under Section 13(a) or 15(d) of the 1934 Act, the Company shall make publicly
available the information specified in Rule 144(c)(2) under the Act;
(d) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of SEC Rule 144 (at
any time after ninety (90) days after the effective date of the first
registration statement declared effective by the Company), the Act, and the 1934
Act (at any time after it has become subject to such reporting requirements), or
that it qualifies as a registrant whose securities may be resold pursuant to
Form S-3 (at any time after it so qualifies), (ii) a copy of the most recent
annual or quarterly report of the Company and such other reports and documents
so filed by the Company and (iii) such other information as may be reasonably
requested in availing any Holder of any rule or regulation of the SEC which
permits the selling of any such securities without registration or pursuant to
such form.
<PAGE>
1.12 Form S-3 Registration. In case the Company shall receive from any
Holder or Holders a written request or requests that the Company effect a
registration on Form S-3 and any related qualification or compliance with
respect to all or a part of the Registrable Securities owned by such Holder or
Holders, the Company will use its best efforts to:
(a) promptly give written notice of the proposed registration
and any related qualification or compliance, to all other Holders and, as soon
as practicable, effect such registration and all such qualifications and
compliances as may be so requested and as would permit or facilitate the sale
and distribution of all or such portion of such Holder's of Holders' Registrable
Securities as are specified in such request, together with all or such portion
of the Registrable Securities of any other Holder or Holders joining in such
request as are specified in a written request given within fifteen (15) days
after receipt of such written notice from the Company; provided, however, that
the Company shall not be obligated to effect any such registration,
qualification or compliance, pursuant to this Section 1.12: (1) if Form S-3 is
not then available for such offering by Holders; (2) if the Holders, together
with the holders of any other securities of the Company entitled to inclusion in
such registration, propose to sell Registrable Securities and such other
securities (if any) at an aggregate price to the public of less than $2 million;
(3) if the Company shall furnish to the Holders a certificate signed by the
Chief Executive Officer of the Company stating that in the good faith judgment
of the Board of Directors of the Company, it would be seriously detrimental to
the Company and its shareholders for such Form S-3 Registration to be effected
at such time, in which event the Company shall have the right to defer the
filing of the Form S-3 registration statement for a period of not more than
sixty (60) days after receipt of the request of the Holder or Holders under this
Section 1.12; provided, however, that the Company shall not utilize this right
more than two (2) times in any twelve (12) month period; (4) if the Company has,
within the twelve (12) month period preceding the date of such request, already
effected one (1) registration on Form S-3 for the Holders pursuant to this
Section 1.12; (5) if the Company has already effected four (4) such
registrations pursuant to this Section 1.12; or (6) in any particular
jurisdiction in which the Company would be required to qualify to do business or
to execute a general consent to service of process in effecting such
registration, qualification or compliance.
<PAGE>
1.13 Assignment of Registration Rights. The rights to cause the Company
to register Registrable Securities, to the extent granted by the applicable
provisions of this Section 1, may be assigned (but only with all related
obligations) by an original Holder to (i) any transferee or assignee of such
securities who is a member of such Holder's immediate family, (ii) if such
Holder is a partnership, any partner thereof, (iii) any entity (as determined as
of this date) controlling, controlled by or under common control with, any DE
Investor or USI Investor; or (iv) any transferee or assignee of the Registrable
Securities who or which acquires at least 25% of the Registrable Securities held
by such Holder as of the date of this Agreement; provided, however, in no event
shall any right to cause the Company to register Registrable Securities be
transferred to a competitor of the Company, and any permitted transfer of such
rights shall be effective only if, contemporaneous with such transfer, the
Company is furnished with written notice of the name and address of such
transferee or assignee and the securities with respect to which such
registration rights are being assigned; provided, further, that such assignment
shall be effective only if such transferee, prior to the transfer of the
Registrable Securities, executes and delivers to the Company an agreement
satisfactory to the Company that such transferee shall thereafter be a Holder
for purposes of this Agreement and if immediately following such transfer the
further disposition of such securities by the transferee or assignee is
restricted under the Act. For the purposes of determining the number of shares
of Registrable Securities held by a transferee or assignee, the holdings of
transferees and assignees of a partnership who are partners or retired partners
of such partnership (including spouses and ancestors, lineal descendants, and
siblings of such partners or spouses who acquire Registrable Securities by gift,
will or intestate succession) shall be aggregated together and with the
partnership. For purposes of this Section 1.13, a transfer by an original Holder
of Registrable Securities to a custodial account or trust whereby such original
Holder retains the sole voting rights of such Registrable Securities shall not
affect the rights to registration for such Registrable Securities.
1.14 Limitations on Subsequent Registration Rights. From and after the
date of this Agreement, the Company shall not, without the prior written consent
of the holders of more than fifty percent (50%) of the outstanding Registrable
Investors' Securities, enter into any agreement with any holder or prospective
holder of any securities of the Company giving such holder or prospective holder
any registration rights, including without limitation "piggyback" registration
rights, the terms of which are the same or more favorable than the registration
rights granted to either the holders of Registrable Investors' Securities or the
holders of the Registrable Individuals' Securities hereunder.
<PAGE>
1.15 "Market Stand-Off" Agreement. Each Holder hereby agrees
that, during the period of duration (not to exceed one hundred eighty (180)
days) specified by the Company and an underwriter of Common Stock or other
securities of the Company, following the effective date of a registration
statement for the Company's initial offering of securities to the public
generally, he, she or it shall not, to the extent requested by the Company and
such underwriter, directly or indirectly sell, offer to sell, contract to sell
(including, without limitation, any short sale), grant any option to purchase or
otherwise transfer or dispose of (other than to donees who agree to be similarly
bound) any securities of the Company held by him, her or it at any time during
such period except Common Stock included in such registration; provided,
however, that all officers and directors of the Company, and all other persons
with registration rights (whether or not pursuant to this Agreement) enter into
similar agreements.
In order to enforce the foregoing covenant, the Company may
impose stop-transfer instructions with respect to the Registrable Securities of
each Holder (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such period.
1.16 Termination of Registration Rights. No Holder shall be entitled to
exercise any rights provided for in this Section 1:
(a) after five (5) years following the Company's Qualified
Public Offering for demand registration rights under Section 1.2 and five (5)
years following the Company's Qualified Public Offering for Piggyback
Registration Rights under Section 1.3 or
(b) if such Holder owns less than one percent (1 %) of the
issued and outstanding Registrable Securities.
2. Covenants of the Company.
2.1 Delivery of Financial Statements. The Company shall
furnish the following information to each Holder (as of the date of
determination) of an aggregate of at least one hundred thousand (100,000) shares
of Registrable Securities (as presently constituted):
(a) as soon as practicable, but in any event within one
hundred twenty (120) days after the end of each fiscal year of the Company, an
income statement for such fiscal year, a balance sheet of the Company and
statement of shareholder's equity as of the end of such year, and a statement of
cash flows for such year, such year-end financial reports to be in reasonable
detail, prepared in accordance with generally accepted accounting principles
("GAAP"), and audited by independent public accountants of nationally recognized
standing selected by the Company;
(b) as soon as practicable, but in any event within forty-five
(45) days after the end of each of the first three (3) quarters of each fiscal
year of the Company, an unaudited profit or loss statement, unaudited statement
of cash flows for such fiscal quarter and an unaudited balance sheet as of the
end of such fiscal quarter;
<PAGE>
(c) within forty-five (45) days of the end of each quarter, an
unaudited quarterly income statement and statement of cash flows and balance
sheet for and as of the end of such month, in reasonable detail;
(d) as soon as practicable, but in any event thirty (30) days
prior to the end of each fiscal year, a budget and business plan for the next
fiscal year, prepared on a monthly basis, including balance sheets, sources and
applications of funds statements for such months, projected backlog schedule and
updates of significant contracts and/or accounts and, as soon as prepared, any
other budgets or revised budgets prepared by the Company;
(e) with respect to the financial statements called for in
subsections (b) and (c) of this Section 2.1, an instrument executed by the
Treasurer or other senior officer of the Company and certifying that such
financials were prepared in accordance with GAAP consistently applied with prior
practice for earlier periods (with the exception of footnotes that may be
required by GAAP) and fairly present the financial condition of the Company and
its results of operation for the period specified, subject to year-end audit
adjustment; and
(f) such other information relating to the financial condition
or business of the Company as the Holder or any assignee of the Holder may from
time to time request; provided, however, that the Company shall not be obligated
under this subsection (f) or any other subsection of Section 2.1 to provide
information which it deems in good faith to be a trade secret or other
confidential information.
2.2 Affirmative Covenants. The Company covenants and agrees as follows:
(a) Maintenance of Key Man Insurance. Maintain term life
insurance on the lives of such executives of the Company in such amounts as the
Board of Directors of the Company shall determine to be in the best interest of
the Company and the Stockholders, in each case for so long as such person
remains an officer or employee of the Company, the proceeds of which are payable
to the Company.
<PAGE>
(b) Inspection Rights. Permit during normal business hours,
upon reasonable request and notice, each of the Holders or any employees, agents
or representatives thereof, at the Holder's expense, to examine and make copies
of and extracts from the records and books of account of, and visit and inspect
the properties, assets, operations and business of the Company, and to discuss
the affairs, finances and accounts of the Company with those officers,
consultants, directors, key employees, attorneys or independent accountants
selected by the Company; provided, however, that any Holder, employee, agent or
representative, as the case may be, agrees in writing to hold all information
confidential.
(c) Budgets Approval. As soon as practicable after submission
of the business plan and budget required by 2.1(d) and obtain in respect thereof
the approval of the members of the Board of Directors.
(d) Financing. Promptly, fully and in detail, inform the Board
of Directors of any discussions, offers or contracts relating to possible
financing of any material nature for the Company, whether initiated by the
Company or any other person.
(e) New Developments. Cause all technological developments,
patentable or unpatentable inventions, discoveries or improvements by the
Company's employees or consultants to be documented in accordance with industry
practice and, where possible and appropriate, to file and prosecute United
States and foreign patent, copyright, trademark, mask work or other intellectual
property right applications relating to and protecting the Company's inventions,
discoveries or developments on behalf of the Company.
(f) Meetings of Directors, Committees and Observer Rights. The
Company shall hold meetings of the Company's Board of Directors not less than
every three (3) months. At all times hereafter up to the time of effectiveness
of the Company's Qualified Public Offering, each Significant Holder at its own
expense shall have the right to have one representative attend all such meetings
of the Board of Directors in a nonvoting observer capacity and to receive notice
of such meetings; provided, however, the Company may require as a condition
precedent to the exercise of any Holder's rights under this Section 2.2(f) that
each person proposing to attend any meeting of the Board of Directors and having
access to any of the information provided by the Company to the Board of
Directors shall agree to hold in confidence and trust and to act in a fiduciary
manner with respect to all information so received during such meetings or
otherwise; and, provided further, that the Company reserves the right not to
provide information and to exclude such Significant Holder (and its
representative) from any meeting or portion thereof if (i) delivery of such
information to, or attendance at such meeting by, such Significant Holder (or
its representative) would result in disclosure of trade secrets to such Holder
(or its representative); (ii) in the opinion of the majority of the Board of
Directors such attendance and/or delivery of such information would be contrary
to the best interests of the Company; (iii) such attendance and/or delivery of
such information would adversely affect the attorney-client privilege between
the Company and its counsel; or (iv) if such Significant Holder (or its
representative) is a competitor of the Company, as determined by the Board of
Directors of the Company. "Significant Holder" shall mean each of Information
Associates, L.P., Information Associates, C.V., Vulcan Ventures, Inc., Internet
Capital Group, L.L.C., Technology Leaders, II, L.P., Technology Leaders II
Offshore C.V., RAF Ventures VIII, L.P., and Safeguard 98 Capital, L.P.
<PAGE>
(g) Agreements of Officers and Employees. As determined by the
Board of Directors, cause each employee of the Company now or hereafter employed
and all consultants of the Company involved in the design, review, evaluation or
development of products or intellectual property rights to execute and deliver a
Nondisclosure Agreement as approved by the Board of Directors of the Company
except that no employees other than the management shall be required to agree to
any restriction on competing with the Company after termination of their
employment unless specifically determined by the Board of Directors or the Chief
Executive Officer or President of the Company.
(h) By-laws; Meetings and Indemnification. The Company shall
use its best efforts at all times while any Preferred Stock remain outstanding
to cause its Bylaws to provide that, (A) unless otherwise required by the laws
of the state of its incorporation, (i) any three (3) directors or (ii) any
holder or holders of at least 25% of all of the then outstanding shares of
Preferred Stock of the Company, voting as a separate class, shall have the right
to call a meeting of the Stockholders, and (B) a quorum for a meeting of the
Board of Directors or any committee thereof of which a Preferred Director is a
member shall require the attendance of at least one director elected by the
holders of Preferred Stock in accordance with terms of the Second Amended and
Restated Stockholders' Agreement dated as of this date (a "Preferred Director"),
except that if any properly called Board of Directors meeting is adjourned for
lack of a Preferred Director, and such meeting is reconvened with proper notice
as required for a new special meeting, a quorum at the reconvened meeting shall
require a simple majority of the directors then holding office. The Company
shall at all times maintain provisions in its By-laws or Certificate of
Incorporation indemnifying all directors against liability and exculpating all
directors from liability to the maximum extent permitted under the laws of the
state of its incorporation.
(i) Corporate Existence. Maintain its corporate existence,
intellectual property rights, other rights and franchises in full force and
effect to the extent appropriate in accordance with good business practice.
(j) Properties. Business. Insurance. Maintain as to its
respective properties and business, with financially sound and reputable
insurers, insurance against such casualties and contingencies and of such types
and in such amounts as is customary for companies of a similar size and
financial condition similarly situated within the same industry.
(k) Expenses of Directors. Promptly reimburse in full each
non-management director of the Company for all of his reasonable out-of-pocket
expenses incurred in attending each meeting of the Board of Directors of the
Company or any committee thereof.
<PAGE>
(1) Compliance with Laws. Comply with all applicable laws,
rules, regulations and orders, noncompliance with which could materially
adversely affect its business, assets, intellectual property rights, operations
or condition, financial or otherwise.
(m) Keeping of Records and Books of Account. Keep adequate
records and books of account, in which complete entries will be made in
accordance with generally accepted accounting principles consistently applied,
reflecting all financial transactions of the Company, and in which, for each
fiscal year, all proper reserves for depreciation, depletion, obsolescence,
amortization, taxes, bad debts and other purposes in connection with its
business shall be made.
(n) Rule 144A Information. At all times during which the
Company is not subject to the reporting requirements of Section 13 or 15(d) of
the Exchange Act, it will provide as promptly as practicable (in any event not
later than twenty (20) days after initial request) in written form, upon the
written request of any Holder or a prospective buyer of shares of the Company
from any Holder, all information required by Rule 144A(d)(4)(i) of the General
Regulations promulgated by the Commission under the Securities Act ("Rule 144A
Information"). The Company further covenants, upon written request, as promptly
as practicable (in any event not later than twenty (20) days after initial
request), but only to the extent necessary and customary in connection with the
resale through the National Association of Securities Dealers, Inc. system for
Private Offerings Resales and Trading through Automated Linkage ("PORTAL") of
securities of a nature similar to the shares of the Company and which have been
issued under circumstances similar to the issuance of the shares of the Company,
to cooperate with and assist any Holder or any member of PORTAL in applying to
designate and thereafter maintain the eligibility of such shares for trading
through PORTAL. The Company's obligations under this Section 2.2(n) shall at all
times be contingent upon the relevant Holder's obtaining from a prospective
purchaser an agreement to take all reasonable precautions to safeguard the Rule
144A Information from disclosure to anyone other than a person who will assist
such purchaser in evaluating the purchase of the shares of the Company.
<PAGE>
2.3 Negative Covenants of the Company. The Company covenants and agrees
that it will not without the consent or waiver of (i) the holders of at least 66
2/3% of the outstanding shares of the Preferred Stock, or (ii) two of the
Preferred Directors:
(a) Dealings with Affiliates. Enter into any transaction,
including, without limitation, any loans or extensions of credit or royalty
agreements with any employee, consultant, officer or director of the Company or
holder of five percent (5%) of any class of capital stock of the Company, or any
member of their respective immediate families or any corporation or other entity
directly or indirectly controlled by one or more of such employees, consultants,
officers, directors or 5% stockholders or members of their immediate families,
(i) on terms less favorable to the Company than it would obtain in a transaction
between unrelated parties or (ii) except in the case of any transaction or
series of transactions entered into in the ordinary course of business and
involving less than $5,000 in the aggregate, without the approval of the Board
of Directors (excluding any interested director);
(b) Transfer of Technology. Transfer, sell dispose of, assign,
license, or donate any ownership or interest in, or material rights relating to,
any of its technology, or other Intellectual Property Rights to any person or
entity which is not a member of the "consolidated group" of the Company and its
Subsidiaries; provided, however, that this Section shall not apply to transfers
or licenses of technology or Intellectual Property Rights accomplished in the
ordinary course of business as presently conducted or proposed to be conducted.
For purposes of this Agreement, "Intellectual Property Rights"
means any and all, whether domestic or foreign, patents, patent applications,
patent right, trade secrets, confidential business information, formula,
processes, laboratory notebooks, algorithms, copyrights, mask works, claims of
infringement against third parties, licenses, permits, license rights, contract
rights with employees, consultants and third parties, trademarks, trademark
rights, inventions and discoveries, and other such rights generally classified
as intangible, intellectual property assets in accordance with GAAP.
For purposes of this Agreement, "Subsidiary" or "Subsidiary"
means any entity of which the Company and/or any of its other Subsidiaries (as
herein defined) directly or indirectly owns at the time of determination at
least fifty percent (50%) of the outstanding voting shares of every class of
such corporation or trust other than directors' qualifying shares.
(c) Restriction on Indebtedness. Incur, create, or assume any
Indebtedness other than the following:
<PAGE>
(i) Indebtedness existing on the date hereof
(including the maximum borrowing capacity under the existing indebtedness to
Progress Bank) and renewals, replacements and refinancing thereof that do not
increase the aggregate amount of Indebtedness of the Company and its
Subsidiaries taken as a whole; and Indebtedness contemplated by the Business
Plan or in a budget or projection approved by a majority of the Board of
Directors, including at least one Preferred Director;
(ii) Indebtedness of a Subsidiary owing to the
Company or to another Subsidiary.
For purposes of this Agreement, "Indebtedness" means (i) any liability
for borrowed money or evidenced by a note or similar obligation given in
connection with the acquisition of any property or other assets (other than
trade accounts payable incurred in the ordinary course of business); (ii) all
guaranties, endorsements and other contingent obligations, in respect of
Indebtedness of others, whether or not the same are or should be reflected in
the Company's balance sheet (or the notes thereto), except guaranties by
endorsement of negotiable instruments for deposit or collection or similar
transactions in the ordinary course of business, and (iii) the present value of
any lease payments due under leases required to be capitalized in accordance
with applicable Statements of Financial Accounting Standards, determined by
discounting all such payments at the interest rate determined in accordance with
applicable Statements of Financial Accounting Standards.
(d) Conduct of Business. Engage in any business other than the
business engaged in by the Company and its Subsidiaries on the date hereof and
any businesses or activities substantially similar or related thereto other than
as contemplated by any business plan approved by the Board of Directors.
(e) Investments in Other Corporations or Entities. Make any
loan or advance to any person or entity, or purchase or otherwise acquire, the
capital stock, assets comprising the business of, obligations of, or any
interest in, any other corporation or entity which will not be operated as a
wholly-owned Subsidiary, except as set forth in any business plan approved by
the Board of Directors and except:
(i) investments by the Company or a Subsidiary in
evidences of indebtedness issued or fully guaranteed by the United States of
America and having a maturity of not more than one year from the date of
acquisition;
(ii) investments by the Company or a Subsidiary in
certificates of deposit, notes, acceptances and repurchase agreements having a
maturity of not more than one year from the date of acquisition issued by
Progress Bank and any other bank organized in the United States having capital,
surplus and undivided profits of at least $50,000,000;
(iii) investments by the Company or a Subsidiary in
the highest-rated commercial paper having a maturity of not more than one year
from the date of acquisition;
<PAGE>
(iv) investments by the Company or a Subsidiary in
"Money Market" fund shares, or in money market accounts fully insured by the
Federal Deposit Insurance Corporation and sponsored by banks and other financial
institutions, provided that the investments consist principally of the types of
investments described in clauses (i), (ii) or (iii) of this subsection (e); or
(v) loans or advances from a Subsidiary to the
Company or from the Company to a Subsidiary.
2.4 Termination of Covenants. The covenants set forth in
Section 2.1, Section 2.2, and Section 2.3 hereof shall terminate and be of no
further force or effect following a Qualified Public Offering or when the
Company first becomes subject to the periodic reporting requirements of Sections
12(g) or 15(d) of the 1934 Act, whichever event shall first occur.
3. Miscellaneous.
3.1 Prior Agreements. This Agreement amends and restates the
Amended and Restated Investors' Rights Agreement and constitutes the full and
complete agreement of the parties hereto with respect to the subject matter
hereof and supersedes all prior or contemporaneous oral or written agreements
with respect thereto. Without limiting the generality of the foregoing, the
obligations of the Company and Digital Evolution, Inc. set forth in the
agreements listed on Schedule 3.1 hereto are hereby terminated and are not
binding upon the Company.
3.2 Successors and Assigns. 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
(including transferees of any shares of Registrable Securities as set forth in
Section 1.13). 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.
<PAGE>
3.3 Governing Law. This Agreement shall be governed by and
construed under the laws of the State of Incorporation of the Company as of the
date of determination, without reference to conflict of laws principles.
3.4 Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
3.5 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.
3.6 Notices. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed to
have been given (a) 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, (b) if sent by facsimile transmission, when so sent and
receipt acknowledged by telephone or facsimile verification or (c) one day after
being deposited with an overnight courier, charges prepaid, at the address
indicated for such party on the records of the Company, or at such other address
as such party may designate by ten (10) days' advance written notice to the
other parties.
3.7 Expenses. If any action at law or in equity is necessary
to enforce or interpret the terms of this Agreement, the prevailing party shall
be entitled to reasonable attorneys' fees, costs, and necessary disbursements in
addition to any other relief to which such party may be entitled.
3.8 Amendments and Waivers. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only if evidenced by the written consent of the Company and a
written instrument executed by duly authorized representatives of the parties
hereto or their assigns holding not less than fifty percent (50 %) of the
Registrable Securities then outstanding (voting together as a single class). In
the event any proposed amendment or waiver of any term or provision to this
Agreement would not adversely effect the rights and obligations of all Holders
of Registrable Securities on an equal basis, then such amendment or waiver may
only be effected with the written consent executed by duly authorized
representatives of the parties hereto or their assigns holding not less than
fifty percent (50%) of (i) each series of Preferred Stock that is to be
adversely effected by such amendment or waiver and (ii) the Common Stock. Each
Holder acknowledges and agrees that any amendment or waiver effected in
accordance with this Section 3.8 shall be binding upon all holders of any
Registrable Securities then outstanding, each future holder of all such
Registrable Securities, and the Company, whether or not such holder in fact
consented to such amendment or waiver.
<PAGE>
3.9 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 the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
3.10 Entire Agreement: Amendment: Waiver. This Agreement
constitutes the full and entire understanding and agreement between the parties
with regard to the subjects hereof and thereof.
3.11 (a) The term "Holder" (as such term is defined herein)
shall be deemed to include Progress Capital, Inc. ("Progress") and the term
"Registrable Investors' Securities" (as such term is defined herein) shall be
deemed to include shares of Common Stock in the Company held by Progress, in
each case from and after (i) the date of any exercise (the "Exercise") by
Progress of a warrant or warrants to purchase Common Stock of the Company, with
respect to the shares of Common Stock so purchased; and (ii) compliance by
Progress upon the first such Exercise with the terms and conditions set forth in
Subparagraph (b) below.
(b) To evidence Progress' joinder in and agreement to
be bound by all of the terms and conditions of this Agreement, Progress shall
execute a Joinder in the following form:
"Joinder" - The undersigned in its capacity as a Holder of
Registrable Investors' Securities hereby joins in and agrees to be bound by all
of the terms and conditions of that certain Second Amended and Restated
Investors' Rights Agreement as same may be amended from time to time, with
respect to any and all shares of Common Stock of the Company in which the
undersigned now or may ever have any interest.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Second
Amended and Restated Investors' Rights Agreement as of the day and year first
above written.
U.S. INTERACTIVE, INC.
By:
Richard Masterson, President
Eric Pulier
Churchill MegaSOFT, a California
general partnership
By:
Name:
Title:
John Shulman
Vulcan Ventures, Inc.
By:
Name:
Title:
Information Associates, L.P.
By: Trident Capital Management, LLC.
By:
Name:
Title:
Information Associates, C.V.
By: Trident Capital Management, LLC.
By:
Name:
Title:
Larry Smith
Richard Masterson
Richard Masterson, as Custodian for Connor Masterson under
the New Jersey Uniform Transfers to Minors Act
Richard Masterson, as Custodian for Samantha Masterson under
the New Jersey Uniform Transfers to Minors Act
Stephen Zarrilli
Stephen Zarrilli, as Custodian for Christopher Zarrilli
under the Pennsylvania Uniform Transfers to Minors Act
Stephen Zarrilli, as Custodian for Brendan Zarrilli under
the Pennsylvania Uniform Transfers to Minors Act
Stephen Zarrilli, as Custodian for Melissa Zarrilli under
the Pennsylvania Uniform Transfers to Minors Act
Michael Chaney
Daniel and Elyse Endy
Daniel Endy, as Custodian for Gregory Endy under the
Pennsylvania Uniform Transfers to Minors Act
Daniel Endy, as Custodian for Brian Endy under the
Pennsylvania Uniform Transfers to Minors Act
Robert Kost
Robert Kost, as Custodian for Damon Kost under the New York
Uniform Transfers to Minors Act
Robert Kost, as Custodian for Andrea Kost under the New York
Uniform Transfers to Minors Act
Internet Capital Group, L.L.C.
By:
Name:
Title:
<PAGE>
Technology Leaders II, L.P.
By: Technology Leaders II Management L.P.,
Its general Partner
By: Technology Leaders Management, Inc.,
a General Partner
By:
Managing Director
Technology Leaders II Offshore C.V.
By: Technology Leaders II Management L.P.,
Its General Partner
By: Technology Leaders Management, Inc.,
a General Partner
By:
Managing Director
RAF Ventures VIII, L.P.
By: RAF Ventures, Inc., General Partner
By:
Name:
Title:
TL Ventures Third Corp.
By:
Name:
Title:
Safeguard 98 Capital, L.P.
By:
Name:
Title:
<PAGE>
Richard Masterson, Voting Trustee Under Voting Trust dated
September 21, 1998
Larry Smith, Voting Trustee Under Voting Trust dated
September 21, 1998
Robert Kost, Voting Trustee Under Voting Trust dated
September 21, 1998
Stephen Zarrilli, Voting Trustee Under Voting Trust (Eric
Pulier Trust) dated September 21, 1998
Michael Chaney, Voting Trustee Under Voting Trust dated
September 21, 1998
Deloitte & Touche USA LLP
By:
Name:
Title: General Partner
Thurston Interests LLC
By:
Name:
Title:
Thurston Bridge Fund, L.P.
By:
Name:
Title:
<PAGE>
SCHEDULE A
DE INVESTORS
------------
Churchill MegaSOFT, Inc., a California general partnership
Vulcan Ventures, Inc.
Information Associates, L.P.
Information Associates, C.V.
<PAGE>
SCHEDULE B
MANAGEMENT STOCKHOLDERS
-----------------------
Eric Pulier
Larry Smith
Richard Masterson
Stephen Zarrilli
Michael Chaney
Daniel and Elyse Endy
Robert Kost
John Shulman
Richard Masterson, as Custodian for Connor Masterson under the New Jersey
Uniform Transfers to Minors Act
Richard Masterson, as Custodian for Samantha Masterson under the New Jersey
Uniform Transfers to Minors Act
Stephen Zarrilli, as Custodian for Christopher Zarrilli under the
Pennsylvania Uniform Transfers to Minors Act
Stephen Zarrilli, as Custodian for Brendan Zarrilli under the Pennsylvania
Uniform Transfers to Minors Act
Stephen Zarrilli, as Custodian for Melissa Zarrilli under the Pennsylvania
Uniform Transfers to Minors Act
Daniel Endy, as Custodian for Gregory Endy under the Pennsylvania Uniform
Transfers to Minors Act
Daniel Endy as Custodian for Brian Endy, under the Pennsylvania Uniform
Transfers to Minors Act
Robert Kost, as Custodian for Damon Kost under the New York Uniform
Transfers to Minors Act
Robert Kost, as Custodian for Andrea Kost under the New York Uniform Transfers
to Minors Act
Richard Masterson, Voting Trustee Under Voting Trust Dated September 21, 1998
Larry Smith, Voting Trustee Under Voting Trust Dated September 21, 1998
Robert Kost, Voting Trustee Under Voting Trust Dated September 21, 1998
Michael Chaney, Voting Trustee Under Voting Trust Dated September 21, 1998
Stephen Zarrilli, Voting Trustee Under Voting Trust (Eric Pulier Trust) Dated
September 21, 1998
<PAGE>
SCHEDULE C
USI INVESTORS
-------------
Internet Capital Group, LLC
Technology Leaders II, L.P.
Technology Leaders II Offshore, C.V.
TL Ventures Third Corp.
RAF Ventures VIII, L.P.
Safeguard 98 Capital, L.P.
<PAGE>
SCHEDULE D
INVENGEN INVESTORS
------------------
1 Deloitte & Touche USA LLP
2 Thurston Interests LLC
3 Thurston Bridge Fund, L.P.
<PAGE>
SCHEDULE 3.1
TERMINATED AGREEMENTS
---------------------
The Following Agreements, as amended:
A. Series A Preferred Stock Purchase Agreement, dated November 8, 1996, by and
among Digital Evolution, Inc., Eric Pulier, Churchill MegaSOFT, Inc., John D.
Shulman, Information Associates, L.P., Information Associates, C.V., and Vulcan
Ventures, Inc.;
B. Co-Sale Agreement, dated November 14, 1996, by and among Digital Evolution,
Inc., Eric Pulier, Churchill MegaSOFT, Inc., John D. Shulman, Information
Associates, L.P., Information Associates, C.V. and Vulcan Ventures, Inc.;
C. "Amended and Restated Investors' Rights Agreement", dated November 14, 1996,
by and among Digital Evolution, Inc., Eric Pulier, Churchill MegaSOFT, Inc.,
John D. Shulman, Information Associates, L.P., Information Associates, C.V., and
Vulcan Ventures, Inc.;
D. Shareholders' Agreement, dated November 14, 1996, by and among Digital
Evolution, Inc., Eric Pulier, Churchill MegaSOFT, Inc., John D. Shulman,
Information Associates, L.P., Information Associates, C.V. and Vulcan Ventures,
Inc.;
E. Letter of Agreement, dated January 10, 1997, by and among Digital Evolution,
Inc., Information Associates, L.P., Information Associates, C.V. and Vulcan
Ventures, Inc.;
F. Shareholders Agreement, dated July 25, 1996, by and among U.S. Interactive,
Inc., Larry Smith, Richard Masterson, Stephen Zarrilli, Michael Chaney, Robert
Kost, Daniel and Elyse Endy, Stephen Harmelin and Michael Purcell;
G. Series A Preferred Stock Purchase Agreement, dated June 28, 1996, by and
among U.S. Interactive, Inc., Internet Capital Group, LLC, Technology Leaders
II, L.P., Technology Leaders II, Offshore C.V. and TL Ventures;
H. Voting, Stock Restriction and Co-Sale Agreement, dated June 28, 1996, by and
among U.S Interactive, Inc., Larry Smith, Richard Masterson, Stephen Zarrilli,
Michael Chaney and Robert Kost; and
I. Series B Preferred Stock Purchase Agreement and Amendment, dated July 3, 1997
and November 10, 1997, respectively, by and among U.S. Interactive, Inc.,
Internet Capital Group, LLC, Technology Leaders II, L.P., and Technology Leaders
II, and Offshore C.V.
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement"), effective as of
July 2, 1998, is made and entered into by and between U.S. Interactive, Inc., a
New Jersey corporation (the "Company"), successor by merger to DIGITAL
EVOLUTION, INC., a California corporation ("Digital"), and ERIC PULIER (the
"Executive").
RECITALS
WHEREAS, Digital and the Executive are parties to that certain
Employment Agreement dated as of November 14, 1996 (the "Original Employment
Agreement");
WHEREAS, Digital has entered into a Merger Agreement pursuant
to which Digital will be merged with and into the Company (the "Merger");
WHEREAS, from and after the Merger, the Company will engage 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 Digital and its policies, procedures, methods and
personnel; and
WHEREAS, in connection with and as a condition to the Merger,
the Company (as successor to Digital) desires to continue to employ the
Executive as its Executive Chairman 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:
<PAGE>
1. Employment. Subject to and pursuant to the terms of this
Agreement, effective as of the date of this Agreement (the "Effective Date"),
the Original Employment Agreement shall be amended and restated in its entirety
as set forth in this Agreement, the Original Employment Agreement shall have no
further force and effect and the Company shall employ the Executive, and the
Executive shall be employed by and shall serve the Company, in the capacity of
Executive Chairman, reporting directly to the Board of Directors (the "Board")
pursuant to the terms and conditions of this Agreement. Executive, Richard
Masterson and Larry Smith shall also have the title of Co-Founders, such title
to be used in press releases, promotional literature, announcements and the
like.
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 the one (1) year
anniversary of the Effective Date. 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.
3. Duties. During the Term, the Executive shall be employed at
the offices of the Company in Los Angeles, California, or such other office of
the Company as may be selected by the Executive, and shall serve as and have the
title of the Executive Chairman, Co-Founder and Chief Technology Officer 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 Chairman of the Board. 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.
<PAGE>
(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 Executive Chairman. An Executive Committee, comprised
of the Executive chairman, Chief Executive Officer, President 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.
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,
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 in professional or
business organizations (not to include country clubs or social clubs) reasonably
requested by Executive, and approved by the Compensation Committee, in an amount
up to $10,000 per year;
(v) use of the automobile currently provided by
Digital;
<PAGE>
(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; and
(vii) continuation of the Executive's current
health plan until such time as the Company has a health plan substantially
equivalent to Executive's current health plan.
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").
(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;
<PAGE>
(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
(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 10(b) 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,
<PAGE>
(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;
(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
<PAGE>
(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.
(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.
<PAGE>
(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 cause within thirty (30) days and the Company shall have
commenced care within such thirty (30) day period and is then proceeding with
due diligence to cure such breach.
(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 shareholders 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 shareholder 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 and Digital,
the Executive has been and will be exposed to, and will receive confidential and
proprietary information relating to the businesses of Digital and 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 and Digital'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.
<PAGE>
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) were known to the Executive
prior to his employment by Digital, or (ii) were or become 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) were or is disclosed
to third parties by the Company without the obligation of confidentiality,
except in connection with the Business of the Company.
(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, 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.
<PAGE>
(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 are made by
Executive while employed by the Company or Digital ("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.
<PAGE>
9. Miscellaneous.
(a) In connection with the Merger, and at all times
thereafter, Executive shall have all right, title and interest in and to the
name Digital Evolution and any marks related thereto; provided, however, for the
six (6) month period following the Merger, Executive does hereby grant to the
Company an exclusive (as to third parties and Executive), royalty-free license
to use, and to continue any existing use of, the name Digital Evolution and any
variations thereof and marks related thereto.
(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.
(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.
7 Great Valley Parkway
Suite 100
Malvern, PA 19355
Telecopier: (610) 651-0605
Attn: Chief Executive Officers
<PAGE>
If to the Executive:
Mr. Eric Pulier
1501 Georgina Avenue
Santa Monica, California 90402
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.
(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.
<PAGE>
(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]
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first written above.
U.S. INTERACTIVE, INC.
By: /s/ Larry W. Smith
-----------------------
/s/ Eric Pulier
---------------------------
Name: Eric Pulier
<PAGE>
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.
1
<PAGE>
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.
2
<PAGE>
9.2 The parties agree that concepts, information, and materials
developed by USI prior to commencement of and independent of Services to be
performed under a Work Order, including all versions of the e-commerce suite of
technologies that USI has rights to use, shall remain the property of USI,
except that, for so long as Juggernaut is not in default with respect to any
payment required under the pertinent Work Order and thereafter upon completion
of all payments required under such Work Order, Juggernaut shall have a
non-exclusive, royalty-free license to use all code then owned by USI associated
with e-commerce engines already created by USI. In addition for so long as
Juggernaut is not in default with respect to any payment required under the
pertinent Work Order and thereafter upon completion of all payments required
under such Work Order Juggernaut shall have a non-exclusive, royalty-free
license to use all code associated with e-commerce engines to be created and
owned by USI in the next three years following the date of this Agreement, For
so long as Juggernaut is not in default with respect to any payment required
under the pertinent Work Order, and thereafter upon completion of all payments
required under such Work Order, Juggernaut shall have a non-exclusive license to
use all code then owned by USI associated with e-commerce engines and tools
already created and owned by USI or then to be created and owned by USI and
USI's 1998 Agreement with Dairy Farm Management Services, Ltd.
9.3 USI agrees that concepts, information, and materials developed by Juggernaut
prior to commencement of and independent of Services to be performed under a
Work Order, or owned by a third-party, Juggernaut, or a supplier of Juggernaut
and furnished to USI by Juggernaut to enable USI to perform the Services
described in a Work Order, shall remain the property of Juggernaut or such
third-party, or supplier of Juggernaut.
9.4 For so long as Juggernaut is not in default with respect to
any payment required under the pertinent Work Order and thereafter upon
completion of all payments required under such Work Order, all copyrights in
Juggernaut-specific computer programs, Juggernaut-specific source code listing,
Juggernaut-specific programming documentation, and Juggernaut-specific manuals
and written materials relating to the specific materials developed by USI solely
for, and in connection with, the Services provided under this Agreement (the
"Deliverables," on in the singular "Deliverable") shall be the property of
Juggernaut. For so long as Juggernaut is not in default with respect to any
payment required under the pertinent Work Order, and thereafter upon completion
of all payments required under such Work Order, Juggernaut shall have a
non-exclusive, royalty-free, right to display, perform and distribute the "User
Interface" (meaning, all screen displays in Deliverables, and all test,
graphics, images and audiovisual works included in Deliverables, as well as all
combinations and sequences thereof included in Deliverables, owned by USI prior
to creation of Deliverable), and to make modifications and enhancements to, and
to create derivative works based on, the User Interface, for use in connection
with, inter alia, the Deliverables for the benefit of their customers.
3
<PAGE>
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.
4
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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
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the Castle Infinity on-line game in or about February, 1997 if Juggernaut has
failed to make all payments due prior to such termination under pertinent Work
Order, but if Juggernaut has made all payments due prior to such termination
under the pertinent Work Orders, subject to Section 15.9, Juggernaut shall
continue to have a non-exclusive, royalty free license to USI's Java game engine
and such intellectual property.
15.8 Either party may, upon thirty (30) days' prior written notice
to the other, terminate this Agreement if the terminating party determines, in
its reasonable and lawful judgment, the other party is in breach. Upon
termination under this Section, Concept/Product Ownership rights shall be
equitably adjusted in accordance with Sections 15.2 to 15.7 of this Agreement,
if and to the extent Juggernaut has failed to make all payments due prior to
such termination under the pertinent Work Order, and the parties agree to
execute any documents reasonably requested by the other party concerning the
termination and the effect it had on Concept/Product Ownership rights. The power
or right to terminate for breach set forth in this Section does not imply
elimination of any rights either party might otherwise have to bring an action
for damages (including interest at the legal rate) or equitable relief.
15.9 In the event that USI has not been paid a total of $2,000,000
by Juggernaut for USI's work efforts under agreed Work Orders, within 18 months
of the date of this Agreement (other than due to termination of this Agreement
for a material breach by USI pursuant to Section 15.8), the licenses granted
under Section 9.2 and Section 9.6 shall terminate on the 18 month anniversary of
this Agreement. If the Agreement termination is due to material breach by USI
pursuant to Section 15.8, and USI has not been paid a total of $1,000,000 by
Juggernaut for USI's work efforts under agreed Work Orders, within 18 months of
the date of this Agreement, then the licenses granted under Section 9.2 and
Section 9.6 shall terminate on the 18 month anniversary of this Agreement.
Section 16. Assignability. This Agreement shall not be assignable
by either party to any other party without the consent of the other party.
Consent by USI shall not be unreasonably withheld.
Section 17. Non-Exclusivity. This Agreement is a non-exclusive
agreement. USI reserves the right to provide services to others and Juggernaut
reserves the right to obtain similar services from others; provided, however,
that neither party shall violate the provisions of Section 9 (Concept/Product
Ownership) or Section 14 (Confidentiality) in its transactions with others.
Section 18. Intellectual Property. Except as expressly provided
herein, nothing contained in this Agreement shall be construed as conferring by
implication, estoppel, or otherwise, any license or right, under any patent,
trademark, trade name, trade secret, copyright, or other proprietary right of
either party.
8
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Section 19. Access to Premises . Juggernaut shall, at no charge to
USI, grant reasonable access to Juggernaut's premises in connection with the
Services to be provided by USI. USI shall coordinate such access with
Juggernaut's designated representative. USI agrees that its employee(s)
performing the Services on Juggernaut's premises shall observe Juggernaut's
security and safety rules and guidelines. In the event any of the Services to be
provided by USI necessitate that the work be performed on Juggernaut's premises,
Juggernaut agrees to provide at no charge to USI working space, telephone
access, terminals, computer time, clerical support, and any other facilities and
support reasonably requested by USI.
Section 20. Compliance with Laws. Each party shall comply with all
applicable federal, state, and local laws, ordinances, regulations, codes,
rules, orders and requirements of all duly constituted governmental authorities,
including the procurement of permits and licenses when needed.
Section 21. No Third-Party Beneficiaries. This Agreement and the
Work Orders entered into pursuant hereto are for the benefit of USI and
Juggernaut and not for any other person.
Section 22. Notices. Any notice required to be given hereunder
shall be in writing and shall be either hand delivered, with receipt
acknowledged, sent by U.S. registered or certified mail, return receipt
requested, postage prepaid by a reputable overnight air carrier service that
provides written notice of delivery, or by facsimile transmission. Notices shall
be deemed given on the business day following the date shown on the facsimile
transmission or the date shown on the signed evidence of receipt. Notices
intended for USI shall be sent to its address appearing on page 1 hereof to the
attention of Mark J. Silverman, telephone (310) 440-3377, facsimile (310)
440-3378. Notices intended for Juggernaut shall be sent to its address appearing
on page 1 hereof to the attention of John Shulman, telephone 202/965-5700,
facsimile 202/333-8260. Either party may change its address, telephone or
facsimile number for notice purposes by providing written notice to the other
party in accordance with this Section 24.
Section 23. Severability. If any provision of this Agreement or
the application of any such provision shall be held by a tribunal of competent
jurisdiction to be contrary to law, the remaining provisions of this Agreement
and all other applications of such provision shall continue in full force and
effect.
Section 24. Governing Law; Jurisdiction. This Agreement shall be
governed by and construed under the laws of the State of Delaware, except for
the conflicts of law principles thereof.
Section 25. Entire Agreement; Survival. This Agreement and Work
Orders entered into pursuant hereto constitute the entire agreement between the
parties concerning the subject matter hereof and may not be amended or modified
except by written instrument signed by authorized representatives of both
parties hereto. The provisions of Sections 9, 10, 14 and 15 hereof shall survive
any termination or expiration of this Agreement and shall continue in effect
unless otherwise specified by the terms of this Agreement.
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Section 26. Titles and Headings. Titles and headings used in this
Agreement have been inserted for convenience of reference only and are not to be
considered a part hereof and shall in no way define, modify or restrict the
meaning or interpretation of the terms or provisions of this Agreement.
Section 27. Authority. EACH PARTY HAS FULL POWER AND AUTHORITY TO
ENTER INTO, PERFORM, AND EXECUTE THIS AGREEMENT, AND EACH PERSON SIGNING THIS
AGREEMENT ON BEHALF OF EITEHR PARTY HAS BEEN PROPERLY AUTHORIZED AND EMPOWERED
TO ENTER INTO AND EXECUTE THIS AGREEMENT. EACH PARTY FURTHER ACKNWOLEDGES THAT
IT HAS READ THIS AGREEMENT, UNDERSTANDS IT, AND AGREES TO BE BOUND BY IT.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
[SIGNATURE PAGE FOLLOWS]
<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>
Juggernaut Web Site Development - Launch 1
US Interactive Statement of Work
Created for Juggernaut Partners
Revised March 27, 1999
CONFIDENTIAL - Copyright 1999 US Interactive
1
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Table of Contents
INTRODUCTION ..................................................................4
PROJECT OVERVIEW...............................................................5
SCOPE FOR LAUNCH 1 DEVELOPMENT.................................................6
Interface Scope...........................................................6
User Interface.......................................................6
[ ] Interface.......................................................7
Global Management Application........................................7
Technical Scope...........................................................9
Security Layer......................................................10
Juggernaut Database.................................................10
Data Access Layer...................................................10
Registration and Account Management.................................10
Login...............................................................11
Navigation..........................................................11
Search..............................................................11
[ ] Dispatcher.....................................................11
[ ]................................................................12
Transaction.........................................................12
Accounting..........................................................12
Category Management.................................................13
Product/Service Management..........................................13
Fulfillment.........................................................13
Promotions and Advertisement........................................14
[ ]................................................................14
Business Rules Module...............................................14
[ ]................................................................15
[ ]................................................................15
Error and Logging...................................................15
Messaging / Email...................................................16
Customer Support....................................................16
[ ]................................................................16
Online Help.........................................................17
System Monitor......................................................17
SCOPE CONTINGENCIES...........................................................18
PROJECT MANAGEMENT METHODOLOGY................................................20
PRODUCTION TEAM...............................................................21
Team Members.............................................................21
Team Structure...........................................................22
LAUNCH TIMELINE...............................................................25
MILESTONES AND DELIVERABLES ..................................................26
PRODUCTION COST ESIMATE FOR LAUNCH 1..........................................27
Technical Development Costs..............................................27
Creative Development Costs...............................................28
Other Costs..............................................................28
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PAYMENT SCHEDULE..............................................................29
RISKS / CRITICAL PATH DEADLINES...............................................31
PRODUCTION PLAN / BUDGET CONTINGENCIES........................................35
AGREEMENT.....................................................................38
3
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- --------------------------------------------------------------------------------
Introduction
Juggernaut's mission is to provide a global-exchange platform,
[
]
The following features are a part of the vision for the Juggernaut Web Site:
o [ ]
o [ ]
o [ ]
o Powerful search feature
o [ ]
o [ ]
o [ ]
o [ ]
o [ ]
o [ ]
o Market-tested interface usability
o International Brand / Logo strategy
o [ ]
o [ ]
o [ ]
o Juggernaut Site Management System
o Expansive Customer Support / Help Desk System
This document describes the Project Scope, Cost Estimates, Production Plan, and
Timeline for Launch 1 of the Juggernaut Web Site, the first step toward this
vision.
4
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- --------------------------------------------------------------------------------
Project Overview
US Interactive is being hired by Juggernaut Partners to provide Business Plan
Development and production toward Launch 1 for the Juggernaut Web Site. Two
separate teams have been created to work on the Juggernaut engagement: the
Business Development Team and the Production Team.
The USI Business Development Team and the USI Production Team are being retained
by separate Statements of Work with Juggernaut Partners.* This document details
the scope of work to be completed by the USI Production Team for Launch 1.
Juggernaut Partners is responsible for:
o Business Plan Development
o Business Operations
o Top-level Business Strategies
o Establishing Supplier Partnerships
o Establishing Bank Partnerships
The USI Business Development team is responsible for:
o Business Plan Development
o Top-level Business Strategies
o Communication of Top-level Business Strategies to Production Team
The USI Production Team is responsible for the following, as they relate to the
feature-set described in the Project Scope section of this document:
o Planning and development of the web site technical architecture
o Planning and Development of the web site information architecture
o Planning and Development of the web site Interface Design
o Product Categorization Plan and Implementation
o Tactical implementation of the Business Strategies as communicated by
the Business Team
o Full Technical and Creative documentation - providing descriptions and
breakdowns of all processes, technical systems, code, and design
style-guides. (This will be further defined to a mutually agreeable
level once production begins.)
o Management of third party vendors, including:
o Brand/Logo company(ies)
o Market Research company(ies)
o Companies providing outsourced software development
o Call Center [ ]
o Hosting/Site Maintenance [ ]
* Additional Statements of Work will also be created between Juggernaut and any
necessary third-party vendor, such as Landor, Questus New Media, IVT, Call
Center [ ], and Data Center [ ]. USI is not responsible for these contracts.
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Scope for Launch 1 Development
- --------------------------------------------------------------------------------
The following scope description details the feature-set of the Juggernaut site
on Launch 1. Additional features will be incorporated into future versions of
the site, as agreed by both Juggernaut and USI.
Interface Scope:
User Application
----------------
o [ ]
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Scope for Launch 1 Development (Continued)
- --------------------------------------------------------------------------------
User Application (Continued)
---------------- -----------
[ ]
[ ] Interface - External Application
- ----------------------------------
o [ ]
Global Management Application
-----------------------------
o [ ]
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Scope for Launch 1 Development: Continued
- --------------------------------------------------------------------------------
Interface Scope: (Continued)
Global Management Application (Continued)
-----------------------------------------
[ ]
8
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Scope for Launch 1 Development: Continued
- --------------------------------------------------------------------------------
Technical Scope Launch 1
Having discussed in detail the functional requirements for Juggernaut we have
identified the implementation level modules which will serve as the technical
scope for this project. Displayed below in Figure 1 is the software application
architecture for the Juggernaut project. Each module is described in detail in
the next section so that the technical scope of the project becomes more
apparent. Please refer to the Technical Design Document, to be presented and
approved on 3/19, for full detail on the specific scope of each module to be
completed during production of Juggernaut web site Launch 1. [ ]
Figure 1. Software Architecture Diagram
---------------------------------------
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Scope for Launch 1 Development: Continued
- --------------------------------------------------------------------------------
Technical Scope Launch 1: (Continued)
The module functionality descriptions are provided below:
1) Security Layer
The security layer provides a secure environment for the application.
It provides a secure socket layer (SSL) communication between the
user-interface and the underlying application and data. Also, whenever
necessary a user-name and password will be used to authenticate entry
to the available application resources. This module not only manages
security for data access but also takes into consideration data
confidentiality issues and audit/logging issues whenever the system is
accessed.
2) Juggernaut Database
The Juggernaut database will serve as the heart of the application.
[ ]
3) Data Access Layer
The data access layer will be the interface between the database and
the application. The data access layer will manage the database
connections and database calls. The data access layer will define a
uniform method of data access to all the other application modules.
4) Registration & Account Management
[ ]
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Scope for Launch 1 Development: Continued
- --------------------------------------------------------------------------------
Technical Scope Launch 1: (Continued)
5) Login
The Login module functions to authenticate the user via their user-name
and password.
[ ]
6) Navigation
The Navigator tool and the associated functionality will be part of
this module. [ ]
7) Search
[ ]
8) [ ]
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Scope for Launch 1 Development: Continued
- --------------------------------------------------------------------------------
Technical Scope Launch 1: (Continued)
9) [ ]
10) Transaction
This module is the key to the purchase process. [ ]
11) Accounting Interface
This module will provide programmatic interfaces to accounting packages
and tools that are used by management and partners. [ ]
12
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Scope for Launch 1 Development: Continued
- --------------------------------------------------------------------------------
Technical Scope Launch 1: (Continued)
12) Category Management
[ ]
13) Product Management
The Product Management module will be one of the most important modules
of the application. [ ]
14) Fulfillment
[ ]
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Scope for Launch 1 Development: Continued
- --------------------------------------------------------------------------------
Technical Scope Launch 1: (Continued)
15) Promotions & Advertisement
[ ]
16) [ ]
17) Business Rules Module
The business rules module will be tightly coupled with the database and
the data access layer. It is the development teams intention to
consolidate all business rules in a centralized module so that it is
easier to manage any changes that need to be made. [ ]
14
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Scope for Launch 1 Development: Continued
- --------------------------------------------------------------------------------
Technical Scope Launch 1: (Continued)
18) [ ]
19) [ ]
20) Error & Logging
The error and logging module will be very critical in identifying
problems that occur with the system while in production mode. The
errors and logs captured by this module will be invaluable in debugging
and solving problems. [ ]
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- --------------------------------------------------------------------------------
Scope for Launch 1 Development: Continued
Technical Scope Launch 1: (Continued)
21) Messaging/Email
This module will provide interfaces to create, modify, activate, and
inactivate emails to be sent out to the users on a regular basis. [ ]
22) Customer Support
The customer support module is a portion of the management application.
This module will support all functionality that is needed to assist a
user when s/he calls the customer service center. The customer support
module will be an integration of functionality already created for the
users.
[ ]
23) [ ]
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Scope for Launch 1 Development: Continued
- --------------------------------------------------------------------------------
Technical Scope Launch 1: (Continued)
24) Online Help
The online help module is one of the simpler modules within the
Juggernaut system. The online help module will have frequently asked
questions (FAQ) section for users and guides.
25) System Monitor
The System Monitor module will provide the heartbeat of the system.
[ ]
17
<PAGE>
Scope Contingencies:
- --------------------------------------------------------------------------------
The Project Budget and Production Schedule are based on the following Scope
Contingencies for Launch 1. If the following Scope Contingency list changes, the
Budget and Production Schedule may need to be altered accordingly.
1. Business-specific system
o [ ]
2. [ ]
3. Call-Center / Help Desk Module
o [ ]
4. Purchasing Escrow
o We will be designing the system to support purchasing escrow.
o [ ]
5. Recurring Purchases / Scheduling Tool
o [ ]
6. [ ]
7. Fulfillment
o [ ]
8. Services
o Services will be offered through our database during future site
releases.
9. [ ]
10. [ ]
11. Hosting / Site Maintenance
o [ ]
12. Business Rules Module
o [ ]
13. [ ]
18
<PAGE>
Project Management Methodology:
- --------------------------------------------------------------------------------
The USI Senior Project Manager will be in contact with Juggernaut daily,
discussing the project, ensuring that all deliverables and reviews are met, and
documenting all progress. In order to expedite communication between USI and
Juggernaut, the following reports and processes will be implemented:
Production Schedule
The Production Schedule is a timeline of the project, outlining the
important project milestones. If the project scope is altered during
production, the Production Schedule is updated accordingly to reflect
the change. All internal and external reviews and milestones will be
reflected in this schedule. The Production Schedule will be updated
with completed tasks and delivered to Juggernaut twice monthly.
Status Meetings
Internal team Status Meetings will be held on a weekly basis. Client
Status Meetings will be determined by milestones within the Production
Schedule; a schedule of all Client Status Meetings will be generated
and distributed on a monthly basis.
Weekly Status Report
Given to Juggernaut weekly. These reports reflect all conversations,
developments, and issues relevant to the project, and reiterate any
dependencies or deliverables that are needed from Juggernaut.
Contact Report
Used as a verification of an agreement or important meeting with
Juggernaut, a Contact Report is usually sent a few days after the
conversation takes place. Our policy is to fax the report -- if it is
not disputed within 24 hours, it is understood that Juggernaut agrees
with the account of the decisions made, and the next production steps
will be taken.
Milestone Approval
At each major milestones or deliverable, the presentation overview, any
appropriate revisions, and next steps will be presented in a report.
The report will be signed by Juggernaut before work toward the
revisions will be done by USI.
Change Request Form
This form will be sent from Juggernaut to USI whenever a change or
revision to the scope is requested, as outlined in the Change Request
Process (Addendum 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.
19
<PAGE>
- --------------------------------------------------------------------------------
Production Team:
Total people: 38
Technical: 21
Creative: 10
Other: 7 (Project Managers, Taxonomist, Asset Manager, Copywriters,
etc.)
Total Team:
1. [
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38. ]
20
<PAGE>
- --------------------------------------------------------------------------------
Production Team: Continued
Team Structure:
(people are spread across multiple teams... Please refer to Team Org Chart
for more detail)
Overall Management Team:
o [
o
o
o ]
Cross-Functional Integration Team:
o [
o
o
o
o
o ]
Internal Market Research Team:
o [
o
o
o ]
Brand / Logo Management:
o [
o
o ]
All Site Copy:
o [
o
o
o ]
Information Architecture Development:
o [
o
o
o
o
o
o ]
21
<PAGE>
Production Team: Continued
- --------------------------------------------------------------------------------
Database Module Team:
o [
o
o ]
Application Development Team:
o [ ]
22
<PAGE>
- --------------------------------------------------------------------------------
Production Team: Continued
User Application Interface Design:
o [
o
o
o
o
o
o
o
o ]
Quality Assurance Team:
o (All team for each responsible module)
o [
o ]
Technical Documentation Team:
o Full-time Technical Writer
o [
o
o
o
o
o
o
o
o
o ]
[ ]
Interface Design Production Team:
o [
o
o
o ]
23
<PAGE>
- --------------------------------------------------------------------------------
Launch 1 Timeline:
The Production Schedule is based on the project scope as outlined in the Scope
for Launch 1 Development section of this document. If the project scope is
altered, either through a Change Order Request or other request, the Production
Schedule may be updated to reflect the change.
Important Dates / Deadlines for Launch 1:
- - [ ]
[ ]
* If USI is fully involved in the Quality Assurance of the Juggernaut Web Site
by the launch date of [ ], Juggernaut may decide to retain the USI team on a
Time and Material basis for an extended timeframe for further Quality Assurance
work under this agreement, [ ]
Milestone Schedule:
- --------------------------------------------------------------------------------
(Please refer to the Production Schedule for additional details)
[ ] [ ]
[ ] [ ]
Technical Design Document Presented [ ]
[ ] [ ]
[ ] [ ]
[ ] [ ]
[ ] [ ]
[ ] [ ]
Copy Review 1 [ ]
Usability Test Report [ ]
24
<PAGE>
[ ] [ ]
[ ] [ ]
[ ] [ ]
Technical Integration Report 1 [ ]
[ ] [ ]
Copy Review 2 [ ]
[ ] [ ]
[ ] [ ]
[ ] [ ]
Logo Presentation [ ]
Technical Integration Report 2 [ ]
[ ] [ ]
User Interface Design Complete [ ]
Technical Integration Report 3 [ ]
[ ] [ ]
[ ] [ ]
[ ] [ ]
[ ] [ ]
25
<PAGE>
Production Cost Estimate for Launch 1:
- --------------------------------------------------------------------------------
Based on the current scope as defined in the Project Scope sections above, the
budget is set at a fixed price. USI and Juggernaut will have monthly evaluations
of the project, from which any necessary Change Orders will be generated.
Technical Development Costs:
---------------------------------------------------------------------
Development / Integration Effort: Estimated Cost:
---------------------------------------------------------------------
[ ] [ ]
---------------------------------------------------------------------
Technical / Creative Integration [ ]
---------------------------------------------------------------------
Database [ ]
---------------------------------------------------------------------
[ ] [ ]
---------------------------------------------------------------------
Login Module [ ]
---------------------------------------------------------------------
Registration Module [ ]
---------------------------------------------------------------------
[ ] [ ]
---------------------------------------------------------------------
[ ] [ ]
--------------------------------------------------------------------
[ ] [ ]
---------------------------------------------------------------------
Customer Support Module [ ]
---------------------------------------------------------------------
[ ] [ ]
---------------------------------------------------------------------
[ ] [ ]
---------------------------------------------------------------------
[ ] [ ]
---------------------------------------------------------------------
[ ] [ ]
---------------------------------------------------------------------
Transaction Module [ ]
---------------------------------------------------------------------
Financial/Billing Module [ ]
---------------------------------------------------------------------
[ ] [ ]
---------------------------------------------------------------------
Online Help [ ]
---------------------------------------------------------------------
[ ] [ ]
---------------------------------------------------------------------
[ ] [ ]
---------------------------------------------------------------------
[ ] [ ]
---------------------------------------------------------------------
[ ] [ ]
---------------------------------------------------------------------
System Monitor Module [ ]
---------------------------------------------------------------------
Security [ ]
---------------------------------------------------------------------
Fulfillment and Shipping Feedback [ ]
---------------------------------------------------------------------
[ ] [ ]
---------------------------------------------------------------------
User Interface Programming [ ]
---------------------------------------------------------------------
[ ] [ ]
---------------------------------------------------------------------
Quality Assurance [ ]
---------------------------------------------------------------------
Documentation [ ]
---------------------------------------------------------------------
SUBTOTAL [ ]
---------------------------------------------------------------------
26
<PAGE>
Production Cost Estimate for Launch 1: Continued
- --------------------------------------------------------------------------------
Creative Development Costs:
--------------------------------------------------------------------
Development / Integration Effort: Estimated Cost:
--------------------------------------------------------------------
[ ] [ ]
--------------------------------------------------------------------
Information Architecture Development [ ]
--------------------------------------------------------------------
Interface Design [ ]
User Interface
[ ]
--------------------------------------------------------------------
Production [ ]
--------------------------------------------------------------------
SUBTOTAL [ ]
--------------------------------------------------------------------
Other Costs:
--------------------------------------------------------------------
Production Effort: Estimated Cost:
--------------------------------------------------------------------
Team Management: [ ]
Overall Project Management
Senior Project Manager
Project Manager
Project Coordinator
Technical Team leadership
Senior Tech Lead
Co-Tech Lead
Co-Tech Lead
Creative Team leadership
Creative Director
Senior Art Director
--------------------------------------------------------------------
[ ]
[ ]
--------------------------------------------------------------------
[ ] [ ]
--------------------------------------------------------------------
[ ] [ ]
--------------------------------------------------------------------
SUBTOTAL [ ]
--------------------------------------------------------------------
ESTIMATED TOTAL [ ]
NEGOTIATED TOTAL $3,600,000
27
Payment Schedule:
- --------------------------------------------------------------------------------
US Interactive is to receive equal payments at the end of each month for the
duration of the project. Upon approval of this document, the first month's
payment is due.
If work toward Launch 1 continues past the estimated launch end-date of July 30,
1999 (or such later date as the Launch 1 Date shall have been extended to in
accordance with the provisions set forth in the Production Plan/Budget
Contingencies section of this Statement of Work), because of reasons other than
reasonably avoidable delay solely attributable to USI, or a Force Majeure
Condition (as defined in the Agreement [defined below]) in which case the
provisions of Section 11 of the Agreement shall apply.1 Force Majeure Conditions
do not include reasonably avoidable days of delay attributable to Juggernaut or
its suppliers or other contractors, or reasonably avoidable days of delay
attributable to third parties not connected with either party. U.S. Interactive
will be paid the remainder of the fixed fee of $3.6 million in accordance
herewith and will then be paid monthly at the end of each month on a time and
material basis for work on and after July 30, 1999 at the usual and customary
rates charged by U.S. Interactive, discounted by 20%. The last $1 million of the
fixed fee of $3.6 million shall be paid no later than October 15, 1999. Should
payment of the last $1 million not occur by before October 15, 1999, then
Juggernaut will pay interest to U.S. Interactive at 10% per annum from July 30,
1999 on any such unpaid amount until the same is paid.
Some additional team members working specifically on the Business Plan portion
of the project are not included in the cost estimate. These team members will be
retained on a time and material basis until the Business Plan is completed.
- --------
(1) Section 11 of the Agreement provides: USI shall provide the
Deliverable described in, and when scheduled in, the Work Orders. Neither party
shall be held responsible for any delay or failure in performance of any part of
the Agreement to the extent such delay or failure is caused by fire, flood,
explosion, war, strike, embargo, government requirement, civil or military
authority, act of God, or other similar causes beyond its control and without
the fault or negligence of the delayed or non-performing party ("Force Majeure
Condition"). If any Force Majeure Condition occurs, the party affected by the
other's delay or inability to perform may elect to (1) suspend this Agreement
for the duration of the Force Majeure Condition and, once the Force Majeure
Condition ceases, resume performance under this Agreement with an option in the
affected party to extend the period of this Agreement up to the length of time
the Force Majeure Condition was endured; and/or (2) when the delay or
non-performance continues for a period of at least thirty (30) days, terminate,
at no charge, and effective upon written notice thereof to the non-terminating
party, this Agreement in its entirety, provided however that the terminating
party shall remain liable in respect of Services provided through the date of
such termination. Unless written notice is given within forty-five (45) days
after the affected party is notified of the Force Majeure Condition, election
(1) shall be deemed selected.
28
<PAGE>
Payment Schedule: Continued
- --------------------------------------------------------------------------------
It is agreed that Juggernaut may terminate work under this Statement of Work,
effective as of the receipt of Juggernaut's notice of termination, for
Juggernaut's convenience and not based on any default, if the amounts paid to US
Interactive under this Statement of Work as of the date of such termination
total $2,500,000 or more. In the event that USI has not been paid a total of
$2,500,000 by Juggernaut for USI's work efforts under this Statement of Work,
within 18 months of the date of this Statement of Work (other than due to
termination of the Professional Services And Consulting Agreement dated as of
January 6, 1999 Between Juggernaut Partners, LLC and U.S.Interactive, Inc. [the
"Agreement"] for a material breach by USI pursuant to Section 15.8 thereof), the
licenses granted under Section 9.2 and Section 9.6 of the Agreement shall
terminate on the 18 month anniversary of this Statement of Work.
Except as set forth above, this Statement of Work is not intended to modify or
waive the rights of either party under the Agreement. In the event of a
termination for convenience, Juggernaut shall pay to USI reasonable actual
expenses incurred by USI in connection with providing the services under this
Statement of Work up to the date of the termination for convenience. Upon
receipt of the notice of termination, USI shall immediately cease performance of
services under this Statement of Work and USI shall make commercially reasonable
efforts to minimize cost and to preserve the Deliverables completed to date.
Juggernaut shall not be responsible for fees, costs, or expenses (including, but
not limited to, travel and lodging) of any services performed by USI more than
30 days after USI receives the notice of termination, other than unavoidable and
reasonable expenses experienced by USI despite good faith efforts by USI to make
commercially reasonable efforts to minimize cost and to preserve the
deliverables completed to date. The parties agree that licenses to intellectual
property and ownership thereof will be allocated in accord with the Agreement
upon such termination.
29
<PAGE>
Risks / Critical Path Deadlines:
- --------------------------------------------------------------------------------
Outlined below are critical business/partnership issues that Juggernaut and the
USI Business Development Team are responsible for. These deadlines directly
effect the Production Schedule and Production Team efforts. If any of the
following Critical Path Deadlines are not met, the Production Schedule and/or
Production Budget may be effected.
The following table details the Critical Path Issues and specific responsible
party:
<TABLE>
<CAPTION>
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Critical Path Issue: Responsible Party: Deadline:
- ---------------------------------------------------------------------------------------------------------
Juggernaut Management Hiring Plan Juggernaut [ ] [ ]
- ---------------------------------------------------------------------------------------------------------
Juggernaut Management Hiring Juggernaut [ ] [ ]
Immediate Needs:
- - [ ]
- ---------------------------------------------------------------------------------------------------------
Juggernaut Management Hiring Juggernaut [ ] [ ]
Secondary Needs:
- - [ ]
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
[ ] Juggernaut [ ] [ ]
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Technical Due Diligence for [ ] USI Development Team [ [ ]
] with assistance from
Juggernaut [
]
- ---------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
Risks / Critical Path Deadlines: Continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Bank Partnership Juggernaut [ [ ]
]
- ---------------------------------------------------------------------------------------------------------
Accounting Software Package Decision Juggernaut [ ] [ ]
- ---------------------------------------------------------------------------------------------------------
Legal Questions Juggernaut [ ] May 10
- ---------------------------------------------------------------------------------------------------------
Business Strategy: Juggernaut and USI Business [ ]
- - [ ] Development Team
[ ] TBD
Business Strategists)
- ---------------------------------------------------------------------------------------------------------
[ ] Juggernaut [ ] [ ]
- ---------------------------------------------------------------------------------------------------------
[ ] USI Production Team [ ]
[ ]
- ---------------------------------------------------------------------------------------------------------
</TABLE>
* * This [ ] deadline will be fulfilled when Juggernaut delivers the
Following information per partner to USI:
1. [ ]
2. Technical contact information
3. Contract status, interest level and time estimates for contract
signing and integration
4. Category
5. [ ]
6. General Systems Capabilities
7. Systems Issues - Answers to as many of the technical due-diligence
questions (listed in next footnote below) as possible
8. Next Steps
* * * Technical Due Diligence is defined as answers to the following questions:
1. File format Information:
o [ ]
2. Category Information:
o Organization of data
o Organizational structure protocols
31
<PAGE>
3. Branding Information:
o Representation concerns
4. File Access Information:
o Process for receiving information (i.e. FTP, HTTP, E-mail)
o Frequency of data updates
o Charges associated with accessing the partner's data
o Times for access availability (24/7 or other)
5. Order Entry Information:
o Process for communicating an order
o [ ]
o Back-order system reliability
o Back-order logistics
6. Shipping Information:
o Carrier information
o Shipping locations
o Multiple warehouses or singe warehouse
o Availability of shipping cost information
o Availability of any additional information
7. Returns Information:
o Return logistics
8. Technical Support and Customer Service:
o Availability of technical support for development team
o Logistics of customer support
o Times of customer support availability
9. Fees and Pricing Information:
o Fees associated with [ ]
o Fees associated with placing orders
o Fees associated with sending back returns
o [ ]
o Pricing contingencies
32
<PAGE>
Risks / Critical Path Deadlines: Continued
- --------------------------------------------------------------------------------
* * * Technical Due Diligence is defined as answers to the following questions:
(Continued from previous page...)
10. Network and Security Information
o Network Topology (Private[Leased] line, Internet)
o Security and Access Control Policy
o [ ] requirements
o Data encryption requirements
33
<PAGE>
Production Plan / Budget Contingencies:
- --------------------------------------------------------------------------------
o Once the Production Schedule and Estimated Costs are approved, by
execution of this Statement of Work by the parties, modifications in
the scope of the project will come in the form of a Change Request, as
outlined in the Change Request Procedure attached as Addendum 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 [ ]
o All milestones in the Production Schedule will be strictly adhered to.
In the event of a delay of a Juggernaut -driven milestone or approval,
the Production Schedule will be adjusted accordingly on a case-by-case
basis as agreed by both parties. In the event of a delay of a
USI-driven milestone or deliverable, the schedule will not be modified
and USI will use it's best efforts to meet the final launch date as
agreed by both parties.
o USI will communicate to Juggernaut when a Juggernaut-driven milestone
or approval is approaching.
o Due to the aggressive Production Schedule, USI requests that approval
turnaround for updated Budget Estimate and Production Schedules, or
any deliverable associated with the project occur within 72 hours and
that the parties negotiate in good faith during such 72 hour period to
reach agreement with respect to the terms of any updated Budget
Estimate and Production Schedule presented by USI. If there is a delay
of more than 72 hours for any approval, it is understood that USI will
be granted an extension for delivery of the effected deliverable and
all other deliverables that are reasonably likely to be delayed and
actually are delayed as a result of such delay in approval (unless
such delay is due to USI's failure to negotiate in good faith during
such 72 hour period to reach agreement with respect to the terms of
any updated Budget Estimate and Production Schedule presented by USI).
o At every major milestone/deliverable point (as detailed in the
Production Schedule), Juggernaut will be required to sign a Milestone
Review Sheet. Project production work and/or work toward the requested
revisions for the deliverable will commence upon execution of this
form.
o If a milestone status meeting and the associated milestone
approval/revision discussions take longer than 2 days, the final
Launch 1 Date will be pushed back one day for each day in excess of
such 2 day period until the terms of the Reviewed Deliverable are
finally agreed upon and such Milestone Review Sheet is executed by
Juggernaut) .
o For artistic or creative approvals, there will only be one round of
revisions per deliverable.
o If the time necessary to complete revisions to a given deliverable
exceeds two weeks, a Change Order Request will be required from
Juggernaut containing terms that are mutually agreed to by Juggernaut
and USI.
34
<PAGE>
Production Plan / Budget Contingencies: Continued
- --------------------------------------------------------------------------------
o If any of the Critical Path deadlines for which USI is not responsible
or for which USI does not share responsibility (as described in the
Critical Path section above) are not met, USI will not be held to the
Launch 1 deadline and a change order will be required to review the
project schedule. The number of days that the Launch 1 Date is moved
will be communicated by USI on a case-by-case basis.
o Status Meetings requested by Juggernaut which are not already outlined
in the predetermined monthly Status Meeting schedule will effect the
Launch 1 Date. The number of days that the Launch 1 Date is moved will
be communicated by USI on a case-by-case basis. However, any ad hoc
Status Meetings (1 hour or less in length, consisting of an oral
presentation of general project status with no resulting additional
work) will not effect the Launch 1 Date.
o [ ]
o [ ]
o [ ]
o [ ]
o The Production Cost Estimate does not include costs for the following,
which will be billed separately with prior approval from Juggernaut:
- [ ]
35
<PAGE>
o All Out of Pocket Expenses, including fees associated with travel,
hardware, and software licenses for both USI and any third-party
vendors, are not included in the Project Estimate and will be billed
separately with prior approval from Juggernaut.
o US Interactive is not responsible for any delays in the production
schedule as caused by development partners or third party vendors. If
such a delay occurs, the Launch date may be effected. The number of
days that the Launch Date is moved will be communicated by USI on a
case-by-case basis.
o USI is responsible for hiring the Production Team members necessary to
complete the Project Scope by the Launch 1 deadlines.
o Pending any future Change Order Requests or other requests to alter
the scope of the project, USI is responsible for creating the system
to include the features described in the Project Scope section above.
o If the Launch 1 Date (as the same may be extended in accordance with
the provisions set forth in the Production Plan/Budget Contingencies
section of this Statement of Work) is not met or clearly will not be
met because of the reasonably avoidable delays solely attributable to
USI, then Juggernaut may, upon written notice to USI, terminate this
Statement of Work and the provisions of Section 15.8 of the Agreement
with respect to allocation of licenses and ownership of property
rights will apply. The power or right to terminate for such breach
does not eliminate any rights Juggernaut might otherwise have to bring
an action for damages (including interest at the legal rate) or
equitable relief.
36
<PAGE>
Agreement
- --------------------------------------------------------------------------------
The following signatures designate intent to proceed with development of
Juggernaut's online electronic commerce business with specific acknowledgement
on the scope of work, the estimated cost and the timeline of the engagement.
Upon execution by both parties, this Statement of Work shall become Appendix B
to the Professional Services and Consulting Agreement.
By: _________________________________________________________________________
Name: _________________________________________________________________________
Date: _________________________
Juggernaut Partners, LLC
By: _________________________________________________________________________
Name: _________________________________________________________________________
Date: _________________________
US Interactive, Inc.
37
<PAGE>
CONFIDENTIAL
SEVERANCE AGREEMENT
This SEVERANCE AGREEMENT is executed by U. S. Interactive,
Inc. (hereinafter referred to as "USI") and Richard Masterson (hereinafter
referred to as "Masterson").
WITNESSETH:
WHEREAS, Masterson is currently an employee and a director and
President of USI; and
WHEREAS, Masterson has agreed to resign from his employment
with USI, and from his office of President and as a Director, and USI has agreed
to accept Masterson's resignations;
WHEREAS, USI is preparing to effect its initial underwritten
public offering of its common stock (the "Offering");
WHEREAS, USI intends to register shares of its common stock
under the Securities Act of 1933 (the "Securities Act") for sale in the
Offering; and
WHEREAS, Masterson desires to sell certain of his shares of
USI common stock in the Offering;
NOW THEREFORE, in consideration of the obligations of the
parties hereto, and other consideration, receipt of which is hereby
acknowledged, the parties hereto agree as follows:
1. Resignation. USI and Masterson hereby agree that as of this
date Masterson is no longer employed by USI and that Masterson does hereby
resign as of this date from all officer positions and director positions of USI
and all USI affiliates.
2. Severance Compensation: USI shall pay to Masterson the sum
of One Hundred Thirty one Thousand Two Hundred Fifty Dollars ($131,250). This
sum will be paid in equal periodic payments throughout the next nine (9) months,
in accordance with USI's normal payroll disbursements, or at such earlier times
at the discretion of USI. These payments are to be made irrespective of any
other employment Masterson may obtain. USI will make state and federal tax
deductions, social security deductions, and all other appropriate deductions
from these severance payments and any other payments hereunder. If Masterson
breaches any material obligation set forth in this document or in the agreements
referred to in Section 6, and if such breach is curable and is not cured within
ten (10) days after Masterson is aware of such breach or receives notice of such
breach, whichever is earlier, all payments set forth in this section and the
benefits and insurance coverages set forth in Section 5 will immediately
terminate.
3. Vacation Compensation: USI and Masterson agree that
Masterson has no accrued, unused vacation.
4. Stock Options: Masterson may exercise his 51,948 currently
vested options for shares of USI stock during the period of ninety (90) days
immediately after the date hereof. All options for shares not vested as of this
date (11,103 exercisable on 1/1/00) are deemed to be vested immediately upon
execution by Masterson and USI of this Agreement and are exercisable for a
period of ninety (90) days immediately after the date hereof. The 51,948 options
and the 11,103 options are hereinafter referred to as the "Vested Options".
Masterson must exercise the Vested Options in accordance with the Amended and
Restated 1997 U.S. Interactive Stock Option Plan and the Option Agreement dated
June 15, 1998. USI and Masterson acknowledge that upon execution by Masterson
and USI of this Agreement that Masterson has 63,051 Vested Options at an
exercise price of $3.85 per option.
1
<PAGE>
5. Insurance and Other Benefits: USI will continue at USI's
sole expense the existing coverage of Masterson and his family (to the extent
applicable) for health, life, disability and dental care for a period of nine
(9) months after the date hereof. Thereafter, Masterson will be eligible to
continue his coverage in accordance with applicable law. USI will provide
Masterson information regarding his eligibility for such benefits and his
obligations pursuant to applicable law including, without limitation, COBRA.
Masterson understands and agrees that following the nine (9) month period, he
will be solely responsible for making any applicable premium payments. USI shall
reimburse Masterson for auto expenses up to a maximum of $500 per month, in
accordance with the reimbursement practices of USI until final payment of the
severance compensation set forth in Section 2.
6. Existing Agreements. Masterson does hereby affirm his
obligations under and agrees that he remains subject to (i) the Employee
Non-Disclosure, Assignment of Developments, Non-Solicitation and Non-Competition
Agreement executed by him on June 28, 1996, as modified by Exhibit A attached
hereto; (ii) the Second Amended and Restated Investors' Rights Agreement dated
as of March 12, 1999; and (iii) the Second Amended and Restated Stockholders'
Agreement (individually, as a voting trustee, and in a custodial capacity) dated
as of March 12, 1999.
7. Release. Except for the obligations of USI set forth in
this Agreement, Masterson does hereby remise, release and forever discharge USI,
and each of USI's past and present divisions, subsidiaries, parents,
predecessors, and, in a corporate capacity and as an individual, each of USI's
past and present directors, officers, shareholders, agents and employees (except
with respect to the obligations of USI under this Agreement, the Amended and
Restated 1997 U.S. Interactive Stock Option Plan and any option agreements, the
Employee Non-Disclosure, Assignment of Developments, Non-Solicitation and
Non-Competition Agreement executed by Masterson on June 28, 1996, as modified by
Exhibit A attached hereto, the Second Amended and Restated Stockholders'
Agreement (individually, as a voting trustee, and in a custodial capacity) dated
as of March 12, 1999 as amended from time to time), and USI does hereby remise,
release and forever discharge Masterson (except with respect to the obligations
of Masterson under: this Agreement; the Amended and Restated 1997 U.S.
Interactive Stock Option Plan and any option agreements; the Employee
Non-Disclosure, Assignment of Developments, Non-Solicitation and Non-Competition
Agreement executed by Masterson on June 28, 1996 , as modified by Exhibit A
attached hereto; the Second Amended and Restated Investors' Rights Agreement
dated as of March 12, 1999, as amended from time to time, and the Second Amended
and Restated Stockholders' Agreement (individually, as a voting trustee, and in
a custodial capacity) dated as of March 12, 1999 as amended from time to time),
from any and all manner of actions, causes of action, suits, debts, accounts,
contracts, agreements, controversies, which Masterson (in the case of USI) and
USI (in the case of Masterson) ever had, now has, or hereafter can, shall or may
have for, upon or by reason of any act, transaction, practice, conduct, matter,
cause or thing of any kind whatsoever that arose or occurred prior to the date
hereof, whether or not now known, including but not limited to any action, cause
of action, suit, debt, account, contract, agreement, controversy, judgment,
damage, claim, liability and demand of any nature whatsoever, arising out of,
relating to or based upon, in whole or in part:
2
<PAGE>
(a) Masterson' employment with USI and any
compensation arrangements related thereto, including vacation, sick time, and
any options (excluding the Vested Options) granted or to be granted to Masterson
by USI;
(b) Any act, transaction, practice or conduct arising
or occurring prior to the date hereof, which is actionable, or claimed to be
actionable, under any statutory or common law of the United States or any state
thereof;
(c) Any effect which existed or occurred, or
presently exists, or may in the future exist or occur, as a result of any act,
transaction, practice or conduct that occurred prior to the date hereof;
(d) All claims arising from or during Masterson's
employment by USI or as a result of the termination of Masterson's employment,
and all claims arising under federal, state or local laws or regulations
prohibiting employment discrimination based upon age, race, sex, religion,
handicap, disability, national origin or any other protected characteristic,
including, but not limited to, any and all claims arising under the laws of the
Commonwealth of Pennsylvania , the State of New Jersey, and the laws of the
State of Delaware, the Age Discrimination in Employment Act, the Fair Labor
Standards Act, Title VII of the Civil Rights Act of 1964, The Civil Rights Act
of 1991, the Employee Retirement Income Security Act ("ERISA"), and/or claims
growing out of any legal restrictions, expressed or implied, on USI's right to
control or terminate the employment of its employees; and
(e) Any other act, transaction, practice or conduct
whatever that occurred prior to the date hereof, whether or not Masterson or USI
presently has knowledge of the acts, transactions, practices, conduct or other
matters covered herein (all of the foregoing, hereinafter "Claims").
Exclusions. Notwithstanding the foregoing, nothing in this Severance
Agreement shall operate, or shall be construed or interpreted, as a release,
acquittal, discharge or waiver of any of the following, and none of the
following shall be included in the claims that are the subject of the release
contained in this Severance Agreement:
a. Such rights of Masterson which are unconditionally
vested in him as of the date hereof under the terms of the employee welfare
benefit plans of USI (medical, dental and disability insurance plans, life
insurance, and 401(k) plan), Masterson hereby acknowledging that all such rights
shall be provided only in accordance with, and subject to, the terms and
provisions of the relevant plans as in effect from time to time which are
applicable to Masterson.
b. The right of Masterson and his dependents to the
continuation of health care coverage for nine (9) months as specified in Section
5 hereof, and subject to, applicable law, including, without limitation, COBRA,
of which Masterson understands he will be notified after the date hereof.
Masterson hereby acknowledges that such rights are subject to Masterson's timely
exercise and that all payments subsequent to such nine (9) month severance
period for any such continued health care coverage will be paid by him.
c. Masterson's right to reimbursement of business
expenses incurred through the date hereof, in accordance with and subject to the
normal reimbursement procedures of USI, provided that in order for a request to
be eligible for reimbursement it must be submitted on or before forty-five (45)
days after the date hereof.
3
<PAGE>
d. Any right which Masterson now has or may have to
claim indemnity (including advancement of expenses) for liabilities in
connection with his activities as a director, officer or employee of USI
pursuant to the terms of any applicable statute, under any insurance policy, or
pursuant to the certificate of incorporation or bylaws of USI.
Masterson hereby confirms that: (a) his execution of the release
contained in this Severance Agreement is a material inducement to USI for
entering into this Severance Agreement and making the payments at the time
called for herein; (b) Masterson has had the opportunity to consult, and has in
fact consulted with legal counsel, concerning this Severance Agreement; (c) no
statements, representations or promises have been made to Masterson, or relied
upon by Masterson, in executing this Severance Agreement.
8. Covenant Not to Sue. Except for the obligations of USI set
forth in this Agreement,, Masterson covenants and agrees not to commence or
prosecute any action or proceeding against USI or any of USI's past or present
divisions, subsidiaries, parents, predecessors, or, in a corporate capacity or
as an individual, any of USI's past or present directors, officers,
shareholders, agents, or employees, or to assert against USI or any of USI's
past or present divisions, subsidiaries, parents, predecessors, or, in a
corporate capacity or as an individual, any of USI's past or present directors,
officers, shareholders, agents or employees in any action or proceeding any
matter whether or not now known, based upon any act, transaction, practice or
conduct of USI or any of USI's past or present divisions, subsidiaries, parents,
predecessors, or, in a corporate capacity or as an individual, any of USI's past
or present directors, officers, shareholders, agents or employees, that occurred
prior to the date hereof.
9. References. If inquiries are made to USI from prospective
employers of Masterson or from any other person or entity, the inquiries
(whether written or oral) will be referred to Mr. Pulier or another executive
mutually agreed upon by Masterson and USI, and Mr. Pulier or the other executive
will provide only the information contained on Exhibit B attached hereto. If
authorized by Masterson in writing in advance, USI also will provide a
prospective employer any other information mutually agreed upon by Masterson and
USI.
10. Non-Disparagement: Masterson agrees that he will not
disparage or defame USI and/or its current or former directors, officers,
shareholders, and employees, and USI agrees not to, and shall cause its
directors, officers and employees not to, disparage or defame Masterson.
11. Return of USI Property: Masterson agrees that as of the
execution of this Severance Agreement, he has returned to USI any and all USI
property currently in his possession, including, but not limited to, any USI
keys, access cards, credit cards, computer equipment, computer tapes and
diskettes, documents, manuals, client information, and any other information in
either printed or electronic formats which he obtained as a result of or in
connection with his employment by USI, with the exception of the items of
personal property and computer equipment specified on Exhibit C attached hereto,
which shall be Masterson's property.
12. Special Provisions: USI agrees to grant Masterson the
following:
4
<PAGE>
o Masterson's current phone extension and voicemail (to be used
without reference to USI) during the nine (9) month period
defined in Section 2.
o During the nine (9) month period, USI's Email account for
Masterson will be maintained or at Masterson's option
Masterson's current USI Email address will be directed to the
following Email address: ----------------.
o At the request of Masterson, in office storage of Masterson's
office furniture including those items specified on Exhibit C
for the nine (9) month period defined in Section 2. USI shall
be responsible for the first five hundred dollars ($500) for
moving the furniture off the USI premises, and Masterson will
be responsible for any amounts in excess of five hundred
dollars ($500).
o Allowance of two hundred dollars ($200) per month for a period
of nine months for office expenses of Masterson.
o Administrative support, not to exceed four hours per week, for
a period of three months.
o A waiver of USI's right to purchase Masterson's shares of
stock of USI pursuant to Section 3.5(a) of the Second Amended
and Restated Stockholders' Agreement dated March 12, 1999 in
the event of Masterson's death.
o USI shall not object to the transfer of shares by Masterson to
his children, other donees, trust(s) or a family limited
partnership provided the customary and usual joinders are
executed and Masterson retains voting control of such shares
until consummation of the Offering.
o In any history of USI, USI will specifically refer to
Masterson by name as a co-founder to the extent it refers to
any of the other co-founders.
o USI will allocate 2,500 shares of "friends and family" stock
to persons (other than Masterson) designated by Masterson in
the Offering.
13. Confidentiality: The parties hereto agree that it is the
intent of the parties to maintain the complete confidentiality of this Severance
Agreement and the negotiations leading to this Severance Agreement. Therefore,
the parties agree that they will not publicize, and will take all prudent steps
to ensure the confidentiality of this Severance Agreement. The only comment the
parties will make about Masterson's resignation from USI is detailed in the
attached Exhibit B, that he resigned voluntarily, and that all matters relating
to his employment with USI have been resolved to the mutual satisfaction of the
parties. Notwithstanding the terms of this Section, Masterson will be entitled
to disclose the terms of this Severance Agreement as may be required by law ,and
to his lawyers, tax advisors, accountants, and immediate family on the condition
that those to whom such disclosure is made also will be bound by the terms of
this Section, and USI shall be permitted to disclose the terms of this Severance
Agreement as required by law, including any disclosure required in connection
with the Offering.
14. Public Offering Lock-up. Masterson hereby agrees to
execute and deliver to the Underwriter in connection with the Offering a Lock-up
Agreement in the form attached hereto concurrently with the execution and
delivery to USI of this Severance Agreement by Masterson. Masterson hereby
agrees to accurately complete, execute and deliver to USI within three (3) days
after the execution and delivery of this Severance Agreement by Masterson the
Director & Officer Questionnaire previously delivered to him in connection with
the Offering.
15. Certain Registration Rights. (a) Election to Include
Shares in Offering. Masterson shall, during the fifteen (15) day period
commencing on the date hereof, have the right to elect to require USI to include
not less than one hundred thousand (100,000) but no more than five hundred
thousand (500,000) shares of USI Common Stock in a registration statement to be
filed by USI under the Securities Act for offer and sale in the Offering (the
"Shares"), subject to the terms and conditions set forth below in this Section
15. Such election shall be made by giving written notice thereof to USI in
accordance with the provisions of Section 20 of this Severance Agreement.
5
<PAGE>
(b) Underwriting Agreement. Masterson acknowledges
and agrees that he will execute and deliver an Underwriting Agreement as
contemplated by the prospectus constituting part of the registration statement
and in the form to be agreed upon by USI and the Underwriters. Such Underwriting
Agreement shall contain such provisions and terms and conditions as are
customarily included in connection with underwritten public offerings of a
nature similar to the Offering, including, without limitation, underwritiers'
cut-backs and such representations, warranties, agreements, indemnities, and
assurances by Masterson as are customarily made or given by selling stockholders
to issuers and underwriters.
(c) Registration Expenses. All Registration Expenses
shall be borne by USI. "Registration Expenses" shall mean all expenses incurred
in effecting the registration contemplated in connection with the Offering,
including all registration, qualification and filing fees, reproduction and
printing expenses, expenses incurred by USI in the preparation of the
registration statement referred to above and the effectiveness of the
registration statement, fees and disbursements of counsel for USI and those of
USI's other independent professional advisers and experts, listing fees and
other costs incurred in listing the Shares for trading on NASDAQ or on any stock
exchange, and blue sky fees and expenses (if any), but shall not include: (i)
brokerage fees, underwriting discounts and selling commissions relating to the
Shares or (ii) any fees and disbursements of counsel to Masterson.
(d) Subsequent IPO Registration. In the event the
contemplated Offering by USI is not effected, USI will provide to Masterson in
any subsequent offering of USI common stock substantially the same registration
rights as provided in this Section 15.
16. No Admission of Fault: Masterson and USI agree that their
willingness to enter into this Severance Agreement does not constitute, and is
not to be construed as, any admission of liability or fault on the part of
Masterson or USI.
17. Jurisdiction. Any action, suit or proceeding arising out
of or relating to this Agreement or any other agreement executed in connection
herewith shall be litigated exclusively in the Courts of the Commonwealth of
Pennsylvania. Each of the parties hereto hereby irrevocably and unconditionally
(A) submits to the jurisdiction of the Pennsylvania Courts, (B) waives, and
agrees not to plead or to make, any objection to the venue of any proceeding in
the Pennsylvania Courts, (C) waives, and agrees not to plead or to make, any
claim that any proceeding brought in the Pennsylvania Courts has been brought in
an improper or otherwise inconvenient forum, (D) waives, and agrees not to plead
or to make, any claim that the Pennsylvania Courts lack personal jurisdiction
over him or it, (E) waives their rights to remove any proceeding to the federal
courts except where such courts are vested with sole and exclusive jurisdiction
by statute, and (F) understands and agrees that they shall not seek a jury trial
or punitive damages in any proceeding based upon or arising out of or otherwise
related to this Agreement or any other agreement executed in connection herewith
or the breach, termination or validity thereof, and waives any and all rights to
any such jury trial or to seek punitive damages. Each party is required to
continue to perform its obligations under this Agreement pending final
resolution of any dispute arising out of or relating to this Agreement, unless
to do so would be impossible or impracticable under the circumstances.
18. Injunctive Relief; Acceleration of Payments (a) Each
party agrees that any breach of their respective obligations under this
Agreement will cause irreparable harm to the other party and that in the event
of such a breach the other party shall have, in addition to any and all remedies
at law, the right to an injunction, specific performance or other equitable
relief.
6
<PAGE>
(b) In the event it is determined by a court of
competent jurisdiction that USI has breached its obligations to make the
required severance payments hereunder, USI shall immediately pay to Masterson
(i) the amount of such payments and all remaining payments, (ii) the benefits
and insurance premiums for coverages required to be provided by USI but not
provided, (iii) interest at a rate of ten percent (10%) per annum from the
original due date on amounts not paid to Masterson, and (iv) all reasonable
attorney's fees and costs incurred by Masterson in obtaining such a
determination.
19. No Waiver. No failure or delay on the part of any party to
this Agreement in exercising any right, power or remedy hereunder shall operate
as a waiver thereof; nor shall any single or partial exercise of any such right,
power or remedy preclude any other or further exercise thereof or the exercise
of any other right, power or remedy hereunder. The remedies herein provided are
cumulative and not exclusive of any remedies provided by law.
20. Notices. Except as expressly set forth in this Agreement,
all notices, requests, demands and other communications provided for hereunder
shall be in writing and mailed or delivered to the applicable party at the
addresses specified below:
If to Masterson: at the following address, or at such other address as
shall be designated by Masterson in a written notice to USI complying as to
delivery with the terms of this Agreement:
Richard Masterson
12 Bayau Trail
Medford, NJ 08055
Phone: (609) 953-7266
With a copy to: Dean M. Schwartz, Esquire
Stradley, Ronon, Stevens & Young
2600 One Commerce Square
Philadelphia, PA 19103
If to USI: at the following address, or at such other address as shall
be designated by USI in a written notice to Masterson complying as to delivery
with the terms of this Agreement:
U.S. Interactive, Inc.
2012 Renaissance Boulevard
King of Prussia, PA 19406
Phone: (610) 313-9700
Fax: (610) 382-8908
Attn: Stephen T. Zarrilli, CEO
With a copy to: Lawrence F. Shay, Esquire
Dilworth Paxson LLP
3200 Mellon Bank Center
1735 Market Street
Philadelphia, PA 19103
Phone: (215) 575-7036
Fax: 215-575-7200
7
<PAGE>
All notices, requests, demands and other communications must be by
express overnight courier service, or registered or certified mail return
receipt requested, and shall be considered to be delivered three (3) days after
dispatch.
21. No Transfer of Claim. Masterson represents and warrants
that he has not sold, assigned, transferred, conveyed or otherwise disposed of
any claim, demand or cause of action relating to any matter covered by this
Agreement.
22. Successors and Assigns. This Agreement shall inure to the
benefit of USI and its predecessors, successors and assigns and shall be binding
upon Masterson and his heirs, executors, and administrators. Masterson shall not
have the right to assign any of his rights hereunder or any interest herein nor
delegate any of his duties hereunder.
23. Entire Agreement. This Agreement, and the other agreements
executed and delivered herewith, constitute the entire agreement between the
parties and supersede any prior understandings or agreements concerning the
subject matter hereof.
24. Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Delaware without
giving effect to choice of laws principles.
25. Counterparts. This Agreement may be executed in any number
of counterparts, all of which taken together shall constitute one and the same
instrument, and any of the parties hereto may execute this Agreement by signing
any such counterpart.
IN WITNESS WHEREOF, the parties hereto, intending to be
legally bound hereby, have executed this Agreement under seal on the day and
year set forth below.
WITNESS:
By:
------------------------------
Richard Masterson
Date:
------------------------------
U.S. INTERACTIVE, INC.
BY:
------------------------------
TITLE:
------------------------------
DATE:
------------------------------
8
<PAGE>
Exhibit A
The Employee Non-Disclosure, Assignment of Developments,
Non-Solicitation and Non-Competition Agreement executed by Richard Masterson on
June 28, 1996 is hereby amended as follows:
The provisions of Section 3 shall apply for a period of nine(9) months
from the date of the Severance Agreement between Masterson and USI and shall
thereafter be null and void.
Section 3 (iii) is hereby deleted in its entirety and replaced with the
following:
(iii) (a) become a partner, officer, director, consultant, agent, lender,
employee or 3% or greater stockholder of any entity set forth below; (b) become
a partner, officer, director, consultant, agent, lender, employee or 3% or
greater stockholder of any of the following entities: Agency.com, Organic, Modem
Media Poppe Tyson, Proxicom, Magnet, Rare Medium, IXL, CKS/US Web, RazorFish,
K2, Renaissance/Neoglyphics, Sapient/Studio Archetype, Viant, Scient, Ogilvy
One, Dawin Digital, Thunder House, EDS, Perot Systems, Cambridge Technology
Partners, Diamond; (c) become a partner, officer, director, consultant, agent,
lender, employee or a 3% or greater stockholder of any entity which, prior to me
becoming an employee, partner, officer, director, agent, lender, consultant, or
a 3% or greater stockholder, results from a merger or other combination
involving any entity in either (a) or (b) above, or any entity which, prior to
me becoming an employee, partner, officer, director, agent, lender, consultant,
or a 3% or greater stockholder, controls, is controlled by, or is under common
control with, any of the entities in (a) or (b) above; or (d) form an entity
which delivers, or as an individual deliver, products or services which are
products or services identified in USI's E-Roadmap development plan.
Notwithstanding anything to the contrary provided herein, the foregoing
provisions shall not be deemed to limit or restrict Masterson during such nine
(9) month period with respect to any of the following activities: (a) public
speaking as to any topic including internet and E-commerce, (b) involvement in
any capacity with V-Call and its products and services, (c) consulting in a
personal capacity as to strategic internet and E-commerce matters, provided such
consulting is not rendered to or in association with any entity set forth below,
and (d) furnishing in any capacity any internet and E-commerce products and
services to charitable organizations and institutions.
<TABLE>
<CAPTION>
<S> <C>
Atlantic Data Services Benchmarking Partners
BISYS Group, The Born Information Services Group
Cambridge Technology Partners Braun Technology Group
Cognizant Technology Solutions CIBER, Inc.
Diamond Technology Partners, Inc. Clarkston-Potomac Group, Inc.
Kenda Systems Cohesibe Network Systems, Inc.
Registry, Inc., The (Renaissance Worldwide, Inc.) Collective Technologies
TIER Corporation Computer Merchant (The)
Whittman-Hart Context Integration, Inc.
Extraprise
Fort Point Partners, Inc
</TABLE>
9
<PAGE>
Exhibit A
<TABLE>
<CAPTION>
<S> <C>
i-Cube
Inforte Information Technology
Management Information Consulting, Inc.
Micro Modeling Associates
OneSource Information Services, Inc
Paragon Computer Professionals, Inc.
Pencom Systems, Inc.
Saleslink
Sapient Corporation
Scient
SE Technologies
Seek Consulting Group
Silicon Valley Internet Partners
SPL (Systems Programming, Ltd.)
Tanning Technology Corporation
Tessera Enterprise Systems, Inc.
The Concours Group
The Revere Group, Inc.
US Web
Biant Corporation (Silicon Balley Internet Partners)
ACI Corporation
</TABLE>
10
<PAGE>
Exhibit A
(Continued)
<TABLE>
<CAPTION>
<S> <C>
ADEPT, Inc. B&M Associates, Inc.
AppNet Systems, Inc. Barra Inc.
Beacon Application Services Corporation Beggs Heidt Enterprise Consulting, Inc.
Breakaway Systems (formerly the Counsell group Blackwell Consulting Services
Business Data Services, Inc. Cambridge Interactive
CoreTech Consulting Group, Inc. Circle Strategies, Inc.
CORIO, Inc. Computer Management Sciences
DARC Development corporation Computer Sciences Corporation - Waltham
Decision Technologies, Inc. COMPUTERPEOPLE, Inc.
Eggrock Partners, LLC. Compuware
Eliassen Group Corporate Information Technologies
Elumen Solutions Cotelligent Group, Inc
Greenbrier & Russel C/bridge Internet Solutions
Greystone Solutions, Inc. Daou Systems
ICON Solutions Data Processing Resources Corporation
Internet Business Advantage Database Technologies Corporation
Inbenta DataEdge, Inc.
Keane, Inc. Dimension Systems, Inc.
Kinderhook Systems Edgewarter Technology, Inc.
Lante Corporation EDS
Logical Design Solutions Enterprise Networking Systems, Inc.
Mastech Systems Corporation ERP Technologies
METRO Information Services Executive Alliance
Naviant Technology Solutions First Consulting Group
NexGen SI, Inc. Free Range Media
Nims Associates, Inc. Granitar Systems, Inc.
NobleStar Systems Group Cortex, Inc
Pencom Web Works Hall, Kinion
PKS Information Systems High Technology Solutions
Professional Development Group, Inc. HSO Business Systems, Inc/
PSW Technologies, Inc. Hurwitz Group, Inc
SCB Computer Technology, Inc. Immersive Environments
Synetics Corporation Information Management Resources
Technium, Inc. INS (international Network Services)
Technology Solutions Co. Inc. Integral Results, Inc.
TransTech Integrated Information Systems, Inc
TVisions, Inc. Integrates Software Specialists, Inc.
Unisource Systems, Inc. Integration Associates, Inc.
Interactive Business Systems, Inc.
Adaptive Consulting Partners LLC Jack Martin - Independent Consultant
Advanced Technology Systems Kanbay Incorporated
Alliance Consulting Group LCI Computer Group N>B.
American Management Systems Lighthouse Technology Solutions
Aris Corporation Matrix Resources
Automated Labor (Infolmage)
</TABLE>
11
<PAGE>
Exhibit A
(Continued)
<TABLE>
<CAPTION>
<S> <C>
Maznet Systems, Inc./ World Research Advisory
Metzler Group
Modus Media
Natural Data
NCI Information Systems, Inc.
Net Daemons Associates, Inc.
NeTegrity
NetGuru systems, Inc.
NetSolbe, Inc.
Network Six
New Resources Corp.
Nexus Consulting Group
Northeast Consulting Resources
Online Enbirons, Inc.
Optimum Consulting
Opus Communications
Osprey Systems, Inc.
Pinkerton Computer Consultants, Inc
Polaris Service, Inc
Predictive Systems, Inc
Premier Systems Integrators, Inc.
Orixucin
Quest Consulting, Inc.
Rare Medium, Inc.
Razorfish
ReadyAbout Interactive
Research Triangle Consultants, Inc.
ReSOURCE PARTNER, Inc.
Resource Support Associates, inc.
RMS Technologies
Rock Island Group
Rwd Technologies, Inc
Semaphore
Sigma Systems, Inc.
Silverline Industries, Inc.
Snickelways Interactive
Soften Systems
Sullivan and Cogliano Companies (The)
Systems Services Corporation
Systems Solutions Group
Tangent International Computer Consultants, Inc
The Lab
The Telluride Group, Inc.
The Tower Group
US internetworking
Waterstone Consulting
Web Design Group, Inc.
</TABLE>
12
<PAGE>
Exhibit B
Inquiry Script
In reference to Richard Masterson
Effective May 18,1999, with the consent and support of the Board of Directors,
Richard Masterson resigned his positions as President and as a Director of US
Interactive. Richard Masterson remains a significant shareholder of the company.
Under Richard Masterson's leadership, U.S. Interactive has become one of the
nation's leading Internet professional services firms with over 200 employees in
5 offices. His strategic insights and activities are responsible for the unique
and powerful position as creators of "Electronic Enterprise solutions" supported
by a simple product service portfolio under the branded "E-Roadmap (TM)"
development plan and proprietary "IVL Methodology (TM)."
In 1994, Richard co-founded U.S. Interactive and served as President from July
1998 to May 1999 and as Executive Vice President Business Development prior
thereto.
Richard Masterson is an accomplished President with a unique blend of business
strategy, creative marketing, and Internet technology knowledge and skills.
These competencies, along with innovative approaches, entrepreneurial enthusiasm
and the ability to squeeze maximum results from limited resources, make him a
unique leader in the dynamic, rapidly changing Internet business arena.
Under his leadership U.S. Interactive completed the following significant
financial events:
o Grew annual revenue over 100% each year from 1994 to 1998.
o Closed three rounds of Venture Capital funding from investors
including Safeguard Scientifics, TL Ventures, and Internet
Capital Group.
o Successfully restructured and repositioned the company
annually to sustain growth, fulfill the needs of Clients, and
profit from the fluid dynamics of the Internet Industry.
o Positioned company for possible IPO.
o Completed 3 M&A events: Web Access acquisition in June 1996,
Mixed Media Works acquisition in June 1997, and merger with
Digital Evolution in July 1998.
Richard Masterson is also highly visible within the Internet Community, with the
following positions, awards and activities among his accomplishments:
To be submitted subsequently by Masterson and reasonably agreed to by
USI.
13
<PAGE>
Exhibit C
Property Owned By Masterson
Equipment and possessions of Richard Masterson:
Equipment whose ownership is transferred from USI to Richard Masterson:
All equipment located in Masterson's office including, without
limitation, computer hardware, software and appropriate licenses, but excluding
the telephone system and furniture.
Richard Masterson's personal possessions currently located and stored at
USI/King of Prussia office:
All personal possessions located in Masterson's office.
14
<PAGE>
CONFIDENTIAL
SEVERANCE AGREEMENT
This SEVERANCE AGREEMENT is executed by U. S. Interactive,
Inc. (hereinafter referred to as "USI") and Larry W. Smith (hereinafter referred
to as "Smith").
WITNESSETH:
WHEREAS, Smith is currently an employee and a director of USI;
and
WHEREAS, Smith has agreed to resign from his employment with
USI and USI has agreed to accept Smith's resignation;
NOW THEREFORE, in consideration of the obligations of the
parties hereto, and other consideration, receipt of which is hereby
acknowledged, the parties hereto agree as follows:
1. Resignation. USI and Smith hereby agree that as of this
date Smith is no longer employed by USI and that Smith does hereby resign as of
this date from all officer positions of USI and all USI affiliates. Smith hereby
agrees to resign from his position as a director of USI if he at any time
becomes an employee, partner, officer, director, consultant, agent, lender, or a
3% or greater stockholder, of any entity set forth on Exhibit A or Exhibit A-1.
2. Severance Compensation: USI shall pay to Smith the sum of
One Hundred Thirty - one Thousand Two Hundred Fifty Dollars ($131,250). This sum
will be paid in equal periodic payments throughout the next nine (9) months, in
accordance with USI's normal payroll disbursements, or at such earlier times at
the discretion of USI. These payments are to be made irrespective of any other
employment Smith may obtain. USI will make state and federal tax deductions,
social security deductions, and all other appropriate deductions from these
severance payments and any other payments hereunder. If Smith breaches any
obligation set forth in this document or in the agreements referred to in
Section 6, and if such breach is curable and is not cured within ten (10) days
after Smith is aware of such breach or receives notice of such breach, whichever
is earlier, all payments set forth in this section and the benefits and
insurance coverages set forth in Section 5 will immediately terminate.
3. Vacation Compensation: In addition to the compensation
described in Section 2 above, USI shall pay to Smith compensation for his
accrued, unused vacation in the amount of Twelve Thousand One Hundred Fifteen
Dollars ($12,115), less all appropriate deductions, at the next scheduled
payroll.
4. Stock Options: Smith may exercise his 51,948 currently
vested options for shares of USI stock during the period of ninety (90) days
immediately after the date hereof. All options for shares not vested as of this
date (11,103 exercisable on 1/1/00) are deemed to be vested immediately upon
execution by Smith and USI of this Agreement and are exercisable for a period of
ninety (90) days immediately after the date hereof. The 51,948 options and the
11,103 options are hereinafter referred to as the "Vested Options". Smith must
exercise the Vested Options in accordance with the Amended and Restated 1997
U.S. Interactive Stock Option Plan and the Option Agreement dated June 15, 1998.
USI and Smith acknowledge that upon execution by Smith and USI of this Agreement
that Smith has 63,051 Vested Options at an exercise price of $3.85 per option.
<PAGE>
5. Insurance and Other Benefits: USI will continue at USI's
sole expense Smith's existing coverage for health, life, disability and dental
care for a period of nine (9) months after the date hereof. Thereafter, Smith
will be eligible to continue his coverage in accordance with applicable law. USI
will provide Smith information regarding his eligibility for such benefits and
his obligations pursuant to applicable law including, without limitation, COBRA.
Smith understands and agrees that following the nine (9) month period, he will
be solely responsible for making any applicable premium payments. USI shall
reimburse Smith for auto expenses up to a maximum of $700 per month, in
accordance with the reimbursement practices of USI until final payment of the
severance compensation set forth in Section 2.
6. Existing Agreements. Smith does hereby affirm his
obligations under and agrees that he remains subject to (i) the Employee
Non-Disclosure, Assignment of Developments, Non-Solicitation and Non-Competition
Agreement executed by him on June 28, 1996, as modified by Exhibit B attached
hereto; (ii) the Amended and Restated Investors' Rights Agreement dated as of
September 22, 1998; and (iii) the Amended and Restated Stockholders' Agreement
(both individually and as a voting trustee) dated as of September 22, 1998.
7. Release. Except for the obligations of USI set forth in
this Agreement, Smith does hereby remise, release and forever discharge USI, and
each of USI's past and present divisions, subsidiaries, parents, predecessors,
and, in a corporate capacity and as an individual, each of USI's past and
present directors, officers, shareholders, agents and employees, and USI does
hereby remise, release and forever discharge Smith (except with respect to the
obligations of Smith under: this Agreement; the Amended and Restated 1997 U.S.
Interactive Stock Option Plan and any option agreements; the Employee
Non-Disclosure, Assignment of Developments, Non-Solicitation and Non-Competition
Agreement executed by Smith on June 28, 1996 , as modified by Exhibit B attached
hereto; the Amended and Restated Investors' Rights Agreement dated as of
September 22, 1998, as amended from time to time, and the Amended and Restated
Stockholders' Agreement (both individually and as a voting trustee) dated as of
September 22, 1998) as amended from time to time, from any and all manner of
actions, causes of action, suits, debts, accounts, contracts, agreements,
controversies, which Smith (in the case of USI) and USI (in the case of Smith)
ever had, now has, or hereafter can, shall or may have for, upon or by reason of
any act, transaction, practice, conduct, matter, cause or thing of any kind
whatsoever that arose or occurred prior to the date hereof, whether or not now
known, including but not limited to any action, cause of action, suit, debt,
account, contract, agreement, controversy, judgment, damage, claim, liability
and demand of any nature whatsoever, arising out of, relating to or based upon,
in whole or in part:
(a) Smith' employment with USI and any compensation
arrangements related thereto, including vacation, sick time, and any options
(excluding the Vested Options) granted or to be granted to Smith by USI;
(b) Any act, transaction, practice or conduct arising
or occurring prior to the date hereof, which is actionable, or claimed to be
actionable, under any statutory or common law of the United States or any state
thereof;
2
<PAGE>
(c) Any effect which existed or occurred, or
presently exists, or may in the future exist or occur, as a result of any act,
transaction, practice or conduct that occurred prior to the date hereof;
(d) All claims arising from or during Smith's
employment by USI or as a result of the termination of Smith's employment, and
all claims arising under federal, state or local laws or regulations prohibiting
employment discrimination based upon age, race, sex, religion, handicap,
disability, national origin or any other protected characteristic, including,
but not limited to, any and all claims arising under the laws of the State of
New York (including, without limitation, the New York Human Rights Law and the
New York Labor Law, and the New York Payment of Wages Law), the laws of the
State of Delaware (including, without limitation, the Delaware Wage Payment and
Collection Law), the Age Discrimination in Employment Act, the Fair Labor
Standards Act, Title VII of the Civil Rights Act of 1964, The Civil Rights Act
of 1991, the Employee Retirement Income Security Act ("ERISA"), and/or claims
growing out of any legal restrictions, expressed or implied, on USI's right to
control or terminate the employment of its employees; and
(e) Any other act, transaction, practice or conduct
whatever that occurred prior to the date hereof, whether or not Smith or USI
presently has knowledge of the acts, transactions, practices, conduct or other
matters covered herein (all of the foregoing, hereinafter "Claims").
Smith hereby acknowledges that insofar as the Claims that are subject
to release include any Claim arising under the federal Age Discrimination in
Employment Act, as amended ("Age Discrimination Claim"), the following terms
apply:
a. Smith has been advised in writing to consult with
an attorney prior to agreeing to and signing this Severance Agreement.
b. Smith has been advised that he has a period of 21
days within which to consider the terms of this Severance Agreement prior to
signing this Severance Agreement; however, Smith may voluntarily choose to sign
prior to the end of the 21-day period.
c. Smith has been advised that he has a period of 7
days immediately following his signing of this Severance Agreement to revoke
this Severance Agreement and the release contained herein and that any such
revocation must be in writing, signed by Smith, and hand delivered during the
revocation period to the Chief Operating Officer of USI.
d. Smith agrees not to exercise all or any part of
the Vested Options for a period of eight (8) days following Smith's execution of
this Agreement.
If Smith chooses to exercise his right during the Revocation Period to
revoke this Severance Agreement, then, in order to place USI and Smith in the
positions they were in prior to the Severance Agreement, Smith shall, within 24
hours of the revocation, return to USI all amounts paid to Smith, if any,
pursuant to this Severance Agreement and any other benefits whatsoever conferred
upon Smith in this Severance Agreement, including the acceleration of any
vesting or exercisability provisions relating to options referred to herein.
Smith shall take all required steps, including execution of such documents as
may be required by USI to effectuate such return of payments and other
consideration. Upon such timely return of such payments and other consideration,
Smith shall reserve whatever rights and claims he held prior to this Severance
Agreement.
Exclusions. Notwithstanding the foregoing, nothing in this Severance
Agreement shall operate, or shall be construed or interpreted, as a release,
acquittal, discharge or waiver of any of the following, and none of the
following shall be included in the claims that are the subject of the release
contained in this Severance Agreement:
3
<PAGE>
a. Such rights of Smith which are unconditionally
vested in him as of the date hereof under the terms of the employee welfare
benefit plans of USI (medical, dental and disability insurance plans, life
insurance, and 401(k) plan), Smith hereby acknowledging that all such rights
shall be provided only in accordance with, and subject to, the terms and
provisions of the relevant plans as in effect from time to time which are
applicable to Smith.
b. The right of Smith and his dependents to the
continuation of health care coverage for nine (9) months as specified in Section
5 hereof, and subject to, applicable law, including, without limitation, COBRA,
of which Smith understands he will be notified after the date hereof. Smith
hereby acknowledges that such rights are subject to Smith's timely exercise and
that all payments subsequent to such nine (9) month severance period for any
such continued health care coverage will be paid by him.
c. Smith's right to reimbursement of business
expenses incurred through the date hereof, in accordance with and subject to the
normal reimbursement procedures of USI, provided that in order for a request to
be eligible for reimbursement it must be submitted on or before forty-five (45)
days after the date hereof.
d. Any right which Smith now has or may have to claim
indemnity (including advancement of expenses) for liabilities in connection with
his activities as a director, officer or employee of USI pursuant to the terms
of any applicable statute, under any insurance policy, or pursuant to the
certificate of incorporation or bylaws of USI.
Smith hereby confirms that: (a) his execution of the release contained
in this Severance Agreement is a material inducement to USI for entering into
this Severance Agreement and making the payments at the time called for herein;
(b) Smith has had the opportunity to consult, and has in fact consulted with
legal counsel, concerning this Severance Agreement; (c) no statements,
representations or promises have been made to Smith, or relied upon by Smith, in
executing this Severance Agreement.
8. Covenant Not to Sue. Except for the obligations of USI set
forth in this Agreement,, Smith covenants and agrees not to commence or
prosecute any action or proceeding against USI or any of USI's past or present
divisions, subsidiaries, parents, predecessors, or, in a corporate capacity or
as an individual, any of USI's past or present directors, officers,
shareholders, agents, or employees, or to assert against USI or any of USI's
past or present divisions, subsidiaries, parents, predecessors, or, in a
corporate capacity or as an individual, any of USI's past or present directors,
officers, shareholders, agents or employees in any action or proceeding any
matter whether or not now known, based upon any act, transaction, practice or
conduct of USI or any of USI's past or present divisions, subsidiaries, parents,
predecessors, or, in a corporate capacity or as an individual, any of USI's past
or present directors, officers, shareholders, agents or employees, that occurred
prior to the date hereof.
9. References. If inquiries are made to USI from prospective
employers of Smith or from any other person or entity, the inquiries (whether
written or oral) will be referred to Mr. Pulier or another executive mutually
agreed upon by Smith and USI, and Mr. Pulier or the other executive will provide
only the information contained on Exhibit C attached hereto. If authorized by
Smith in writing in advance, USI also will provide a prospective employer any
other information mutually agreed upon by Smith and USI.
10. Non-Disparagement: Smith agrees that he will not disparage
or defame USI and/or its current or former directors, officers, shareholders,
and employees, and USI agrees not to, and shall cause its directors, officers
and employees not to, disparage or defame Smith.
4
<PAGE>
11. Return of USI Property: Smith agrees that as of the
execution of this Severance Agreement, he has returned to USI any and all USI
property currently in his possession, including, but not limited to, any USI
keys, access cards, credit cards, computer equipment, computer tapes and
diskettes, documents, manuals, client information, and any other information in
either printed or electronic formats which he obtained as a result of or in
connection with his employment by USI, with the exception of the items of
personal property and computer equipment specified on Exhibit D attached hereto,
which shall be Smith's property. Notwithstanding anything to the contrary
contained in this Section 11, it is understood and agreed by the parties that
Smith has, and in the future will have, in his possession certain information
relating to USI solely in his role as a director of USI.
12. Special Provisions: USI agrees to grant Smith the
following:
o Smith's current phone extension and voicemail (to be
used without reference to USI) during the nine (9)
month period defined in Section 2.
o Smith's current USI Email address will be directed
during the nine (9) month period to the following
Email address:[email protected].
o In office storage of Smith's office furniture
including his desk, chair and lamps specified on
Exhibit D for the nine (9) month period defined in
Section 2. USI shall be responsible for the first
five hundred dollars ($500) for moving the furniture
off the USI premises, and Smith will be responsible
for any amounts in excess of five hundred dollars
($500).
o The office currently occupied by Smith, or other
office in USI's New York location, to reasonably be
determined by the New York General Manager, for a
period of three months; any relocation from the
current office will be with reasonable notice and
completed by USI.
o Administrative support, not to exceed four hours per
week, for a period of three months.
13. Confidentiality: The parties hereto agree that it is the
intent of the parties to maintain the complete confidentiality of this Severance
Agreement and the negotiations leading to this Severance Agreement. Therefore,
the parties agree that they will not publicize, and will take all prudent steps
to ensure the confidentiality of this Severance Agreement. The only comment the
parties will make about Smith's resignation from USI is detailed in the attached
Exhibit C, that he resigned voluntarily, and that all matters relating to his
employment with USI have been resolved to the mutual satisfaction of the
parties. Notwithstanding the terms of this Section, Smith will be entitled to
disclose the terms of this Severance Agreement as may be required by law ,and to
his lawyers, tax advisors, accountants, and immediate family on the condition
that those to whom such disclosure is made also will be bound by the terms of
this Section, and USI shall be permitted to disclose the terms of this Severance
Agreement as required by law.
14. No Admission of Fault: Smith and USI agree that their
willingness to enter into this Severance Agreement does not constitute, and is
not to be construed as, any admission of liability or fault on the part of Smith
or USI.
5
<PAGE>
15. Jurisdiction. Any action, suit or proceeding arising out
of or relating to this Agreement or any other agreement executed in connection
herewith shall be litigated exclusively in the Courts of the Commonwealth of
Pennsylvania. Each of the parties hereto hereby irrevocably and unconditionally
(A) submits to the jurisdiction of the Pennsylvania Courts, (B) waives, and
agrees not to plead or to make, any objection to the venue of any proceeding in
the Pennsylvania Courts, (C) waives, and agrees not to plead or to make, any
claim that any proceeding brought in the Pennsylvania Courts has been brought in
an improper or otherwise inconvenient forum, (D) waives, and agrees not to plead
or to make, any claim that the Pennsylvania Courts lack personal jurisdiction
over him or it, (E) waives their rights to remove any proceeding to the federal
courts except where such courts are vested with sole and exclusive jurisdiction
by statute, and (F) understands and agrees that they shall not seek a jury trial
or punitive damages in any proceeding based upon or arising out of or otherwise
related to this Agreement or any other agreement executed in connection herewith
or the breach, termination or validity thereof, and waives any and all rights to
any such jury trial or to seek punitive damages. Each party is required to
continue to perform its obligations under this Agreement pending final
resolution of any dispute arising out of or relating to this Agreement, unless
to do so would be impossible or impracticable under the circumstances.
16. Injunctive Relief ; Acceleration of Payments (a) Each
party agrees that any breach of their respective obligations under this
Agreement will cause irreparable harm to the other party and that in the event
of such a breach the other party shall have, in addition to any and all remedies
at law, the right to an injunction, specific performance or other equitable
relief.
(b) In the event it is determined by a court of
competent jurisdiction that USI has breached its obligations to make the
required severance payments hereunder, USI shall immediately pay to Smith (i)
the amount of such payments and all remaining payments, (ii) the benefits and
insurance premiums for coverages required to be provided by USI but not
provided, (iii) interest at a rate of ten percent (10%) per annum from the
original due date on amounts not paid to Smith, and (iv) all reasonable
attorney's fees and costs incurred by Smith in obtaining such a determination.
17. No Waiver. No failure or delay on the part of any party to
this Agreement in exercising any right, power or remedy hereunder shall operate
as a waiver thereof; nor shall any single or partial exercise of any such right,
power or remedy preclude any other or further exercise thereof or the exercise
of any other right, power or remedy hereunder. The remedies herein provided are
cumulative and not exclusive of any remedies provided by law.
18. Notices. Except as expressly set forth in this Agreement,
all notices, requests, demands and other communications provided for hereunder
shall be in writing and mailed or delivered to the applicable party at the
addresses specified below:
If to Smith: at the following address, or at such other address as
shall be designated by Smith in a written notice to USI complying as to delivery
with the terms of this Agreement:
Larry W. Smith
222 West 14th Street, Apt 9E
New York, NY 10011
212-255-1680
With a copy to: Benjamin Raphan, Esq.
Tenzer Greenblatt LLP
The Chrysler Building
405 Lexington Avenue
New York, NY 10174
Direct: 212-885-5511
6
<PAGE>
If to USI: at the following address, or at such other address as shall
be designated by USI in a written notice to Smith complying as to delivery with
the terms of this Agreement:
U.S. Interactive, Inc.
2012 Renaissance Boulevard
King of Prussia, PA 19406
Phone: (610) 313-9700
Fax: (610) 382-8908
Attn: Chief Operating Officer
With a copy to: Lawrence F. Shay, Esquire
Dilworth Paxson LLP
3200 Mellon Bank Center
1735 Market Street
Philadelphia, PA 19103
Phone: (215) 575-7036
Fax: 215-575-7200
All notices, requests, demands and other communications must be by
express overnight courier service, or registered or certified mail return
receipt requested, and shall be considered to be delivered three (3) days after
dispatch.
19. No Transfer of Claim. Smith represents and warrants that
he has not sold, assigned, transferred, conveyed or otherwise disposed of any
claim, demand or cause of action relating to any matter covered by this
Agreement.
20. Successors and Assigns. This Agreement shall inure to the
benefit of USI and its predecessors, successors and assigns and shall be binding
upon Smith and his heirs, executors, and administrators. Smith shall not have
the right to assign any of his rights hereunder or any interest herein nor
delegate any of his duties hereunder.
21. Entire Agreement. This Agreement, and the other agreements
executed and delivered herewith, constitute the entire agreement between the
parties and supersede any prior understandings or agreements concerning the
subject matter hereof.
22. Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Delaware without
giving effect to choice of laws principles.
23. Counterparts. This Agreement may be executed in any number
of counterparts, all of which taken together shall constitute one and the same
instrument, and any of the parties hereto may execute this Agreement by signing
any such counterpart.
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto, intending to be
legally bound hereby, have executed this Agreement under seal on the day and
year set forth below.
WITNESS:
- ---------------------------
By:
-----------------------------
Larry W. Smith
Date: February 26, 1999
--------------------------
U.S. INTERACTIVE, INC.
BY:
-----------------------------
TITLE:
--------------------------
DATE: February 26, 1999
--------------------------
8
<PAGE>
Exhibit A
1. Agency.com
2. Organic
3. Modem Media Poppe Tyson
4. Proxicom
5. Magnet
6. Rare Medium
7. IXL
8. CKS/US Web
9. RazorFish
10. K2
11. Renaissance/Neoglyphics
12. Sapient/Studio Archetype
13. Viant
14. Scient
15. Ogilvy One
16. Dawin Digital
17. Thunder House
18. EDS
19. Perot Systems
20. Cambridge Technology Partners
21. Diamond
22. All entities set forth on Exhibit A-1
23. Any entity which (prior to Smith becoming an employee, partner,
officer, director, agent, lender, consultant, or a 3% or greater
stockholder) results from a merger or other combination involving any
of the foregoing entities, and any entity which (prior to Smith
becoming an employee, partner, officer, director, agent, lender,
consultant, or a 3% or greater stockholder) controls, is controlled by,
or is under common control with, any of the foregoing entities.
9
<PAGE>
Exhibit A-1
<TABLE>
<CAPTION>
<S> <C>
Atlantic Data Services Beacon Application Services Corporation
BISYS Group, The Breakaway Systems (formerly the Counsel group
Cambridge Technology Partners Business Data Services, Inc.
Cognizant Technology Solutions CoreTech Consulting Group, Inc.
Diamond Technology Partners, Inc. CORIO, Inc.
Kenda Systems DARC Development corporation
Registry, Inc., The (Renaissance Worldwide, Inc.) Decision Technologies, Inc.
TIER Corporation Eggrock Partners, LLC.
Whittman-Hart Eliassen Group
Elumen Solutions
Benchmarking Partners Greenbrier & Russel
Born Information Services Group Greystone Solutions, Inc.
Braun Technology Group ICON Solutions
CIBER, Inc. Internet Business Advantage
Clarkston-Potomac Group, Inc. Inbenta
Cohesibe Network Systems, Inc. Keane, Inc.
Collective Technologies Kinderhook Systems
Computer Merchant (The) Lante Corporation
Context Integration, Inc. Logical Design Solutions
Extraprise Mastech Systems Corporation
Fort Point Partners, Inc METRO Information Services
i-Cube Naviant Technology Solutions
Inforte Information Technology NexGen SI, Inc.
Management Information Consulting, Inc. Nims Associates, Inc.
Micro Modeling Associates NobleStar Systems
OneSource Information Services, Inc Pencom Web Works
Paragon Computer Professionals, Inc. PKS Information Systems
Pencom Systems, Inc. Professional Development Group, Inc.
Saleslink PSW Technologies, Inc.
Sapient Corporation SCB Computer Technology, Inc.
Scient Synetics Corporation
SE Technologies Technium, Inc.
Seek Consulting Group Technology Solutions Co. Inc.
Silicon Valley Internet Partners TransTech
SPL (Systems Programming, Ltd.) TVisions, Inc.
Tanning Technology Corporation Unisource Systems, Inc.
Tessera Enterprise Systems, Inc.
The Concours Group Adaptive Consulting Partners LLC
The Revere Group, Inc. Advanced Technology Systems
US Web Alliance Consulting Group
Biant Corporation (Silicon Balley Internet Partners) American Management Systems
Aris Corporation
ACI Corporation Automated Labor (Infolmage)
ADEPT, Inc.
AppNet Systems, Inc.
</TABLE>
10
<PAGE>
Exhibit A-1
(Continued)
<TABLE>
<CAPTION>
<S> <C>
B&M Associates, Inc. Natural Data
Barra Inc. NCI Information Systems, Inc.
Beggs Heidt Enterprise Consulting, Inc. Net Daemons Associates, Inc.
Blackwell Consulting Services NeTegrity
Cambridge Interactive NetGuru systems, Inc.
Circle Strategies, Inc. NetSolbe, Inc.
Computer Management Sciences Network Six
Computer Sciences Corporation - Waltham New Resources Corp.
COMPUTERPEOPLE, Inc. Nexus Consulting Group
Compuware Northeast Consulting Resources
Corporate Information Technologies Online Enbirons, Inc.
Cotelligent Group, Inc Optimum Consulting
C/bridge Internet Solutions Opus Communications
Daou Systems Osprey Systems, Inc.
Data Processing Resources Corporation Pinkerton Computer Consultants, Inc
Database Technologies Corporation Polaris Service, Inc
DataEdge, Inc. Predictive Systems, Inc
Dimension Systems, Inc. Premier Systems Integrators, Inc.
Edgewarter Technology, Inc. Orixucin
EDS Quest Consulting, Inc.
Enterprise Networking Systems, Inc. Rare Medium, Inc.
ERP Technologies Razorfish
Executive Alliance ReadyAbout Interactive
First Consulting Group Research Triangle Consultants, Inc.
Free Range Media ReSOURCE PARTNER, Inc.
Granitar Systems, Inc. Resource Support Associates, inc.
Group Cortex, Inc RMS Technologies
Hall, Kinion Rock Island Group
High Technology Solutions Rwd Technologies, Inc
HSO Business Systems, Inc/ Semaphore
Hurwitz Group, Inc Sigma Systems, Inc.
Immersive Environments Silverline Industries, Inc.
Information Management Resources Snickelways Interactive
INS (international Network Services) Soften Systems
Integral Results, Inc. Sullivan and Cogliano Companies (The)
Integrated Information Systems, Inc Systems Services Corporation
Integrates Software Specialists, Inc. Systems Solutions Group
Integration Associates, Inc. Tangent International Computer Consultants, Inc
Interactive Business Systems, Inc. The Lab
Jack Martin - Independent Consultant The Telluride Group, Inc.
Kanbay Incorporated The Tower Group
LCI Computer Group N>B. US internetworking
Lighthouse Technology Solutions Waterstone Consulting
Matrix Resources Web Design Group, Inc.
Maznet Systems, Inc./ World Research Advisory
Metzler Group
Modus Media
</TABLE>
11
<PAGE>
Exhibit B
The Employee Non-Disclosure, Assignment of Developments,
Non-Solicitation and Non-Competition Agreement executed by Larry W. Smith on
June 28, 1996 is hereby amended as follows:
Section 3 (iii) is hereby deleted in its entirety and replaced with the
following:
(iii) (a) become a partner, officer, director, consultant, agent, lender,
employee or 3% or greater stockholder of any entity set forth below; (b) become
a partner, officer, director, consultant, agent, lender, employee or 3% or
greater stockholder of any of the following entities: Agency.com, Organic, Modem
Media Poppe Tyson, Proxicom, Magnet, Rare Medium, IXL, CKS/US Web, RazorFish,
K2, Renaissance/Neoglyphics, Sapient/Studio Archetype, Viant, Scient, Ogilvy
One, Dawin Digital, Thunder House, EDS, Perot Systems, Cambridge Technology
Partners, Diamond; (c) become a partner, officer, director, consultant, agent,
lender, employee or a 3% or greater stockholder of any entity which,prior to me
becoming an employee, partner, officer, director, agent, lender, consultant, or
a 3% or greater stockholder, results from a merger or other combination
involving any entity in either (a) or (b) above, or any entity which, prior to
me becoming an employee, partner, officer, director, agent, lender, consultant,
or a 3% or greater stockholder, controls, is controlled by, or is under common
control with, any of the entities in (a) or (b) above; or (d) form an entity
which delivers, or as an individual deliver, products or services which are
products or services identified in USI's E-Roadmap development plan.
<TABLE>
<CAPTION>
<S> <C>
Atlantic Data Services Inforte Information Technology
BISYS Group, The Management Information Consulting, Inc.
Cambridge Technology Partners Micro Modeling Associates
Cognizant Technology Solutions OneSource Information Services, Inc
Diamond Technology Partners, Inc. Paragon Computer Professionals, Inc.
Kenda Systems Pencom Systems, Inc.
Registry, Inc., The (Renaissance Worldwide, Inc.) Saleslink
TIER Corporation Sapient Corporation
Whittman-Hart Scient
SE Technologies
Benchmarking Partners Seek Consulting Group
Born Information Services Group Silicon Valley Internet Partners
Braun Technology Group SPL (Systems Programming, Ltd.)
CIBER, Inc. Tanning Technology Corporation
Clarkston-Potomac Group, Inc. Tessera Enterprise Systems, Inc.
Cohesibe Network Systems, Inc. The Concours Group
Collective Technologies The Revere Group, Inc.
Computer Merchant (The) US Web
Context Integration, Inc. Biant Corporation (Silicon Balley Internet Partners)
Extraprise ACI Corporation
Fort Point Partners, Inc
i-Cube
</TABLE>
12
<PAGE>
Exhibit B
(Continued)
<TABLE>
<CAPTION>
<S> <C>
ADEPT, Inc. B&M Associates, Inc.
AppNet Systems, Inc. Barra Inc.
Beacon Application Services Corporation Beggs Heidt Enterprise Consulting, Inc.
Breakaway Systems (formerly the Counsell group Blackwell Consulting Services
Business Data Services, Inc. Cambridge Interactive
CoreTech Consulting Group, Inc. Circle Strategies, Inc.
CORIO, Inc. Computer Management Sciences
DARC Development corporation Computer Sciences Corporation - Waltham
Decision Technologies, Inc. COMPUTERPEOPLE, Inc.
Eggrock Partners, LLC. Compuware
Eliassen Group Corporate Information Technologies
Elumen Solutions Cotelligent Group, Inc
Greenbrier & Russel C/bridge Internet Solutions
Greystone Solutions, Inc. Daou Systems
ICON Solutions Data Processing Resources Corporation
Internet Business Advantage Database Technologies Corporation
Inbenta DataEdge, Inc.
Keane, Inc. Dimension Systems, Inc.
Kinderhook Systems Edgewarter Technology, Inc.
Lante Corporation EDS
Logical Design Solutions Enterprise Networking Systems, Inc.
Mastech Systems Corporation ERP Technologies
METRO Information Services Executive Alliance
Naviant Technology Solutions First Consulting Group
NexGen SI, Inc. Free Range Media
Nims Associates, Inc. Granitar Systems, Inc.
NobleStar Systems Group Cortex, Inc
Pencom Web Works Hall, Kinion
PKS Information Systems High Technology Solutions
Professional Development Group, Inc. HSO Business Systems, Inc/
PSW Technologies, Inc. Hurwitz Group, Inc
SCB Computer Technology, Inc. Immersive Environments
Synetics Corporation Information Management Resources
Technium, Inc. INS (international Network Services)
Technology Solutions Co. Inc. Integral Results, Inc.
TransTech Integrated Information Systems, Inc
TVisions, Inc. Integrates Software Specialists, Inc.
Unisource Systems, Inc. Integration Associates, Inc.
Interactive Business Systems, Inc.
Adaptive Consulting Partners LLC Jack Martin - Independent Consultant
Advanced Technology Systems Kanbay Incorporated
Alliance Consulting Group LCI Computer Group N>B.
American Management Systems Lighthouse Technology Solutions
Aris Corporation Matrix Resources
Automated Labor (Infolmage)
</TABLE>
13
<PAGE>
Exhibit B
(Continued)
<TABLE>
<CAPTION>
<S> <C>
Maznet Systems, Inc./ World Research Advisory
Metzler Group
Modus Media
Natural Data
NCI Information Systems, Inc.
Net Daemons Associates, Inc.
NeTegrity
NetGuru systems, Inc.
NetSolbe, Inc.
Network Six
New Resources Corp.
Nexus Consulting Group
Northeast Consulting Resources
Online Enbirons, Inc.
Optimum Consulting
Opus Communications
Osprey Systems, Inc.
Pinkerton Computer Consultants, Inc
Polaris Service, Inc
Predictive Systems, Inc
Premier Systems Integrators, Inc.
Orixucin
Quest Consulting, Inc.
Rare Medium, Inc.
Razorfish
ReadyAbout Interactive
Research Triangle Consultants, Inc.
ReSOURCE PARTNER, Inc.
Resource Support Associates, inc.
RMS Technologies
Rock Island Group
Rwd Technologies, Inc
Semaphore
Sigma Systems, Inc.
Silverline Industries, Inc.
Snickelways Interactive
Soften Systems
Sullivan and Cogliano Companies (The)
Systems Services Corporation
Systems Solutions Group
Tangent International Computer Consultants, Inc
The Lab
The Telluride Group, Inc.
The Tower Group
US internetworking
Waterstone Consulting
Web Design Group, Inc.
</TABLE>
14
<PAGE>
Exhibit C
Inquiry Script
In reference to Larry W. Smith
Effective February 26, 1999, with the consent and support of the Board of
Directors, Larry resigned his position as Chief Executive Officer of US
Interactive. Larry remains a significant shareholder and will continue to serve
on the Board of Directors to assist in the ongoing success of the company.
Under Larry's leadership, US Interactive has become one of the nation's leading
Internet professional services firms with over 200 employees in 5 offices. His
strategic insights and activities are responsible for the unique and powerful
position as creators of "Electronic Enterprise solutions" supported by a simple
product service portfolio under the branded "E-Roadmap (TM)" development plan
and proprietary "IVL Methodology (TM)."
In 1994, Larry co-founded US Interactive and served as the CEO and President
until July 1998. At that time, concurrent to a merger with Digital Evolution,
Larry assumed the CEO-only title, while Eric Pulier (co-founder) became Chairman
of the Board, and Richard Masterson (co-founder) assumed the President/COO
position.
Larry Smith is an accomplished CEO with a unique blend of business strategy,
creative marketing, and Internet technology knowledge and skills. These
competencies, along with innovative approaches, entrepreneurial enthusiasm and
the ability to squeeze maximum results from limited resources, make him a unique
leader in the dynamic, rapidly changing Internet business arena.
Under his leadership US Interactive completed the following significant
financial events:
o Grew annual revenue over 100% each year from 1994 to 1998.
o Closed three rounds of Venture Capital funding from investors
including Safeguard Scientifics, TL Ventures, and Internet
Capital Group.
o Successfully restructured and repositioned the company
annually to sustain growth, fulfill the needs of Clients, and
profit from the fluid dynamics of the Internet Industry.
o Positioned company for possible IPO.
o Completed 3 M&A events: Web Access acquisition in June 1996,
Mixed Media Works acquisition in June 1997, and merger with
Digital Evolution in July 1998.
Upon request by Larry Smith, the Company, unless otherwise restricted by law or
due to a "quiet period" restriction, through Eric Pulier, Stephen Zarrilli,
Michael Forgash or Robert Keith, will confirm orally that Larry Smith prepared
the Company in Summer 1998 for an IPO including hiring of investment bankers and
drafting of the S-1 document.
15
<PAGE>
Exhibit C
(Continued)
Larry Smith is also highly visible within the Internet Community, with the
following positions and activities among his accomplishments:
o Served on Board of Directors of the Association of Online
Professionals, 1996
o Founding Committee of Interactive Marketing Institute, 1996
o Founding member, and served as Technology Chair, Internet
Advertising Bureau, 1996-97
o Judge, International Advertising Festival, Cannes CyberLions
Awards, June 1998
o Member, National Council of Mayors, Technology Council, 1998
o Member, American Association of Advertising Agencies P&G/Fast
Summit Development Committee, 1998
o Featured in numerous industry publications including Fast
Company, Adweek, Industry Standard, InfoWeek, and other
publications
o Frequent Speaker and Seminar leader at Industry events including
the past 5 Internet World events.
16
<PAGE>
Exhibit D
Property Owned By Smith
Equipment and possessions of Larry W. Smith
Equipment whose ownership is transferred from USI to Larry Smith:
>> Macintosh Powerbook 3400: TY2825A7KM (Office computer, ownership
transferred from USI to Larry W. Smith)
>> Macintosh Powerbook 1400: QF6530BX963 (Home computer, ownership
transferred from USI to Larry W. Smith)
>> Hewlett Packard LaserJet 6MP, #USBB020866 and the interface
attachment, HP Jet Direct EX plus, #S674560108: (Office printer,
transferred from USI to Larry W. Smith)
>> Canon Innova PC, 486DX: 40001254460139 (no value, purchased in
1994 at start of MasterSmith)
>> VCP external harddrive: ZG53407459
Larry Smith's personal possessions currently located and stored at USI/NY
office:
>> Toshiba 19 inch TV
>> Funai VCR
>> Macintosh Powerbook 170: FC22202C705 (LWS owned, started
business with it)
>> Macintosh Plus computer
>> TI 99/4A antique home computer
>> TRS 80 antique home computer
>> Commodore 64 antique home computer
>> Oak Rolltop desk
>> Cherry finished wood desk
>> Antique Victrola
>> Antique Royal typewriter
>> 3 folding chairs
>> 2 Antique wood side chairs
>> Antique wood desk chair
>> 2 Oak file cabinets
>> Standard torchier lamp
>> 2 Antique torchier lamps
>> Plant
>> 4 boxes of miscellaneous files, periodicals, and sundries (no
USI files)
>> Antique mirror
>> Misc. photographs and posters
17
<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
May 18, 1999
<PAGE>
EXHIBIT 23.3
Consent of Independent Certified Public Accountants
To the Board of Directors and Stockholders
Digital Evolution, Inc.
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form S-1 of our report dated August 25, 1998, relating
to the balance sheets of Digital Evolution as of December 31, 1997 and 1996 and
the related statements of operations, stockholders' equity and cash flows for
each of the two years then ended, which are contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO Seidman, LLP
-------------------------------
BDO Seidman, LLP
Los Angeles, California
May 19, 1999
<PAGE>
Exhibit 99.1
[LOGO OF U.S. INTERACTIVE GROUP APPEARS HERE]
, 1999
Dear Safeguard Stockholder:
As you may know, we are undertaking an initial public offering of the
common stock of U.S. Interactive. We are permitting Safeguard Scientifics to use
its Directed Share Subscription Program to offer you the opportunity to buy our
common stock at our initial public offering price. We are offering a total of
_______________ shares of our common stock to Safeguard stockholders under the
program.
Safeguard has previously sent you materials describing in general terms how
the program works. Set forth below is a detailed description of how the program
will work in connection with our offering. Please review this description and
the attached prospectus carefully in deciding whether or not you wish to invest.
Who can subscribe
Only holders of Safeguard common stock as of , 1999
are eligible to participate in the program.
You may not transfer your right to subscribe
Your right to participate may not be transferred except by involuntary
operation of law such as death or certain dissolutions. There will be no trading
market for your right to subscribe.
Number of shares for which you may subscribe
To determine how many shares of our common stock you are eligible to
purchase, divide the number of shares of Safeguard common stock that you owned
as of _________________, 1999 by _____ and round up to the nearest whole number.
For example, if you held between ___ and ___ shares of Safeguard common stock as
of this date, you may subscribe for up to __ shares of our common stock. You
would have to have had at least ___ shares of Safeguard common stock to be
eligible to subscribe for __ shares of our common stock. You may not subscribe
for a fractional share of our common stock.
Minimum Subscription Size
The minimum subscription that we will accept for any account is for shares
of our common stock. Therefore, holders of fewer than shares of Safeguard common
stock as of , 1999 will not be able to purchase our shares under the program.
This limit applies to each of your accounts, not the aggregate of all of your
accounts. If as of , 1999 you held shares of Safeguard common stock in one
account and another shares in a different account, we will not consider you to
be the owner of shares of Safeguard common stock. Since none of your accounts
contained at least shares of Safeguard common stock, you would not be eligible
to subscribe.
<PAGE>
You are under no obligation to subscribe, but if you subscribe for any
shares it must be for at least ______________ shares in each account. For
example, if you held _______________ shares of Safeguard common stock in a
single account as of , 1999 and you choose to purchase our shares under the
program, you may purchase between __________ and ____________ shares.
Subscription Price
The price per share under the program will be the same price that all
investors will pay in our initial public offering. The price per share in the
initial public offering will be determined by negotiations between us and the
underwriters of our offering. The factors that we expect to consider in these
negotiations are described in the attached prospectus under the heading
"Underwriting." We currently anticipate that the offering price will be between
$______ and $_______ per share. We will inform you of the initial public
offering price as described below under "How to Subscribe."
Stock Purchase Agreement with Safeguard Scientifics
We intend to enter into a Stock Purchase Agreement with Safeguard. This
agreement will provide that if all _______________ of our shares offered under
the program are not purchased by Safeguard stockholders, then Safeguard will
purchase the remaining shares at our initial public offering price. Safeguard
will be able to transfer all or part of its obligation to purchase these
remaining shares to third parties.
How to Subscribe
Enclosed with this letter and the attached copy of our preliminary
prospectus is a subscription form. The subscription form specifies the number of
our shares of common stock you may purchase in the program after we determine
the initial offering price. We expect to determine the initial public offering
price in late June to early July 1999, but various factors could hasten or
delay us. We will close the initial public offering and stop accepting
subscription forms four business days after we determine the initial public
offering price.
IN ORDER TO PURCHASE SHARES UNDER THE PROGRAM, YOU MUST ADHERE TO THE
FOLLOWING PROCEDURES:
o Subscription forms and payments will not be accepted until after we have
determined our initial public offering price. Any subscription forms or
payments received before then will be returned to you.
o Time will not permit us to notify you directly of our initial public offering
price and closing date. Instead, Safeguard will take the following actions:
o publicize the offering price and the closing date on Safeguard's Web site
(www.safeguard.com) and through a press release and other news media;
o make every effort to notify each broker, dealer, bank, trust company or
other nominee that holds shares on behalf of Safeguard stockholders of the
offering price and closing date;
o make available an automated investor relations line (888-SFE-1200) on a 24
hour basis; and
o through the Safeguard Web site, provide you with an opportunity to request
e-mail notification (either directly to you or your designated
representative).
You will have to monitor these media to know when to place your order and
deliver payment. Also, if you do not hold your Safeguard shares directly,
you will need to keep in close contact with your broker, bank or other
nominee that holds your Safeguard shares on your behalf since they will need
to process the subscription form for our shares and payment on your behalf.
o We will stop accepting orders under the program at 5:00 p.m. New York City
time on the fourth business day after we determine the initial public
offering price. Subscription forms and payments
2
<PAGE>
that have not been received by ChaseMellon Shareholder Services, L.L.C. by
this deadline will not be honored. For example, if we determine the initial
public offering price on a Thursday, ChaseMellon must receive all orders and
payments by 5:00 p.m. New York City time on the following Wednesday. This
deadline would be extended to the following Thursday if there were any
intervening holidays on which the Nasdaq National Market was closed.
o To place an order for our shares under this program, you will have to take
the following actions:
o If you hold your Safeguard shares in your own name, you must complete
and sign the subscription form and return it with full payment to
ChaseMellon. Your subscription form and payment must be received by
ChaseMellon before 5:00 p.m. New York City time on the fourth business
day after we determine the initial public offering price. We will not
honor any subscription form received by ChaseMellon after that date.
We suggest, for your protection, that you deliver your subscription form
and payment to ChaseMellon by overnight or express mail courier (or by
facsimile transmission if you intend to wire funds) as follows:
By Hand Delivery:
ChaseMellon Shareholder Services, L.L.C.
Reorganization Department
120 Broadway - 13th Floor
New York, NY 10271
By Overnight or Express Mail Courier:
ChaseMellon Shareholder Services, L.L.C.
Reorganization Department
85 Challenger Road
Mail Drop Reorg
Ridgefield Park, NJ 07660
By Facsimile Transmission and Wire Transfer:
ChaseMellon Shareholder Services, L.L.C.
Facsimile Transmission: (201) 329-_______
To confirm fax, call: (201) 296-_______
Wire instructions: Wire to: Mellon Bank, N.A.
ABA #________________
Credit: U.S. Interactive, Inc. Escrow Account
A/C #_________________
Attention: ______________________
Reference: [account number that appears on your
subscription form]
. If you hold your Safeguard shares through a broker, bank, trust company
or other nominee, then after we determine the initial public offering
price, you will have to contact the nominee that holds your Safeguard
shares if you wish to place an order and arrange for payment. WE CAUTION
YOU THAT BROKERS AND OTHER NOMINEES WILL REQUIRE SOME TIME TO PROCESS
SUBSCRIPTION FORMS FROM SAFEGUARD STOCKHOLDERS. THEREFORE, THEY MOST
LIKELY WILL STOP ACCEPTING SUBSCRIPTION FORMS EARLIER THAN THE FOURTH
BUSINESS DAY AFTER WE DETERMINE THE INITIAL PUBLIC OFFERING PRICE.
3
<PAGE>
o You must pay the subscription price by cash, check or money order in
U.S. dollars payable to "ChaseMellon Shareholder Services, L.L.C."
or by wire transmission. Until this offering has closed, your
payment will be held in escrow by ChaseMellon Shareholder Services,
L.L.C.
o We will provide to each broker, dealer, bank, trust company, clearing
corporation and other nominee who holds Safeguard shares for the account
of others copies of the preliminary and final prospectus to provide to
the beneficial owners. Each of those entities will be responsible for
providing you with a copy of the preliminary and final prospectus.
ChaseMellon Shareholder Services will mail the final prospectus to all
record holders of Safeguard common stock as of , 1999.
o Safeguard will decide all questions as to the validity, form and
eligibility of subscriptions (including times of receipt, beneficial
ownership and compliance with minimum exercise provisions). The
acceptance of subscription forms and the subscription price also will be
determined by Safeguard. Alternative, conditional or contingent
subscriptions will not be accepted. Safeguard reserves the absolute
right to reject any subscriptions not properly submitted. In addition,
Safeguard may reject any subscription if the acceptance of the
subscription would be unlawful. Safeguard also may waive any
irregularities or conditions in the subscription for our shares, and
Safeguard's interpretation of the terms and conditions of the program
will be final and binding.
o We are not obligated to give you notification of defects in your
subscription. We will not consider a subscription to be made until all
defects have been cured or waived. If your subscription is rejected,
your payment of the exercise price will be promptly returned by
ChaseMellon.
Cancellation of Initial Public Offering
We may cancel our initial public offering at any time up until the closing.
If the initial public offering is canceled, Safeguard will publicize the
cancellation on its Web site and through a press release and other news media.
The program gives you no rights to purchase shares of our common stock if we
cancel our initial public offering and any funds previously submitted by you
will be returned promptly.
Federal Tax Consequences
We believe that you will not be considered to have received a taxable
distribution of property as a result of your having the opportunity to
participate in this offering. Furthermore, we believe that, if the opportunity
were considered to be a property right, its value would be minimal, because your
opportunity is nontransferable, is of short duration and gives you only the
ability to purchase our common stock under the program at the same price as
other purchasers in our initial public offering. However, the Internal Revenue
Service is not bound by this position, and you are encouraged to consult with
your tax advisors about the federal, state and other tax consequences of the
program.
Stabilization
The underwriters of our initial public offering may engage in certain
transactions that stabilize the price of our common stock. We make no
representation as to the direction or magnitude of any effect that such
transactions may have on the price of our common stock.
Risk Factors
Investing in our common stock involves certain risks which are disclosed on
page of the attached preliminary prospectus.
Certain Restrictions
In managing the program, we and Safeguard will take reasonable steps to
comply with the laws of the different countries in which Safeguard stockholders
live. If compliance is too burdensome in one or more countries,
4
<PAGE>
Safeguard stockholders residing in such countries will not be offered the
opportunity to purchase our shares under the program.
* * *
If you have any questions regarding the Directed Share Subscription Program,
please contact Safeguard's automated investor relations line at (888) SFE-1200.
Please do not call U.S. Interactive with any questions regarding this
program. Only Safeguard's automated investor relations line or representatives
of Safeguard will be able to answer your questions.
Sincerely,
Stephen T. Zarrilli
President and
Chief Executive Officer
5
<PAGE>
Exhibit 99.3
[LOGO OF U.S. INTERACTIVE APPEARS HERE]
Dear Broker:
As you may know, we are undertaking an initial public offering of our shares of
common stock. We are permitting Safeguard Scientifics, Inc. to use its Directed
Share Subscription Program to offer Safeguard stockholders the opportunity to
buy shares of our common stock at the initial public offering price. The price
per share under this program will be the same price that all investors will pay
in our initial public offering.
The right to participate in this program may not be transferred. There will be
no trading market for this subscription right, and there will be no
oversubscription privilege.
If you have any questions regarding the Directed Share Subscription Program,
please call Safeguard's investor relations line at (888) SFE-1200. Please do
---------
not call U.S. Interactive regarding this program. Only Safeguard's ------
- ------------------------------------------------- automated investor relations
line or representatives of Safeguard will be able to provide you with
information regarding this program or answer any questions you may have.
Under this program, each Safeguard stockholder will be eligible to purchase one
share of our common stock for every ____ Safeguard shares owned of record on
_________, 1999. If the number of Safeguard shares owned by a stockholder is not
evenly divisible by ______, the number of shares a Safeguard stockholder is
entitled to purchase will be rounded up to the nearest whole number. You will
have until ________, 1999 to advise ChaseMellon Shareholder Services, L.L.C.,
the agent for this program, of your requirements for rounding purposes. The
minimum subscription we will accept is for ________ shares of our common stock.
Therefore, holders of fewer than _______ Safeguard shares as of _________, 1999
will be unable to purchase our shares under this program. This limit applies to
each account, not the aggregate of all accounts, held by a Safeguard
stockholder. For example, if as of ______, 1999, a stockholder held ______
Safeguard shares in one account and another ______ Safeguard shares in a
different account, the stockholder will not be considered to be the owner of the
minimum number of Safeguard shares required to participate in this program and
will, therefore, not be eligible to subscribe.
<PAGE>
Preliminary prospectuses for distribution to Safeguard stockholders are being
distributed through Corporate Investor Communications, Attention: Processing
Department, 111 Commerce Road, Carlstadt, NJ 07072-2586, telephone number (201)
896-1900. You should provide a copy of the preliminary prospectus to each
Safeguard stockholder on whose behalf you hold shares.
Subscription forms and payment cannot be accepted until after we have determined
our initial public offering price.
Once our initial public offering price has been determined, Safeguard
Scientifics will take the actions outlined in the preliminary prospectus to
publicize the Subscription Price and the date by which you must respond to the
offer that is being made to Safeguard stockholders under this program.
Depository Trust Company has advised Safeguard Scientifics that they will notify
their participants electronically of the initial public offering price and the
expiration date for this program. Corporate Investor Communications will provide
you with final prospectuses for distribution to the Safeguard stockholders who
received a preliminary prospectus.
All subscription forms and payments must be received by ChaseMellon Shareholder
Services, L.L.C. by 5:00 p.m. New York City time on the fourth business day
after we have determined our initial public offering price. In order for your
customers to purchase shares under the program you will have to act promptly and
advise your customers to act promptly.
When you exercise this subscription privilege on behalf of beneficial owners of
common stock through Depository Trust Company's Automated Subscription Offer
Program, you will be required to certify that each beneficial owner for whom you
are subscribing meets the eligibility requirements of this program. If you have
any questions regarding the Directed Share Subscription Program, please call
Safeguard's investor relations line at (888) SFE-1200.
Sincerely,
Stephen T. Zarrilli
President and
Chief Executive Officer
<PAGE>
Exhibit 99.4
- --------------------------- -------------------------------------
Account # Directed Share Subscription Program #
- ---------------------------------------------------
Maximum # of Shares of U.S. Interactive, Inc.
Available for Purchase
- ---------------------------------------------------
Record Date Shares of Safeguard Scientifics, Inc.
SAFEGUARD SCIENTIFICS, INC.
DIRECTED SHARE SUBSCRIPTION PROGRAM
- --------------------------------------------------------------------------------
U.S. INTERACTIVE, INC.
SUBSCRIPTION FORM
The shareholder named below has the right to purchase, pursuant to the terms and
conditions of the Safeguard Scientifics, Inc. Directed Share Subscription
Program, the number of fully paid and non-assessable shares of common stock,
$.001 par value, of U.S. Interactive, Inc. indicated above at a Subscription
Price that will be determined as outlined below. THE DIRECTED SHARE SUBSCRIPTION
PROGRAM WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME ON THE FOURTH BUSINESS DAY
AFTER THE INITIAL PUBLIC OFFERING PRICE IS DETERMINED. As described in the
preliminary prospectus accompanying this Subscription Form, each shareholder may
subscribe for one share of U.S. Interactive common stock for every ___ shares of
Safeguard Scientifics common stock held as of , 1999 in any account, rounded
upwards. The minimum subscription that we will accept is for __ shares of U.S.
Interactive per any individual account. Therefore, holders will not be able to
subscribe with respect to accounts containing fewer than ___ shares of Safeguard
common stock as of , 1999. The right to participate in this program and purchase
shares of U.S. Interactive is nontransferable except involuntarily by operation
of law (e.g. death or certain dissolutions). Should an involuntary transfer
occur by operation of law, please contact ChaseMellon Shareholder Services,
L.L.C., the agent for the program, by telephone at 800-______________ for
appropriate instructions.
The Subscription Price per share under the program will be the same price that
all investors will pay in U.S. Interactive's initial public offering. The price
per share will be determined by negotiations between U.S. Interactive and the
underwriters of the offering. The factors to be considered in these negotiations
are described in the preliminary prospectus accompanying this Subscription Form.
U.S. Interactive currently anticipates that its initial public offering price
will be determined in late June to early July 1999 but various factors could
hasten or delay this determination. Time will not permit U.S. Interactive to
notify you directly of the Subscription Price and the expiration date for this
offering, but Safeguard Scientifics will take the actions described in the
accompanying preliminary prospectus to publicize this information.
No offer to buy securities can be accepted, and no part of the subscription
price can be received, until the initial public offering price has been
determined and the registration statement, of which the preliminary prospectus
accompanying this Subscription Form is a part, has been declared effective. Any
Subscription Forms or payments received before then will be returned to you. All
persons electing to subscribe for shares of U.S. Interactive, Inc. must
complete the Election to Purchase on the reverse side of this Subscription Form
and return the Subscription Form, together with full payment of the Subscription
Price, to ChaseMellon at the addresses on the back of this Subscription Form. If
you do not properly complete and sign this Subscription Form, it may be
rejected. The Subscription Form and full payment of the Subscription Price must
be received by ChaseMellon no later than 5:00 p.m. New York City time on the
fourth business day after the initial public offering price is determined.
ChaseMellon will not honor any subscriptions received after that time and date.
If you do not wish to subscribe for shares, you do not need to return this
Subscription Form. Before completing and returning this Subscription Form, you
are urged to read carefully the preliminary prospectus mailed to you with this
Subscription Form for a more complete explanation of the offering and for
information about U.S. Interactive. If U.S. Interactive cancels the
initial public offering, you will have no rights to purchase shares of
U.S. Interactive and any funds previously submitted by you will be returned.
<PAGE>
You should not return this Subscription Form or deliver any payment until after
U.S. Interactive has determined its initial public offering price. Any
subscription forms or payment received before then will be returned to you. Once
the initial public offering price has been determined, Safeguard Scientifics
will take the actions described in the preliminary prospectus to publicize the
subscription price and the date by which you must respond to the offer that has
been made to you under this program.
If you wish to subscribe for shares at that time, you should complete this
Subscription Form and deliver payment of the subscription price to ChaseMellon.
ChaseMellon must receive the properly completed and signed Subscription Form and
full payment of the Subscription Price by 5:00 p.m. New York City Time, on the
fourth business day after U.S. Interactive determines its initial public
offering price. ChaseMellon will stop accepting Subscription Forms after that
time and date.
We suggest, for your protection, that you deliver the completed Subscription
Form and payment of the subscription price to ChaseMellon Shareholder Services,
L.L.C. by overnight or express mail courier. The addresses for ChaseMellon are
as follows:
By Hand Delivery: By Overnight Delivery/Express Mail Courier
- ----------------- ------------------------------------------
ChaseMellon Shareholder Services, ChaseMellon Shareholder Services,
L.L.C. L.L.C.
Attn: Reorganization Dept. Attn: Reorganization Dept.
120 Broadway, 13th Floor 85 Challenger Road, Mail Drop--Reorg
New York, NY 10271 Ridgefield Park, NJ 07660
If you wish to pay the subscription price by wire transfer, please see the
Facsimile Transmission and Wire Transfer Instructions on page 3 of the letter
accompanying the preliminary prospectus.
- --------------------------------------------------------------------------------
SUBSCRIPTION FORM--ELECTION TO PURCHASE
Subject to the terms and conditions of the Directed Share Subscription Program
described in the preliminary prospectus, receipt of which is hereby
acknowledged, the undersigned hereby elects to purchase shares of common stock
of U.S. Interactive, Inc. as indicated below.
<TABLE>
<CAPTION>
<S> <C>
Number of shares purchased/1/ ____________________(NOTE: __ share minimum required
in each account)/2/
Per Share Subscription Price $___________________
Payment enclosed/3/ $___________________
</TABLE>
/1/ If the amount enclosed is not sufficient to pay the Subscription Price for
all shares that are stated to be purchased, or if the number of shares
being purchased is not specified, the number of shares purchased will be
assumed to be the maximum number that could be purchased upon payment of
such amount. Any amount remaining after such division shall be returned to
the purchaser.
/3/ Any order for less than the minimum purchase requirement will be rejected.
/3/ The Subscription Price must be paid by cash, check or money order in U.S.
<PAGE>
dollars representing "good funds" payable to ChaseMellon Shareholder
Services, L.L.C. The payment enclosed should equal the total shares
purchased multiplied by the per share subscription price.
Shares of common stock of U.S. Interactive, Inc. will be issued promptly
following the closing of the offering. Such shares will be registered in the
same manner set forth on the face of this Subscription Form. If your shares are
held in joint ownership, all joint owners must sign. When signing as attorney,
executor, administrator, trustee or guardian, please give your full title as
such. If signing for a corporation, an authorized officer must sign and provide
title. If signing for a partnership, an authorized partner must sign and
indicate title.
Please provide a telephone number at which you can be reached in the event that
we have questions regarding the information that you have supplied.
Daytime Telephone Number ( ) ____________________________________
Evening Telephone Number ( ) ____________________________________
(IF JOINTLY OWNED, BOTH MUST SIGN)
SIGNATURE(S): ________________________________________
Dated:___________________________, 1999
----------------------------------------
NOTE: The above signature(s) must correspond with the
name(s) as written upon the face of this
Subscription Form in every particular without
alteration.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SUBSTITUTE FORM W-9
DEPARTMENT OF THE TREASURY, INTERNAL REVENUE SERVICE--
PAYER'S REQUEST FOR TAXPAYER IDENTIFICATION NUMBER (TIN) Failure to
complete this form may subject you to 31%
federal income tax withholding.
Part 1: PLEASE PROVIDE YOUR TAXPAYER IDENTIFICATION NUMBER IN THE SPACE
PROVIDED AT RIGHT AND CERTIFY BY SIGNING AND DATING BELOW
TIN__________________________________________________
Social Security or Employer Identification Number
Part 2: Check the box if you are awaiting a TIN [_]
Part 3: CERTIFICATION--UNDER PENALTIES OF PERJURY, I CERTIFY THAT (1) the number
shown on this form is my correct taxpayer identification number (or a TIN has
not issued to me but I have mailed or delivered an application to receive a TIN
or intend to do so in the near future), (2) I am not subject to backup
withholding either because I have not been notified by the Internal Revenue
Service (the "IRS") that I am subject to backup withholding as a result of a
failure to report all interest or dividends or the IRS has notified me that I am
no longer subject to backup withholding, and (3) all other information provided
on this form is true, correct and complete.
Dated:___________________, 1999 SIGNATURE:___________________________________
You must cross out item (2) above if you have been notified by the IRS that you
are currently subject to backup withholding because of underreporting interest
or dividends on your tax return. However, if after being notified by the IRS
that you were subject to backup withholding, you received another notification
from the IRS that you are no longer subject to backup withholding, do not cross
out item (2).
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
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