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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File Number 0-26923
U.S. INTERACTIVE, INC.
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(Exact name of registrant as specified in its charter)
Delaware 23-3316696
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(State or Other Jurisdiction of (I.R.S. Employer)
Incorporation or Organization) (Identification Number)
2012 Renaissance Boulevard,
King of Prussia, Pennsylvania 19406
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(Address of principal executive offices) (Zip Code)
(610) 313-9700
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 26,070,451 shares of
common stock, $.001 par value per share, as of October 31, 2000.
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U.S. Interactive, Inc. and Subsidiaries
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements Page No.
Consolidated Balance Sheets as of September 30, 2000 (Unaudited) and December 31, 1999...1
Consolidated Statements of Operations
for the three and nine months ended September 30, 2000 and 1999 (Unaudited)..............2
Consolidated Statements of Cash Flows
for the nine months ended September 30, 2000 and 1999 (Unaudited)........................3
Notes to Condensed Consolidated Financial Statements.....................................4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....9
Item 3. Quantitative and Qualitative Disclosures about Market Risk..............................15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................16
Item 2. Changes in Securities and Use of Proceeds...............................................17
Item 6. Exhibits and Reports on Form 8-K........................................................17
SIGNATURES..............................................................................18
</TABLE>
i
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- -------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ...................................................... $ 13,531 $ 34,130
Accounts receivable (net of allowance of $2,975 in 2000 and $75 in 1999) ....... 19,937 12,274
Fees and expenditures in excess of billings .................................... 1,715 353
Prepaid expenses and other current assets ...................................... 4,394 2,383
--------- ---------
Total current assets ....................................................... 39,577 49,140
Furniture and equipment, net ...................................................... 18,294 5,451
Goodwill and other intangibles, net ............................................... 326,613 5,988
Other assets ...................................................................... 2,225 1,699
--------- ---------
Total Assets ............................................................... $ 386,709 $ 62,278
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ............................................................... $ 3,480 $ 2,641
Accrued expenses and other liabilities ......................................... 18,264 5,164
Notes payable-shareholders ..................................................... 80,000 --
Current portion of long-term debt .............................................. 1,885 977
Billings in excess of fees and expenditures .................................... 668 1,854
Deferred revenue ............................................................... 404 --
--------- ---------
Total current liabilities .................................................. 104,701 10,636
Long-term debt, net of current portion ............................................ 2,768 1,666
--------- ---------
Total Liabilities .......................................................... 107,469 12,302
Stockholders' Equity
Preferred stock, $.001 par value, 15,000,000 shares authorized,
none issued or outstanding ................................................... -- --
Common stock $.001 par value, 90,000,000 shares authorized,
27,166,447 shares issued in 2000 (unaudited), 20,551,192 shares issued in 1999 27 21
Additional paid-in capital ........................................................ 391,318 80,581
Deferred stock compensation ....................................................... (3,199) (831)
Treasury stock, 1,117,209 and 1,062,709 shares, at cost ........................... (5,319) (5,055)
Accumulated translation adjustment ................................................ (14) --
Accumulated deficit ............................................................... (103,573) (24,740)
--------- ---------
Total Stockholders' Equity ................................................ 279,240 49,976
--------- ---------
Total Liabilities and Stockholders' Equity ................................ $ 386,709 $ 62,278
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
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U.S. INTERACTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
2000 1999 2000 1999
-------------- -------------- -------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue ...................................... $ 17,840 $ 9,887 $ 65,907 $ 23,650
Operating costs and expenses:
Project personnel and related expenses .. 12,902 5,521 35,290 12,819
Management and administrative ........... 24,238 5,007 42,663 11,601
Research and development ................ 819 -- 1,804 --
Selling and marketing ............. 3,193 1,013 9,272 2,464
Depreciation and amortization ........... 20,813 2,680 49,852 7,737
Restructuring charge..................... 1,598 -- 1,598 --
--------- --------- --------- ---------
Total operating expenses .............. 63,563 14,221 140,479 34,621
--------- --------- --------- ---------
Operating loss ............................... (45,723) (4,334) (74,572) (10,971)
Other income (expense):
Interest expense ................... (1,418) (74) (3,310) (314)
Interest income ................. 343 289 1,333 347
--------- --------- --------- ---------
Loss before extraordinary item ............... (46,798) (4,119) (76,549) (10,938)
Extraordinary item - loss from
early extinguishment of debt............... -- -- (2,284) --
--------- --------- --------- ---------
Net loss ..................................... (46,798) (4,119) (78,833) (10,938)
Accretion of mandatorily redeemable
preferred stock to redemption value -- (168) -- (916)
--------- --------- --------- ---------
Net loss attributable to common stockholders $ (46,798) $ (4,287) (78,833) $ (11,854)
========= ========= ========= =========
Basic and diluted loss per share before
extraordinary item and before accretion of
mandatorily redeemable preferred stock
to redemption value $ (1.81) (.29) $ (3.33) $ (1.05)
Basic and diluted loss per share for
extraordinary item -- -- (.10) --
--------- --------- --------- ---------
Basic and diluted loss per share before
accretion of mandatorily redeemable
preferred stock to redemption value ....... $ (1.81) (.29) $ (3.43) $ (1.05)
========= ========= ========= =========
Basic and diluted loss per share attributable
to common stockholders..................... $ (1.81) (.30) $ (3.43) $ (1.14)
========= ========= ========= =========
Weighted average shares outstanding used in
the loss per common share calculation:
Basic and diluted ......................... 25,860 14,414 22,987 10,447
</TABLE>
See accompanying notes to consolidated financial statements.
2
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U.S. INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
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<CAPTION>
Nine Months Ended September 30,
2000 1999
---------------- -------------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss .................................................................. $(78,833) $(10,938)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of deferred stock compensation and
other non-cash charges ........................................... 2,379 473
Depreciation and amortization ....................................... 49,852 7,737
Changes in operating assets and liabilities, net of effects of
acquisitions:
Increase in accounts receivable .................................. (324) (6,777)
Decrease (increase) in fees and expenditures in excess of billings 260 (417)
Decrease (increase) in prepaid expenses and other current assets . 834 (339)
Increase in accounts payable and accrued expenses ................ 7,787 5,606
Increase (decrease) in billings in excess of fees and expenditures (1,187) 1,320
-------- --------
Net cash used in operating activities ..................................... (19,232) (3,335)
-------- --------
Cash flows from investing activities:
Purchase of furniture and equipment ................................. (14,000) (2,840)
Acquisition, net of cash acquired ................................... (28,081) --
Other ............................................................... (110) (24)
-------- --------
Net cash used in investing activities ..................................... (42,191) (2,864)
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock .......................... 41,731 44,509
Net proceeds from equipment financing ............................... 1,449 387
Net repayments under bank line of credit ............................ (3,653) (1,700)
Net proceeds from the exercise of stock options ..................... 1,371 194
Payments to acquire treasury stock .................................. (88) --
-------- --------
Net cash provided by financing activities ................................. 40,810 43,390
-------- --------
Effect of exchange rate differences on cash ............................ 14 --
-------- --------
Net (decrease) increase in cash and cash equivalents ................... (20,599) 37,191
Cash and cash equivalents, beginning of period ......................... 34,130 3,698
-------- --------
Cash and cash equivalents, end of period ............................... $ 13,531 $ 40,889
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest ................................................. $ 477 $ 176
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Interim Financial Information
The interim condensed consolidated financial statements of U.S.
Interactive, Inc. (the Company) for the three and nine months ended September
30, 2000 and 1999, included herein have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations relating to interim financial statements. These unaudited
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto as of December 31, 1999
included in the Company's Form 10-K. In the opinion of management, the
accompanying unaudited interim consolidated financial statements reflect all
adjustments, consisting only of normal recurring adjustments and restructuring
charges, necessary to present fairly the financial position of the Company at
September 30, 2000, and the results of its operations for the three and nine
months ended September 30, 2000 and 1999, and the results of its cash flows for
the nine months ended September 30, 2000 and 1999.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The Company is an Internet professional services firm focused on
providing e2e Solutionssm to Global 2000 organizations. e2e Solutions utilize
Internet, wireless and broadband technologies to enable organizations to fully
leverage their information resources to effectively communicate, share knowledge
and conduct business transactions with key constituencies such as employees,
customers, suppliers and partners. When developing our solutions, we draw upon
our expertise in Internet strategy consulting, application development, security
and enterprise application integration.
At November 17, 2000 the Company had approximately $8.6 million in cash
and cash equivalents, of which $3.0 million has been reserved for payment of the
delinquent taxes owed by its German subsidiary which was acquired from Soft
Plus. The Company's ability to meet its obligations in the ordinary course of
business is dependent upon its ability to establish profitable operations or
raise additional capital through public or private equity financing, bank
financing or other sources of capital. Management believes that its current
funds combined with other available sources of funding may be sufficient to
enable the Company to meet certain of its planned expenditures through December
31, 2000. The Company may require additional capital to finance its future
operations beyond 2000. The Company is in discussions with its creditors
including unsecured vendors, landlords and equipment financing companies
in order to reach mutually agreeable resolutions to amounts outstanding.
The Company has begun a restructuring of the business during the third
quarter of fiscal 2000 to focus its efforts on its core competencies and target
markets and to reduce its operating expenses. During the third quarter of fiscal
2000, the Company began and is continuing to reduce its operating expenses
through a series of general, administrative, and other cost reductions,
including reductions in workforce and the closure of certain facilities in the
near future. The Company also intends to pursue restructuring of certain of its
obligations and recently entered into binding letters of intent to restructure
the $80 million note owed to former shareholders of Soft Plus, Inc. with five
former Soft Plus shareholders, including our President, director, and recently
appointed Chief Executive Officer, Mohan Uttarwar.
There can be no assurance that the Company will be able to complete the
restructuring and generate sufficient cash flow to continue its operations. The
accompanying financial statements have been prepared on the basis that the
Company is a going concern and do not include any adjustments that might result
from the outcome of this uncertainty.
The Company may seek to obtain additional capital through the sale of
equity or debt securities, through additional credit facilities or otherwise.
Sales of additional equity or convertible debt securities would result in
additional dilution to the Company's stockholders. The Company may need to raise
additional funds sooner in order to support more rapid expansion, develop new or
enhanced services and products, respond to competitive pressures, acquire
complementary businesses or technologies or take advantage of unanticipated
opportunities. Future liquidity and capital requirements will depend on numerous
factors, including the success of existing and new service offerings and
competing technological and market developments. There are no assurances that
the Company will be able to obtain additional capital. Additional financing, if
available, may not be available on satisfactory terms.
Principles of Consolidation
The accompanying consolidated financial statements include the
financial statements of the Company and its four wholly owned subsidiaries, Web
Access, Inc., U.S. Interactive Corp. (Delaware), The Fourth Room, Ltd. and U.S.
Interactive (Canada), Inc. All significant intercompany balances and
transactions have been eliminated in consolidation.
4
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Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of any potential contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Historical Net Loss Per Share
The Company computes earnings per share in accordance with SFAS No.
128, "Earnings per Share" ("SFAS No. 128"). Basic earnings per share is computed
using the weighted average number of common shares outstanding during the
period. Diluted earnings per share is computed using the weighted-average number
of common and common equivalent shares outstanding during the period. For all
loss periods, the effect of common equivalent shares were excluded from the
computation as their effect is anti-dilutive
New Accounting Pronouncements
Financial Accounting Standards Board Interpretation "FIN" No. 44,
"Accounting for Certain Transactions Involving Stock Compensation," an
interpretation of Accounting Principles Board Opinion No. 25, is effective for
financial statements beginning after July 1, 2000. The Company does not believe
FIN No. 44 will have a significant impact on its financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements,
as amended, which is effective no later than the fourth quarter of fiscal 2000.
This accounting pronouncement did not have a material impact on the Company's
results of operations, financial position and cash flows.
2. ACQUISITIONS
In March 1999, the Company acquired certain assets and assumed certain
liabilities of InVenGen LLC, a regional Internet professional service firm, in
exchange for 584,800 shares of the Company's common stock having an estimated
fair market value of $2,924,000 at the time of the transaction. The acquisition
was accounted for using the purchase method of accounting. Accordingly, a
portion of the purchase price was allocated to the net assets acquired and
liabilities assumed. The balance of the purchase price was recorded as goodwill
and is being amortized over two years.
The Company also issued 275,200 shares of restricted common stock in
connection with the transaction. The former employees of InVenGen LLC who became
employees of the Company are required to be employed by the Company during the
two-year period following closing in order for the restricted shares to be
released. If an employee leaves the Company during the two-year period all
unvested shares for such employee are forfeited. The Company recorded $1,376,000
of deferred stock compensation in connection with these restricted shares that
is being amortized over the two-year vesting period. As of September 30, 2000,
35,318 shares have been forfeited. The historical results of operations of
InVenGen LLC are not material to the Company.
On March 8, 2000, the Company acquired by merger (the Merger) Soft
Plus, Inc. (Soft Plus), a privately-held e-solutions company. The Company paid
to the Soft Plus shareholders 3.4 million shares of the Company's common stock
and 1.4 million options to acquire shares of the Company's common stock with an
estimated combined fair value of $262 million, $20 million in cash paid at
closing and an unsecured $80 million note bearing interest at 6.2% due to the
selling shareholders to be paid March 8, 2001. The Merger has been accounted for
using the purchase method of accounting. Accordingly, the purchase price has
been allocated to the fair value of the net assets acquired and liabilities
assumed. The balance of the purchase price has been allocated to goodwill and
other intangible assets and is being amortized over their estimated useful lives
of approximately five years (note 9).
On July 25, 2000, the Company acquired The Fourth Room Ltd. a
London-based strategic marketing and brand consulting firm. The Company paid to
The Fourth Room Ltd. shareholders 382,802 shares of the Company's common stock,
with an estimated fair value of $5.7 million, and $600,000 in cash paid at
closing. In addition the Company issued 50,000 options to acquire shares of the
Company's common stock to certain employees of The Fourth Room Ltd. who
continued with the Company. The acquisition was accounted for using the purchase
method of accounting. Accordingly, a portion of the purchase price was allocated
to net assets acquired and liabilities assumed. The balance of the purchase
price was recorded as goodwill and is being amortized over five years. The
historical results of operations of The Fourth Room Ltd. are not material to the
Company (note 9).
5
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U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table reflects unaudited pro forma combined results of
operations of the Company and Soft Plus on the basis that the acquisition had
taken place at the beginning of 1999 (in thousands, except per share data).
<TABLE>
<CAPTION>
Three Months Ending Nine Months Ending
September 30, September 30,
1999 1999 2000
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<S> <C> <C> <C>
Revenue ........................................... $ 16,273 $ 40,957 $ 72,407
Net loss attributable to common stockholders ...... (24,233) (70,903) (98,190)
Basic and diluted loss per common share ........... $ (1.36) $ (5.12)$ (4.13)
</TABLE>
In management's opinion, the unaudited pro forma combined results of
operations are not indicative of the actual results that would have occurred had
the acquisition been consummated at the beginning of 1999 or of future
operations of the combined companies under the ownership and management of the
Company.
3. REVOLVING CREDIT FACILITY
In March 2000, the Company entered into a revolving credit facility
with a commercial bank which provides for maximum borrowings of $15 million.
Interest is charged at the bank's prime lending rate plus 0.50%. On September
30, 2000 there were no outstanding borrowings under the line. The Company has
$517,000 outstanding under letters of credit arrangements for various facility
leases of which $436,000 will expire on November 24, 2000. Prior to expiration,
the Company plans to post cash collateral so as to extend the $436,000 letter of
credit. The two remaining letters of credit arrangements pertain to leased
facilities that the Company will no longer occupy pursuant to its restructuring
plan and as such will be addressed as part of the termination of such leases.
The line is collateralized by substantially all of the Company's assets and
expires on December 7, 2000 at which time any amounts outstanding, including any
letters of credit, will become due and payable. The Company has been informed
that the line will not be renewed.
During the three months ended September 30, 2000, the Company was in
violation of all financial performance loan covenants (note 9).
4. LITIGATION
The Company is a party to legal proceedings and claims.
On April 7, 2000, First Albany Corporation (FAC) filed a complaint
against U.S. Interactive, Inc., Soft Plus and U.S. Interactive Corp. (Delaware),
our wholly-owned subsidiary into which Soft Plus merged, in the U.S. District
Court, Northern District of California, San Jose Division (Case No. C-0020383),
alleging that Soft Plus had breached an agreement dated November 29, 1999 (the
Engagement Agreement) between Soft Plus and FAC. FAC alleges that the defendants
breached their obligations under the Engagement Agreement by failing to pay
First Albany fees in excess of $6.1 million. FAC has requested that the court
require the defendants to pay these fees, with interest, together with FAC's
costs and expenses. The adverse resolution of this matter could have a material
adverse effect on our business, operating results, financial condition and cash
flows.
<PAGE>
On April 11, 2000, five former shareholders of Soft Plus (the Former
Shareholders) filed a complaint against U.S. Interactive, Inc., Soft Plus, USIC,
Mohan Uttarwar, Vijay Uttarwar, Vinay Deshpande, O.P. Srinivasan and Does 1-25,
in the Superior Court of California, County of Santa Clara (case number
CV789065). The plaintiffs filed a second amended complaint on or about August
31, 2000, which alleges, among other things, that the Former Shareholders
requested but were improperly denied inspection of some of the corporate records
of Soft Plus in connection with evaluating the Merger and whether to exercise
their dissenters' rights. The Former Shareholders request that the court compel
the defendants to produce for the Former Shareholders these corporate records
and materials for inspection. The second amended complaint also alleges that
some transactions involving or for the benefit of the Principal Shareholders or
their relatives were improper, including the issuance of common stock and
preferred stock of Soft Plus and options to purchase common stock of Soft Plus.
The Former Shareholders allege the Principal Shareholders breached their
fiduciary duty to the Former Shareholders and seek damages in excess of $5.0
million. The Former Shareholders also request that the court declare that the
time for the Former Shareholders to assert their dissenters' rights in
connection with the merger has not expired because they allege that the notice
sent to them which triggered those rights was defective under California law. In
addition to the damages noted above, the Former Shareholders request attorneys'
fees, compensatory and punitive damages, interest and costs in its possession,
as it deemed appropriate. One of the Former Shareholders has also alleged that
Mr. Deshpande made material misrepresentations to him in connection with and
offer of employment and employee stock options. On this claim the Former
Shareholder is seeking damages in excess of $1.0 million.
6
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We have notified counsel to Soft Plus that the Former Shareholders have
claimed that the notice of dissenter's rights prepared by them was defective and
that they issued on opinion stating that all Soft Plus stock had been validly
issued and fully paid, and that the Company intends to seek indemnification from
them for any damages arising therefrom in the event that the Court determines
that the notice was defective or the Soft Plus stock was not properly issued.
The Company notified representatives of the Principal Shareholders
that, in accordance with the terms of the Merger, the Company intended to seek
indemnification from them for any costs or liabilities arising from the pending
litigation, including asserting its right to retain shares of our common stock
escrowed in the Merger or to reduce payments we are to make under the $80
million Note. Based on subsequent discussions among the Principal Shareholders,
the Company and USIC, the Principal Shareholders, the Company and USIC entered
into an agreement under which the parties would reserve all indemnification
rights which the Principal Shareholders may have against the Company and USIC
under the Soft Plus merger agreement. Subsequent to entering into the foregoing
agreement, in early November 2000 the Company entered into binding letters of
intent with five former shareholders of Soft Plus to restructure the $80 million
Note. Under the terms of the letters of intent, all of the rights which the
Company has to indemnification under the Soft Plus merger agreement would be
waived if the Note is restructured. The adverse resolution of this matter could
have a material adverse effect on our business, operating results, financial
condition and cash flows.
On September 22, 2000, the Company was served with a Complaint filed in
the Pennsylvania Court of Common Pleas for Chester County by Talentpoint
Technologies Inc. (formerly known as Raymond Karsan Associates). The Complaint
alleges that the Company breached five agreements entered between October 4,
1999 and December 21, 1999 for employee searches and seeks damages of
$972,603.70. U.S. Interactive, Inc. is evaluating the claim of Talentpoint
Technologies, Inc. We are presently unable to offer any estimate of the
likelihood that U.S. Interactive, Inc. will prevail in connection with
litigation that might arise from the claims of Talentpoint Technologies, Inc.
We are involved from time to time in disputes and other litigation in
the ordinary course of business. We do not believe that the outcome of any
pending disputes or litigation (including matters we have previously reported)
will have a material adverse effect on our business, operating results,
financial condition and cash flows. However, the ultimate outcome of these
matters, as with litigation generally, is inherently uncertain and it is
possible that some of these matters may be resolved adversely to us. The adverse
resolution of any one or more of these matters could have a material adverse
effect on our business, operating results, financial condition and cash flows.
5. EXTRAORDINARY ITEM
On March 21, 2000, the Company repaid all of the outstanding debt
acquired in the Soft Plus Merger (note 2). The early extinguishment of this debt
resulted in an extraordinary charge of $2.3 million that consisted of $1.8
million of deferred financing costs and a $500,000 early termination fee.
6. PUBLIC OFFERING
In April 2000, the Company completed a public offering of securities
and issued a total of 2,274,567 shares of common stock at $19.63 per share. An
additional 225,433 shares were sold by existing stockholders at $19.63 per
share. Proceeds to the Company from its public offering net of underwriting
discounts and costs of the offering were approximately $41.7 million. The
Company used a total of $6.0 million of the net proceeds to repay all debt then
outstanding under its line of credit (note 3).
7. RELATED PARTY TRANSACTIONS
The Company and NetSmart, Inc. (formerly known as Chromazone, LLC) and
Exist Corporation (formerly known as Juggernaut Partners, LLC) are related
parties because a director and the former Chairman of the Company holds an
ownership interest in the Company, NetSmart, Inc. and Exist Corporation and
another director of the Company holds an ownership interest in the Company and
Exist Corporation. The Company provided professional services to NetSmart, Inc.
and Exist Corporation during the three and nine months ended September 30, 2000
and 1999. The price of these services were negotiated at an arm's length basis
and amounted to $0 million for Exist Corporation for the three and nine months
ended September 30, 2000, and $0 million and $4.5 million for NetSmart, Inc. for
the three and nine months ended September 30, 2000, respectively, and $800,000
and $3.4 million for Exist Corporation for the three and nine months ended
September 30, 1999, respectively, and $1.7 million and $3.1 million for
NetSmart, Inc. for the three and nine months ended September 30, 1999,
respectively. There are no amounts due for these services at September 30, 2000
as a result of the Company's decision to write off approximately $3.9 million
for NetSmart, Inc. and approximately $1.1 million for Exist Corporation during
the three months ended September 30, 2000, as the Company has deemed these
amounts to be uncollectible as the respective companies experienced financial
difficulties and informed the Company that they do not have the wherewithal to
pay these amounts. Accounts receivable from these services at December 31, 1999
was $3.5 million.
7
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8. RESTRUCTURING CHARGES
During the quarter ended September 30, 2000 the Company recorded a
restructuring charge of $1.6 million. This amount represents $1.0 million
related to severance costs in connection with the Company's decision to
terminate 125 employees, substantially all of which was paid during the quarter
ended September 30, 2000, and $600,000 related to severance costs in connection
with the Company's former Chief Executive Officer which is scheduled to be paid
out over an eighteen month period.
9. SUBSEQUENT EVENTS
Restructuring charge:
On November 8, 2000, the Company announced a plan to reduce overall
operating expenses by further reducing its current workforce by approximately
200 positions, and by moving its' corporate headquarters from King of Prussia,
PA to its offices in Cupertino, CA and closing certain facilities. These
activities are expected to be completed no later than March 31, 2001. The
restructuring charge will primarily relate to the termination of leased
facilities and severance packages for the terminated employees.
In addition, during the quarter ending December 31, 2000, the Company
will continue to evaluate its business strategy in connection with its
restructuring.
Restructuring of $80 million Note:
On November 8, 2000, the Company announced it had entered into binding
letters of intent with five former shareholders of Soft Plus to restructure a
majority of the $80 million note (the Note) owed to the former Soft Plus
shareholders. The five shareholders, which include Mohan Uttarwar, our
President, Chief Executive Officer and director, hold approximately 74% of the
Note. Mr. Uttarwar holds approximately 29% of the Note. The closing on the Note
restructuring is subject to certain conditions, including, among others,
approval of the Company's stockholders of the issuance of the Company's common
stock upon conversion or satisfaction of the convertible Notes, consent of
holders of at least 90% of the principal amount of the Note, effectiveness of a
registration statement covering the shares of common stock issuable under the
restructured Note, receipt of a fairness opinion and retention of Mohan Uttarwar
as CEO, subject to termination only upon a 2/3 vote of the Board of Directors.
The binding letters of intent terminate on March 7, 2001, if not terminated
earlier. The Company anticipates closing on the restructuring of the Note during
the first quarter of 2001.
The Fourth Room Ltd.:
During the quarter ending December 31, 2000, the Company entered into
negotiations to sell The Fourth Room Ltd. back to its founders (note 2). If the
transaction closes on the terms presently under discussion, the Company
anticipates an approximate $6 million loss on this transaction that will be
recorded during the quarter ended December 31, 2000.
Revolving Credit Facility:
In November, 2000 the Company was notified by its commercial bank that
its revolving credit facility would expire on December 7, 2000. There are no
outstanding borrowings under the line. The Company has $517,000 outstanding
under three letters of credit arrangements for various facility leases of which
$436,000 will expire November 24, 2000. Prior to expiration, the Company plans
to post cash collateral so as to extend the $436,000 letter of credit. The two
remaining letters of credit arrangements pertain to leased facilities that the
Company will no longer occupy pursuant to its restructuring plan and as such
will be addressed as part of the terminatiin of such leases.
Equipment and Facility Leases:
The Company is currently in default under certain of its equipment,
furniture and facility leases. Full payment under certain leases of
approximately $1.1 million has been demanded by the lending institution and the
Company is currently negotiating payment terms with the lending institution. In
addition, the Company is in discussions with its various landlords regarding
defaults under its facility leases.
German Taxes:
The Company has been investigating and has recently determined that its
German subsidiary which was acquired through the merger with Soft Plus, was
delinquent in collecting and paying employee income taxes and social security
taxes for the 1998, 1999 and 2000 fiscal years. The Company is currently working
with the German tax authorities to ensure that full payment and total compliance
is achieved. The Company expects to make a payment between $3.0 million and $4.0
million in the quarter ending December 31, 2000.
Stay Bonuses:
In connection with the Company's plans to move its corporate
headquarters to Cupertino, California, the Company has offered "stay bonuses" to
approximately thirty employees located in its King of Prussia, PA facility to
assist in the transition. The total amount of the "stay bonus" will be
approximately $1.5 million and will be expensed over the period of December 1,
2000 through February 28, 2001.
8
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U.S. INTERACTIVE, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of U.S. Interactive, Inc. should be read in conjunction with the
unaudited condensed consolidated financial statements and notes thereto included
elsewhere in this report. This Quarterly Report on Form 10-Q contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 1E of the Securities Exchange Act of 1934,
as amended. These forward-looking statements involve risks and uncertainties,
and actual results could be significantly different than those discussed in this
Quarterly Report on Form 10-Q. These forward-looking statements include
statements about the following:
o implementing our new business strategy
o managing our costs
o our business strategies and other statements contained herein that
are not historical facts.
When used in this Report, the words "anticipate," "believe,"
"estimate," "expect," "seek," "intend," "may" and similar expressions are
generally intended to identify forward-looking statements. There are important
factors that could cause actual results to differ materially from those
expressed or implied by such forward-looking statements including: changes in
general economic and business conditions and those in the Internet professional
services market in particular; changes in Internet-related technologies; actions
of competitors; the extent to which we are able to expand our business into new
markets; our inability to effectively manage growth (including growth through
acquisitions), including problems which may arise in integrating acquired
businesses into the Company's operations and in achieving satisfactory operating
results from the acquired businesses; the level of demand for our services; our
inability to successfully implement the recent restructuring of our business
strategy; the inability of our recently restructured senior management team to
work together efficiently; our inability to successfully manage and operate our
business in light of the existing and planned reductions in operating expenses;
our inability to establish profitable operations or raise additional capital in
the near future; our inability to obtain financing when required including funds
required to repay the $80 million note issued to former Soft Plus shareholders
in the event we are unable to close on the restructuring of that note, or, if
the note is restructured, to pay the portion of the note held by holders who do
not consent to the restructuring; our inability to restructure our debt
obligations; and other factors discussed under the caption "Risk Factors" in our
prospectus dated April 12, 2000.
Recent Developments
As previously reported on Interim Report on Form 8-K filed with the
Securities and Exchange Commission on November 13, 2000, the Company has entered
into binding letters of intent with five former shareholders of Soft Plus, Inc.,
including our director and President and recently appointed Chief Executive
Officer, Mohan Uttarwar, to restructure a majority of the $80 million note due
March 8, 2001 and owed to certain former shareholders of Soft Plus, Inc. into
convertible seven year notes to be issued to each of the $80 million note
holders who consents to the restructuring in proportion to their interests in
the $80 million note. The five former shareholders of Soft Plus, Inc. hold
approximately 74% of the interests in the $80 million note. Mr. Mohan Uttarwar
holds approximately 29%. Any portion of the $80 million note which is not
restructured will be due on March 8, 2001. Closing on the restructuring is
subject to the satisfaction of certain conditions, including, among others, the
approval of the stockholders of US Interactive to the issuance of up to
24,000,000 shares of the Company's common stock upon conversion or satisfaction
of the restructured notes and the consent of the holders of 90% or more of the
$80 million note. Upon closing of the restructuring, so long as 51% of the
restructured notes remain outstanding, the Board of Directors has agreed to
nominate and recommend for appointment to the Board three designees selected by
the restructured note holders, one of which shall be our current director, Mohan
Uttarwar, so long as he remains a member of the Board. The Board intends to fill
two of the three Board vacancies which currently exist with the resignation of
E. Michael Forgash in October, 2000 with those designees. The Company
anticipates closing on the restructuring during the first quarter of fiscal
2001. In addition, our director, William C. Jennings, has succeeded our
director, Eric Pulier, as Chairman of the Board.
Our common stock is currently traded on the Nasdaq National Stock
Market. In October, the Nasdaq National Market notified the Company that it no
longer met the market capitalization or total revenue requirements for continued
listing on the Nasdaq National Market, that it was reviewing the Company's
eligibility for continued listing on the Nasdaq National Market, and requested
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<PAGE>
that the Company provide a specific plan to achieve and sustain compliance no
later than October 23, 2000. The Company submitted its plan and was subsequently
notified that it further failed to qualify as it no longer met the minimum bid
price for continued listing on the Nasdaq National Market. On November 1, 2000,
the Nasdaq National Market notified the Company that its plan was rejected and
that the Company's securities would be delisted from the Nasdaq National Market
on November 10, 2000. The Company has appealed this determination and a hearing
has been scheduled for December 8, 2000. If the Nasdaq National Market fails to
grant the Company further time to regain compliance with the requirements for
listing on the Nasdaq National Market, the Company's common stock could be
delisted from the Nasdaq National Market at any time on or after December 8,
2000. The Company's common stock is not currently eligible for listing on the
Nasdaq SmallCap Market. Nasdaq has informed us that we may be eligible for
trading on, and we will seek to have our common stock traded on, the OTC
Bulletin Board. However, there is no assurance that, if eligible, we will be
accepted or, if accepted, that existing market makers or any other
broker-dealers would continue to make a market in the Company's common stock on
the OTC Bulletin Board. Among other things, our Company could receive less media
coverage and have fewer security analysts. The liquidity of our common stock
will likely be significantly impaired and the price of our common stock may be
significantly adversely affected. If our common stock is delisted, then trading
in our common stock will be subject to rules under the Securities Exchange Act
of 1934 that require additional disclosure by broker-dealers in connection with
any trades involving a stock defined as "penny stock." In general, a penny stock
is an equity security that is not listed on a national exchange and has a market
price of less than $5.00 per share, subject to some exceptions. For these
transactions, the broker-dealer also must make a special suitability
determination for the purchaser and have received the purchaser's written
consent to the transaction prior to sale. The additional burdens imposed on
broker-dealers by these requirements may discourage them from effecting
transactions in our common stock, which could severely limit the liquidity of
our common stock.
During the quarter ended December 31, 2000, the Company entered into
negotiations to sell The Fourth Room Ltd. back to its founders. If the
transaction closes on the terms presently under discussion, the Company
anticipates an approximate $6 million loss on this transaction that will be
recorded during the quarter ended December 31, 2000.
The Company is currently in default under certain of its equipment,
furniture and facility leases. Full payment under certain leases of
approximately $1.1 million has been demanded by the lending institution and the
Company is currently negotiating payment terms with the lending institution. In
addition, the Company is in discussions with its various landlords regarding
defaults under its facility leases.
The Company has been investigating and has recently determined that its
German subsidiary which was acquired through the merger with Soft Plus, was
delinquent in collecting and paying employee income taxes and social security
taxes for the 1998, 1999 and a portion of 2000 fiscal years. The Company is
currently working with the German tax authorities to ensure that full payment
and total compliance is achieved. The Company expects to make a payment between
$3.0 million and $4.0 million in the quarter ending December 31, 2000.
In connection with the Company's plans to move its corporate
headquarters to Cupertino, California, the Company has offered "stay bonuses" to
approximately thirty employees located in its King of Prussia facility to assist
in the transition. The total amount of the "stay bonus" will be approximately
$1.5 million and will be expensed over the period of December 1, 2000 through
February 20, 2000.
Restructuring
Starting in the third quarter of fiscal 2000, the Company experienced
significant declines in revenues and its share of the Internet professional
services market. The decline in demand and resulting losses led to the Company's
decision to restructure our business during the third quarter of fiscal 2000 to
focus our efforts on our core competencies and target markets and to reduce our
operating expenses. During the third quarter of fiscal 2000 the Company began
and is continuing to reduce its operating expenses through a series of general,
administrative, and other cost reductions, including reductions in workforce,
and the closure of certain facilities in the near future. The Company also
intends to pursue restructuring of certain of its obligations and recently
entered into binding letters of intent to restructure the $80 million note owed
to former shareholders of Soft Plus, Inc. with five former Soft Plus
shareholders, including our director, director, President and recently appointed
Chief Executive Officer, Mohan Uttarwar. See Recent Developments, above. The
Company has also made additional senior management changes and will move its
headquarters to its offices in Cupertino, California and close certain
facilities. The Company believes that these restructuring actions will decrease
operating expenses commencing in the first quarter fiscal 2001. There can be no
assurance that the Company will be able to complete the restructuring and
generate sufficient cash flow to continue its operations. The accompanying
financial statements have been prepared on the basis that the Company is
a going concern and do not include any adjustments that might result from
the outcome of this uncertainty.
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Overview
Revenue. Revenue is derived from fixed-fee or time and materials contracts.
Revenue under fixed-fee arrangements is recognized on the
percentage-of-completion method based on the ratio of costs incurred to total
estimated costs. Fees and expenditures in excess of billings represent the costs
incurred on projects and anticipated profits earned on projects in excess of
amounts billed to date. These amounts are recorded as an asset. Billings in
excess of fees and expenditures represent amounts billed in excess of costs
incurred and estimated profit earned. These amounts are recorded as a liability.
Revenues exclude reimbursable expenses charged to clients. Losses on projects in
progress are recognized when known.
Approximately 43% of our revenue for the nine months ended September
30, 2000 was derived from fixed-fee arrangements. The percentage of our revenue
that is derived from fixed-fee arrangements may increase in the future.
Substantially all of our client projects may be terminated early by the client
without penalty.
Cost Structure. A significant portion of our costs consists of
employee-related expenses for our project personnel and other direct costs, such
as third-party vendor costs. The remainder of our costs are associated with the
development of our business and support of our project personnel, such as
marketing and sales, and management and administrative support. Marketing and
sales consists primarily of personnel costs and commissions as well as the cost
associated with our development and maintenance of our marketing materials and
programs. Management and administrative expense consists primarily of the costs
associated with:
o operations
o finance
o human resources
o information systems
o facilities
o other administrative support for project personnel
We regularly review our fees for services, compensation and overhead
costs in an effort to remain competitive within our industry. In addition, we
monitor the progress of client projects with client senior management from time
to time. Monitoring the costs and progress associated with each project is aided
by our web-based project management systems. We manage the activities of our
service delivery personnel by monitoring project schedules and staffing
requirements for new projects. Most of our client projects can, and may in the
future, be terminated by the client without penalty. As a result, an
unanticipated termination of a client project could require us to maintain
underutilized employees, resulting in higher than expected percentage and number
of inactive professionals. While we intend to adjust our professional staff to
reflect our projects, we must maintain a sufficient number of senior
professionals to oversee existing and anticipated client projects and
participate with our sales efforts to secure new client projects.
Variability of Operating Results. Our operating results have fluctuated
from quarter to quarter and may continue to fluctuate in the future. These
fluctuations may be significant. It is difficult for us to forecast accurately
the frequency and duration of our projects. We incur expenses, which are mainly
fixed expenses, based on our expectations concerning the costs of our future
projects. We may not be able to adjust our spending in a timely manner to
compensate for any shortfall in our projected revenues. In the event of such a
shortfall, our expenses as a percentage of our revenue would increase. We also
have experienced seasonality with respect to our revenues that has resulted in
lower revenue during summer, year-end vacation and holiday periods.
<PAGE>
In March 1999, the Company acquired certain assets and assumed certain
liabilities of InVenGen LLC, a regional Internet professional service firm, in
exchange for 584,800 shares of the Company's common stock having an estimated
fair market value of $2,924,000 at the time of the transaction. The acquisition
was accounted for using the purchase method of accounting. Accordingly, a
portion of the purchase price was allocated to the net assets acquired and
liabilities assumed. The balance of the purchase price was recorded as goodwill
and is being amortized over two years. The results of operations of InVenGen LLC
have been consolidated with the Company's results of operations since April 1,
1999.
In March 2000, we acquired by merger (the Merger) Soft Plus, a provider
of e-CRM solutions. We paid to the Soft Plus shareholders in the Merger: (i)
3,391,106 unregistered shares of our common stock, (ii) $20 million in cash, and
(iii) an unsecured $80 million note due to the former shareholders of Soft Plus
to be paid March 8, 2001. In addition, we assumed the stock options which were
outstanding under Soft Plus' stock option plans, which became options to
purchase a total of 1,408,866 shares of our common stock. The Merger has been
accounted for using the purchase method of accounting. Accordingly, the purchase
price has been allocated to the net assets acquired and liabilities assumed. The
balance of the purchase price has been allocated to goodwill and other
intangible assets and is being amortized over their estimated useful lives of
approximately five years.
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On July 25, 2000, the Company acquired The Fourth Room Ltd. a
London-based strategic marketing and brand consulting firm. The Company paid to
The Fourth Room Ltd. shareholders 382,802 shares of the Company's common stock,
with an estimated fair value of $5.7 million and $600,000 in cash paid at
closing. In addition the Company issued 50,000 options to acquire shares of the
Company's common stock to certain employees of The Fourth Room Ltd. who planned
to continue with the Company. The acquisition was accounted for using the
purchase method of accounting. Accordingly, a portion of the purchase price was
allocated to net assets acquired and liabilities assumed. The balance of the
purchase price was recorded as goodwill and is being amortized over five years.
The historical results of operations of The Fourth Room Ltd. are not material to
the Company.
Results of Operations
The following table presents, for the periods indicated, the relative
composition of revenue and selected statements of operations data as a
percentage of revenue:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net revenues 100% 100% 100% 100%
Operating expenses:
Project personnel and related expenses ................ 72 56 54 54
Management and administration ......................... 136 51 65 49
Research and development .............................. 5 -- 3 --
Selling and marketing ................................. 18 10 14 10
Depreciation and amortization ......................... 117 27 76 33
Restructuring charge .................................. 9 -- 2 --
---- ---- ---- ----
Total operating expenses .............................. 356 144 214 146
---- ---- ---- ----
Operating loss .............................................. (256) (44) (114) (46)
Other income (expense), net ................................. (6) 2 (3) --
---- ---- ---- ----
Loss before extraordinary item .............................. (262) (42) (117) (46)
Extraordinary item-loss from early extinguishment of debt ... -- -- (3) --
---- ---- ---- ----
Net loss .................................................... (262%) (42%) (120%) (46%)
==== ==== ==== ====
</TABLE>
Three Months Ended September 30, 2000 Compared to the Three Months Ended
September 30, 1999
Revenue. Revenue increased $8.0 million, or 80%, to $17.8 million for
the three months ended September 30, 2000, from $9.9 million for the three
months ended September 30, 1999. The increase in revenue was due to the
acquisition of Soft Plus, Inc. (Soft Plus) which was effective March 8, 2000
which accounted for an increase of approximately $9.4 million which was
partially offset by a $2.1 million decrease in other services delivered to
clients.
As a result of the factors discussed under Recent Developments, coupled with a
general market decline in demand for services such as the Company's, the Company
expects quarterly revenues to remain flat or decrease for the foreseeable
future.
<PAGE>
Project Personnel and Related Expenses. Project personnel and related
expenses consist primarily of payroll, associated taxes, employee benefits and
any third-party contracted services incurred in the delivery of our services.
These costs increased $7.4 million, or 134%, to $12.9 million for the three
months ended September 30, 2000, from $5.5 million for the three months ended
September 30, 1999. The increase was primarily due to the increase in the hiring
of project personnel as well as contracted services and $5.3 million additional
personnel related expenses associated with the Soft Plus acquisition.
Management and Administrative. Management and administrative expenses
increased $19.2 million, or 383%, to $24.2 million for the three months ended
September 30, 2000, from $5.0 million for the three months ended September 30,
1999. The increase was principally due to expenses incurred to accommodate
anticipated growth, including the expansion of office facilities and the
increased cost of management and administrative personnel and other general
operating expenses in the areas of legal, accounting, human resources and
general operations. There was also increased management and administrative
expenses associated with the Soft Plus acquisition. Additionally, the Company
wrote off $8.8 million of uncollectible accounts receivable of which $3.9
million and $1.1 million were amounts due from NetSmart, Inc. and Existing
Corporation, respectively, which are related parties.
Selling and Marketing. Selling and marketing expenses increased $2.2
million, or 215%, to $3.2 million for the three months ended September 30, 2000,
from $1 million for the three months ended September 30, 1999. The increase was
attributable to the continuing investment in the Company's marketing and sales
programs including the hiring of new business development and marketing
personnel and additional marketing and selling expenses resulting from the Soft
Plus acquisition.
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Depreciation and Amortization. Depreciation and amortization increased
$18.1 million to $20.8 million for the three months ended September 30, 2000 as
compared to $2.7 million for the three months ended September 30, 1999. The
increase was primarily due to amortization of approximately $18.3 million from
the Soft Plus acquisition. The amount is being amortized over a five-year
period. There was also increased capital expenditures for new equipment and
leasehold improvements.
Restructuring Charge. During the quarter ended September 30, 2000 the
Company recorded a restructuring charge of $1.6 million. This amount represents
$1.0 million related to severance costs in connection with the Company's
decision to terminate 125 employees, substantially all of which was paid during
the quarter ended September 30, 2000, and $600,000 related to severance costs in
connection with the Company's former Chief Executive Officer which will be paid
out over an eighteen month period.
Other Income (Expense). Other expense increased $1.3 to $1.1 million
for the three months ended September 30, 2000, compared to an income of $215,000
for the three months ended September 30, 1999. The increase was primarily
attributable to interest expense on the $80 million note due to former Soft Plus
shareholders as a result of the merger on March 8, 2000. The increase was
partially offset by increased interest income from cash equivalents primarily
the result of the Company's public offerings.
Income Tax Expense. As a result of the Company's losses there was no
income tax expense for the three months ended September 30, 2000, or the three
months ended September 30, 1999.
Nine Months Ended September 30, 2000 Compared to the Nine Months Ended September
30, 1999
Revenue. Revenue increased $42.3 million, or 179%, to $65.9 million for
the nine months ended September 30, 2000, from $23.7 million for the nine months
ended September 30, 1999. The increase in revenue was primarily due to growth in
services delivered to new clients, additional projects for existing clients and
larger average project size as well as the acquisition of Soft Plus, Inc. (Soft
Plus) which was effective March 8, 2000 which accounted for approximately $22.0
million of the revenue increase.
As a result of the factors discussed under Recent Developments, coupled
with a general market decline in demand for services such as the Company's, the
Company expects quarterly revenues to remain flat or decrease for the
foreseeable future.
Project Personnel and Related Expenses. Project personnel and related
expenses consist primarily of payroll, associated taxes, employee benefits and
any third-party fees incurred in the delivery of our services. These costs
increased $22.5 million, or 175%, to $35.3 million for the nine months ended
September 30, 2000, from $12.8 million for the nine months ended September 30,
1999. The increase was primarily due to the increase in the hiring of project
personnel as well as contracted services and $11.7 million additional personnel
related expenses associated with the Soft Plus acquisition.
Management and Administrative. Management and administrative expenses
increased $31.1 million, or 268%, to $42.7 million for the nine months ended
September 30, 2000, from $11.6 million for the nine months ended September 30,
1999. The increase was principally due to expenses incurred to accommodate
anticipated growth, including the expansion of office facilities and the
increased cost of management and administrative personnel and other general
operating expenses in the areas of legal, accounting, human resources and
general operations as well as increased management and administrative expenses
associated with the Soft Plus acquisition. Additionally, the Company wrote off
$8.8 million of uncollectible accounts receivable of which $3.9 million and $1.1
million were amounts due from NetSmart, Inc. and Exist Corporation,
respectively, which are related parties.
Selling and Marketing. Selling and marketing expenses increased $6.8
million, or 276%, to $9.3 million for the nine months ended September 30, 2000,
from $2.5 million for the nine months ended September 30, 1999. The increase was
attributable to the continuing investment in the Company's marketing and sales
programs including the hiring of new business development and marketing
personnel as well as additional marketing and selling expenses associated with
the Soft Plus acquisition.
Depreciation and Amortization. Depreciation and amortization increased
$42.1 million to $49.9 million for the nine months ended September 30, 2000, as
compared to $7.7 million for the nine months ended September 30, 1999. The
increase was primarily due to amortization of approximately $41.4 million from
the Soft Plus acquisition. The amount is being amortized over a five-year
period. There was also increased capital expenditures for new equipment and
leasehold improvements.
Restructuring Charge. During the quarter ended September 30, 2000 the
Company recorded a restructuring charge of $1.6 million. This amount represents
$1.0 million related to severance costs in connection with the Company's
decision to terminate 125 employees, substantially all of which was paid during
the quarter ended September 30, 2000, and $600,000 related to severance costs in
connection with the Company's former Chief Executive Officer which will be paid
out over an eighteen month period.
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Other Income (Expense). Other expense increased $2.0 million to $2.0
million for the nine months ended September 30, 2000, compared to $0 for the
nine months ended September 30, 1999. The increase was primarily attributable to
interest expense on the $80 million note due to former Soft Plus shareholders as
a result of the merger on March 8, 2000. The increase was partially offset by
increased interest income from cash equivalents primarily the result of the
Company's public offerings.
Income Tax Expense. As a result of the Company's losses there was no
income tax expense for the nine months ended September 30, 2000, or the nine
months ended September 30, 1999.
Liquidity and Capital Resources
Prior to the completion of our initial public offering in August 1999,
the Company had financed operations primarily from sales of preferred stock and
borrowings under a line of credit and term loan from a commercial bank. Through
December 31, 1998, we had raised approximately $12.7 million, net of offering
expenses, through the sale of our preferred stock.
In August 1999, we completed our initial public offering of 4,865,848
shares of common stock at a price of $10.00 per share. We received net proceeds
from our initial public offering of approximately $44.5 million (net of
underwriters' discount and offering expenses).
In April 2000, the Company completed a public offering of securities
and issued a total of 2,274,567 shares of common stock at $19.63 per share. An
additional 225,433 shares were sold by existing stockholders at $19.63 per
share. Proceeds to the Company from its public offering net of underwriting
discounts and costs of the offering were approximately $41.7 million. The
Company used a total of $6.0 million of the net proceeds to repay all
outstanding debt under its line of credit.
At September 30, 2000 the Company had approximately $13.5 million in
cash and cash equivalents.
Net cash used in operating activities was $19.2 million for the nine
month period ended September 30, 2000, as compared to $3.3 million for the
comparable period in 1999. Cash used in operating activities in each of these
periods was primarily the result of net losses, which were partially offset by
non-cash charges for depreciation and amortization, as well as decreases in
working capital.
Net cash used in investing activities was $42.2 million for the nine
months ended September 30, 2000, as compared to $2.9 million for the nine months
ended September 30, 1999. The increase in net cash used was primarily due to the
cash paid and expenses accrued for in the Soft Plus acquisition and increased
purchases of furniture and equipment.
Net cash provided by financing activities was $40.8 million for the
nine months ended September 30, 2000, as compared to $43.4 million for the nine
months ended September 30, 1999. The principal reason for the decrease was a
reduction in proceeds received from the Company's secondary public offering
completed in April, 2000, as compared to proceeds from the Company's initial
public offering completed in August, 1999. The Company also paid off the Soft
Plus credit facility in March, 2000.
On March 8, 2000, we acquired by merger Soft Plus, with headquarters in
Cupertino, California, which provides e-CRM solutions, primarily to wireless
communications providers and other companies in the emerging communications
industry. We paid to the Soft Plus shareholders: (i) 3,391,106 unregistered
shares of our common stock, (ii) $20 million in cash, and (iii) an unsecured $80
million note due to the former shareholders of Soft Plus. In addition, we
assumed the stock options which were outstanding under the Soft Plus stock
option plans, which became options to purchase a total of 1,408,866 shares of
our common stock in the Merger. As a result of the Merger, Soft Plus became our
wholly owned Delaware subsidiary with the name "U.S. Interactive Corp.
(Delaware)."
The amount of principal which we must pay under the $80 million note
will be reduced under certain circumstances relating: to (i) our rights to be
indemnified by the principal shareholders of Soft Plus under the Merger
Agreement, and (ii) certain costs incurred by Soft Plus in the Merger. The $80
million note is due and payable on March 8, 2001. In early November 2000, the
Company entered into binding letters of intent with five of the former
shareholders of Soft Plus, including our director, President and Chief Executive
Officer, Mohan Uttarwar, to restructure the $80 million note, discussed in more
detail under Recent Developments above. Closing on the note restructuring is
subject to the satisfaction of certain conditions. In the event the Company
closes on the note restructuring, the Company has agreed under the terms of the
letters of intent to waive these rights.
We had initially anticipated that we would repay the $80 million note
with proceeds to be obtained from one or more of the following: borrowings under
our credit facilities, a refinancing, or a sale of capital stock or debt
securities in the public or private markets, together with revenues generated
14
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from operations. However, the Company has been unsuccessful in its attempts to
do so and, as noted above, has entered into binding letters of intent with five
of the former shareholders of Soft Plus, including our director, President and
Chief Executive Officer, Mohan Uttarwar, to restructure the $80 million note.
The closing on the restructuring is subject to the satisfaction of certain
conditions, including consent of the holders of not less than 90% of the $80
million note. Holders of the $80 million note who do not consent will be
entitled to receive payment on the portion of the note held by them. Even if we
are successful in completing the note restructuring, there can be no assurances
that we will be able to obtain funds sufficient to repay the portion of the $80
million note held by holders who do not consent to the restructuring, or, even
if such funds are available, that such funds will be available on terms
satisfactory to the Company. The inability of the Company to close on the note
restructuring or, in the event of closing, to obtain funds sufficient to repay
the $80 million note held by holders who do not consent to the restructuring on
terms satisfactory to the Company would have a material adverse effect on the
Company.
At November 17, 2000 the Company had approximately $8.6 million in cash
and cash equivalents, of which $3.0 million has been reserved for payment of the
delinquent taxes owed by its German subsidiary which was acquired from Soft
Plus. The Company's ability to meet its obligations in the ordinary course of
business is dependent upon its ability to establish profitable operations or
raise additional capital through public or private equity financing, bank
financing or other sources of capital. Management believes that its current
funds combined with other available sources of funding may be sufficient to
enable the Company to meet certain of its planned expenditures through at least
December 31, 2000. The Company may require additional capital to finance its
future operations beyond 2000. The Company is in discussions with its creditors
including unsecured vendors, landlords and equipment financing companies in
order to reach mutually agreeable resolutions to amounts outstanding.
The Company has begun a restructuring of the business during the third
quarter of fiscal 2000 to focus its efforts on its core competencies and target
markets and to reduce its operating expenses. During the third quarter of fiscal
2000 the Company began and is continuing to reduce its operating expenses
through a series of general, administrative, and other cost reductions,
including reductions in workforce, and the closure of certain facilities in the
near future. The Company also intends to pursue restructuring of certain of its
obligations.
The Company may seek to obtain additional capital through the sale of
equity or debt securities, through additional credit facilities or otherwise.
Sales of additional equity or convertible debt securities would result in
additional dilution to the Company's stockholders. The Company may need to raise
additional funds sooner in order to support more rapid expansion, develop new or
enhanced services and products, respond to competitive pressures, acquire
complementary businesses or technologies or take advantage of unanticipated
opportunities. Future liquidity and capital requirements will depend on numerous
factors, including the success of existing and new service offerings and
competing technological and market developments. There are no assurances that
the Company will be able to obtain additional capital. Additional financing, if
available, may not be available on satisfactory terms.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk for changes in interest rates
relates primarily to the increase or decrease in the amount of interest income
we can earn on our available funds for investment and on the increase or
decrease in the amount of interest expense we must pay with respect to our
various outstanding debt instruments. The risk associated with fluctuating
interest expense is limited, however, to the exposure related to those debt
instruments and credit facilities which are tied to variable market rates. We do
not plan to use derivative financial instruments in our investment portfolio. We
plan to ensure the safety and preservation of our invested principal funds by
limiting default risks, market risk and reinvestment risk. We plan to mitigate
default risk by investing in high-credit, quality securities. If market interest
rates were to increase by 10% from rates as of November 20, 2000 we do not
believe that the effect would be material to the Company.
Currently, substantially all of our revenues are realized in U.S.
dollars and are from clients primarily in the United States. We do not believe
that we currently have any significant direct foreign currency exchange rate
risk. As a result of the Merger, our future financial results could be affected
by factors such as changes in foreign currency, exchange rates or weak economic
conditions in foreign markets.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
As previously disclosed, we are party to the following proceedings.
On April 7, 2000, First Albany Corporation (FAC) filed a complaint
against U.S. Interactive, Inc., Soft Plus and U.S. Interactive Corp. (Delaware),
our wholly-owned subsidiary into which Soft Plus merged, in the U.S. District
Court, Northern District of California, San Jose Division (Case No. C-0020383),
alleging that Soft Plus had breached an agreement dated November 29, 1999 (the
Engagement Agreement) between Soft Plus and FAC under which Soft Plus had
engaged FAC to render financial advisory and investment banking services in
connection with the possible sale of Soft Plus. FAC had submitted to Soft Plus a
claim for fees and expenses, which FAC asserted it was entitled to receive in
connection with the Soft Plus Merger. After we rejected FAC's claims, FAC
commenced its lawsuit. FAC alleges that the defendants breached their
obligations under the Engagement Agreement by failing to pay First Albany the
fees in excess of $6.1 million it claims it is entitled to receive, including
amounts which FAC alleges it is entitled to receive at various times commencing
upon closing of the Merger. FAC requests that the court require the defendants
to pay these fees, with interest, together with FAC's costs and expenses. The
adverse resolution of this matter could have a material adverse effect on our
business, operating results, financial condition and cash flows.
On April 11, 2000, five former shareholders of Soft Plus (the Former
Shareholders) filed a complaint against U.S. Interactive, Inc., Soft Plus, USIC,
Mohan Uttarwar, Vijay Uttarwar, Vinay Deshpande, O.P. Srinivasan and Does 1-25,
in the Superior Court of California, County of Santa Clara (case number
CV789065). Plaintiffs voluntarily dismissed Mr. Srinivasan without prejudice
from the action in August, 2000. Upon the closing of the Merger, Mohan Uttarwar
became a member of our board of directors, and president of USIC, and he is
currently the president and CEO of US Interactive; he is the brother of Vijay
Uttarwar. Messrs. Uttarwar and Vinay Deshpande (the Principal Shareholders) are
former shareholders, officers and directors of Soft Plus. The plaintiffs filed a
second amended complaint on or about August 31, 2000, which alleges, among other
things, that the Former Shareholders requested but were improperly denied
inspection of some of the corporate records of Soft Plus in connection with
evaluating the Merger and whether to exercise their dissenters' rights. The
Former Shareholders request that the court compel the defendants to produce for
the Former Shareholders these corporate records and materials for inspection.
The second amended complaint also alleges that some transactions involving or
for the benefit of the Principal Shareholders or their relatives were improper,
including the issuance of common stock and preferred stock of Soft Plus and
options to purchase common stock of Soft Plus. The Former Shareholders allege
the Principal Shareholders breached their fiduciary duty to the Former
Shareholders and seek damages in excess of $5.0 million. The Former Shareholders
also request that the court declare that the time for the Former Shareholders to
assert their dissenters' rights in connection with the merger has not expired
because they allege that the notice sent to them which triggered those rights
was defective under California law. In addition to the damages noted above, the
Former Shareholders request attorneys' fees, compensatory and punitive damages,
interest and costs in its possession, as it deemed appropriate. One of the
Former Shareholders has also alleged that Mr. Deshpande made material
misrepresentations to him in connection with and offer of employment and
employee stock options. On this claim the Former Shareholder is seeking damages
in excess of $1.0 million.
We have notified counsel to Soft Plus that the Former Shareholders have
claimed that the notice of dissenter's rights prepared by them was defective and
that they issued on opinion stating that all Soft Plus stock had been validly
issued and fully paid, and that the Company intends to seek indemnification from
them for any damages arising therefrom in the event that the Court determines
that the notice was defective or the Soft Plus stock was not properly issued.
As previously reported, we notified representatives of the Principal
Shareholders that, in accordance with the terms of the Merger, we intended to
seek indemnification from them for any costs or liabilities arising from the
pending litigation, including asserting our right to retain shares of our common
stock escrowed in the Merger or to reduce payments we are to make under the $80
million Note. Based on subsequent discussions among the Principal Shareholders,
the Company and USIC, the Principal Shareholders, the Company and USIC entered
into an agreement under which the parties would reserve all indemnification
rights which the Principal Shareholders may have against the Company and USIC
under the Soft Plus merger agreement. Subsequent to entering into the foregoing
agreement, in early November 2000 the Company entered into binding letters of
intent with five former shareholders of Soft Plus, including our director,
President and recently appointed Chief Executive Officer, Mohan Uttarwar, to
restructure the $80 million note owed to former Soft Plus shareholders. Under
the terms of the letters of intent, all of the rights which the Company has to
indemnification under the Soft Plus merger agreement would be waived if the Note
is restructured. Closing on the note restructuring is subject to the
satisfaction of certain conditions. Under the merger agreement, the Company
agreed to assume USIC's obligations, as successor to Soft Plus, Inc.,
contractual and otherwise, to indemnify the former officers and directors of
Soft Plus to the fullest extent permitted by California law. The adverse
resolution of this matter could have a material adverse effect on our business,
operating results, financial condition and cash flows.
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We are also a party to the following additional proceedings. On
September 22, 2000, the Company was served with a Complaint filed in the
Pennsylvania Court of Common Pleas for Chester County by Talentpoint
Technologies Inc. (formerly known as Raymond Karsan Associates). The Complaint
alleges that the Company breached five agreements entered between October 4,
1999 and December 21, 1999 for employee searches and seeks damages of
$972,603.70. U.S. Interactive, Inc. is evaluating the claim of Talentpoint
Technologies, Inc. We are presently unable to offer any estimate of the
likelihood that U.S. Interactive, Inc. will prevail in connection with
litigation that might arise from the claims of Talentpoint Technologies, Inc.
We are involved from time to time in disputes and other litigation in
the ordinary course of business. We do not believe that the outcome of any
pending disputes or litigation (including matters we have previously reported)
will have a material adverse effect on our business, operating results,
financial condition and cash flows. However, the ultimate outcome of these
matters, as with litigation generally, is inherently uncertain and it is
possible that some of these matters may be resolved adversely to us. The adverse
resolution of any one or more of these matters could have a material adverse
effect on our business, operating results, financial condition and cash flows.
Item 2. Changes in Securities and Use of Proceeds.
(c) Sales of Unregistered Securities.
During the three months ended September 30, 2000, the Company issued
382,802 unregistered shares of the Company's common stock in reliance on the
exemptions provided by Section 4(2) of the Securities Act of 1933 and
Regulations S promulgated thereunder and paid $600,000 in cash in connection
with the acquisition of all of the outstanding shares of The Fourth Room Limited
on July 25, 2000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
The exhibits required by Item 601 of Regulation S-K are listed below
and are incorporated as indicated.
Exhibit Number Description
-------------- -----------
10.1 Form of Change in Control Agreement between the
Company and each of the following individuals; Philip
L. Calamia, Lawrence F. Shay, James J. Huser and O.P.
Srinivasan
10.2 Severance Agreement, dated September 8, 2000 between
Stephen T. Zarrilli and the Company
10.3 Employment Agreement, dated September 8, 2000 between
William C. Jennings and the Company
10.4 Agreement Evidencing a Grant of Non-Qualified Stock
Option, dated September 20, 2000 between William C.
Jennings and the Company
10.5 Binding Letter of Intent by and among the Company,
U.S. Interactive Corp. (Delaware), Soft Plus, Inc.
and Mohan Uttarwar
27.1 Financial Data Schedule
(b) Reports on Form 8-K
1. On September 11, 2000 we filed a Current Report on Form 8-K
reporting our issuance of a press release on September 8, 2000
announcing that Stephen Zarrilli had resigned as our Chief
Executive Officer and that William C. Jennings had been named to
succeed Mr. Zarrilli.
2. On September 21, 2000 we filed a Current Report on Form 8-K
reporting our issuance of a press release on September 20, 2000
announcing that our third quarter financial performance will be
below expectations and that Mohan Uttarwar has been appointed as
our President.
3. On November 13, 2000 we filed a Current Report on Form 8-K
reporting our issuance of two press releases on November 9, 2000
announcing: (a) that our third quarter financial performance was
below revised expectations, that Mohan Uttarwar had succeeded
William C. Jennings as Chief Executive Officer and that Mr.
Jennings had succeeded Eric Pulier as Chairman of the Board and (b)
we entered into binding letters of intent to restructure a majority
of the $80 million note currently due March 8, 2001.
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U.S. INTERACTIVE, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
U.S. INTERACTIVE, INC.
(Registrant)
Date: November 20, 2000 By: /s/ Mohan Uttarwar
----------------------------
Mohan Uttarwar
Chief Executive Officer, President
Date: November 20, 2000 By: /s/ Philip L. Calamia
----------------------------
Philip L. Calamia
Executive Vice President, Chief Financial Officer
(Principal Financial Officer and
Chief Accounting Officer)
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