<PAGE>
As filed with the Securities and Exchange Commission on April 11, 2000
Registration No. 333-32224
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------
Amendment No. 2
to
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
----------------
U.S. INTERACTIVE, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
Delaware 7379 22-3316696
- --------------------------------- ----------------------------- ----------------------
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
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)
----------------
Copies of all communications to:
Merritt A. Cole, Esq. Stephen A. Riddick, Esq.
Susan E. Pendery, Esq. Stephen J. Bolin, Esq.
Dilworth Paxson LLP Robin F. Wallace, Esq.
3200 Mellon Bank Center Brobeck, Phleger & Harrison LLP
1735 Market Street 701 Pennsylvania Avenue, N.W.
Philadelphia, PA 19103-7595 Washington, DC 20004
(215) 575-7000 (202) 220-6000
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, 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, 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,
check the following box. / /
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
The information contained in this prospectus is not complete and may be
changed. These securities may not be sold until the registration statement
filed with the Securities and Exchange Commission is effective. This prospectus
is not an offer to sell these securities, and it is not soliciting an offer to
buy these securities in any state where the offer or sale is not permitted.
Subject to Completion, dated April 11, 2000
PROSPECTUS
3,225,433 Shares
[GRAPHIC OMITTED]
Common Stock
- --------------------------------------------------------------------------------
We are a leading Internet professional services firm which provides
end-to-end (e2e) solutions to help companies take advantage of the business
opportunities presented by the Internet and various wireless and broadband
technologies.
We are offering 3,000,000 shares of our common stock in a public offering.
Some of our stockholders are offering a total of 225,433 shares owned by them
in the offering. We will not receive any of the proceeds from the sale of
shares being sold by the selling stockholders.
Our common stock trades on the Nasdaq National Market under the symbol
"USIT." On April 10, 2000, the last reported sale price of the common stock on
the Nasdaq National Market was $22.25 per share.
Investing in our common stock involves risks. See "Risk Factors" beginning
on page 6 of this prospectus.
Per Share Total
----------- ---------
Public Offering Price ..................... $ $
Underwriting Discount ..................... $ $
Proceeds to U.S. Interactive .............. $ $
Proceeds to Selling Stockholders .......... $ $
We have granted the underwriters an option to purchase up to an aggregate
of 450,000 additional shares of common stock at the public offering price, less
the underwriting discount, within 30 days from the date of this prospectus to
cover any over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
Lehman Brothers expects to deliver the shares of common stock on or about
, 2000.
- --------------------------------------------------------------------------------
LEHMAN BROTHERS
CHASE H&Q
DEUTSCHE BANC ALEX. BROWN
FIRST UNION SECURITIES, INC.
ADAMS, HARKNESS & HILL, INC.
FIDELITY CAPITAL MARKETS
a division of National Financial Services Corporation
, 2000
<PAGE>
COVER ART DESCRIPTION
We intend to display our Logo prominately on the left side and the right
side of the inside covers. The background will be blue, with copy written in
orange.
Underneath our logo will be our name and the following phrase:
"providing e2e Solutions to think, build, and run eBusiness"
<PAGE>
TABLE OF CONTENTS
Page
-----
Prospectus Summary ............................ 1
Risk Factors .................................. 6
Forward-Looking Statements .................... 13
Soft Plus Acquisition ......................... 14
Use of Proceeds ............................... 15
Dividend Policy ............................... 15
Price Range of Common Stock ................... 15
Capitalization ................................ 16
Dilution ...................................... 17
Selected Consolidated Financial Data .......... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................. 20
Page
---
Business ...................................... 28
Management .................................... 40
Certain Relationships and Related Transactions 48
Principal and Selling Stockholders ............ 49
Description of Capital Stock .................. 52
Shares Eligible for Future Sale ............... 55
Underwriting .................................. 58
Legal Matters ................................. 60
Experts ....................................... 60
Additional Information ........................ 61
Index to Financial Statements ................. F-1
ABOUT THIS PROSPECTUS
Investors should rely only on the information contained in this
prospectus. U.S. Interactive and the underwriters have not authorized anyone to
provide any different or additional information. This prospectus is not an
offer to sell or a solicitation of an offer to buy our common stock in any
jurisdiction where it is unlawful. The information contained in this prospectus
is accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of our common stock. This
preliminary prospectus is subject to completion prior to this offering.
The U.S. Interactive name and design and "e-Roadmap" are registered
service marks of U.S. Interactive. In addition, U.S. Interactive has filed for
service mark registration of "U.S. Interactive," "IVL Methodology," "CAPTURE"
and "e2e Solution." This prospectus also includes trademarks and trade names of
other parties.
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and financial statements and notes appearing elsewhere in this
prospectus. Generally, this prospectus does not take into account the possible
sale of additional shares of common stock to the underwriters under the
over-allotment option granted to the underwriters.
U.S. Interactive, Inc.
Our Business
We are a leading Internet professional services firm focused on providing
end-to-end (e2e) solutions to Global 2000 organizations. e2e SolutionsSM
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, digital brand creation, security and enterprise application
integration.
We deliver our services through a development platform that we created and
call e-Roadmap(R). e-Roadmap is a group of service offerings that can be
customized to meet the needs of each client. These services are delivered
through our IVL MethodologySM, a process comprised of three phases. These
phases include:
o an "Innovation" phase, during which we define the overall vision and
scope for a project
o a "Validation" phase, during which we create and test a prototype that
addresses the client's objective
o a "Launch" phase, during which we refine, integrate and deploy the final
solution
To facilitate our implementation process, we employ an extranet template,
which we refer to as CAPTURESM for ongoing client communication on individual
projects. Extranets are linked computer networks designed for use by a company
and third parties that the company designates. CAPTURE serves as a
communications center for a client project that enables our clients to monitor
and comment on a project's direction and progress on a real-time basis.
To provide a comprehensive, integrated solution for our clients, we have
created a strategic alliance network with over 25 leading providers of
e-business applications, infrastructures and promotions. Some of these
alliances include Akamai, BroadVision, IBM, Intel, Microsoft and Vignette.
We have performed over 500 client projects since we commenced operations
in May 1994. For the 12 month period ending December 31, 1999, we worked on
approximately 200 client projects for companies such as AIG, adidas, Citigroup,
Commerce One, Sprint, Thomson Consumer Electronics, Toyota and Universal Music
Group.
1
<PAGE>
Our Market Opportunity
The emergence and adoption of the Internet are changing the way consumers
and organizations communicate, share information and conduct business.
Businesses are attempting to utilize innovative Internet strategies to develop
a competitive advantage to:
o attract and retain customers
o lower sales costs
o improve operational efficiencies
o strengthen supplier relationships
o improve communications
However, many businesses lack the in-house expertise required to develop
and deploy these solutions. Instead, many of these businesses are seeking
third-party service providers that can deliver integrated Internet strategy
consulting, marketing and technology expertise to develop and deploy Internet
business solutions. For instance, International Data Corp. (IDC) estimates that
the market for Internet professional services will grow from $7.8 billion in
1998 to $78.6 billion in 2003.
Our Strategy
Our strategy is to strengthen our position as a provider of Internet-based
business solutions. Key elements of this strategy include:
o developing technology frameworks for repeatable e-business solutions
o continuing vertical market penetration to take advantage of Business to
Business (B2B) e-commerce opportunities
o strengthening our relationships with technology companies such as Akamai,
BroadVision, IBM, Intel, Microsoft and Vignette
o increasing the size and scope of our business opportunities with our
clients
o enhancing our knowledge management and knowledge distribution
capabilities
o hiring and retaining skilled professionals in the areas of strategic
business consulting, online marketing and Internet technology
o expanding geographically into other metropolitan markets, both
domestically and internationally
Recent Developments
On March 8, 2000, we acquired by merger (the Merger) Soft Plus, Inc., a
California corporation with headquarters in Cupertino, California, which
provides electronic customer relationship management (e-CRM) solutions,
primarily to wireless communications providers and to 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
to be paid upon the earlier of one year or the receipt by us of not less than
$80 million from the net proceeds of a public offering of our capital stock. 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.
2
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by U.S. Interactive ................. 3,000,000 shares
Common stock offered by the selling stockholders ......... 225,433 shares
Common stock outstanding after this offering including the
shares issued in connection with the Merger ............ 26,035,479 shares
Use of proceeds .......................................... Repayment of debt under credit facilities
with a commercial bank, opening of new
offices, capital expenditures, funding of
potential acquisitions and other general
corporate purposes. In addition, we may
repay a portion of the $80 million note
issued in the Merger. U.S. Interactive will
not receive any proceeds from the sale of
shares by the selling stockholders.
Nasdaq National Market symbol ............................ USIT
</TABLE>
Common stock outstanding after this offering is based on the pro forma
number of shares outstanding as of February 29, 2000, including the shares
issued in the Merger and excluding:
o 4,668,605 shares of common stock issuable upon the exercise of stock
options outstanding at February 29, 2000, at a weighted average exercise
price of $24.92 per share
o 658,493 shares of common stock reserved for future grant under U.S.
Interactive's stock option plans
o 70,000 shares of common stock issuable upon the exercise of a warrant
outstanding at February 29, 2000, at an exercise price of $3.50 per share
o on a pro forma basis, 1,408,866 shares of common stock issuable upon the
exercise of stock options assumed in connection with the Soft Plus Merger,
at a weighted average exercise price of $1.86 per share
Additional Information
We were formed in August 1991 and commenced operations in May 1994. We changed
our name from MasterSmith, Inc. to U.S. Interactive, Inc. in November 1995 and
reincorporated in Delaware in September 1998. We completed our initial public
offering in August 1999. Our principal executive offices are located at 2012
Renaissance Boulevard, King of Prussia, Pennsylvania 19406, and our telephone
number is (610) 313-9700. We maintain a site on the World Wide Web at
www.usinteractive.com. The information found on our site is not a part of this
prospectus and should not be relied upon when making a decision to invest in
our common stock.
3
<PAGE>
Summary Consolidated Financial Information
The following summary historical consolidated financial data has been
derived from our audited 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.
On March 8, 2000, we completed a merger with Soft Plus. The unaudited pro
forma consolidated statements of operations data for the year ended December
31, 1999, reflects the effect of the Soft Plus merger as if the transaction had
occurred on January 1, 1999. The unaudited pro forma consolidated balance sheet
data as of December 31, 1999, reflects the effect of the Merger as if the
transaction had occurred on December 31, 1999.
On July 2, 1998, we completed a merger with Digital Evolution, Inc., an
Internet professional services company. The results of operations of Digital
Evolution have been included in our consolidated financial statements since
July 1, 1998.
The pro forma, as adjusted, balance sheet data gives effect to the sale of
the shares offered by us at an assumed public offering price of $22.25 per
share and the application of the net proceeds as described in "Use of
Proceeds," after deducting underwriting discounts and commissions and estimated
offering expenses.
4
<PAGE>
Summary Consolidated Financial Information
<TABLE>
<CAPTION>
Year Ended
Year Ended December 31, December 31,
---------------------------------------------------------------------- -------------
1995 1996 1997 1998 1999 1999
----------- ---------- ---------- ------------- -------------- -------------
(Pro Forma
(in thousands, except per share data) Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Revenue ..................... $ 935 $ 1,950 $ 6,061 $ 13,636 $ 35,255 $ 59,540
Operating expenses .......... 882 2,295 6,319 21,927 50,098 151,274
----- ------- ------- --------- ---------- ---------
Income (loss) from opera-
tions ...................... 53 (345) (258) (8,291) (14,843) (91,734)
Other income (expense),
net ........................ (2) 235 (32) (152) 454 (4,654)
----- ------- ------- --------- ---------- ---------
Income (loss) before
income tax expense ......... 51 (110) (290) (8,443) (14,389) (96,388)
Income tax expense .......... 13 19 -- -- -- --
----- ------- ------- --------- ---------- ---------
Net income (loss) ........... 38 (129) (290) (8,443) (14,389) (96,388)
Accretion of mandatorily
redeemable preferred
stock to redemption
value ...................... -- -- -- (625) (916) (916)
----- ------- ------- --------- ---------- ---------
Net income (loss) attribut-
able to common stock-
holders .................... $ 38 $ (129) $ (290) $ (9,068) $ (15,305) $ (97,304)
===== ======= ======= ========= ========== =========
Net income (loss) per
common share:
Basic and diluted ........... $ .01 $ (.03) $ (.06) $ (1.36) $ (1.19) $ (6.00)
===== ======= ======= ========= ========== =========
Weighted average shares
outstanding used in the
basic and diluted per
common share calcula-
tion ....................... 2,813 4,486 4,737 6,670 12,826 16,217
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------------------
Pro Forma,
Pro Forma As Adjusted
Actual (Unaudited) (Unaudited)
---------- ------------- ------------
(in thousands)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents ...................... $34,130 $ 9,953 $ 72,732
Working capital (deficit) ...................... 38,504 (64,520) (1,741)
Total assets ................................... 62,278 411,754 474,534
Acquisition note payable ....................... -- 80,000 80,000
Long-term debt, net of current portion ......... 1,666 3,366 3,366
Total stockholders' equity ..................... 49,976 311,996 374,776
</TABLE>
5
<PAGE>
RISK FACTORS
You should carefully consider the risks described below and other
information in this prospectus before making an investment decision. If any of
the following risks actually occur, our business, financial condition or
results of operations could be materially adversely affected. As a result, the
trading price of our common stock may decline, and you may lose all or part of
your investment.
Risks Related to U.S. Interactive
Management of Growth -- We may be unable to manage our future growth
effectively.
Our success depends on our ability to effectively manage our future
growth. Our past growth has placed significant demands on our resources. We
have incurred substantial increases in expenses as our revenues have grown. As
a result, our losses have increased significantly in recent periods. For
example, our net loss was $14.4 million for the year ended December 31, 1999,
compared to $8.4 million for the year ended December 31, 1998. Our net loss
increased to $8.4 million for the year ended December 31, 1998, from $290,000
for the year ended December 31, 1997. Our net loss would have been $96.4
million for the year ended December 31, 1999, as calculated on a pro forma
basis.
A key part of our strategy is to increase our revenues, both by hiring
more personnel and by acquiring additional companies, which may continue to
place a strain on our resources. To manage any future growth effectively, we
must, among other things, do the following:
o hire, train and retain highly qualified employees
o estimate our project costs and requirements accurately
o efficiently match employees with client projects
o maintain levels of expertise that are expected by clients
o continue to refine our operational, financial and other systems
o improve, upgrade and expand our infrastructure
o manage expansion into additional geographic territories
If we do not effectively manage any future growth we may achieve, our
revenues, reputation and operating results will be materially adversely
affected. We may never be able to achieve profitability.
Integration of Current and Potential Acquisitions -- We may be unable to
achieve the anticipated benefits from our acquisition of Soft Plus or other
acquisitions we may complete.
On March 8, 2000, we completed the acquisition, by merger, of Soft Plus.
We may, in the future, seek to consummate other acquisitions. Some of the risks
we may encounter in connection with our merger with Soft Plus and any future
acquisitions we may consummate include:
o unforeseen expenses, delays and difficulties in integrating the acquired
company into our organization
o difficulties in integrating the culture of the acquired company into our
own culture
o loss of senior executives or other key employees from the acquired
company
o adverse client reaction to the acquisition including, but not limited to,
a client's termination of contracts with us or with the acquired company
o diversion of our management team's focus during the integration process
o undisclosed or potential liabilities of the acquired company, related to
its employees, operations, business contracts or intellectual property
If we are unable to effectively manage these risks, our revenues,
reputation and operating results could be materially adversely affected.
6
<PAGE>
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 us, we could be materially adversely affected.
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 in demand for individuals with Internet technology-related skills. This
shortage is likely to continue for the foreseeable future. We have had
difficulty hiring a sufficient number of technical employees. We may not be
able to attract, assimilate or retain enough qualified personnel to support our
growth, and this would have a material adverse affect on our ability to retain
existing projects and bid for new projects.
Revenue Concentration -- We generate a large part of our revenues from a
limited number of clients.
For the year ended December 31, 1998, our five largest clients by revenue
accounted for approximately 36% of our revenues. For the year ended December
31, 1999, our five largest clients by revenue accounted for approximately 48%
of our revenues. Three of these clients, Chromazone LLC (together with its
affiliate, NetSmart, Inc.), Exist Corporation (formerly known as Juggernaut
Partners LLC) and Thomson Consumer Electronics, Inc., accounted for 13%, 12%
and 12%, respectively, of our revenues in this period. We do not have long-term
contracts with these clients. We may be unable to sustain the volume of work we
perform for these clients. They may terminate their relationship with us at any
time without penalty. These clients may not retain us in the future. Any
cancellation, deferral or significant reduction in work performed for these
clients could have a material adverse effect on our business, financial
condition and results of operations.
Eric Pulier, our Chairman of the Board, and John D. Shulman, a director,
are shareholders of Exist and owned during part of 1999, in the aggregate, 36%
of the equity of Exist on a fully diluted basis. Their aggregate ownership is
currently 17% on a fully diluted basis. In addition, Mr. Pulier and Mr. Shulman
each hold currently exercisable options to acquire an additional 6% of the
equity ownership of Exist. Mr. Shulman is the Chairman of the Board and Mr.
Pulier is a director of Exist. Mr. Pulier is the sole general partner, and
together with his wife, Heather Pulier, owns 100%, of Digital Evolution, L.P.
Digital Evolution, L.P. owns 50% of Chromazone LLC. Chromazone LLC owns 50% of
NetSmart, Inc. Mr. Pulier is a director of Chromazone LLC and a director of
NetSmart, Inc. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business-Clients" and "Certain Relationships and
Related Transactions" for more information relating to our clients.
Variability of Operating Results -- The variability of our operating results
may adversely affect our stock price.
Our operating results have fluctuated from quarter to quarter and may
continue to fluctuate in the future. Fluctuations in our operating results may
be significant. It is difficult for us to forecast accurately the frequency and
duration of our client projects. We incur expenses, which are mainly fixed
expenses, based on our expectations concerning the costs of our future
projects. We may not be able to adjust our spending in a timely manner to
compensate for any shortfall in our projected revenues. In the event of such a
shortfall, our expenses as a percentage of our revenue would increase. Our
operating results may fluctuate because of:
o the number, size and scope of projects
o the accuracy of our project estimates
o project delays
o our ability to hire, train and retain qualified personnel
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
7
<PAGE>
o our ability to utilize our employees in a cost efficient manner
We also have experienced seasonality with respect to our revenues that has
resulted in lower revenue during summer, year-end vacation and holiday periods.
Our quarterly operating results may not meet the expectations of analysts
or investors. This may cause a decline in the market price of our common stock.
Contract Terminations -- If a large client project or a significant number of
other client projects are terminated or reduced, we may have a large number of
employees who are not generating revenue.
Most of our client projects may be canceled by the client without penalty.
We may have a large number of employees who are not generating revenue if a
large client project or a significant number of client projects are terminated
or materially reduced. When a client project is completed, terminated,
postponed or materially reduced, we must shift our employees to other client
projects or they will not be generating revenue. If we do not use these
employees efficiently on other projects, our revenues will decrease and our
results of operations will be materially adversely affected.
Fixed Price Contracts -- We have many fixed price contracts which create a risk
that the costs we incur in performing these contracts will exceed the revenues
we will receive for these contracts.
For the year ended December 31, 1999, approximately 61% of our revenue was
derived from fixed price contracts. There are many risks and difficulties
associated with fixed price contracts. To achieve profitability from fixed
price contracts, we must, among other things:
o accurately estimate the resources required to perform these contracts
o complete our clients' projects on a timely basis
o effectively manage our clients' expectations
o complete the projects within budget and to our clients' satisfaction
If we do not successfully accomplish these goals, we could be exposed to
cost overruns and penalties. If this occurs in connection with a large project
or a sufficient number of projects, our revenues will decrease and our results
of operations will be materially adversely affected.
Complex and Critical Projects -- If we fail to meet our clients' expectations,
we could severely damage our reputation and have difficulty attracting new
business.
Many of our projects are complex and critical to the success of our
clients' businesses. Our reputation could be severely damaged if we fail to
meet a client's expectations. This could materially adversely affect our
ability to attract new business from that client or others. In addition, some
clients might sue us in an attempt to collect monetary damages. If these events
were to occur, our revenues, results of operations and financial condition may
be materially adversely affected.
Limited Management History -- The majority of our senior management team has
worked together in their present capacities for less than one year.
Subsequent to our initial public offering, we have added one new member to
our senior management team, James J. Huser, the General Manager of our Los
Angeles office, who became our Chief Operating Officer in December 2000. (Mr.
Huser continued to serve as General Manager of our Los Angeles office through
March 2000.) Since the Merger, Mohan Uttarwar has served as President of our
subsidiary, U.S. Interactive Corp. (Delaware). The majority of our senior
management team has worked together in their present capacities for less than
one year. Our success depends on the ability of our management team to work
together effectively. Our business, revenues, results of operations and
financial condition will be materially adversely affected if our management team
does not manage our business effectively, or if we are unable to retain existing
senior management personnel.
8
<PAGE>
History of Losses -- We have a history of losses, and we may never achieve
profitability.
Since our inception, we have incurred significant losses. As of December
31, 1999, we have an accumulated deficit of approximately $24.7 million. Our
net loss in 1999 was $14.4 million. 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 profitability.
We anticipate that we will repay the $80 million note which we issued in
the Merger with proceeds to be obtained from one or more of the following:
borrowings under our credit facilities, a refinancing, and a sale of capital
stock or debt securities in the public or private markets, together with
revenues generated from operations. (We also may repay a portion of the note
with some of the proceeds of this offering.) However, there can be no assurances
that we will be able to obtain funds sufficient to repay the $80 million note on
terms satisfactory to us, in which event our ability to achieve profitability
will be materially adversely affected.
Strategic Relationships -- We may not be successful in retaining our current
relationships or entering into new relationships.
We have strategic relationships with over 25 companies. We have written
agreements with 12 companies, and all other strategic relationships rely on
oral agreements. These relationships are non-exclusive and the other parties
are free to enter similar or more favorable relationships with our competitors.
Whether written or oral, the agreements underlying our relationships are
general in nature, do not legally bind the parties, have indefinite terms and
may be ended at the will of either party. We may not be able to maintain our
existing strategic relationships, and may fail to enter into new relationships.
If we are unable to maintain these relationships, the benefits we derive from
these relationships to joint-market or otherwise collaborate and cooperate with
these companies may be lost. If we are unable to maintain our existing
strategic relationships, or fail to enter into new relationships, we may not
gain access to technologies and client opportunities that are important to our
business. This may have a material adverse effect on our business, financial
condition and results of operations.
Intellectual Property -- Our success depends, in part, on intellectual property
which may be difficult to protect. This could affect our ability to compete
effectively.
Existing trade secret and copyright laws give us only limited protection
for our copyrights, trademarks, service marks and trade secrets. Third parties
may attempt to disclose, obtain or use our intellectual property without paying
us. This is particularly true in foreign countries where laws or law enforcement
practices may not protect our intellectual property rights as fully as in the
United States. Third parties may independently develop and obtain patents or
copyrights for technologies that are similar or superior to our technologies.
Year 2000 -- Year 2000 compliance issues may adversely affect either our
clients or us.
Prior to January 1, 2000, there was a great deal of concern regarding the
ability of computers to adequately recognize 21st century dates from 20th
century dates due to the two-digit date fields used by many systems. Most
reports to date, however, are that computer systems are functioning normally
and the compliance and remediation work accomplished leading up to the year
2000 was effective to prevent any problems. Computer experts have warned that
there may still be residual consequences of the change in centuries and any
such difficulties could result in a decrease in the services we provide, an
increase in allocation of our and our client's resources to address Year 2000
problems without additional revenue commensurate with such dedication of
resources, or an increase in litigation costs relating to losses suffered by us
or our clients due to such Year 2000 problems.
9
<PAGE>
Risks Related to our Industry
Competition -- We may not be able to compete successfully.
The market for Internet professional services is intensely competitive and
subject to rapid technological change. We compete with:
o other Internet professional services firms
o information technology consulting and integration firms
o web design firms
o management consulting firms
o software application providers
o application service providers
In addition, we face potential competition from the in-house technology
and marketing departments of our clients and potential clients.
Many of our current and potential competitors have advantages over us.
These advantages include longer operating histories, larger client bases and
significantly greater financial, personnel, marketing, sales and public
relations resources. These competitors may increase their commitments to our
market in response to the growth of the Internet.
There are relatively low barriers to entry into our business. We expect
that we will face additional competition from new entrants into the market in
the future. Existing or future competitors may develop or offer services that
provide significant performance, price, creative or other advantages over those
offered
by us.
Our revenues and results of operations will be adversely affected if we do
not compete successfully.
Market Acceptance -- Continued market acceptance of our industry is uncertain.
Widespread market acceptance of the outsourcing of the design, development
and maintenance of Internet-based applications to Internet professional
services firms is uncertain. Many of our potential clients may ultimately
decide to perform these services in-house. In-house personnel may have better
access to both key client decision-makers and the information required to
prepare proposals for such solutions. If independent providers of Internet
professional services prove to be unreliable, ineffective or too expensive, or
if software companies develop tools that are sufficiently user-friendly and
cost-effective, companies may instead choose to design, develop or maintain
their Internet-based applications internally. We will be materially adversely
affected if the market for our services does not continue to develop or
develops more slowly than we expect, or if our services are not accepted by the
market.
Rapid Technological Change -- Our industry is characterized by rapid
technological change, a pace which we may not be able to match.
The market for Internet professional services is characterized by rapid
technological change including:
o changing client requirements and preferences
o frequent new product and service introductions embodying new processes
and technologies
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
10
<PAGE>
If we do not respond effectively to these developments, our business,
financial condition and results of operations would be materially adversely
affected.
Decline in Internet Usage -- Lack of growth or decline in Internet usage could
cause our business to suffer.
We have derived all of our revenue from projects involving the Internet.
Our business will be adversely affected if Internet usage does not continue to
grow. Internet usage may not continue to grow because of inadequate network
infrastructure, security concerns, inconsistent service quality and lack of
cost-effective, high-speed service, among other reasons. On the other hand, if
Internet usage grows too rapidly, the Internet infrastructure may not support
the demands this growth will place on it. As a result, the Internet's
performance and reliability may decline. In addition, outages and delays have
occurred throughout the Internet network infrastructure and have interrupted
Internet service. If these outages or delays occur frequently in the future,
Internet usage could grow more slowly or decline.
We may also incur substantial costs to keep up with changes surrounding
the Internet. Unresolved critical issues concerning the commercial use and
government regulation of the Internet include the following:
o security
o cost and ease of Internet access
o intellectual property ownership
o privacy
o taxation
o liability issues
Any costs we incur due to these factors would materially and adversely
affect our business, financial condition and results of operations.
Risks Related to the Offering
Shares Eligible for Future Sale -- If our current stockholders sell significant
amounts of 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. Certain shares of our common
stock that were outstanding on February 29, 2000 (including shares outstanding
on a pro forma basis after giving effect to the Merger), will not be sold in the
offering and will become eligible for sale without registration pursuant to Rule
144 or Rule 701 under the Securities Act as follows:
o 3,696,687 shares are currently eligible for sale into the public market
under Rule 144(k) or Rule 701
o 8,141,150 shares are eligible for sale under Rule 144
o 4,284,793 shares of common stock will become eligible for sale from time
to time after the date of this prospectus under Rule 144 upon expiration
of their respective holding periods
Some holders of shares of our common stock outstanding immediately prior
to the offering also have registration rights, which had been granted to them
prior to our initial public offering, relating to a total of 4,145,982 shares
of our common stock (other than shares which are being sold by the holder in
this offering), enabling them to require us to register their shares under the
Securities Act for sale in the future. In addition, we have agreed to file a
registration statement on Form S-3 covering a maximum of approximately 720,088
of the shares of our common stock which we issued in the Merger. (We anticipate
that we will become eligible to utilize Form S-3 in August 2000.) The former
shareholders of Soft Plus also have limited piggyback registration rights
relating to a maximum of approximately 690,227 of the shares of our common
stock which we issued in the Merger. The underwriters have requested that the
stockholders who are selling shares in this offering, who will hold a total of
555,446 shares outstanding after the offering, agree not to sell shares of our
common stock for 90 days after the date of this prospectus without the consent
of Lehman Brothers Inc.
11
<PAGE>
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, eight stockholders, including two
former executive officers and Safeguard Scientifics, Inc., collectively, will
own beneficially approximately 40.9% of our outstanding common stock. If our
controlling stockholders chose to act together, they may be able to exert
considerable influence over us, including in the election of directors and the
approval of actions submitted to our stockholders. In addition, without the
consent of these stockholders, we may be prevented from entering into
transactions that could be beneficial to us. The interests of our controlling
stockholders could conflict with the interests of our other stockholders.
Volatility of Stock Price -- Our common stock price has been and is likely to
continue 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 companies in particular are often subject to greater
fluctuation than the stock markets in general. The trading price of our common
stock has and may continue to fluctuate widely. This volatility may result from
many events directly involving us, including our operating results, potential
litigation, strategic relationship developments and analysts' statements.
Volatility may also result from developments not directly involving us such as
general economic, industry and market conditions and competitive developments.
In particular, the market prices of the securities of Internet-related
companies have been especially volatile. In the past, companies that have
experienced volatility in the market price of their stock have been the subject
of securities class action litigation. We would incur substantial costs and
experience a diversion of our management's attention and resources if we were
the subject of securities class action litigation.
Anti-takeover Mechanisms -- Our certificate of incorporation and Delaware law
contain provisions that could discourage a takeover.
Our certificate of incorporation provides for the division of our board of
directors into three classes and provides our board of directors the power to
issue shares of preferred stock without stockholder approval. This preferred
stock could have voting rights, including voting rights that could be superior
to that of our common stock, and the board of directors has the power to
determine these voting rights. In addition, Section 203 of the Delaware General
Corporation Law contains provisions which impose restrictions on stockholder
action to acquire control of U.S. Interactive. The effect of these provisions
of our certificate of incorporation and Delaware law provisions would likely
discourage third parties from seeking to obtain control of U.S. Interactive.
12
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements under the captions
"Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business" and elsewhere. These
forward-looking statements include statements about the following:
o implementing our business strategy
o managing our growth and employee costs
o our business and growth strategies and other statements contained herein
that are not historical facts
When used in this prospectus, the words "anticipate," "believe,"
"estimate," "expect," "seek," "intend," "may" and similar expressions are
generally intended to identify forward-looking statements. There are important
factors that could cause actual results to differ materially from those
expressed or implied by such forward-looking statements including:
o changes in general economic and business conditions and those in the
Internet professional services market in particular
o changes in Internet-related technologies
o actions of competitors
o the extent to which we are able to expand our business into new markets
o our inability to effectively manage our growth
o the level of demand for our services
o changes in our business strategies
o our inability to obtain financing when required
o other factors discussed under the caption "Risk Factors"
13
<PAGE>
SOFT PLUS ACQUISITION
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 Soft Plus' stock option
plans, which became options to purchase a total of 1,408,866 shares of our
common stock. 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, (ii) the results of certain audits being performed after the closing
of the Merger, and (iii) costs incurred by Soft Plus in the Merger above agreed
levels. The $80 million note is due and payable on the earlier of March 8, 2001
or the receipt by us of not less than $80 million from the net proceeds of a
public offering of our capital stock. However, we may pay a portion of the $80
million note with some of the proceeds of this offering.
To secure any of our potential indemnification claims against the former
principal shareholders of Soft Plus under the Merger agreement, we placed in
escrow for one year a total of 717,972 of the 3,391,106 shares of our common
stock issued in the Merger. These shares will be released from the escrow to
satisfy any valid indemnification claims we make during the one-year period
following March 8, 2000, the closing date of the Merger.
At closing of the Merger, we held an additional 127,013 of the shares of
our common stock issued in the Merger. These shares were exchanged in the Merger
for shares of Soft Plus common stock that had been acquired by a total of 12
persons under restricted stock purchase agreements. These shares continue to be
subject to a right of repurchase upon termination of employment or engagement by
us of these former Soft Plus shareholders. Commencing on March 8, 2000, our
right to repurchase a portion of these shares lapses on a monthly basis over
periods ranging from 30 to 36 months.
At the closing of the Merger, the President and CEO of Soft Plus, Mohan
Uttarwar, entered into an employment agreement with us under which he is now
employed as the President of our subsidiary, U.S. Interactive Corp. (Delaware).
Moreover, on March 8, 2000, Mr. Uttarwar was appointed to fill the unexpired
term of the vacant seat on our board of directors, which term ends on the date
of the 2001 annual meeting of our stockholders. Since the closing of the
Merger, in addition to Mr. Uttarwar, each of the other principal shareholders
of Soft Plus has also become our employee and has entered into a
Non-Disclosure, Assignment of Developments, Non-Solicitation and
Non-Competition Agreement with us that, among other things, prohibits each
principal shareholder from competing with us for one year following termination
of his employment with us, or for a period of two years from March 8, 2000, the
date the Merger closed, whichever date is later.
Shareholders of Soft Plus holding a total of approximately 2,880,351
unregistered shares of our common stock which they received in the Merger
signed an agreement requiring them to hold their shares for up to two years,
with the restriction to lapse with respect to 25% of the shares every six
months beginning on a date six months following the closing of the Merger. We
agreed to register for resale up to 25% of the shares of our stock which are
subject to the lock-up restrictions when we are eligible to register shares of
our common stock on Form S-3. We granted additional limited registration rights
under a registration rights agreement covering the shares of our common stock
issued in the Merger. Additional information regarding the lock-up restrictions
and registration rights is provided below under "Shares Eligible For Future
Sale."
14
<PAGE>
USE OF PROCEEDS
Based on an assumed offering price of $22.25 per share, we estimate that
our net proceeds from the sale of the 3,000,000 shares of our common stock by
us in this offering will be approximately $62.8 million, 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 the net proceeds from this offering to repay any
outstanding balance under our revolving credit agreement with a commercial bank,
open new offices and for other general corporate purposes. In addition, we may
use a portion of the net proceeds from this offering for acquisitions or to
repay a portion of the $80 million dollar note issued in the Merger. We actively
investigate and conduct discussions with potential candidates for acquisition,
joint venture opportunities or other relationships on an ongoing basis. However,
we are not presently conducting discussions or negotiations with respect to any
such material transactions. Pending such uses, we will invest the net proceeds
of this offering in short-term, investment grade securities.
There was an outstanding balance under our revolving credit agreement of
$6 million on March 31, 2000. Borrowings under the revolving credit agreement
bear interest at variable rates; on March 31, 2000, the interest rate was
9.50%. We may reborrow amounts under our revolving credit agreement, which will
be available for future borrowings through December 7, 2000 (or, if we repay the
Soft Plus note in full prior to that date, the line of credit will expire on
March 21, 2001).
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.
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on the Nasdaq National Market since
August 10, 1999, under the symbol "USIT." Prior to that time, there was no
public market for our common stock. The following table sets forth, for the
periods indicated, the high and low closing sales prices per share of the
common stock on the Nasdaq National Market.
Common Stock Price
-------------------------
1999 High Low
- ---- ----------- -----------
Third Quarter (from August 10, 1999) ........... $ 29.63 $ 10.00
Fourth Quarter ................................. $ 56.13 $ 18.50
2000
- ----
First Quarter .................................. $ 76.50 $ 29.9375
Second Quarter (through April 10, 2000)......... $ 29.25 $ 22.25
On April 10, 2000, the last reported sale price for our common stock on the
Nasdaq National Market was $22.25 per share. As of April 7, 2000, there were
approximately 534 holders of record of our common stock.
15
<PAGE>
CAPITALIZATION
The following table sets forth:
o our total capitalization as of December 31, 1999
o our pro forma capitalization as of December 31, 1999, to give effect to
the Merger
o our pro forma, as adjusted capitalization to give effect to the sale of
3,000,000 shares of common stock by us pursuant to this offering and the
application of the estimated net proceeds of approximately $62.8 million.
You should read this information together with the consolidated financial
statements and notes to those consolidated financial statements and the
unaudited pro forma combined financial statements and the notes thereto
appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of December 31, 1999
-------------------------------------------
Pro Forma,
Pro Forma As Adjusted
Actual (Unaudited) (Unaudited)
------------ ------------- ------------
(dollar amounts in thousands)
<S> <C> <C> <C>
Long-term debt and capital lease obligations, current portion ......... $ 977 $ 1,528 $ 1,528
Acquisition note payable, short term .................................. -- 80,000 80,000
========= ========= =========
Long-term debt and capital lease obligations, net of current portion... 1,666 3,366 3,366
--------- --------- ---------
Stockholders' equity:
Preferred stock, $.001 par value; 15,000,000 shares authorized, no
shares issued and outstanding -- actual, pro forma and pro forma
as adjusted .......................................................... -- -- --
Common stock, $.001 par value; 90,000,000 shares authorized,
20,551,192 shares issued of which 19,488,483 are outstanding --
actual; 23,942,298 shares issued of which 22,879,589 are out-
standing -- pro forma and 27,098,188 shares issued of which
26,035,479 shares are outstanding, pro forma as adjusted ............. 21 24 27
Additional paid-in capital ............................................ 80,581 342,598 405,375
Deferred stock compensation ........................................... (831) (831) (831)
Treasury stock; 1,062,709 shares, at cost ............................. (5,055) (5,055) (5,055)
Accumulated deficit ................................................... (24,740) (24,740) (24,740)
--------- --------- ---------
Total stockholders' equity ............................................ 49,976 311,996 374,776
--------- --------- ---------
Total capitalization .................................................. $ 51,642 $ 315,362 $ 378,142
========= ========= =========
</TABLE>
The foregoing table excludes as of February 29, 2000:
o 4,668,605 shares of common stock issuable upon the exercise of
outstanding stock options at a weighted average exercise price of $24.92
per share
o 658,493 shares of common stock reserved for future grant under our stock
option plans
o 70,000 shares of common stock issuable upon the exercise of a warrant
outstanding at February 29, 2000, at an exercise price of $3.50 per share
o on a pro forma basis, 1,408,866 shares of common stock issuable upon the
exercise of stock options assumed in connection with the Soft Plus merger
at a weighted average exercise price of $1.86 per share
16
<PAGE>
DILUTION
Our pro forma net tangible book value at December 31, 1999, was $(57.2)
million, or $(2.50) per share of common stock. Pro forma net tangible book
value per share represents the amount of our stockholders' equity less
intangible assets divided by the total number of shares of common stock
outstanding on a pro forma basis after giving effect to the Merger.
Net tangible book value dilution per share represents the difference
between the amount per share paid by the purchasers of shares of our common
stock in this offering and the net tangible book value per share of our common
stock immediately after completion of this offering. Our pro forma net tangible
book value as of December 31, 1999, would have been $5.6 million, or $0.22 per
share after
o giving effect to our sale of 3,000,000 shares of common stock offered by
this prospectus at an assumed public offering price of $22.25 per share
o deducting underwriting discounts and estimated offering expenses
o giving effect to the Merger
This represents an immediate increase in pro forma net tangible book value
of $2.72 per share to existing stockholders and an immediate dilution in pro
forma net tangible book value of $22.03 per share to new investors purchasing
shares at the assumed public offering price. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed offering price per share ......................................... $ 22.25
Pro forma net tangible book value per share as of December 31, 1999 ...... $(2.50)
Increase per share attributable to new investors ......................... $ 2.72
------
Pro forma net tangible book value per share after this offering .......... $ .22
-------
Net tangible book value dilution per share to new investors .............. $ 22.03
=======
</TABLE>
The foregoing table excludes as of February 29, 2000, 6,147,471 shares of
common stock issuable upon exercise of an outstanding warrant and outstanding
stock options, at a weighted average exercise price of $19.39 per share. The
table also excludes as of February 29, 2000, 658,493 shares reserved for future
grants under our stock option plans. The exercise of the outstanding warrant
and stock options will cause further dilution to new investors.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statement of operations data for each of the years in the
three-year period ended December 31, 1999, and the consolidated balance sheet
data as of December 31, 1998 and 1999 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 each of the years in the two-year period ended
December 31, 1996, and the balance sheet data as of December 31, 1995, 1996 and
1997 have been derived from our audited financial statements that are not
included in this prospectus. 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 financial statements and the notes thereto.
The unaudited pro forma consolidated statements of operations data for the
year ended December 31, 1999, reflect the effect of the Soft Plus merger, as if
the transaction had occurred on January 1, 1999. The unaudited pro forma
consolidated balance sheet as of December 31, 1999, reflects the effect of the
Soft Plus merger as if the transaction had occurred on December 31, 1999.
18
<PAGE>
Selected Consolidated Financial Data
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ---------- ---------- ------------- --------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of Operations
Data:
Revenue ....................................... $ 935 $ 1,950 $ 6,061 $ 13,636 $ 35,255
Operating costs and expenses:
Project personnel and related expenses ....... 544 945 2,841 7,405 18,687
Management and administrative ................ 316 1,012 2,196 7,876 17,370
Research and development ..................... -- -- -- -- --
Marketing and sales .......................... 5 277 1,013 2,054 3,531
Depreciation and amortization ................ 17 61 269 4,592 10,510
----- ------- ------- --------- ----------
Total Operating Expenses .................. 882 2,295 6,319 21,927 50,098
----- ------- ------- --------- ----------
Income (loss) from operations ................. 53 (345) (258) (8,291) (14,843)
Other income (expense), net ................... (2) 235 (32) (152) 454
----- ------- ------- --------- ----------
Income (loss) before income tax expense ....... 51 (110) (290) (8,443) (14,389)
Income tax expense ............................ 13 19 -- -- --
----- ------- ------- --------- ----------
Net income (loss) ............................. 38 (129) (290) (8,443) (14,389)
Accretion of mandatorily redeemable
preferred stock to redemption value .......... -- -- -- (625) (916)
----- ------- ------- --------- ----------
Net income (loss) attributable to common
stockholders ................................. $ 38 $ (129) $ (290) $ (9,068) $ (15,305)
===== ======= ======= ========= ==========
Net income (loss) per common share:
Basic and diluted ............................. $ .01 $ (.03) $ (.06) $ (1.36) $ (1.19)
===== ======= ======= ========= ==========
Weighted average shares outstanding used in
the basic and diluted per common share
calculation .................................. 2,813 4,486 4,737 6,670 12,826
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended
December 31,
1999
-------------
(in thousands,
except per
share data)
(Pro Forma
Unaudited)
<S> <C>
Consolidated Statements of Operations
Data:
Revenue ....................................... $ 59,540
Operating costs and expenses:
Project personnel and related expenses ....... 32,051
Management and administrative ................ 25,953
Research and development ..................... 2,764
Marketing and sales .......................... 7,187
Depreciation and amortization ................ 83,319
---------
Total Operating Expenses .................. 151,274
---------
Income (loss) from operations ................. (91,734)
Other income (expense), net ................... (4,654)
---------
Income (loss) before income tax expense ....... (96,388)
Income tax expense ............................ --
---------
Net income (loss) ............................. (96,388)
Accretion of mandatorily redeemable
preferred stock to redemption value .......... (916)
---------
Net income (loss) attributable to common
stockholders ................................. $ (97,304)
=========
Net income (loss) per common share:
Basic and diluted ............................. $ (6.00)
=========
Weighted average shares outstanding used in
the basic and diluted per common share
calculation .................................. 16,217
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1995 1996 1997 1998
------ -------- -------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents ...................... $ 13 $ 594 $ 786 $ 3,698
Working capital (deficit) ...................... 105 747 701 1,916
Total assets ................................... 238 1,770 4,122 22,262
Acquisition note payable ....................... -- -- -- --
Long-term debt, net of current portion ......... -- 46 79 583
Mandatorily redeemable convertible preferred
stock ........................................ -- -- -- 17,293
Total stockholders' equity (deficit) ........... 73 1,111 1,795 (1,820)
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1999
----------------------------------------
(in thousands)
Pro Forma,
Pro Forma As Adjusted
Actual (Unaudited) (Unaudited)
----------- ------------- ------------
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents ...................... $ 34,130 $ 9,953 $ 72,732
Working capital (deficit) ...................... 38,504 (64,520) (1,741)
Total assets ................................... 62,278 411,754 474,534
Acquisition note payable ....................... -- 80,000 80,000
Long-term debt, net of current portion ......... 1,666 3,366 3,366
Mandatorily redeemable convertible preferred
stock ........................................ -- -- --
Total stockholders' equity (deficit) ........... 49,976 311,996 374,776
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with "Selected
Consolidated Financial Data," our consolidated financial statements and the
notes to those financial statements elsewhere in this prospectus. In addition
to historical information, this discussion contains forward-looking information
that involves risks and uncertainties. Our actual results could differ
materially from those anticipated by such forward-looking information due to
competitive factors, risks associated with our expansion plans and other
factors discussed under "Risk Factors" and elsewhere in this prospectus.
Overview
Revenue. 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 61% of our revenue for the year ended December 31, 1999, was
derived from fixed fee arrangements. The percentage of our revenue that is
derived from fixed fee arrangements may increase in the future. Substantially
all of our client projects may be terminated early by the client without
penalty.
Cost Structure. The largest portion of our costs consists of
employee-related expenses for our project personnel and other direct costs,
such as third-party vendor costs. The remainder of our costs are associated
with the development of our business and support of our project personnel, such
as marketing and sales, and management and administrative support. Marketing
and sales consists primarily of personnel costs and commissions as well as the
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 and 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 our clients' senior management from time
to time. Monitoring the costs and progress associated with each project is
aided by our intranet-based project management systems. We manage the
activities of our service delivery personnel by monitoring project schedules
closely and staffing requirements for new projects. Most of our client projects
can, and may in the future, be terminated by the client without penalty. As a
result, an unanticipated termination of a client project could require us to
maintain underutilized employees, resulting in higher than expected percentage
and number of inactive professionals. While we intend to adjust our
professional staff to reflect our active projects, we must maintain a
sufficient number of senior professionals to oversee existing and anticipated
client projects and participate in 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
20
<PAGE>
spending in a timely manner to compensate for any shortfall in our projected
revenues. In the event of such a shortfall, our expenses as a percentage of our
revenue would increase. We also have experienced seasonality with respect to
our revenues that has resulted in lower revenue during summer, year-end
vacation and holiday periods.
In July 1998, we completed the Digital Evolution merger, which resulted in
the issuance of 4,383,954 shares of common stock and 1,573,533 shares of Series
A preferred stock to the shareholders of Digital Evolution. Prior to the
merger, Digital Evolution was an Internet professional services firm. The
Digital Evolution merger has been accounted for using the purchase method of
accounting. Of the total value of the consideration paid of $17.0 million,
$872,000 has been allocated to the fair value of the net tangible assets
acquired and liabilities assumed, and $16.1 million has been allocated to
goodwill and other intangible assets, which is being 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 certain assets and assumed certain liabilities
of InVenGen LLC, a regional Internet professional services firm, in exchange
for 584,800 shares of our 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 our results of operations since April 1, 1999.
In March 2000, we acquired by 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 upon the earlier of one year or the receipt by us of not less than $80
million from the net proceeds of a public offering of our capital stock. 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 will be accounted for using the purchase method
of accounting. Accordingly, the purchase price will be allocated to the net
assets acquired and liabilities assumed. The balance of the purchase price will
be allocated to goodwill and other intangible assets and amortized over their
estimated useful lives of approximately five years.
Results of Operations
The following table sets forth, as a percentage of revenue, our statement
of operations for the years ended December 31, 1997, 1998 and 1999.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1998 1999
---------- ----------- ----------
<S> <C> <C> <C>
Statement of Operations Data:
Revenue ......................................................... 100% 100% 100%
Operating costs and expenses:
Project personnel and related expenses ......................... 47 54 53
Management and administrative .................................. 36 58 49
Marketing and sales ............................................ 17 15 10
Depreciation and amortization .................................. 4 34 30
--- --- ---
Total operating expenses ..................................... 104 161 142
--- --- ---
Operating loss .................................................. (4) (61) (42)
Other income (expense), net ..................................... (1) (1) 1
--- --- ---
Loss before income tax expense .................................. (5) (62) (41)
Income tax expense .............................................. -- -- --
--- --- ---
Net loss ........................................................ (5) (62) (41)
Accretion of mandatorily redeemable preferred stock to redemption
value .......................................................... -- (5) (2)
Net loss attributable to common stockholders .................... (5)% (67)% (43)%
=== === ===
</TABLE>
21
<PAGE>
1999 Compared to 1998
Revenue. Revenue increased $21.7 million, or 159%, to $35.3 million for
the year ended December 31, 1999 from $13.6 million for the year ended December
31, 1998. This increase in revenue was primarily due to growth in 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 consist primarily of payroll, associated taxes, employee benefits and
any third-party fees incurred in the delivery of our services. These costs
increased $11.3 million, or 152%, to $18.7 million for the year ended December
31, 1999, from $7.4 million for the year ended December 31, 1998. The increase
was primarily due to the increase in the hiring of project personnel as well as
increased contracted services associated with the increased demand for our
services. Headcount for project personnel as of December 31, 1999, was 245
compared with 131 as of December 31, 1998. As a percentage of revenue, project
personnel and related expenses were 53% for the year ended December 31, 1999,
and 54% for the year ended December 31, 1998.
Management and Administrative. Management and administrative expenses
increased $9.5 million, or 121%, to $17.4 million for the year ended December
31, 1999, from $7.9 million for the year ended December 31, 1998. The increase
was principally due to expenses incurred to accommodate current and anticipated
growth, including the expansion of office facilities and the increased cost of
management and administrative personnel and other general operating expenses in
the areas of legal, accounting, human resources, travel and general operations.
Office rent expense increased to $2.1 million for the year ended December 31,
1999, from $1.1 million for the year ended December 31, 1998. Management and
administrative headcount increased to 112 as of December 31, 1999, from 58 as
of December 31, 1998. The increases in office rent and personnel accounted for
11% and 40% of the overall increase, respectively. As a percentage of revenue,
management and administrative expense was 49% for the year ended December 31,
1999, and 58% for the year ended December 31, 1998.
Marketing and Sales. Marketing and sales expenses increased $1.5 million,
or 71%, to $3.5 million for the year ended December 31, 1999, from $2.1 million
for the year ended December 31, 1998. The increase was attributable to the
continuing investment in our marketing and sales programs including the hiring
of new business development and marketing personnel. As a percentage of
revenue, marketing and sales expenses were 10% for the year ended December 31,
1999, and 15% for the year ended December 31, 1998.
Depreciation and Amortization. Depreciation and amortization increased
$5.9 million to $10.5 million for the year ended December 31, 1999, from $4.6
million for the year ended December 31, 1998. The increase was primarily due to
amortization of approximately $1.3 million from the InVenGen LLC acquisition in
March 1999 and a $4.1 million increase in amortization expense associated with
the Digital Evolution merger which was effective July 2, 1998. These amounts
are being amortized over a two year period. There were also increased capital
expenditures for new equipment and leasehold improvements.
Other Income (Expense). Other income increased $606,000 to $454,000 for
the year ended December 31, 1999 compared to an expense of $152,000 for the
year ended December 31, 1998. The increases were primarily attributable to
increased interest income from cash investments which was partially offset by
increased interest expense from borrowings under the bank line of credit and
term loan. The average aggregate balance outstanding on our line of credit and
our term loan was $2.0 million during the year ended December 31, 1999, as
compared to $1.4 million during the year ended December 31, 1998. Interest
expense under these facilities was $146,000 for the year ended December 31,
1999, and $93,000 for the year ended December 31, 1998.
Interest Income. Our cash, cash equivalents and short-term investments are
invested primarily in money market accounts. During 1998, we received $10.8
million of net proceeds from the sale of our preferred stock. During the year
ended December 31, 1999, we received $44.5 million of net proceeds from the
sale of shares of our common stock in our initial public offering. The increase
in interest income in 1998 and the year ended December 31, 1999, was primarily
due to the significant increase in our cash and cash equivalents throughout
1998 and 1999 as a result of these transactions.
22
<PAGE>
Income Tax Expense. As a result of our losses, we had no income tax
expense for either the year ended December 31, 1999, or the year ended December
31, 1998. As of December 31, 1999 we had approximately $9.9 million and $8.3
million of federal and state net operating loss carryforwards, respectively,
available to offset future taxable income. The federal net operating loss
carryforwards will expire between 2010 and 2019, if not utilized. The state net
operating loss carryforwards will expire through the year 2019, if not
utilized.
Under the Tax Reform Act of 1986, the utilization of a corporation's net
operating loss carryforward is limited following a greater than 50% change in
ownership. Due to our prior and current equity transactions, our net operating
loss carryforwards may be subject to an annual limitation. Any unused annual
limitation may be carried forward to future years for the balance of the net
operating loss carryforward period.
1998 Compared to 1997
Revenue. Revenue increased by $7.5 million, or 123%, to $13.6 million for
the year ended December 31, 1998, from $6.1 million for the year ended December
31, 1997. The increase is primarily attributable to the Digital Evolution
merger as well as an increase in the volume of services delivered to new
clients and additional work delivered for existing clients. Approximately 23%
of the increase was attributable to the Digital Evolution client base and 77%
was attributable to overall increases in project sizes.
Project Personnel and Related Expenses. Project personnel and related
expenses increased by $4.6 million, or 164%, to $7.4 million for the year ended
December 31, 1998, from $2.8 million for the year ended December 31, 1997. The
absolute increase was attributable to the hiring of additional project
personnel associated with the increase in the volume of services delivered to
clients. Direct salary expense increased $4.2 million as a result of 58 new
hires and overall increases in compensation expense. As a percentage of
revenue, project personnel and related expenses were 54% for the year ended
December 31, 1998, and 47% for the year ended December 31, 1997.
Management and Administrative. Management and administrative expenses
increased $5.7 million, or 259%, to $7.9 million for the year ended December
31, 1998, from $2.2 million for the year ended December 31, 1997. The absolute
increase was primarily attributable to expenses incurred to accommodate our
current and anticipated growth, including the expansion of some of our office
facilities and the increased cost of management and administrative personnel
and other general operating expenses in the areas of accounting, human
resources and general operations. Office rent expense increased to $1.1 million
for the year ended December 31, 1998 from $213,000 for the year ended December
31, 1997. Headcount for management and administrative staff increased to 36
from 19. As a percentage of revenue, management and administrative 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 expenses increased by $1.1
million, or 110%, to $2.1 million for the year ended December 31, 1998, from
$1.0 million for the year ended December 31, 1997. The absolute increase in
these expenses was attributable to the hiring of business development and
marketing personnel, increased public relations activities and the
implementation and continuance of our marketing programs. Total marketing and
sales personnel headcount was 16 as of December 31, 1998, compared to nine as
of December 31, 1997. As a percentage of revenue, marketing and sales expenses
were 15% for the year ended December 31, 1998, and 17% for the year ended
December 31, 1997.
Depreciation and Amortization. Depreciation and amortization increased by
$4.3 million to $4.6 million for the year ended December 31, 1998, from
$269,000 for the year ended December 31, 1997. The increase was primarily due
to amortization expense of $4.0 million associated with the Digital Evolution
merger which was effective July 2, 1998. The remaining amount of depreciation
was related to increased investments in furniture and equipment in prior years.
Other Income (Expense). Other expense increased by $120,000 to $152,000
for the year ended December 31, 1998, from $32,000 for the year ended December
31, 1997. The increase was primarily attributable to increased borrowings under
our bank line of credit, partially offset by an increase in interest income.
Interest expense related to these borrowings was $93,000 for the year ended
December 31, 1998, and $25,000 for the year ended December 31, 1997.
23
<PAGE>
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.
Our Unaudited Quarterly Operating Results
The following table presents our unaudited historical quarterly statement
of operations. We believe that all necessary adjustments, consisting only of
normal recurring adjustments, have been included in the amounts stated below to
present fairly such quarterly information. The operating results for any
quarter are not necessarily indicative of results for any subsequent period.
The results of operations of Digital Evolution have been consolidated with
our results since the beginning of the quarter ended September 30, 1998.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------
Mar. 31, Jun. 30, Sept. 30,
1998 1998 1998
------------ ------------- ---------------
(in thousands, unaudited)
<S> <C> <C> <C>
Statement of Operations Data:
Revenue ......................................... $2,378 $2,546 $ 4,554
Operating costs and expenses:
Project personnel and related expenses ......... 1,249 1,424 2,412
Management and administrative .................. 690 1,200 2,747
Marketing and sales ............................ 351 490 623
Depreciation and amortization .................. 91 123 2,181
------ ------ --------
Total operating expenses ...................... 2,381 3,237 7,963
------ ------ --------
Income (loss) from operations ................... (3) (691) (3,409)
Other income (expense), net ..................... (17) (12) (76)
------ ------ --------
Net income (loss) ............................... (20) (703) (3,485)
Accretion of mandatorily redeemable preferred
stock to redemption value ...................... -- -- (251)
------ ------ --------
Net income (loss) attributable to common
stockholders ................................... $ (20) $ (703) $ (3,736)
====== ====== ========
As a Percentage of Revenue:
Revenue ......................................... 100% 100% 100%
Operating costs and expenses:
Project personnel and related expenses ......... 52 56 53
Management and administrative .................. 29 47 60
Marketing and sales ............................ 15 19 14
Depreciation and amortization .................. 4 5 48
------ ------ --------
Total operating expenses ...................... 100 127 175
------ ------ --------
Income (loss) from operations ................... -- (27) (75)
Other income (expense), net ..................... (1) (1) (2)
------ ------ --------
Net income (loss) ............................... (1) (28) (77)
Accretion of mandatorily redeemable preferred
stock to redemption value ...................... -- -- (5)
Net income (loss) attributable to common
stockholders ................................... (1)% (28)% (82)%
====== ====== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------------
Dec. 31, Mar. 31, Jun. 30, Sept. 30,
1998 1999 1999 1999
--------------- --------------- -------------- --------------
(in thousands, unaudited)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenue ......................................... $ 4,158 $ 6,123 $ 7,641 $ 9,887
Operating costs and expenses:
Project personnel and related expenses ......... 2,320 3,071 4,181 5,521
Management and administrative .................. 3,239 2,683 3,921 5,007
Marketing and sales ............................ 590 723 728 1,013
Depreciation and amortization .................. 2,197 2,496 2,597 2,680
-------- -------- ------- -------
Total operating expenses ...................... 8,346 8,973 11,427 14,221
-------- -------- ------- -------
Income (loss) from operations ................... (4,188) (2,850) (3,786) (4,334)
Other income (expense), net ..................... (47) (92) (90) 215
-------- -------- ------- -------
Net income (loss) ............................... (4,235) (2,942) (3,876) (4,119)
Accretion of mandatorily redeemable preferred
stock to redemption value ...................... (374) (374) (374) (168)
-------- -------- ------- -------
Net income (loss) attributable to common
stockholders ................................... $ (4,609) $ (3,316) $(4,250) $(4,287)
======== ======== ======= =======
As a Percentage of Revenue:
Revenue ......................................... 100% 100% 100% 100%
Operating costs and expenses:
Project personnel and related expenses ......... 56 50 55 56
Management and administrative .................. 78 44 51 51
Marketing and sales ............................ 14 12 10 10
Depreciation and amortization .................. 53 41 34 27
-------- -------- ------- -------
Total operating expenses ...................... 201 147 150 144
-------- -------- ------- -------
Income (loss) from operations ................... (101) (47) (50) (44)
Other income (expense), net ..................... (1) (1) (1) 2
-------- -------- ------- -------
Net income (loss) ............................... (102) (48) (51) (42)
Accretion of mandatorily redeemable preferred
stock to redemption value ...................... (9) (6) (5) (2)
Net income (loss) attributable to common
stockholders ................................... (111)% (54)% (56)% (44)%
======== ======== ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months
Ended
-------------
Dec. 31,
1999
-------------
(in thousands,
unaudited)
<S> <C>
Statement of Operations Data:
Revenue ......................................... $11,604
Operating costs and expenses:
Project personnel and related expenses ......... 5,914
Management and administrative .................. 5,759
Marketing and sales ............................ 1,067
Depreciation and amortization .................. 2,737
-------
Total operating expenses ...................... 15,477
-------
Income (loss) from operations ................... (3,873)
Other income (expense), net ..................... 423
-------
Net income (loss) ............................... (3,450)
Accretion of mandatorily redeemable preferred
stock to redemption value ...................... --
-------
Net income (loss) attributable to common
stockholders ................................... $(3,450)
=======
As a Percentage of Revenue:
Revenue ......................................... 100%
Operating costs and expenses:
Project personnel and related expenses ......... 51
Management and administrative .................. 50
Marketing and sales ............................ 9
Depreciation and amortization .................. 24
-------
Total operating expenses ...................... 134
-------
Income (loss) from operations ................... (34)
Other income (expense), net ..................... 3
-------
Net income (loss) ............................... (31)
Accretion of mandatorily redeemable preferred
stock to redemption value ...................... --
Net income (loss) attributable to common
stockholders ................................... (31)%
=======
</TABLE>
Liquidity and Capital Resources
Prior to the completion of our initial public offering in August 1999, we
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. At December 31, 1999, we had
approximately $34.1 million in cash and cash equivalents.
24
<PAGE>
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).
Net cash used in operating activities for the years ended December 31,
1997, 1998 and 1999 was $23,000, $3.4 million and $9.9 million, respectively.
Cash used in operating activities in each of these periods was primarily the
result of net losses, adjusted for non-cash items primarily related to
depreciation and amortization, increases in accounts receivable and fees and
expenditures in excess of billings, partially offset by increases in accounts
payable and accrued expenses.
Net cash used in investing activities for the years ended December 31,
1997, 1998 and 1999 was $612,000, $649,000 and $5.0 million, 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,
1997, 1998 and 1999 was $827,000, $7.0 million and $45.3 million, 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. In August 1999, we completed
our initial public offering of securities and issued a total of 4,865,848
shares of common stock at $10.00 per share (including a total of 692,250 shares
issued to the underwriters upon exercise of the option which we had granted to
them solely to cover overallotments). An additional 441,402 shares were sold by
existing stockholders at $10.00 per share. Upon the initial closing of the
public offering, all 5,341,096 of the outstanding shares of mandatorily
redeemable convertible preferred stock were converted to 5,341,096 shares of
common stock. Proceeds to us from our initial public offering net of
underwriting discounts and costs of the offering were approximately $44.5
million. The Company used a total of $2.9 million of the net proceeds to repay
all outstanding debt under its line of credit and term loan.
As of December 31, 1999, our principal commitments consisted of
obligations under equipment leases. The equipment leasing arrangements consist
primarily of the payment of rental fees to third-party leasing providers at
interest rates between 5% and 19%. 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 December 31, 1999, we had a $3.3 million line of credit with a
commercial bank which had an expiration date of June 30, 2000. The line of
credit, was secured by substantially all of our assets and had an interest rate
of prime plus 1.25% (9.75% at December 31, 1999). There was no balance
outstanding and $3.3 million available under the line of credit as of December
31, 1999. At March 21, 2000, there was a principal amount of $500,000
outstanding under this line of credit. On that date, we repaid the outstanding
balance in full and terminated the line of credit. We replaced the line of
credit with a $15.0 million line of credit with two commercial banks (including
the bank which had extended the terminated line of credit).
The new line of credit is secured by substantially all of our assets.
Borrowings under the line of credit are subject to a limit of 80% of eligible
accounts, as defined in the line of credit. The line of credit bears interest at
a rate equal to the lender's prime rate plus 0.50% (9.5% on March 21, 2000). The
line of credit will expire on December 7, 2000; however, if we repay in full the
$80 million note issued in the Merger prior to that date, the line of credit
will expire on March 21, 2001. At March 31, 2000, there was an outstanding
principal balance under the line of credit of $6.0 million.
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)."
25
<PAGE>
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, (ii) the results of certain audits being performed after the closing
of the Merger, and (iii) certain costs incurred by Soft Plus in the Merger. The
$80 million note is due and payable on the earlier of March 8, 2001, or the
receipt by us of not less than $80 million from the net proceeds of a public
offering of our capital stock. (We may pay a portion of the $80 million note
with some of the proceeds of this offering.)
We anticipate that we will repay the note with proceeds to be obtained from
one or more of the following: borrowings under our credit facilities, a
refinancing, and a sale of capital stock or debt securities in the public or
private markets, together with revenues generated from operations. (We also may
repay a portion of the note with some of the proceeds of this offering.)
However, there can be no assurances that we will be able to obtain funds
sufficient to repay the $80 million note on terms satisfactory to us, in which
event our ability to obtain profitability will be materially adversely affected.
The Company believes that the net proceeds from this offering, current
cash balances and borrowings available under the credit facilities will be
sufficient to fund requirements for working capital and capital expenditures
for at least the next 18 months. The Company may seek to obtain additional
capital from time to time 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 our
stockholders. The Company may need to raise additional funds sooner in order to
support more rapid expansion, develop new or enhanced services and products,
respond to competitive pressures, acquire complementary businesses or
technologies or take advantage of unanticipated opportunities. Future liquidity
and capital requirements will depend on numerous factors, including the success
of existing and new service offerings and competing technological and market
developments. Additional financing, if any, may not be available on
satisfactory terms.
Year 2000
Background. Prior to January 1, 2000, there was a great deal of concern
regarding the ability of computers to adequately distinguish 21st century dates
from 20th century dates due to the two-digit date fields used by many systems.
We believe that our compliance and remediation efforts leading up to the year
2000 were effective in preventing any problems, since we have not received any
reports to date of any erroneous results or system failures in the solutions we
market or in the software and hardware we utilize internally due to the
changeover to the year 2000. There may, however, still be residual problems
related to the change in centuries. Any such difficulties could result in a
decrease in the sales of the services we provide, an increase in the allocation
of both our and our clients' resources to address Year 2000 problems without
additional revenue commensurate with such dedication of resources, or an
increase in litigation costs relating to losses suffered by us or our clients
due to such Year 2000 problems.
Corporate Infrastructure State of Readiness. Prior to January 1, 2000, we
had completed our Year 2000 compliance and remediation efforts with respect to
our internal operating systems. The infrastructure is composed of Information
Technology (IT) systems (e.g., financial, human resources, order entry, client
support tracking) and non-IT systems (e.g., elevators, fire suppression systems,
voicemail). We believe that all identified systems that were at risk were made
Year 2000 compliant or replaced before December 31, 1999, and that our business
critical systems that have date sensitivity were fixed, tested and in place
before the year 2000. We believe that we have communicated with all our material
vendors, suppliers, landlords and other third parties regarding Year 2000
compliance of embedded processors in computers, facilities, software, other
information technology, and other products and services which we obtain from
such third parties. We believe that affected embedded processors were replaced
before the year 2000. We have tested all business critical systems for Year 2000
compliance, whether or not these systems have been warranted Year 2000 compliant
by the manufacturer. We believe that we made any required modifications to the
IT and non-IT systems within the corporate infrastructure. We continue to
monitor and assess Year 2000 issues relating to such products, facilities and
services.
Costs. We have expensed approximately $271,000 through December 31, 1999,
in our Year 2000 compliance program, mainly for consulting services and
hardware costs. Approximately 37% of the costs were for modification and
replacement, approximately 51% were for testing, and approximately 12% of the
costs were for identification and assessment of the Year 2000 issue. The
portion of this amount attributable to the year ended December 31, 1999,
constitutes approximately 18% of the IT budget for the year ended December 31,
1999.
Risks. Solutions as complex as those offered by us might contain
undetected errors or failures when first introduced. This includes the risk
that solutions thought to be Year 2000 compliant are not Year 2000
26
<PAGE>
compliant. In addition, we might experience unforeseen difficulties that could
delay or prevent the continued successful development and release of solutions
that are Year 2000 compliant. If we experience any unforeseen delays, there
could be a material adverse effect upon our business, operating results,
financial condition and cash flows.
We utilize third-party vendor equipment, telecommunications products and
software products, all of which appear to be functioning normally in the year
2000. There may, however, still be residual problems related to the change in
centuries. The failure of any critical technology components to operate
properly may have a material impact on business operations or require us to
incur unanticipated expenses to remedy any problems.
Disclosures About Market Risk
Our exposure to market risk for changes in interest rates relates
primarily to the increase or decrease in the amount of interest income we can
earn on our available funds for investment and on the increase or decrease in
the amount of interest expense we must pay with respect to our various
outstanding debt instruments. The risk associated with fluctuating 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 December 31, 1999, the effect would
not be material to our 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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BUSINESS
Overview
We are a leading Internet professional services firm focused on providing
end-to-end (e2e) solutions 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. Our three key practice areas are
e-commerce, digital marketing and electronic customer relationship management
(e-CRM). When developing our solutions, we draw upon our expertise in Internet
strategy consulting, application development, digital brand creation, security
and enterprise application integration. We deliver our e2e Solutions through
our e-Roadmap delivery platform leveraging our IVL Methodology, e-business
frameworks and CAPTURE -- our extranet relationship management tool. We believe
that our focus on innovation, capabilities in Internet strategy and expertise
in emerging technologies, position us to enable our clients to think, build and
run e-business.
The Industry
The continual innovation in and increasing penetration of Internet,
wireless and broadband technologies have significantly impacted the way
companies conduct business as they utilize these technologies to provide new
ways of delivering information, communicating and completing business
transactions. Companies have increasingly begun to implement solutions which
leverage all of these technologies, combining devices including personal
computers, cellular phones, pagers and Personal Digital Assistants (PDAs) into
comprehensive technology applications. In 1999, there were more than 7 million
U.S. users logged on with wireless devices. According to IDC, the use of cell
phones and PDAs for Internet-based transactions is projected to increase to
61.5 million users by 2003 in the United States. The development of these
technology applications offers companies unprecedented opportunities to enhance
their competitive position in the marketplace by potentially increasing revenue
opportunities, improving customer service and retention, increasing operating
efficiencies, reducing costs and streamlining the transactional processes
between an enterprise and its trading partners. Importantly, the use of
wireless and broadband technologies is allowing organizations to deploy their
information resources onto new platforms and create new business systems. We
define these new business systems as e2e Solutions.
An increasing number of companies are using these technologies to
capitalize on new Business to Consumer (B2C) and Business to Business (B2B)
e-commerce opportunities. Revenue from B2C sites is projected to grow
significantly as consumers become increasingly familiar and comfortable with
making online purchases. According to Forrester Research (Forrester), in 1999
twice as many paying customers shopped online as in 1998, and Forrester
projects the B2C market to grow from $20.3 billion in 1999 to $100 billion by
the end of 2003.
In the B2B sector, most businesses initially focused on using the Internet
to eliminate middlemen and sell directly to their customers. Now, most B2B
e-commerce initiatives are designed to change the way companies interact with
their customers, suppliers and partners, and eliminate current, relatively
inefficient, trading processes. As a result, organizations are developing
e-commerce business models such as portals and exchanges to facilitate
transactions for specific vertical markets or business processes, aggregate
buyers and sellers, create marketplace liquidity and reduce transaction costs.
These portals and exchanges are transforming the competitive landscape of many
industries as buyers increasingly use them to purchase goods and services
because of their convenience and cost-saving potential. The widespread adoption
of these applications by corporate customers is in turn leading an increasing
number of sellers to distribute their goods via portals and exchanges.
Forrester projects the B2B e-commerce market to grow from $43 billion in 1998
to $2.7 trillion in 2004. Additionally, Forrester estimates that over the next
five years, exchanges will capture more than 50% of all online business trade
in the United States.
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Companies seeking to capitalize on the opportunities presented by creating
B2C and B2B solutions must ensure that these e-commerce initiatives integrate
seamlessly with their overall enterprises and back-end systems to provide a
positive customer experience. Businesses seeking to realize the benefits of the
Internet face formidable challenges in linking their business strategies to
their B2B / B2C initiatives. Before creating a solution, a company must first
review its strategic business requirements and compare them to the capabilities
of its existing processes and systems. A company must also identify existing
silos of marketing, sales, finance and production information which may help
provide a multi-faceted view of its customers' demographics, purchasing
profile, billing status and payment history. Next, the company must architect
the solution and develop an implementation plan. The implementation and
maintenance of the solution will require significant technical expertise in a
number of areas such as e-commerce systems, security and privacy technologies,
application and database programming, and mainframe and legacy integration
techniques. Furthermore, these solutions must be delivered in a manner that
leverages the existing technology infrastructure, established systems and
processes, brand values and design and customer relationship management
objectives. Thus, it is important to address the cross-disciplinary integration
of services required to successfully serve clients and create effective
Internet solutions.
However, the rapid pace of technological change often makes it difficult
and expensive for businesses to maintain the necessary technical and management
capabilities to handle their evolving needs. Professionals with the requisite
strategic, technical and creative skills are often in short supply. In
addition, many organizations have begun to focus on their core competencies. As
a result, businesses are increasingly relying on Internet services firms to
help them create comprehensive Internet solutions. This demand for an
integrated service offering has led to the emergence of Internet professional
services firms. These services providers must not only have the necessary
expertise to serve this rapidly changing market, but also provide a structured
approach to integrating strategy, marketing and technology to create a single,
Internet-based solution. IDC estimates that the market for Internet
professional services will grow from approximately $7.8 billion in 1998 to
$78.6 billion in 2003.
We believe that in order to be successful in this market, professional
services firms must possess an integrated model of Internet strategy, marketing
skills, expertise in wireless and broadband technologies, technology
integration skills, and client and project management capabilities. We believe
that we are the only Internet professional services firm that integrates all of
these skills, with a dedicated focus on e2e Solutions.
Our Solution
We provide e2e Solutions that help our clients take advantage of the
business opportunities presented by the Internet and various wireless and
broadband technologies. We deliver our services through integrated,
multi-disciplinary teams consisting of business strategists, digital marketing
experts and IT professionals. We combine our people, processes, strategic
relationships, technology and integrated service offerings to deliver solutions
to our clients primarily on a fixed-time, fixed-price basis. Our integrated,
client-focused delivery model includes:
o Defined Service Offerings
o e-business Technology Frameworks
o Internet Focused Delivery Methodology
o Extranet Based Client Management System
o Strategic Alliance Network
Defined Service Offerings. Our proprietary delivery platform, e-Roadmap,
serves as a blueprint to define and create a customized solution for an
organization's e-business initiatives. The e-Roadmap is a development platform
that includes 17 specific service offerings. We created these service offerings
based on our cumulative experience in e-commerce solutions development. The
e-Roadmap establishes a specific sequence for the delivery of these defined
service offerings. Given the rapid pace of development within the Internet
professional services industry, we believe that our focus on innovation within
our e-Roadmap delivery platform is critical to our ability to promote our
clients' long-term success.
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e-business Technology Frameworks. Our e-business technology frameworks are
applications that link various software applications, operating systems and
business processes using pre-defined modules. These frameworks utilize a
collection of portable code (Java), portable data (XML-enhanced information),
web application servers and middleware. The framework consists of the
following:
o an enterprise application integration (EAI) layer to connect different
applications together into one system or network
o a common information model to serve as the primary storage hub for data
on transactions and customers
o personalized "e-views" or screen presentments of the data to multiple
devices including personal computers, personal digital assistants and
wireless phones
Internet Focused Delivery Methodology. To provide rapid development while
ensuring quality and cost-efficiency, we deploy our service offerings in
phases according to our IVL Methodology. Under this approach, each project is
comprised of:
o an "Innovation" phase that focuses on high level strategic planning and
development of the proposed solution. We seek to promote creative thinking
and align business objectives by using a series of techniques including
facilitated workshops between our service delivery team and the client's
internal project team, as well as one-on-one interviews with the client.
o a "Validation" phase that focuses on providing and proving the concepts
or strategies developed during the Innovation phase. Validation can be
achieved through extended market research and concept prototype
development.
o a "Launch" phase that consists of the final development and deployment of
the solutions. We accomplish this through a series of design and
development reviews and checkpoints with the client.
Extranet Based Client Management System. We provide an extranet template
called CAPTURE, which we customize for our individual client projects. These
customized extranets are password-protected and allow continuous communications
between our project managers, key employees and clients. We believe that by
enabling our clients to monitor and comment on a project's direction and
progress on a real-time basis, these extranets improve our ability to provide
on-time delivery of solutions that meet client expectations.
Strategic Alliance Network. We maintain strategic alliances with over 25
leading providers of e-business applications, infrastructures and promotion. We
believe that this approach allows us to be nimble to market shifts in
technology and provides our clients with increased efficiencies in the form of
time and cost savings. We believe that giving our clients open and free access
to our strategic alliance network will potentially increase the duration of the
client relationship and subsequently decrease the costs of sales.
Our Strategy
Our strategy is to strengthen our position as a leading provider of
e-business solutions. The key elements of our strategy are as follows:
Continued Development of e-business Framework Technologies. We intend to
continue to invest in the development of technology that connects disparate
applications, operating systems and business processes. Through our advanced
e-engineering group in Murray Hill, New Jersey and our global research and
development facility in India, these efforts will continue.
"Vertical Market" Penetration. We intend to leverage the model Soft Plus
has established in the communications industry. Soft Plus' "vertical in a box"
organizational methodology brought to market the industry experts, process,
technology, alliances and growth model. We believe in order to truly capitalize
on B2B e-commerce opportunities, an organization must possess a strong
expansion model to serve additional vertical markets.
Strengthen Our Relationships with Technology and Internet Infrastructure
Companies. We seek to enter into relationships with companies that we believe
are well positioned to take advantage of current and future
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electronic enterprise opportunities. We have established and currently maintain
over 25 strategic relationships with software and Internet infrastructure
firms. We believe that these non-exclusive relationships enable us to deliver
more effective solutions to our clients with greater efficiency due to the
advanced training and information we receive regarding the availability of new
products and features which are provided by these third parties. These
relationships have also been an important source for identifying new business
opportunities.
Expand Client Relationships. We seek to use our client service delivery
model to increase business opportunities with our clients. Our client service
personnel work closely with our clients and our project managers to identify
these opportunities. Additionally, the application of our proprietary e-Roadmap
development platform includes an assessment of our clients' needs which
provides insight into potential opportunities for expanding their Internet
initiatives. We are also extending the use of CAPTURE beyond the term of
particular projects in order to enhance our communication with our clients and
enable us to market our services more proactively. We believe these actions
will enable us to continue building long-term client relationships and better
respond to our clients' evolving needs.
Enhance Knowledge Management and Knowledge Distribution Capabilities. We
seek to use our knowledge management and knowledge distribution capabilities to
employ our resources more efficiently and institutionalize the collective
knowledge and experience gained from over 500 client projects. Our knowledge
management system consists of databases, written materials and related internal
procedures. Our intranet provides access to this knowledge management system,
which includes:
o reusable templates for new business presentations
o project management tools for application development knowledge
o libraries of creative material
We are continuing to make substantial investments in our intranet to
improve access to our knowledge management system. This enables our service
delivery professionals to utilize our past experiences to speed deployment of
our solutions.
Hire and Retain Skilled Professionals. We intend to identify, hire, train
and retain individuals who are highly skilled in the rapidly changing
technology of the Internet. Therefore, we seek to foster a corporate culture
that offers employee stock ownership, promotion from within, advanced training,
challenging assignments and involvement in many facets of our business.
Specifically, we are currently implementing the following initiatives:
o creation of specific career path models for all levels of staff
o global implementation of our advanced e-engineering group's benchmark
studies
o increase research and development efforts related to emerging wireless
and broadband initiatives
o development of wireless e-business technology frameworks
Expand Geographically. We intend to continue to expand geographically in
order to enhance our profile and market reach both domestically and
internationally. Additionally, we will from time to time evaluate the
acquisition of other Internet professional services businesses to accelerate
our growth in particularly attractive geographic markets.
Services
Our solutions are delivered using four primary elements: our e-Roadmap,
IVL Methodology, e-business technology frameworks and our CAPTURE extranet
template.
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e-Roadmap
Our e-Roadmap development platform incorporates a combination of defined
service offerings from our three primary practice areas. These practice areas,
which allow us to focus our resources on specific areas of product development
and implementation skills, are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Electronic Commerce Digital Marketing e-CRM
------------------- ----------------- -----
<S> <C> <C>
o e-commerce software application o Website design and development o Customer care application
implementation design
o Media planning and buying
o Internet catalogue systems o Packaged software
o Affiliate marketing program implementation
o Custom e-commerce software development
development of complex o Customer care audits
transaction processing solutions o Brand creation and management
o Software evaluation workshops
o Enterprise application
integration
- --------------------------------------------------------------------------------------------------------------------------
Enables clients to market products Helps clients create a Enables organizations to utilize
and services, fulfill and confirm compelling Internet presence to the Internet to acquire, retain and
orders, approve and process credit market their company, products develop customers. Transforms an
card transactions, and deliver or services organization's traditional call
on-line customer service center(s) into next generation
"Internet Contact Center(s)."
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
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IVL Methodology
When completing projects encompassing only one practice area or an e2e
Solution which would encompass all our three practice areas, we group our
service offerings into one of three IVL Methodology phases. These service
offerings are detailed below.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Innovation Phase Validation Phase Launch Phase
---------------- ---------------- ------------
<S> <C> <C>
Creative Concepts Enterprise Design and
Business Case Development
Creating brand logos, banner
Strategy development, cost advertisements and layout and Iterative construction and
benefit analysis and return on design of websites definition of requirements,
investment evaluation determining project scope
Customer Care Audit Digital Channel Strategy
Custom Software Development
Providing a framework for Strategic analysis of a client's
customer service offerings, value chain systems architecture, Creating reusable code and
detailed analysis of establishing guidelines for software applications
current consumer attitudes technology architecture
Enterprise Architecture Audit Custom Commerce Solutions
Digital Prototyping
Aligning current technology Integration and development of
infrastructures to the Internet Visual demonstration of the Internet business solutions
proposed solution
Brand Audit
Enterprise Software Implementation
Evaluating the perception of a Usability Testing
company's existing brand and Partnering with Internet software
developing strategies to maintain Testing a preliminary solution application providers to integrate
and extend the brand using the through a target market sampling e-commerce, digital marketing,
Internet enterprise relationship management
and knowledge management solutions
Competitive Analysis Software Evaluation Workshop
Rating existing web presence Bypasses the Request for Proposal Systems Integration
against a competitor's site, ease (RFP) process to identify the most
of navigation, design, technology effective software application Integration of a client's existing
and presentation technologies to new electronic
enterprise systems
Digital Brand Positioning
Generating guidelines for brand Media Plan
strategy development through
competitive product, service Analysis and recommendation of
and/or consumer research Internet media, placement,
analysis distribution and tracking
Media Placement and Tracking
Placing and measuring the
effectiveness of print and Internet
promotional campaigns
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
e-business Technology Frameworks
In order to deliver Internet solutions in the future, we believe leading
Internet professional services firms must offer their clients an e-business
framework. An e-business framework is a "middleware" application that links
various software applications, operating systems and business processes using
pre-determined modules.
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These modules serve to speed deployment of the client initiative by re-using
proven components from previous client engagements and internal research and
development activities. To date, we have utilized our e-business technology
frameworks on more than ten client projects. These client projects have been
principally in the communications and financial services industries. On any
given client engagement, 80% of the e-business framework is re-usable across
vertical industries.
CAPTURE Extranet Template
As part of many of our client projects, we create individually customized
extranets, which we call CAPTURE, to facilitate communications throughout the
project. CAPTURE allows a client to monitor the progress of the project
electronically through a secure extranet. CAPTURE extranets allow clients to
view shared:
o work plans
o project updates
o project communications
o creative / technical prototypes
o new business proposals
CAPTURE also allows us to gather instant feedback from key decision-makers
within a client's organization regarding specific elements of a project. This
feedback allows us to address client issues during the development phase. We
intend to continue to expand the features of CAPTURE.
Clients
Set forth below is a selected list of clients we (including Soft Plus)
have served since January 1, 1999.
AIG E*TRADE
adidas France Telecom
Asia Online GeoCities
British Telecom NaviNet
Business.com Sprint
Citigroup Sun Microsystems
Commerce One Thomson Consumer Electronics
Dairy Farm International Toyota
Deloitte Consulting LLP Universal Music Group
Disney Online Viag Interkom
Selected Case Studies
AIG
Challenge
AIG is the leading U.S. based international insurance organization and the
largest underwriter of commercial and industrial insurance in the United
States. To maintain its lead in the insurance industry and gain online market
share, AIG engaged us to help it develop its overall Internet strategy. This
strategy helps AIG to reach and sell insurance products to new online
customers, enhances customer service and integrates disparate markets and sales
channels into one comprehensive e-business solution.
Solution
Using our e-Roadmap development platform, we helped AIG create and execute
its direct-to-consumer e-commerce strategy providing one-stop shopping for
virtually all of a customer's insurance needs. We worked with AIG to develop
and deploy aigdirect.com, a comprehensive, direct-to-consumer, e-business
solution.
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The aigdirect.com initiative enables consumers to access a wide array of
easy to use, secure online services, including price quotes, calculator tools,
a resource center and online transactions. aigdirect.com offers a broad range
of personal and small business insurance coverage from auto, homeowners,
renters, life, accidental death and dismemberment, to home warranty products.
Additionally, this solution offers Internet-based first claim filing and policy
processing as well as interactive, web-based customer service. Providing
enhanced product knowledge and distribution through the e-business site
reinforces AIG's commitment to customer service. This solution provides a cost
savings benefit to customers with a direct, secure vehicle to conduct
transactions online.
e-Roadmap services delivered:
o Business Case
o Customer Care Audit
o Enterprise Architecture Audit
o Digital Prototyping
o Enterprise Design and Development
o Custom Commerce Solutions
o Systems Integration
Asia Online
Challenge
Asia Online, a leading Hong Kong Internet service provider, is the largest
provider of fast, reliable and efficient communication links for businesses in
Hong Kong, China, the Philippines and Australia. Funded by Softbank Group, a
leading Internet investment firm in Asia, Asia Online's goal is to develop a
complex, Pan-Asia Pacific network through acquisitions and strategic partners.
Asia Online engaged Soft Plus to develop a robust IT infrastructure to enable
streamlined and efficient customer operations. Superior customer service and
rapid deployment were key to the success of this e-business initiative.
Solution
Using a phased delivery schedule and the e-Roadmap development platform,
Soft Plus worked with Asia Online to deliver an e-business solution for its
Hong Kong operations. A deep understanding of the ISP business, IT challenges,
experience in delivering solutions to many ISPs around the world and the
e-business technology framework enabled the deployment of the e-business
solution. The implementation of customer eViews, the Vantive TelcoCare CRM
application and Portal Software intranet billing system together provide a
single unified view of all customer interactions including billing information
and all customer interactions. These applications were integrated so that
customer interaction processes are made seamless, faster and more responsive
for Asia Online's customers. The ability to leverage this scalable and flexible
platform allows Asia Online to apply this e-business solution to the new
properties that Asia Online acquires.
e-Roadmap services delivered:
o Business Case
o Customer Care Audit
o Custom Software Development
Thomson Direct Inc.
Challenge
Thomson Direct Inc., (TDI) is a wholly owned subsidiary of Thomson
Consumer Electronics, Inc. (Thomson), one of the world's largest consumer
electronics companies headquartered in Paris, France. Thomson's U.S. brands,
RCA, GE and PROSCAN, are recognized names in consumer electronics and valuable
assets to Thomson. Thomson engaged us to develop a strategic e-business
solution that would provide its customers with online information on products
and services, while at the same time developing long-term relationships with
customers by increasing the quality of customer service.
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Solution
Working with cross-functional departments at Thomson, we created and
implemented a strategic e-commerce business for RCA.com and Lyrazone.com. The
e-business implementation provides a comprehensive database of information on
RCA products, dealer locator, automatic product warranty, real time product
fulfillment and a product demonstration of RCA's new personal digital player,
"The Virtual Lyra." Customer service and satisfaction were primary factors in
the development of this e-business initiative. We helped TDI develop their
overall online strategy using our e-Roadmap development platform. Also featured
in the e-solution is a robust infrastructure that allows TDI to easily grow its
e-business initiatives. In addition, we developed Thomson's online media
strategy, planning, creative development and affiliate marketing programs.
e-Roadmap services delivered:
o Digital Brand Positioning Strategy
o Enterprise Architecture Audit
o Competitive Analysis
o Creative Concepts
o Enterprise Software Implementation
o Systems Integration
o Media Plan
o Media Placement & Tracking
Viag InterKom
Challenge
Viag InterKom is the third largest communications services provider in
Germany offering Internet access and mobile services to both corporate and
residential customers. Viag InterKom, a joint venture between British Telecom,
Viag and Telenor was formed to take advantage of the opportunities arising out
of the deregulation of the German communications market. To differentiate Viag
Interkom from its competitors and provide superior e-CRM services to its
customers, Viag Interkom engaged Soft Plus to develop a strategic e-business
solution that would help Viag Interkom update its overall IT infrastructure,
while providing its customers with information on products and services, and
increasing the quality of the total customer experience and services.
Solution
Working with the internal IT group at Viag Interkom, Soft Plus delivered
an e-business solution which included Web-based registration and automatic
provisioning for ISP customers, and a single, unified view for the contact
center agent. Using the e-Roadmap development platform, the e-business solution
helped Viag InterKom enter the German communications market with a platform to
deliver better customer service. Our IVL Methodology ensured the delivery of
the solution in a phased manner to meet or better deadlines consistently. Also
featured in the e-business solution is a technology infrastructure providing
seamless integration of the order fulfillment process into back-end systems,
which reduces the cost of customer operations.
e-Roadmap services delivered:
o Business Case
o Customer Care Audit
o Enterprise Architecture Audit
o Enterprise Software Implementation
o Systems Integration
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Strategic Relationships
We maintain several strategic relationships that have been an important
source for new client opportunities. We have relationships with over 25
companies including Akamai, Be Free, BroadVision, Commerce One, IBM, Intel
Online Services, Portal Software and Vignette. We have written agreements with
12 companies, and all other strategic relationships rely on oral agreements.
These agreements are non-binding and non-exclusive and normally have an
indefinite term that can be ended by either party. The following is a brief
summary of some of our relationships:
Akamai: We combine with Akamai's Global Server Network to provide global
web content and Internet applications delivery for high-performance e-business
sites by utilizing our digital and creative marketing, business strategies and
technology. In February 2000, we were named Akamai's Partner of the Year.
Be Free: Together with Be Free, we help clients, leading on-line
merchants, portals and information sites, build and manage their own branded
on-line sales channels. These "affiliate" or e-mail marketing programs allow
clients to drive site awareness and capture incremental additional revenue
streams by selling products in context throughout the Web. We are Be Free's
principal solutions provider in the Internet professional services space.
BroadVision: BroadVision is a provider of e-commerce and Internet-based
business software. We have a "Channel Partner" agreement with BroadVision. We
engage in joint marketing activities and help BroadVision sell its software,
while BroadVision helps market our services.
Commerce One: Together with Commerce One, we enable clients to access a
B2B portal for procurement. We are Commerce One's Premier Partner for
MarketSite(TM) deployments for global clients. MarketSite(TM) is Commerce One's
real-time B2B trading community that helps participating companies to increase
efficiencies by reducing cost and time to market for the procurement of goods
and services.
IBM: In January 2000, we announced an enhanced strategic alliance with IBM
to help our clients take advantage of the convergence of wireless and broadband
computing and the next generation of e-business. Through a technology
partnership with IBM's Web Integrator Initiative, our Advanced e-Engineering
Group has direct access to IBM's research labs.
Intel Online Services (IOS): Together with IOS, we deliver hosting
solutions and expertise that support e-business. Support includes standard and
non-standard hardware and software platforms, various levels of administration,
maintenance, monitoring, reporting and website analysis.
Portal Software: Together with Portal Software, we help customers develop
e-CRM solutions for Internet and emerging, next-generation communications
services. These solutions enable service providers to manage customers, support
services and collect money. In February 2000, we were named a "Gold" strategic
alliance partner for Portal Software.
Vignette: Vignette is a provider of content management solutions for
e-commerce. We have a "Solution Provider" agreement with Vignette Corporation
to deliver solutions to companies building businesses online. This relationship
provides for the installation, implementation, training customization, project
management and content loading of software for our joint clients. Our agreement
with Vignette allows for a commission in the form of a finder's fee for
assisting them with selling their software as a reseller.
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
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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 December 31, 1999, our marketing
department consisted of seven full-time employees encompassing both field and
corporate marketing.
We primarily market and sell our services through a direct sales force. As
of December 31, 1999, our direct sales force consisted of 11 full-time sales
professionals whose primary responsibilities are to close new business
opportunities marketed to senior executives of national and international
corporations.
Competition
The market for Internet professional services is intensely competitive and
subject to rapid technological change. We believe we compete with the following
companies in the indicated categories:
o other Internet professional services firms (such as Viant and Scient)
o information technology consulting and integration firms (such as
Cambridge Technology Partners and Sapient)
o web design firms (such as Zefer and Razorfish)
o management consulting firms (such as the "Big 5" consulting firms)
o software application providers (such as Ariba and i2 Technologies)
o application service providers (such as Breakaway Solutions and
USinternetworking, Inc.)
In addition, we face competition with the in-house technology and
marketing departments of our clients and potential clients. We believe that the
principal competitive factors in our industry are:
o integrated Internet strategy, marketing and technology capabilities
o knowledge of emerging technologies
o reliability of client service
o technology expertise and client industry knowledge
o cost management
o referenceable client base
There are relatively low barriers to entry into our business. We expect
that we will face additional competition from new entrants into the market in
the future. Existing or future competitors may develop or offer services that
provide significant performance, price, creative or other advantages over those
offered by us.
Employees
As of March 2000, we employed over 700 people, consisting of approximately
475 project personnel, 45 marketing and sales personnel, 45 research and
development engineers and 135 administrative personnel. Project personnel
includes client service personnel, project managers, designers, programmers and
other personnel designated to complete client projects. Administrative
personnel includes finance and accounting, human resources and general
administration personnel. None of our employees is covered by any collective
bargaining agreements. We have not experienced any work stoppages and believe
our relationships with our employees are good.
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Facilities
Our 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. We also lease office space in the following
domestic cities:
o Atlanta, Georgia
o Boston, Massachusetts
o Chicago, Illinois
o Cupertino, California
o Los Angeles, California
o Murray Hill, New Jersey
o New York, New York
o Reston, Virginia
We also lease office space in the following cities outside of the United
States:
o Andheri East, India
o Bangalore, India
o Berkshire, U.K.
o Munich, Germany
o Toronto, Canada
We lease all of our facilities and believe our current facilities are
adequate to meet our needs for the foreseeable future. However, we are
considering leasing some additional office space for management and
administrative personnel near our present headquarters.
Legal Matters
We are not a party to any material legal proceedings.
On April 7, 2000, First Albany Corporation filed a complaint against U.S.
Interactive, Inc., Soft Plus and U.S. Interactive Corp. (Delaware), our
wholly-owned subsidiary into which Soft Plus proposed, in the U.S. District
Court, Northern District of California, San Jose Division (Case No. - 00 20383),
alleging that Soft Plus had breached an agreement dated November 29, 1999 (the
"Employment Agreement") between Soft Plus and FAC under which Soft Plus had
engaged (FAC) to render its 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 Merger. After we rejected FAC's claims FAC commenced its
lawsuit. FAC alleges that the defendants breached their obligations under the
Employment Agreement by failure to pay First Albany the fees in excess of $6.1
million which it is entitled to receive including amounts which FAC alleges it
is entitled to receive at various times in connection with the Merger
consideration which has not yet been paid. FAC requests that the court require
the defendants to pay these fees, with interest, together with FAC's costs and
expenses. We intend to defend vigorously against FAC's claims. While the outcome
of this litigation, as with litigation generally, is inherently uncertain, our
management believes that the ultimate resolution of this dispute would not be
likely to have a material adverse effect on our business or financial condition.
Five former shareholders of Soft Plus have recently informed us that they
believe that certain shares of Soft Plus common stock and options to purchase
such shares had been improperly issued or granted prior to the Merger. They also
assert, among other things, that Soft Plus funds were improperly diverted to
Soft Plus India, then a Soft Plus subsidiary (and, as a result of the Merger,
our second-tier subsidiary). They assert that individuals who then were the four
principal shareholders of Soft Plus (the Principal Shareholders) violated their
fiduciary obligations to the other Soft Plus shareholders in connection with the
issuance of such shares and option grants. The Principal Shareholders also
assert that, as a result of the foregoing, approximately $160 million of the
considerations paid by us in the Merger was allocated to the Principal
Shareholders, rather than to the other Soft Plus shareholders.
Based on our present knowledge, we do not believe that either we or our
subsidiary, U.S. Interactive Corp. (Delaware), the successor to Soft Plus in the
Merger, is liable for any of the alleged improper actions of the Principal
Shareholders. We have notified representatives of the Principal Shareholders
that, in accordance with the terms of the Merger, we intend to seek
indemnification from them for any costs or liability relating to the matters
raised by the five former Soft Plus shareholders, 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.
39
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table presents information about each of U.S. Interactive's
executive officers and directors. U.S. Interactive's board of directors is
divided into three classes serving staggered three-year terms. The number of
directors is presently fixed at nine.
<TABLE>
<CAPTION>
Year of Annual Meeting that
Name Age Position(s) with Company Term as Director Expires
- ------------------------------ ----- ------------------------------------ ----------------------------
<S> <C> <C> <C>
Eric Pulier .................. 33 Chairman of the Board 2002
Stephen T. Zarrilli .......... 38 Director, Chief Executive 2000
Officer and President
Mohan Uttarwar ............... 41 Director, President of our subsid- 2001
iary U.S. Interactive Corp.
(Delaware)
James J. Huser ............... 48 Senior Vice President and Chief
Operating Officer
Philip L. Calamia ............ 37 Senior Vice President, Chief
Financial Officer, Treasurer and
Assistant Secretary
Lawrence F. Shay ............. 41 Senior Vice President, Legal and
Corporate Affairs, General
Counsel and Secretary
Ajit M. Prabhu ............... 40 Senior Vice President and Chief
Technology Officer
Michael M. Carter. ........... 27 Senior Vice President and Chief
Marketing Officer
Robert E. Keith, Jr. ......... 58 Director 2001
John D. Shulman .............. 37 Director 2002
E. Michael Forgash ........... 42 Director 2002
John H. Klein ................ 54 Director 2001
William C. Jennings .......... 60 Director 2000
Robert V. Napier ............. 53 Director 2000
</TABLE>
- ------------
Eric Pulier has been the Chairman of the Board since July 1998. He served
as Chief Technology Officer from July 1998 to May 1999. Mr. Pulier was Chairman
and CEO of Digital Evolution from July 1995 to July 1998 and acted in such
capacities prior thereto. Mr. Pulier was the founder of Digital Evolution.
Digital Evolution performed Internet consulting services for MCI, Microsoft,
AT&T and Intel. Although Mr. Pulier had no involvement in the management or
ownership of our company prior to our merger with Digital Evolution, we
consider Mr. Pulier to be a co-founder of our business because of the
continuity of Digital Evolution's business with ours. Mr. Pulier has been a
director of Exist Corporation since November 1999. Mr. Pulier is currently a
member of the Progressive Policy Institute's New Economy Task Force and is
leading the health/technology forum for the Vice President of the United
States.
Stephen T. Zarrilli has served as Chief Executive Officer since March 1999
and as President since May 1999. Prior thereto Mr. Zarrilli served as acting
Chief Operating Officer from December 1998 until March 1999, as Senior
Executive Vice President and Chief Financial Officer from August 1998 through
December 1998, as 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. He served as our director from
August 1995 until July 1998, and began his current term as a director in April
1999. From May 1994 to December 1994, Mr. Zarrilli served as Director of
Finance for American Gaming Corporation, a publicly held development stage
gaming company. From July 1983 to April 1994, Mr. Zarrilli was employed by
Deloitte & Touche LLC, an international accounting and consulting firm, most
recently as a Senior Manager in the firm's emerging businesses practice group.
40
<PAGE>
Mohan Uttarwar has served as our director and as President of our
subsidiary U.S. Interactive Corp. (Delaware) since March 2000. Prior thereto, he
founded Soft Plus, Inc., a provider of e-CRM solutions primarily to Internet
service providers, wireless communications providers and other companies in the
emerging communications industry which merged with U.S. Interactive in March
2000. Mr. Uttarwar served as President of Soft Plus from January 1994 to March
2000, Chairman of Soft Plus from January 1999 to March 2000, and as CEO of Soft
Plus from June 1997 to March 2000. From October 1988 to March 1997, Mr. Uttarwar
founded and served as President of Digital Tools, Inc., a supplier of Unix based
project management software.
James J. Huser has served as Senior Vice President since May 1999 and as
Chief Operating Officer since December 1999. Prior thereto, he served as Vice
President and General Manager of U.S. Interactive's Los Angeles office since
May 1999. Prior to joining U.S. Interactive, Mr. Huser served as Senior Vice
President, Information Technology Strategy Practices, and member of the
Executive Management Committee for Cambridge Technology Partners
(Massachusetts), Inc. from May 1995 to May 1999. From February 1988 to May 1995
he served as Vice President, Information Services for The Walt Disney Company.
Philip L. Calamia has served as Senior Vice President since February 2000,
as Chief Financial Officer since April 1999, as Treasurer since August 1999 and
as Assistant Secretary since September 1999. Prior thereto he served as Vice
President from April 1999 to February 2000, as Vice President, Finance and
Accounting from July 1998 to March 1999, as Corporate Controller from December
1996 to July 1998, and as Secretary from April 1999 to September 1999. Prior to
joining U.S. Interactive, from March 1995 to December 1996, Mr. Calamia was
Manager of Financial Reporting at Mediq/PRN, a national medical services
company. Prior to Mediq/PRN, from January 1993 to March 1995, Mr. Calamia was
with the accounting firm Deloitte & Touche. Mr. Calamia is a Certified Public
Accountant.
Lawrence F. Shay has served as Senior Vice President, Legal and Corporate
Affairs and General Counsel since June 1999, and has been Secretary since
September 1999. Prior to that time, Mr. Shay was a partner in the law firm of
Dilworth Paxson LLP, where he practiced law since 1985.
Ajit M. Prabhu has served as Senior Vice President since February 2000,
and as Chief Technology Officer since May 1999. Prior thereto, Mr. Prabhu
served as a Vice President of Client Services from March 1999 to May 1999. From
August 1997 until March 1999, Mr. Prabhu served as a Managing Director of
InVenGen LLC, an Internet professional services company that he co-founded. Mr.
Prabhu was a Senior Manager with the Deloitte & Touche Consulting Group from
April 1993 to August 1997, and acting Chief Operating Officer of NetDox, Inc.
from February 1996 to August 1997. Mr. Prabhu was a senior engineer with AT&T
Bell Laboratories (now a part of Lucent Technologies, Inc.) from 1984 to 1993.
Michael M. Carter has served as Senior Vice President and Chief Marketing
Officer since February 2000, as Vice President of Marketing from December 1998
to January 2000, and as Director, Corporate Marketing from April 1998 to
December 1998. Prior to joining U.S. Interactive, Mr. Carter served as
Worldwide Marketing Manager, Network Services Group for Cambridge Technology
Partners (Massachusetts), Inc. from December 1997 to April 1998, as
Marketing/Business Development Manager, Mid-Atlantic Region from January 1997
to December 1997, and consultant from July 1996 to December 1996, for Cambridge
Technology Partners (Massachusetts), Inc. Mr. Carter has served as an advisor
to the board of Investors Broadcast Network/V-Call, Inc. since May 1999, and
served on the advisory board of Soft Plus from September 1998 to March 2000.
Robert E. Keith, Jr. has been our director since June 1996. Mr. Keith
serves as Chairman of the Board of Internet Capital Group, Inc. and is Vice
Chairman of the Board of Safeguard Scientifics. Mr. Keith is also Managing
General Partner of Technology Leaders II, L.P., where he has had principal
operating responsibility since 1988. Mr. Keith also serves as a director of
American Education Centers, Inc., Cambridge Technology Partners (Massachusetts),
Inc., Masterpack International, Inc., Naviant Technology Solutions, Inc.,
Sunsource, Inc., and Whisper Communications, Inc., all of which are
privately-held companies, except Cambridge Technology Partners (Massachusetts),
Inc., Sunsource, Inc., Internet Capital Group, Inc. and Safeguard Scientifics.
John D. Shulman has been our director since July 1998. Mr. Shulman has
served as President and 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
41
<PAGE>
and investment firm from 1988 to 1994. Mr. Shulman also serves as Chairman of
Exist Corporation, and as a member of the board of Interactive Video
Technologies, Inc., Phar-Mor, Inc., ChemLink Laboratories, LLC, Taiwan
Mezzanine Fund I and Performance Distribution, Inc., all of which are
privately-held companies, except Phar-Mor, Inc.
E. Michael Forgash has been our director since October 1998. Mr. Forgash
was Vice President, Operations of Safeguard Scientifics from January 1998 to
March 2000. 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 serves as a director of
Internet Capital Group, Inc. and eMerge Interactive, Inc. He also serves as a
director of 4anything.com, Inc., Who? Vision Systems, Inc., XL Vision, Inc. and
Integrated Visions, Inc., all of which are privately-held companies.
John H. Klein has been our director since September 1999. Since mid-1998,
Mr. Klein has been Chairman and Chief Executive Officer of BiLogix, Inc., a
company providing business intelligence software solutions; Chairman and Chief
Executive Officer of Strategic Business and Technology Solutions LLC, a firm
specializing in business planning and strategy formulation; Chairman of CyBear,
an Internet service provider which primarily offers business solutions over the
Internet; and Vice Chairman and director of Image Vision, a firm focused on
developing, marketing, installing and supporting vertical imaging business
solutions. From April 1996 to May 1998, he was Chairman and Chief Executive
Officer of MIM Corporation, a provider of pharmacy benefit services to medical
groups. Prior to that, he served as President of IVAX North American
Multi-Source Pharmaceutical Group from January 1995 to January 1996, and as
President and Chief Executive Officer of Zenith Laboratories, a generic
pharmaceutical manufacturer, from May 1989 to 1995. Mr. Klein has been a
director of Sunbeam Corporation, and has been a director and Chairman of the
Audit Committee of Coleman Company, Inc., since 1999.
William C. Jennings has been our director since August 1999. Mr. Jennings
is an independent consultant. He was a partner at Coopers & Lybrand (which
merged with Price Waterhouse to become PricewaterhouseCoopers in 1998) from
1992 to 1999. Prior to joining Coopers & Lybrand, he was Executive Vice
President and Chief Financial Officer at Bankers Trust New York Corp. from
October 1988 to January 1991. Prior thereto, Mr. Jennings served as Senior
Executive Vice President, Administration, at Shearson Lehman Brothers, an
investment banking and brokerage firm, from October 1985 to October 1988. Mr.
Jennings currently serves as Chairman of the Board of Intellisource, Inc., a
privately-held outsourcing company.
Robert V. Napier has been our director since October 1999. Mr. Napier has
been Senior Vice President, Information Management and Chief Information
Officer at Compaq Computer Corp., a computer manufacturer, since August 1999.
Prior to joining Compaq, he was Senior Vice President and Chief Information
Officer of Mariner Post-Acute Network, Inc., a health care provider which filed
for bankruptcy under Chapter 11 under the federal bankruptcy code on January
18, 2000, from January 1998 to August 1999. From January 1997 to January 1998,
he was Chief Information Officer at Delphi Automotive Systems Corp., a supplier
of components, modules and integrated systems to the automotive industry. Prior
thereto, Mr. Napier was Vice President and Chief Information Officer of Lucent
Technologies, Inc., a designer, developer and manufacturer of communications
systems, software and products, from September 1995 to January 1997. Previous
to that, he held a similar position from March 1993 to September 1995, at AT&T
Global Business Communications Systems, which was one of the companies spun off
by AT&T Corp. to form Lucent Technologies, Inc. Mr. Napier has been a director
of Extant, Inc., a telecommunications service provider, since March 1999, and
has been a member of the technical advisory board of Safeguard Scientifics
since October 1996.
Five of the current directors were elected to the board of directors
pursuant to a stockholders' agreement that terminated upon the consummation of
our initial public offering. The termination of the stockholders' agreement did
not affect either the current term of the five directors elected under the terms
of the stockholders' agreement or their ability to be re-elected as directors.
Mr. Pulier's employment agreement with us provides that he shall serve as
our Chairman of the Board. Mr. Zarrilli's employment agreement with us provides
that Mr. Zarrilli shall serve on our board of directors. Mr. Uttarwar was
appointed to the board of directors, pursuant to the terms of the Merger, to
serve until the 2001 annual meeting of stockholders.
42
<PAGE>
Board Committees
Our board of directors has a compensation committee and an audit committee.
The compensation committee is comprised of John H. Klein, Chairman, William C.
Jennings and Robert E. Keith. The audit committee is comprised of William C.
Jennings, Chairman, John H. Klein and John D. Shulman. 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 role of the audit committee is to review the qualifications of our
independent auditors, make recommendations to the board of directors regarding
the selection of independent auditors, review the scope, fees and results of any
audit and review any non-audit services and related fees.
Compensation of Directors
U.S. Interactive does not pay fees to directors for serving on our board of
directors. Directors who are not employees of U.S. Interactive are reimbursed
for their reasonable out-of-pocket expenses incurred in attending the meetings
of the board of directors and committees thereof. In addition, directors are
eligible to receive stock options under the 1998 Performance Incentive Plan.
During 1999, Mr. Shulman received an option to acquire 25,000 shares of
our common stock at an exercise price of $9.25 as consideration for his service
on the Board, and Messr. Jennings, Klein and Napier each received an option to
acquire 50,000 shares of our common stock at a per share exercise price of
$19.38, $21.38 and $18.125, respectively, in connection with their joining the
board of directors. Each option granted to a director becomes exercisable in
three equal annual installments and has an exercise price equal to fair market
value on the date of grant. Eric Pulier, our Chairman of the Board, Stephen
Zarrilli, our Chief Executive Officer and President, and Mohan Uttarwar, the
President of our subsidiary U.S. Interactive Corp. (Delaware), each receive
compensation for services as an employee.
Executive Compensation
The following table sets forth certain information concerning compensation
paid or accrued by us for services during the fiscal year ended December 31,
1999, to our Chief Executive Officer and each of the four most highly
compensated executive officers other than the Chief Executive Officer whose
individual total salary and bonus on an annual basis exceeded $100,000 for that
fiscal year (the Named Executive Officers).
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Awards
-------------
Annual Compensation
------------------------ Securities
Underlying All Other
Name and Principal Position(s) Salary Bonus Options Compensation(1)
- ------------------------------------------------ ----------- ---------- ------------- ----------------
<S> <C> <C> <C> <C>
Eric Pulier, Chairman of the Board ............. $235,000 $58,750 $ -- $ 7,058
Stephen T. Zarrilli, President and
Chief Executive Officer ....................... 228,077 $58,750 100,000 9,643
Larry W. Smith, former Chief
Executive Officer ............................. 39,038 -- -- 140,485(2)
Ajit M. Prabhu, Chief Technology Officer ....... 156,462 51,341 -- 3,747
James J. Huser, Chief Operating Officer ........ 138,461 33,750 200,000 2,250
Philip L. Calamia, Chief Financial Officer ..... 130,769 33,000 110,000 2,285
</TABLE>
- ------------
(1) Represents premiums paid for life insurance, automobiles and company
matching of 401(k) contributions.
(2) Includes severance payments in the amount of $131,250. Mr. Smith resigned
as Chief Executive Officer effective as of February 26, 1999.
43
<PAGE>
The following table provides information on stock options granted by us in
1999 to Messrs. Zarrilli, Huser and Calamia, our executive officers during 1999
who received grants in 1999.
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 Exercise Stock Price Appreciation
Underlying Granted to Price for Option Term(1)
Options Employees in (per Expiration -----------------------------
Name Granted Fiscal Year share) Date 5% 10%
- ----------------------------- ------------ -------------- ---------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stephen T. Zarrilli ......... 100,000 4.0% $ 5.00 3/1/09 $1,128,895 $2,093,742
James J. Huser .............. 200,000 8.1 9.25 5/24/09 1,407,789 3,337,485
Philip L. Calamia ........... 50,000 2.0 5.00 3/12/09 564,447 1,046,871
Philip L. Calamia ........... 60,000 2.4 9.25 5/24/09 422,337 1,001,245
</TABLE>
- ------------
(1) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation of 5% and 10%
compounded annually from the date the respective options were granted to
their expiration date. These assumptions are not intended to forecast
future appreciation of our stock price. The potential realizable value
computation does not take into account federal or state income tax
consequences of option exercises or sales of appreciated stock.
Mr. Zarrilli's option vests in four equal annual installments commencing
March 1, 2000. Mr. Huser's option vested as to 35,000 shares on the date of
grant, with the balance vesting in four equal annual installments commencing
May 24, 2000. Mr. Calamia's option grant for 50,000 shares vested as to 25,000
shares on the date of grant, with the balance vesting in four equal annual
installments commencing March 12, 2000. Mr. Calamia's option grant for 60,000
shares vests in four equal annual installments commencing May 24, 2000. No
options were exercisable prior to the closing of our initial public offering.
Exercisability of vested option shares is limited under the terms of the
respective grant agreements to the number of shares which can be exercised
within the $100,000 limitation for Incentive Stock Options contained in the
Internal Revenue Code of 1986, as amended; except for the 35,000 option shares
of Mr. Huser which vested on the date of grant. Each of these grants was made
under the Amended and Restated 1998 U.S. Interactive, Inc. Stock Option Plan.
On January 31, 2000, options to purchase a total of 875,000 shares were
granted to seven of our executive officers. These options have an exercise
price of $50.50 per share.
Employment Agreements
We have entered into an employment agreement, dated July 1998, with Mr.
Pulier, currently our Chairman of the Board. Mr. Pulier's agreement is for a
term of one year and automatically renews for additional one-year periods,
unless either party provides 30 days notice of non-renewal. Under the
agreement, Mr. Pulier currently receives a base salary of $275,000, a bonus at
the discretion of the board of directors and benefits which we offer our other
senior executives generally. The agreement also provides that Mr. Pulier shall
serve as Chairman of the Board. We can terminate the agreement for "cause" and
under certain other circumstances, including death or disability. 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 holds at the time of such early termination would become
vested. The employment agreement contains certain restrictions on Mr. Pulier's
ability to compete with us.
We have also entered an employment agreement, dated as of July 30, 1999,
with Mr. Zarrilli, our President and Chief Executive Officer. The agreement is
for an initial term ending December 31, 2000, and automatically renews for
additional one-year periods, unless either party provides 30 days notice of
non-renewal. Under the agreement, Mr. Zarrilli currently receives a base salary
of $275,000, a bonus at the discretion of the board of directors and benefits
which we offer our other senior executive officers. The agreement also provides
that Mr. Zarrilli shall serve on our board of directors. We can terminate the
agreement for "cause" and under certain other circumstances, including the
death or disability of Mr. Zarrilli. In addition, Mr. Zarrilli may resign by
giving us notice. If the agreement is terminated other than for "cause" or Mr.
Zarrilli's voluntary resignation, we will make severance payments to Mr.
Zarrilli in the amount of his base salary and bonus, if any, through the
balance of the term of the agreement. In addition, any unvested options which
he holds at the time of such early termination would become vested. The
employment agreement contains certain restrictions on Mr. Zarrilli's ability to
compete with us.
We have entered into an employment agreement, dated as of March 8, 2000,
with Mr. Uttarwar, currently President of our subsidiary U.S. Interactive Corp.
(Delaware). The agreement has a one year term. Under the agreement, Mr.
Uttarwar, who reports directly to our Chief Executive Officer, Mr. Zarrilli,
receives a base salary of $200,000, a bonus at the discretion of the board of
directors, and benefits which we offer our other senior executives generally.
The agreement provides that Mr. Uttarwar shall serve as a member of our board
44
<PAGE>
of directors through the date of our 2001 annual meeting of stockholders. We
can terminate the agreement for "cause" and under certain other circumstances,
including death or disability. Mr. Uttarwar may resign by giving us notice. If
the agreement is terminated without "cause," we will make a severance payment
to Mr. Uttarwar in the amount of his base salary and benefits through the
balance of the term of the agreement and a pro rata portion of the bonus, if
any, to which he would have been entitled through the date of termination.
Termination "without cause" includes, for example, termination upon a change in
control. In addition, any of his unvested options which would have vested prior
to expiration of his term would become vested. If the agreement is terminated
due to Mr. Uttarwar's disability, we will continue Mr. Uttarwar's base salary
and benefits for three months following termination. Mr. Uttarwar is party to a
separate agreement dated March 8, 2000, which contains certain restrictions on
Mr. Uttarwar's ability to compete with us.
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 received from us a
severance payment of $131,250, paid in nine equal monthly installments, accrued
but unused vacation time of $12,115, and health, life and disability insurance
and other benefits for a nine-month period commencing February 26, 1999,
including automobile reimbursement expenses up to a maximum of $700 per month.
At that time, Mr. Smith also reaffirmed his non-disclosure and non-competition
agreements which subsequently expired in February 2000.
We have entered into a similar severance agreement with Richard Masterson
effective May 18, 1999. Mr. Masterson resigned as our President and as a
director on May 18, 1999.
Stock Option Plans
We have adopted or assumed:
o the 2000 Performance Incentive Plan
o the 1998 Performance Incentive Plan
o the amended and restated 1998 Stock Option Plan
o the amended and restated 1997 Stock Option Plan
o the amended and restated 1996 Stock Option Plan (assumed in the
acquisition of Digital Evolution)
o the Soft Plus, Inc. 1999 Stock Plan
o the Soft Plus, Inc. 1999 Stock Option Plan
o the Soft Plus, Inc. 1997 Stock Plan
2000 Performance Incentive Plan. Under the 2000 Performance Incentive Plan,
employees may receive up to 4,000,000 shares of common stock pursuant to the
grant of incentive stock options, non-qualified stock options, stock
appreciation rights, restricted stock and performance units. Officers and
directors are presently not permitted to participate in this plan. The 2000
Performance Incentive Plan is administered by the compensation committee of the
board of directors, consisting of two or more "outside directors" as defined
under Section 162(m) of the Internal Revenue Code of 1986, who are "non-employee
directors" as defined under Rule 19b-3 of the Securities Exchange Act of 1934.
The compensation committee presently consists of Messrs. Kline, Jennings and
Keith. The 2000 Performance Incentive Plan was adopted by the board of directors
in February 2000. We intend to seek approval of the board to present an
amendment to the 2000 Performance Incentive Plan to decrease the number of
shares authorized under the plan by 3,000,000 and to include consultants as
participants in the plan. (As described below, we intend to increase the number
of shares authorized under the 1998 Performance Incentive Plan by 3,500,000.) At
March 31, 2000, no options had been granted under the 2000 Performance Incentive
Plan. We only intend to issue non-qualified stock options under the 2000
Performance Incentive Plan.
The terms of stock options granted under the 2000 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
45
<PAGE>
o if an incentive stock option is granted to a person who owns more than
10% of the total combined voting power of all our classes of stock, the
exercise price shall not be less than 110% of the fair market value on the
date of grant
o the term of each stock option may not exceed ten years, and in the case a
person who owns more than 10% of the total combined voting power of all
our classes of stock, the term of each stock option may not exceed five
years
o the issuance of incentive stock options is subject to stockholder
approval of the plan
o payment for the exercise of an option shall be made in cash, or, as shall
be otherwise approved in advance by the compensation 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 compensation 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 2000 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 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. Otherwise, the terms of the 1998 Performance Incentive Plan
are substantially similar to the 2000 Performance Incentive Plan. The 1998
Performance Incentive Plan is administered by the compensation committee of the
board of directors. As of February 29, 2000, options issued under the 1998
Performance Incentive Plan to purchase a total of 2,507,850 shares of common
stock at a weighted average exercise price per share of $38.90 were outstanding,
of which options to purchase 49,000 shares at a weighted average exercise price
of $12.88 were fully vested. As of February 29, 2000, we had 492,150 shares of
common stock available for future grant under this plan. We intend to seek
approval of the board to present, for approval at the next annual meeting of
stockholders, an amendment to the 1998 Performance Incentive Plan to increase
the number of shares authorized under the plan by 3,500,000 and to include
consultants as participants in the plan.
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 February 29, 2000, options issued
under the 1998 Stock Option Plan to purchase a total of 1,261,975 shares of
common stock at a weighted average exercise price per share of $9.10 were
outstanding, of which options to purchase 129,890 shares at a weighted average
exercise price of $7.75 were fully vested. As of this date, we had 96,178 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 compensation 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
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<PAGE>
o the option plan committee may also allow, in its sole discretion, a
"cashless exercise" for the exercise of stock options
1997 Stock Option Plan. The 1997 Stock Option Plan provides for the
issuance to key executives and other employees of incentive stock options and
non-qualified stock options to purchase up to a total of 600,000 shares of
common stock. The terms of the 1997 Stock Option Plan are substantially similar
to the terms of the 1998 Stock Option Plan except that exercisability is not
subject to completion of this offering. This plan is presently administered by
the compensation committee of the board of directors. As of February 29, 2000,
options issued under the 1997 Stock Option Plan to purchase a total of 303,184
shares of common stock at a weighted average exercise price per share of $19.04
were outstanding, of which options to purchase 114,380 shares were fully vested
and exercisable at a weighted average exercise price of $2.75. As of that date,
we had 70,165 shares of common stock available for future grant under this
plan. No options are issuable under the 1997 Stock Option Plan after September
2008.
1996 Stock Option Plan. Digital Evolution had historically granted stock
options to its officers and key employees under a stock option plan. As part of
our merger with Digital Evolution, all of these options which were outstanding
at the time of the merger were converted into stock options to acquire common
stock at the ratio of .99 shares of U.S. Interactive for each share covered by
a Digital Evolution option. No further stock options will be granted under this
former Digital Evolution plan.
Soft Plus Plans. Soft Plus had historically granted stock options to its
officers and employees under three stock option plans. As part of the Merger,
all of the options which were outstanding at the time of the Merger were
converted into stock options to acquire a total of 1,408,866 shares of our
common stock. No further stock options will be granted under any of the former
Soft Plus Plans.
We intend to seek approval of the board for the adoption of an Employee
Stock Purchase Plan under which 1,000,000 shares of our Common Stock would be
authorized for sale to employees and for the submission of the Employee Stock
Purchase Plan for approval of our stockholders at our next annual meeting.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Eric Pulier, our Chairman of the Board, and John D. Shulman, a director,
are stockholders of Exist Corporation and owned during part of 1999, in the
aggregate, 36% of the equity of Exist on a fully diluted basis. Their aggregate
ownership is currently 17% on a fully diluted basis. In addition, Mr. Pulier
and Mr. Shulman each hold currently exercisable options to acquire an
additional 6% of the equity ownership of Exist. Mr. Shulman is the Chairman of
the Board and Mr. Pulier is a director of Exist. Pursuant to a professional
services and consulting agreement dated January 6, 1999, we are providing
professional services to Exist, including strategic design and development, in
connection with Exist's development of an Internet global exchange platform.
The agreement provides that Exist will pay a total of approximately $3.8
million for the services provided by us through December 1999. The professional
services and consulting agreement dated January 6, 1999 replaces a prior
agreement pursuant to which Exist paid a total of approximately $700,000 for
similar services provided by us. Exist represented more than 10% of our revenue
for the twelve months ended December 31, 1999.
Eric Pulier, our Chairman of the Board, is the sole general partner of and
together with his wife, Heather Pulier, owns 100% of Digital Evolution, L.P.
Digital Evolution owns 50% of Chromazone LLC. Mr. Pulier is also a director of
Chromazone.
Chromazone owns a 50% equity interest in NetSmart, Inc. (formerly
Chromazone.com, Inc.) Mr. Pulier is a director of NetSmart. Pursuant to a
professional services and consulting agreement dated September 1999 with
NetSmart, we are providing professional services to NetSmart in connection with
a customized dial up and web browser application. The agreement provides that
NetSmart will pay us $2.9 million. Through December 31, 1999, services totaling
approximately $2.8 million have been invoiced to NetSmart for the services
provided to NetSmart under this agreement, of which approximately $2.0 million
had been paid as of that date. The September 1999 agreement replaces a letter
agreement dated April 6, 1999, between Chromazone and us pursuant to which
Chromazone paid a total of approximately $300,000 for similar services provided
by us.
Pursuant to the same professional services and consulting agreement dated
September 1999 with NetSmart, we are providing professional services to
Citicorp Electronic Commerce, Inc. in connection with the development of a
small business portal and a business plan for new business enterprises. The
agreement provides that NetSmart will pay us $1.7 million. Through December 31,
1999, services totaling approximately $1.6 million have been invoiced to
NetSmart under this agreement, of which approximately $1.4 million had been
paid as of that date.
Chromazone and NetSmart represented more than 13% of our revenue for the
twelve months ended December 31, 1999.
Chromazone owns a 31% equity interest in Decision Support Systems, Inc.
(DSS). Pursuant to a professional services agreement dated July 20, 1999, with
DSS, we provided professional services to DSS in connection with the
development of the health care portal. The agreement provides that DSS will pay
us $30,000. Through December 30, 1999, services totaling approximately $30,000
have been invoiced to DSS, all of which has been paid.
Digital Evolution owns a 35% equity interest in Interactive Video
Technology, Inc. (IVT). Pursuant to a professional services agreement dated
September 1998 between IVT and Toyota Motor Sales, U.S.A., Inc., we were
engaged to assist in Application Development for Toyota Motor Sales, U.S.A.,
Inc. The agreement provides that IVT will pay us $210,000. Through December 31,
1999, services totaling approximately $210,000 have been invoiced to IVT, of
which IVT has paid a total of $164,000.
Michael M. Carter previously held options to purchase 50,000 shares of
common stock of Soft Plus, which he received as compensation for his service on
the Soft Plus advisory board. These options were converted into options to
purchase a total of 18,658 shares of our common stock upon completion of the
Soft Plus merger.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth, on a pro forma basis after giving effect
to the Merger, information regarding the beneficial ownership of our common
stock as of February 29, 2000 by:
o our Chairman of the Board and Chief Executive Officer and each director
o all of our directors and executive officers as a group
o each person known to us to own beneficially more than 5% of our
outstanding shares
o the selling stockholders
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 February 29, 2000, on a pro forma basis after giving effect to the
Merger, there were 23,035,479 shares of our common stock outstanding.
To calculate a stockholder's percentage of beneficial ownership, we must
include in the numerator and denominator those shares underlying options
beneficially owned by that stockholder. Options held by other stockholders,
however, are disregarded in this calculation. Therefore, the denominator used
in calculating beneficial ownership among our stockholders may differ.
The table below assumes that the underwriters have not exercised their
over-allotment option. In addition, the symbol "*" means that the percentage is
less than one percent.
<TABLE>
<CAPTION>
Beneficial Ownership Beneficial Ownership
Prior to Offering After Offering
-------------------------- Shares -------------------------
Beneficial Owner Number Percentage Offered Hereby Shares Percentage
- ------------------------------------------- ----------- ------------ ---------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Named Executive Officers and Directors:
Eric Pulier (1) .......................... 3,462,569 14.9% 3,462,569 13.2%
Stephen T. Zarrilli (2) .................. 595,767 2.6 595,767 2.3
Ajit M. Prabhu (3) ....................... 46,376 * 46,376 *
James J. Huser (4) ....................... 10,810 * 10,810 *
Mohan Uttarwar (5) ....................... 984,310 4.3 984,310 3.8
Philip L. Calamia (6) .................... 63,900 * 63,900 *
John D. Shulman (7) ...................... 308,429 1.3 308,429 1.2
E. Michael Forgash ....................... 11,778 * 11,778 *
Robert E. Keith, Jr. (8) ................. 4,471 * 4,471 *
John H. Klein ............................ 1,000 * 1,000 *
William C. Jennings ...................... -- -- -- --
Robert V. Napier ......................... 2,000 * 2,000 *
All directors, executive officers as a
group (14 persons) (9) ................... 5,551,630 23.7 5,610,522 21.0
Named Former Executive Officer:
Larry W. Smith (10) ...................... 795,701 3.5 795,701 3.1
Other Five Percent Holder:
Safeguard Scientifics, Inc. (11) ......... 2,559,691 11.1 2,559,691 9.8
Additional Selling Stockholders:
Vulcan Ventures Inc. (12) ................ 692,355 3.0 200,000 492,355 2.7
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Beneficial Ownership Beneficial Ownership
Prior to Offering After Offering
----------------------- Shares ----------------------
Beneficial Owner Number Percentage Offered Hereby Shares Percentage
- --------------------------------------- -------- ------------ ---------------- -------- -----------
<S> <C> <C> <C> <C> <C>
MMC/GATX Partnership No. 1
(13)(18) ........................... 54,818 * 16,445 38,373 *
Venture Lending & Leasing II, Inc.
(14)(18) ........................... 21,411 * 5,301 16,110 *
Jaydeep Marfartia(15)(18) ............. 731 * 219 512 *
Arun Medhekur(16)(18) ................. 8,222 * 2,466 5,756 *
Lalitha Swart(17)(18) ................. 3,342 * 1,002 2,340 *
</TABLE>
- ------------
(1) Includes 189,093 shares issuable upon exercise of options and 1,069 shares
issuable upon exercise of options held by Heather Pulier, Mr. Pulier's
wife. Includes 50,000 shares held by Mr. Pulier, as trustee, under the
Eric Pulier 1999 Qualified Grantor Retained Annuity Trust.
(2) Includes 51,525 shares issuable upon exercise of options, 24,195 shares
held as Custodian under the Uniform Transfers to Minors Act for the
benefit of Mr. Zarrilli's three children, and 5,000 shares held as
Custodian under the California Uniform Transfers to Minors Act for the
benefit of Mr. Pulier's son. Includes 50,000 shares held by Mr. Zarrilli,
as trustee, under the Stephen T. Zarrilli 1999 Qualified Grantor Retained
Annuity Trust.
(3) Includes 45,376 shares which Mr. Prabhu is entitled to receive from
InVenGen LLC under the terms of a confidential compensation agreement
between Mr. Prabhu and InVenGen LLC upon the satisfaction of certain
employment taxes by Mr. Prabhu. Excludes shares which Mr. Prabhu is
entitled to receive in two equal installments on September 12, 2000 and
March 12, 2001, under the same agreement and subject to satisfaction of
the same condition. We acquired all of the assets of InVenGen LLC on March
12, 1999.
(4) Includes 10,810 shares issuable upon exercise of options.
(5) Mr. Uttarwar acquired 775,910 shares on March 8, 2000, and is entitled to
receive an additional 208,400 shares held by The Chase Manhattan Trust
Company, N.A., as escrow agent pursuant to the terms of an escrow
agreement as security for certain contingent liabilities of Soft Plus, in
connection with the Merger.
(6) Includes 47,400 shares issuable upon exercise of options.
(7) Includes 297,737 shares held jointly with Alison B. Shulman, Mr. Shulman's
wife, as tenants by the entireties. Includes 10,692 shares issuable upon
exercise of options.
(8) Includes 311 shares held through a self-directed account in the Safeguard
401(k) plan.
(9) Includes 366,214 shares issuable upon exercise of options, including 1,069
shares issuable upon exercise of options held by Mr. Pulier's wife.
(10) Includes 200,000 shares held by Mr. Smith, as trustee, under the Larry W.
Smith 1999 Qualified Grantor Retained Annuity Trust. Mr. Smith is one of
our co-founders and served as one of our directors from 1991 to May 1999,
President from September 1991 to July 1998, and Chief Executive Officer
from September 1996, to December 1998. Mr. Smith is party to a severance
agreement with us relating to his resignation.
(11) Includes 2,114,787 shares issued to Safeguard 98 Capital L.P., 392,081
shares issued to Safeguard Delaware, Inc., 52,677 shares issued to
Safeguard Scientific (Delaware), Inc., and 147 shares issued to Technology
Leaders Management, Inc. Safeguard Delaware, Inc., Safeguard Scientific
(Delaware), Inc. and Technology Leaders Management, Inc. are wholly-owned
subsidiaries of Safeguard Scientifics, Inc. Safeguard Delaware, Inc. is
the sole general partner of Safeguard 98 Capital L.P. and has sole
authority
50
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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. Robert E. Keith,
one of our directors, is a director of Safeguard Scientifics, Inc. The
address of Safeguard is Safeguard Scientifics, Inc., 800 The Safeguard
Building, 435 Devon Park Drive, Wayne, Pennsylvania 19087.
(12) The selling stockholder is a party to an investors' rights agreement.
(13) Includes 11,606 shares held by The Chase Manhattan Trust Company, N.A., as
escrow agent pursuant to the terms of an escrow agreement as security for
certain contingent liabilities of Soft Plus, in connection with the
Merger.
(14) Includes 3,741 shares held by The Chase Manhattan Trust Company, N.A., as
escrow agent pursuant to the terms of an escrow agreement as security for
certain contingent liabilities of Soft Plus, in connection with the
Merger.
(15) Includes 155 shares held by The Chase Manhattan Trust Company, N.A., as
escrow agent pursuant to the terms of an escrow agreement as security for
certain contingent liabilities of Soft Plus, in connection with the
Merger.
(16) Includes 1,741 shares held by The Chase Manhattan Trust Company, N.A., as
escrow agent pursuant to the terms of an escrow agreement as security for
certain contingent liabilities of Soft Plus, in connection with the
Merger.
(17) Includes 708 shares held by The Chase Manhattan Trust Company, N.A., as
escrow agent pursuant to the terms of an escrow agreement as security for
certain contingent liabilities of Soft Plus, in connection with the
Merger.
(18) To the best of our knowledge, the selling stockholder has not held any
office or maintained any material relationship with us or our affiliates
over the past three years. The selling stockholder is a party to a
registration rights agreement.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our Authorized Capital Stock at February 29, 2000
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 26,035,479 shares of common stock outstanding,
including the shares issued in connection with the Merger
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, if any, 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
<PAGE>
Additional Rights:
o subject to the preferential liquidation rights, if any, 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. No shares of
preferred stock are outstanding and we presently have no plans to issue shares
of preferred stock.
52
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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 have 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.
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.
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
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<PAGE>
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" if 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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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have outstanding an aggregate of
26,035,479 shares of our common stock, including the shares issued in
connection with the Merger, assuming no exercise of the underwriters'
over-allotment option and no exercise of options that were outstanding as of
February 29, 2000. Of these shares, all of the 3,225,433 shares sold in the
offering will be freely tradable 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. Approximately
16,122,630 of the remaining outstanding shares of common stock 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 February 29, 2000 and on a pro forma basis after giving effect to
the Merger, subject to the contractual restrictions described below, additional
shares may be sold without registration under the Securities Act as follows:
o 4,668,605 shares of our common stock issuable upon exercise of
outstanding options are eligible for sale under a registration statement
on Form S-8 relating to such shares; 875,909 of such options were
exercisable. There were a total of approximately 4,658,493 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 11,837,837 shares of our common stock then outstanding will be eligible
for sale under Rule 144 or Rule 701
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
The underwriters have requested that the stockholders selling shares in
this offering enter into lock-up agreements under which they would agree not to
transfer or otherwise dispose of, directly or indirectly, without the prior
written consent of Lehman Brothers Inc., any shares of our common stock or any
securities convertible into or exchangeable or exercisable for shares of our
common stock for a period of 90 days following the date of this prospectus.
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.
In connection with the Merger, certain shareholders of Soft Plus who
received 50,000 or more shares of our common stock in the Merger, holding a
total of approximately 2,880,351 unregistered shares of our common stock which
they received in the Merger, signed an agreement requiring them to hold their
shares for up to two years, with the restriction to lapse with respect to 25%
of the shares every six months beginning on a date six months following the
closing of the Merger.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
o one percent of the number of shares of our common stock then outstanding,
which will equal approximately 260,355 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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<PAGE>
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, any of our employees,
consultants or advisors who purchased shares from us in connection with a
compensatory stock or option plan or other written agreement prior to our
initial public offering are eligible to resell such shares subject to the
requirement that the shares are sold in brokers' transactions (as defined in
Rule 144(f) contained in Rule 144).
Registration Rights
Some holders of our common stock have been granted registration rights.
Registration of shares of our common stock pursuant to an exercise of demand
registration rights, piggyback registration rights or shelf registration rights
would result in such shares becoming freely tradable without restriction under
the Securities Act upon the effectiveness of such registration and may
adversely affect our stock price.
Other than shares being sold in this offering, under an investors' rights
agreement with U.S. Interactive, a total of approximately 4,145,982 shares of
our common stock are covered by these registration rights. The shares of our
common stock owned or that can be acquired upon conversion are divided into two
categories under the investors' rights agreement -- registrable investors'
securities and registrable individuals' securities. In particular, persons
holding, in the aggregate, not less than 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. Persons holding in the aggregate, not less
than 20% of the registrable individuals' securities can demand on two occasions
that we register 20% of their shares provided that the shares to be covered by
each such demand have an aggregate price to the public of not less than $5.0
million. In addition, all the holders are entitled under the investors' rights
agreement to piggyback registration rights, subject to reduction at the
discretion of an underwriter. Piggyback registration rights entitle stockholders
to include shares in a registered public offering that has been initiated by
U.S. Interactive. All holders are also entitled under the investors' rights
agreement to an aggregate of four shelf registrations on a registration
statement on Form S-3 provided that the number of shares to be covered by each
shelf registration has an aggregate price to the public of not less than $2.0
million.
In addition, in connection with the Merger, we granted the following
registration rights to former Soft Plus shareholders under a registration
rights agreement with respect to the shares of our common stock issued to them
in the Merger:
o stockholders who sign a lock up agreement and who were not employed by or
directors of Soft Plus within 30 days of the closing date of the Merger
(or controlled by an individual not a director or employed by Soft Plus
within 30 days prior to such date) have been given the right to
participate (subject to underwriters' cutback) in this offering with
respect to up to 30% of their shares. Approximately 120,000 of these
shares are entitled to be registered, of which 25,433 are being sold in
this offering;
o all stockholders have been granted limited rights to participate in a
second firmly underwritten public offering, if any, by us of our common
stock occurring within 24 months following closing of the Merger for not
more than 35% of the shares of our common stock owned by them on the date
of the filing of the registration statement for the second offering. The
right of some of the principal shareholders of Soft Plus to participate in
the offering is limited to not more than 15% of the shares owned by them
on the filing of the registration statement. Approximately 690,227 shares
are entitled to participate in the second offering (if any); and
56
<PAGE>
o we have agreed to file a registration statement on Form S-3 to register
25% of the shares issued in the Merger subject to receiving lock up
agreements once we are eligible to register our shares on Form S-3.
Approximately 720,088 of these shares would be entitled to be registered
on Form 3. (We anticipate that we will become eligible to utilize Form S-3
in August 2000.)
Stock Options
On September 29, 1999, we filed a registration statement on Form S-8 under
the Securities Act covering a total of 5,792,033 shares of common stock reserved
for issuance under our three stock option plans and our 1998 Performance
Incentive Plan. We anticipate that we will file a registration statement on Form
S-8 not later than June 30, 2000, covering shares of our common stock reserved
for issuance under our 2000 Performance Incentive Plan. As of February 29, 2000,
options to purchase 4,668,605 shares of our common stock were issued and
outstanding, of which options to purchase a total of 875,909 shares of our
common stock were vested. Accordingly, shares registered under such registration
statement are, subject to lock-up agreements, vesting provisions and Rule 144
volume limitations applicable to our affiliates, available for sale in the open
market.
The shares of our common stock issuable upon exercise of the Soft Plus
options that in connection with the Merger gave the holder thereof a right to
purchase our common stock will be registered on a Registration Statement on
Form S-8 to be filed within 90 days following the closing of this offering, but
in any event not later than 150 days following the closing date of the Merger.
57
<PAGE>
UNDERWRITING
Under the underwriting agreement between the indentures, us and the
selling stockholders, which is filed as an exhibit to the registration
statement relating to this prospectus, the underwriters named below, for whom
Lehman Brothers Inc., Chase Securities Inc., Deutsche Bank Securities Inc.,
First Union Securities, Inc., Adams, Harkness & Hill, Inc. and Fidelity Capital
Markets, a division of National Financial Services Corporation, are acting as
representatives, have each agreed to purchase from us the respective number of
shares of common stock shown opposite its name below:
<TABLE>
<CAPTION>
Number of
Underwriters Shares
- ------------------------------------------------------------------------ ------------
<S> <C>
Lehman Brothers Inc. ..............................................
Chase Securities Inc. .............................................
Deutsche Bank Securities Inc. .....................................
First Union Securities, Inc. ......................................
Adams, Harkness & Hill, Inc. ......................................
Fidelity Capital Markets, a division of National Financial Services
Corporation .....................................................
------
Total ...........................................................
===========
</TABLE>
Of the 3,225,433 shares to be purchased by the underwriters, 3,000,000
shares will be purchased from us and 225,433 shares will be purchased from the
selling stockholders.
The underwriting agreement provides that the underwriters' obligations to
purchase shares of common stock depend on the satisfaction of the conditions
contained in the underwriting agreement, and that if any of the shares of
common stock are purchased by the underwriters under the underwriting
agreement, then all of the shares of common stock which the underwriters have
agreed to purchase under the underwriting agreement must be purchased. The
conditions contained in the underwriting agreement include the requirement that
the representations and warranties made by us to the underwriters are true,
that there is no material change in the financial markets and that we deliver
to the underwriters customary closing documents.
The representatives of the underwriters have advised us that the
underwriters propose to offer the shares of common stock directly to the public
at the public offering price set forth on the cover page of this prospectus,
and to dealers, who may include the underwriters, at such public offering price
less a selling concession not in excess of $ . per share. The underwriters
may allow, and the dealers may reallow, a concession not in excess of $ . per
share to brokers and dealers. After the offering, the underwriters may change
the offering price and other selling terms.
The following table shows the per share and total public offering price,
underwriting discount to be paid by us and the selling stockholders to the
underwriters and the proceeds before expenses to us and the selling
stockholders. The underwriting discount was determined through discussion with
our management and by reference to the underwriters' experience with
transactions of this type and companies in similar industries. This information
is presented assuming either no exercise or full exercise by the underwriters
of their overallotment option.
<PAGE>
<TABLE>
<CAPTION>
Total
-----------------------
Without
Per share Option With Option
----------- -------- ------------
<S> <C> <C> <C>
Public offering price ................................ $ $ $
Underwriting discount ................................ $ $ $
Proceeds before expenses to U.S. Interactive ......... $ $ $
Proceeds before expenses to the selling stockholders $ $ $
</TABLE>
The expenses of the underwritten offering, exclusive of the underwriting
discount, are estimated at $800,000 and are payable by us. The following table
details these expenses. All amounts shown are estimates, with the exception of
the Securities and Exchange Commission registration fee, the NASD filing fee
and the Nasdaq National Market listing fee.
58
<PAGE>
SEC registration fee ....................... $ 41,557
NASD filing fee ............................ 15,479
Transfer agent and registrar fees .......... 10,000
Printing and engraving ..................... 150,000
Legal fees ................................. 250,000
Nasdaq National Market listing fee ......... 17,500
Accounting fees ............................ 225,000
Miscellaneous .............................. 90,464
--------
Total .................................... $800,000
========
We have granted to the underwriters an option to purchase up to an
aggregate of 450,000 additional shares of common stock, exercisable solely to
cover over-allotments, if any, at the public offering price less the
underwriting discounts and commissions shown on the cover page of this
prospectus. The underwriters may exercise this option at any time until 30 days
after the date of the underwriting agreement. If this option is exercised, each
underwriter will be committed, so long as the conditions of the underwriting
agreement are satisfied, to purchase a number of additional shares of common
stock proportionate to the underwriter's initial commitment as indicated above
and we will be obligated, under the over-allotment option, to sell the shares
of common stock to the underwriters.
We have agreed that, without the prior consent of Lehman Brothers Inc., we
will not directly or indirectly, offer, sell or otherwise dispose of any shares
of common stock or any securities which may be converted into or exchanged for
any such shares of common stock for a period of 90 days from the date of this
prospectus.
The underwriters have requested that the stockholders selling shares in
this offering enter into a lock-up agreement under which it would agree not to
transfer or otherwise dispose of, directly or indirectly, without the prior
written consent of Lehman Brothers Inc., any shares of our common stock or any
securities convertible into or exchangeable or exercisable for shares of our
common stock for a period of 90 days following the date of this prospectus. See
"Shares Eligible for Future Sale."
Our common stock is quoted on the Nasdaq National Market under the symbol
"USIT."
We have agreed to indemnify the underwriters against liabilities,
including liabilities under the Securities Act and liabilities arising from
breaches of the representations and warranties contained in the underwriting
agreement, and to contribute to payments that the underwriters may be required
to make for these liabilities.
Since our initial public offering, Lehman Brothers has been acting as our
financial advisor, including reviewing and evaluating capitalization
strategies, performing structural and financial analysis of this offering and
evaluating liquidity events for us and our employee-stockholders. Lehman
Brothers also acted as financial advisor in connection with our acquisition of
Soft Plus, for which it received customary fees for services provided.
Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters
and selling group members to bid for and purchase shares of common stock. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of the common stock. These transactions
may consist of bids or purchases for the purposes of pegging, fixing or
maintaining the price of the common stock. The underwriters may create a short
position in the common stock in connection with the offering, which means that
they may sell more shares than are set forth on the cover page of this
prospectus. If the underwriters create a short position, then the
representatives may reduce that short position by purchasing common stock in
the open market. The representatives also may elect to reduce any short
position by exercising all or part of the over-allotment option.
The representatives also may impose a penalty bid on underwriters and
selling group members. This means that if the representatives purchase shares
of common stock in the open market to reduce the underwriters' short position
or to stabilize the price of the common stock, the representatives may reclaim
the
59
<PAGE>
amount of the selling concession from the underwriters and selling group
members who sold those shares as part of the offering. In addition, the
representatives reserve the right to reclaim selling concessions from the
underwriters and selling group members if the representatives receive a report
that clients of the underwriters and selling group members have sold the stock
they purchased in this offering generally within 30 days following this
offering. The representatives would reserve this right even if the
representatives do not purchase shares in the open market.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it might to discourage resales of the security by purchasers in
an offering.
Any offers in Canada will be made only under an exemption from the
requirements to file a prospectus in the relevant province of Canada in which
such sale is made.
Purchasers of the shares of common stock offered in this prospectus may be
required to pay stamp taxes and other charges under the laws and practices of
the country of purchase (outside of the United States), in addition to the
offering price listed on the cover of this prospectus.
Fidelity Capital Markets, a division of National Financial Services
Corporation, is acting as an underwriter of this offering and will be
facilitating electronic distribution of information through the Internet, their
Intranet and other proprietary electronic technology.
Lehman Brothers Inc., Chase Securities Inc., Deutsche Bank Securities
Inc., First Union Securities, Inc., Adams, Harkness & Hill, Inc. and Fidelity
Capital Markets, a division of National Financial Services Corporation, have
informed us that they do not intend to confirm sales of shares of common stock
offered by this prospectus to any accounts over which they exercise
discretionary authority. In addition, the other underwriters have informed us
that they do not intend to confirm sales to discretionary accounts that exceed
5% of the total number of shares of common stock offered by them.
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. As of
February 18, 2000, certain partners of Dilworth Paxson LLP owned a total of
approximately 41,047 shares of our common stock. 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, 1998
and 1999, and for each of the years in the three-year period ended December 31,
1999, 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 consolidated financial statements of Soft Plus as of December 31, 1998
and 1999, and for each of the years in the three-year period ended December 31,
1999, have been included herein and in the registration statement in reliance
upon the reports of KPMG LLP, independent certified public accountants,
appearing herein and elsewhere in the registration statement upon the authority
of said firm as experts in accounting and auditing.
The financial statements of Digital Evolution as of December 31, 1996 and
1997, and for each of the years in the two-year period ended December 31, 1997,
have been included herein and in the registration statement in reliance upon
the reports of BDO Seidman, LLP, independent certified public accountants,
appearing herein and elsewhere in the registration statement upon the authority
of said firm as experts in accounting and auditing.
60
<PAGE>
ADDITIONAL INFORMATION
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission. This prospectus, which forms a part of the registration
statement, does not contain all of the information included in the registration
statement. Certain information is omitted and you should refer to the
registration statement and our exhibits. With respect to references made in
this prospectus to any contract or other document of ours, such references are
not necessarily complete and you should refer to the exhibits attached to the
registration statement for copies of the actual contract or document. You may
review a copy of the registration statement at the Securities and Exchange
Commission's public reference room at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Securities and Exchange
Commission's regional offices in Chicago, Illinois and New York, New York.
Please call the Securities and Exchange Commission at 1-800-SEC-0330 for
further information on the operation of the public reference rooms. Our
Securities and Exchange Commission filings and the registration statement can
also be reviewed by accessing the Securities and Exchange Commission's Internet
site at http://www.sec.gov.
61
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Financial Statements Page
- -------------------- -----
<S> <C>
U.S. Interactive, Inc. and Subsidiaries
Independent Auditors' Report ............................................................ F-2
Consolidated Balance Sheets, December 31, 1998 and 1999 ................................. F-3
Consolidated Statements of Operations, Years ended December 31, 1997, 1998 and 1999 ..... F-4
Consolidated Statements of Stockholders' Equity (Deficit), Years ended December 31,
1997, 1998 and 1999 ..................................................................... F-5
Consolidated Statements of Cash Flows, Years ended December 31, 1997, 1998 and 1999 ..... F-6
Notes to Consolidated Financial Statements .............................................. F-7
Digital Evolution, Inc.
Report of Independent Accountants ....................................................... F-20
Balance Sheets, December 31, 1996 and 1997, and June 30, 1998 (unaudited) ............... F-21
Statements of Operations, Years ended December 31, 1996 and 1997, and the six months
ended June 30, 1997 and 1998 (unaudited) ............................................... F-22
Statements of Shareholders' Deficiency, Years ended December 31, 1996 and 1997, and the
six months ended June 30, 1998 (unaudited) ............................................. F-23
Statements of Cash Flows, Years ended December 31, 1996 and 1997, and the six months
ended June 30, 1997 and 1998 (unaudited) ............................................... F-24
Notes to Financial Statements ........................................................... F-25
Soft Plus, Inc. and Subsidiaries
Independent Auditors' Report ............................................................ F-34
Consolidated Balance Sheets, December 31, 1998 and 1999 ................................. F-35
Consolidated Statements of Operations, Years ended December 31, 1997, 1998 and 1999 ..... F-36
Consolidated Statements of Stockholders' Equity, Years ended December 31, 1997, 1998 and F-37
1999 Consolidated Statements of Cash Flows, Years ended December 31, 1997, 1998
and 1999 ............................................................................... F-38
Notes to Consolidated Financial Statements .............................................. F-39
Unaudited Pro Forma Financial Statements
Unaudited Pro Forma Financial Information ............................................... F-49
Unaudited Pro Forma Combined Balance Sheet, December 31, 1999 ........................... F-50
Unaudited Pro Forma Combined Statement of Operations, Year ended December 31, 1999 ...... F-51
Notes to Unaudited Pro Forma Combined Financial Statements .............................. F-52
</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, 1998 and 1999 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, 1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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, 1998 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.
KPMG LLP
Philadelphia, Pennsylvania
February 9, 2000
F-2
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1999
----------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .......................................... $ 3,698 $ 34,130
Accounts receivable (net of allowance of $526 in 1998; and $75 in
1999) ............................................................ 3,388 12,274
Fees and expenditures in excess of billings ........................ 731 353
Prepaid expenses and other current assets .......................... 305 2,383
-------- ---------
Total current assets ............................................. 8,122 49,140
-------- ---------
Furniture and equipment, net ........................................ 1,375 5,451
Goodwill and other intangibles, net ................................. 12,542 5,988
Other assets ........................................................ 223 1,699
-------- ---------
Total Assets ........................................................ $ 22,262 $ 62,278
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable ................................................... $ 1,512 $ 2,641
Accrued expenses ................................................... 2,176 5,164
Notes payable -- bank .............................................. 1,706 --
Current portion of long-term debt .................................. 162 977
Billings in excess of fees and expenditures ........................ 650 1,854
-------- ---------
Total current liabilities ........................................ 6,206 10,636
LONG-TERM DEBT, net of current portion .............................. 583 1,666
-------- ---------
Total Liabilities ................................................... 6,789 12,302
Commitments (Notes 9, 16 and 17)
Mandatorily redeemable convertible preferred stock, $.001 par value,
15,000,000 shares authorized in 1998, 5,341,096 issued and
outstanding in 1998 including accreted dividends of $477 at
December 31, 1998 .................................................. 17,293 --
-------- ---------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock $.001 par value 15,000,000 shares authorized in 1999,
none issued or outstanding in 1999 ................................. -- --
Common stock -- $.001 par value 90,000,000 shares authorized,
9,124,999 shares issued in 1998 and 20,551,192 shares issued in
1999 ............................................................... 9 21
Additional paid-in capital ......................................... 12,418 80,581
Deferred stock compensation ........................................ -- (831)
Treasury stock, 1,039,311 and 1,062,709 shares, at cost ............ (4,812) (5,055)
Accumulated deficit ................................................ (9,435) (24,740)
-------- ---------
Total Stockholders' Equity (Deficit) ............................... (1,820) 49,976
-------- ---------
Total Liabilities and Stockholders' Equity (Deficit) ................ $ 22,262 $ 62,278
======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1997 1998 1999
---------- ------------- ------------
<S> <C> <C> <C>
REVENUE ......................................... $ 6,061 $ 13,636 $ 35,255
OPERATING COSTS AND EXPENSES:
Project personnel and related expenses ......... 2,841 7,405 18,687
Management and administrative .................. 2,196 7,876 17,370
Marketing and sales ............................ 1,013 2,054 3,531
Depreciation and amortization .................. 269 4,592 10,510
------- --------- ---------
Total operating expenses ..................... 6,319 21,927 50,098
------- --------- ---------
OPERATING LOSS .................................. (258) (8,291) (14,843)
OTHER INCOME (EXPENSE):
Interest expense ............................... (51) (223) (399)
Interest income ................................ 19 71 853
------- --------- ---------
NET LOSS ........................................ (290) (8,443) (14,389)
Accretion of mandatorily redeemable preferred
stock to redemption value ...................... -- (625) (916)
------- --------- ---------
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS ................................... $ (290) $ (9,068) $ (15,305)
======= ========= =========
BASIC AND DILUTED LOSS PER COMMON
SHARE .......................................... $ (.06) $ (1.36) $ (1.19)
======= ========= =========
Weighted average shares outstanding used in the
loss per common share calculation:
Basic and diluted .............................. 4,737 6,670 12,826
======= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Mandatorily
Redeemable
Convertible
Preferred Stock Preferred Stock Common Stock
------------------------- ------------------------ -------------------
Shares Amount Shares Amount Shares Amount
----------- ------------ ----------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER
31, 1996 .......................... -- $ -- 1,000 $ 966 4,736 $ 243
Issuance of Series B preferred
stock, net of $26 in costs ........ -- -- 595 974 -- --
Net loss ........................... -- -- -- -- -- --
----- ---------- ----- --------- ----- -------
BALANCES AT DECEMBER
31, 1997 .......................... -- -- 1,595 1,940 4,736 243
Merger with Digital Evolution ...... 1,573 4,490 -- -- 4,385 4
Conversion of no par common
stock to $.001 par value .......... -- -- -- -- -- (238)
Issuance of Series D preferred
stock, net of $25 in costs ........ 2,339 10,807 -- -- -- --
Repurchase of common stock ......... -- -- -- -- -- --
Repurchase of preferred stock ...... (220) (569) -- -- -- --
Issuance of warrants in
connection with debt financing -- -- -- -- -- --
Exercise of stock options .......... -- -- -- -- 4 --
Accretion of mandatorily
redeemable preferred stock to
redemption value .................. -- 477 -- -- -- --
Conversion of preferred stock to
mandatorily redeemable
preferred stock ................... 1,649 2,088 (1,595) (1,940) -- --
Net loss ........................... -- -- -- -- -- --
----- ---------- ------ --------- ----- -------
BALANCES AT DECEMBER
31, 1998 .......................... 5,341 17,293 -- -- 9,125 9
Issuance of common stock in
connection with acquisition ....... -- -- -- -- 585 1
Deferred stock compensation ........ -- -- -- -- 275 --
Repurchase of common stock ......... -- -- -- -- -- --
Accretion of mandatorily
redeemable preferred stock to
redemption value .................. -- 916 -- -- -- --
Conversion of mandatorily
redeemable preferred stock to
common stock ...................... (5,341) (18,209) -- -- 5,341 5
Issuance of common stock in
public offering (net) ............. -- -- -- -- 4,866 5
Amortization of deferred stock
compensation ...................... -- -- -- -- -- --
Exercise of stock options .......... -- -- -- -- 359 1
Net loss ........................... -- -- -- -- -- --
------ ---------- ------ --------- ----- -------
BALANCES AT DECEMBER
31, 1999 .......................... -- $ -- -- $ -- 20,551 $ 21
====== ========== ====== ========= ====== =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Deferred Additional Total
Stock Paid-in Treasury Accumulated Stockholders'
Compensation Capital Stock Deficit Equity (Deficit)
-------------- ------------ ------------ ------------- -----------------
<S> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER
31, 1996 .......................... $ -- $ (21) $ -- $ (77) $ 1,111
Issuance of Series B preferred
stock, net of $26 in costs ........ -- -- -- -- 974
Net loss ........................... -- -- -- (290) (290)
--------- ------- -------- --------- ----------
BALANCES AT DECEMBER
31, 1997 .......................... -- (21) -- (367) 1,795
Merger with Digital Evolution ...... -- 12,506 -- -- 12,510
Conversion of no par common
stock to $.001 par value .......... -- 238 -- -- --
Issuance of Series D preferred
stock, net of $25 in costs ........ -- -- -- -- --
Repurchase of common stock ......... -- -- (4,812) -- (4,812)
Repurchase of preferred stock ...... -- (451) -- -- (451)
Issuance of warrants in
connection with debt financing -- 140 -- -- 140
Exercise of stock options .......... -- 6 -- -- 6
Accretion of mandatorily
redeemable preferred stock to
redemption value .................. -- -- -- (477) (477)
Conversion of preferred stock to
mandatorily redeemable
preferred stock ................... -- -- -- (148) (2,088)
Net loss ........................... -- -- -- (8,443) (8,443)
--------- ------- -------- --------- ----------
BALANCES AT DECEMBER
31, 1998 .......................... -- 12,418 (4,812) (9,435) (1,820)
Issuance of common stock in
connection with acquisition ....... -- 2,923 -- -- 2,924
Deferred stock compensation ........ (1,376) 1,376 -- -- --
Repurchase of common stock ......... -- -- (243) -- (243)
Accretion of mandatorily
redeemable preferred stock to
redemption value .................. -- -- -- (916) (916)
Conversion of mandatorily
redeemable preferred stock to
common stock ...................... -- 18,205 -- -- 18,210
Issuance of common stock in
public offering (net) ............. -- 44,512 -- -- 44,517
Amortization of deferred stock
compensation ...................... 545 -- -- -- 545
Exercise of stock options .......... -- 1,147 -- -- 1,148
Net loss ........................... -- -- -- (14,389) (14,389)
--------- ------- -------- --------- ----------
BALANCES AT DECEMBER
31, 1999 .......................... $ (831) $80,581 $ (5,055) $ (24,740) $ 49,976
========= ======= ======== ========= ==========
</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,
-----------------------------------------------
1997 1998 1999
------------- --------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................... $ (290) $ (8,443) $ (14,389)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ............................... 269 4,592 10,510
Amortization of deferred stock compensation and other
non-cash charges .......................................... -- 89 705
Changes in operating assets and liabilities, net of
effects of acquisitions:
Increase in accounts receivable ........................... (1,340) (113) (8,854)
Increase (decrease) in fees and expenditures in
excess of billings ....................................... (49) (630) 378
Increase in prepaid expenses and other assets ............. (9) (163) (3,478)
Increase in accounts payable and accrued expenses ......... 1,025 1,929 4,050
Increase (decrease) in billings in excess of fees and
expenditures ............................................. 371 (708) 1,204
--------- -------- ---------
Net cash used in operating activities ....................... (23) (3,447) (9,874)
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment ......................... (422) (573) (4,735)
Acquisitions, net of cash acquired .......................... (166) (4) (47)
Other ....................................................... (24) (72) (177)
--------- ---------- ---------
Net cash used in investing activities ....................... (612) (649) (4,959)
--------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) borrowings under bank line of credit . (45) 1,700 (1,700)
Net (repayments) proceeds from equipment financing .......... (79) (201) 1,620
Proceeds from term loan ..................................... -- 600 --
Repayment of stockholder loans .............................. (23) (24) (20)
Payment of deferred financing fees .......................... -- (48) --
Net proceeds from issuance of preferred stock ............... 974 10,807 --
Payments to acquire treasury stock .......................... -- (4,812) --
Net proceeds from issuance of common stock .................. -- -- 44,517
Payments to repurchase preferred stock ...................... -- (1,020) --
Proceeds from exercise of stock options ..................... -- 6 848
--------- ---------- ---------
Net cash provided by financing activities ................... 827 7,008 45,265
--------- ---------- ---------
Net increase in cash and cash equivalents ................... 192 2,912 30,432
Cash and cash equivalents, beginning of period .............. 594 786 3,698
--------- ---------- ---------
Cash and cash equivalents, end of period .................... $ 786 $ 3,698 $ 34,130
========= ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
U.S. Interactive, Inc. (the Company) is a leading 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, digital brand creation,
security and enterprise application integration.
The Company has sustained significant net losses and negative cash flows
from operations since its inception. The Company's ability to meet its
obligations in the ordinary course of business is dependent upon its ability to
establish profitable operations or raise additional capital through public or
private equity financing, bank financing or other sources of capital.
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, 2000. The Company may require
additional capital to finance its future operations beyond 2000. 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.
As further described in note 8, in August 1999 the Company completed an
initial public offering of its common stock, and as described in note 18, in
March 2000 the Company acquired by merger Soft Plus, Inc.
Principles of Consolidation
The accompanying consolidated financial statements include the financial
statements of the Company and its wholly owned subsidiary, Web Access, Inc. All
significant intercompany balances and transactions have been eliminated in
consolidation.
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 $4,287,000 and $13,760,000 as of December 31, 1998
and 1999, respectively. The Company assesses the recoverability of goodwill, as
well as other long-lived assets, in accordance with Statement of Financial
Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, which requires
the Company to review for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset might not be
recoverable. When such an event occurs, the Company estimates the future cash
flows expected to result from the use of the asset and its eventual
disposition. If the undiscounted expected future cash flows is less than the
carrying amount of the asset, an impairment loss is recognized.
F-7
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 on fixed price engagements 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 and estimated profits 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 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.
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 No. 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 No. 25) with pro forma disclosures of net income as if the fair
value method had been applied. The Company applies APB No. 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
F-8
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
assets when events and circumstances warrant such review. The carrying value of
a long-lived asset is considered impaired when the anticipated undiscounted
cash flow from such asset is separately identifiable and is less than the
carrying value. In that event a loss is recognized based on the amount by which
the carrying value exceeds the fair market value of the long-lived asset. Fair
market value is determined by using the anticipated cash flows discounted at a
rate commensurate with the risk involved. Measurement of the impairment, if
any, will be based upon the difference between carrying value and the fair
value of the asset. The Company has identified no such impairment losses.
Historical Net Loss Per Share and Pro Forma Net Loss Per Share
The Company computes earnings per share in accordance with SFAS No. 128,
"Earnings per Share" (SFAS No. 128). Basic earnings per share is computed using
the weighted average number of common shares outstanding during the period.
Diluted earnings per share is 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 forth 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,
-----------------------------------------
1997 1998 1999
---------- ------------ -------------
<S> <C> <C> <C>
Numerator: Net loss attributable to common stockholders ......... $ (290) $ (9,068) $ (15,305)
Denominator:
Historical weighted-average shares outstanding for basic and
diluted loss per common share ................................ 4,737 6,670 12,826
Basic and diluted loss per common share ........................ $ (.06) $ (1.36) $ (1.19)
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1997 1998 1999
---------- ------------ -------------
<S> <C> <C> <C>
Numerator: Net loss attributable to common stockholders ......... $ (290) $ (9,068) $ (15,305)
Pro forma denominator:
Historical weighted-average shares outstanding for basic and
diluted loss per common share ................................ 6,074 9,634 18,167
Pro forma basic and diluted loss per common share ............... $ (.05) $ (.94) $ (.84)
</TABLE>
Recent Accounting Pronouncements
The Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on the Company's results of
operations, financial position or cash flows.
Reclassifications
Certain amounts previously reported have been reclassified to conform to
the current year presentation.
F-9
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1997 1998 1999
------ ---------- --------
<S> <C> <C> <C>
Cash paid during the year for (in thousands):
Interest ..................................................... $ 46 $ 213 $ 419
Supplemental non-cash investing and financing activities:
Acquisition (in thousands):
Fair value of assets acquired (including cash of $332 in
1998 and $135 in 1999) ...................................... $ 8 $ 2,064 $ 544
Liabilities assumed .......................................... 485 1,192 359
Fair value of stock issued in connection with acquisitions
(note 3) .................................................... -- 17,000 2,924
Issuance of warrants in connection with bank financing ......... -- 140 --
</TABLE>
3. ACQUISITIONS
On May 1, 1997, the Company acquired certain assets and assumed certain
liabilities of Mixed Media Works, Inc. (MMW), a regional Internet professional
services firm. The purchase price was approximately $485,000 and was allocated
to the assets acquired and liabilities assumed based on fair values as of the
date of acquisition. The fair value of the assets acquired and liabilities
assumed was $8,000 and $485,000, respectively. The acquisition was accounted
for using the purchase method of accounting and, as such, the excess of the
purchase price over the fair values of the assets acquired of $477,000 was
recorded as goodwill and is being amortized over five years. The results of
operations of MMW were not material to the Company.
On July 2, 1998, the Company completed a merger (the DE Merger) with
Digital Evolution, Inc. (DE), an Internet professional services firm that
provided development services for Internet, intranet and extranet applications.
The shareholders of DE agreed to exchange their common and preferred shares for
common and preferred shares of the Company.
This resulted in the Company issuing 4,383,954 shares of common stock,
1,573,533 shares of Series A mandatorily redeemable convertible preferred stock
and 1,043,945 options to purchase Company common stock. The aggregate purchase
price was approximately $17 million. In connection with the DE Merger, the
holders of the Company's original Series A and B convertible preferred stock
exchanged their shares for Series B and C mandatorily redeemable convertible
preferred stock.
The DE Merger was accounted for under the purchase method of accounting.
The results of operations of DE have been included in the Company's
consolidated financial statements since July 1, 1998.
The excess of the purchase price over the fair value of the net
identifiable assets acquired of $16,128,000 has been recorded as goodwill and
other intangible assets and is amortized on a straight-line basis over its
estimated life of two years.
The purchase price was allocated as follows (in thousands):
<TABLE>
<S> <C>
Fair value of assets acquired
(Primarily accounts receivable and fixed assets) ......... $ 2,064
Goodwill and related intangible assets .................... 15,283
Assembled workforce ....................................... 845
Fair value of liabilities acquired ........................ (1,192)
--------
$ 17,000
========
</TABLE>
In March 1999, the Company acquired certain assets and assumed certain
liabilities of InVenGen LLC, a Internet professional services firm, in exchange
for 584,800 shares of the Company's common stock having an
F-10
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 fair value of
the assets acquired and liabilities assumed. The balance of the purchase price
was recorded as goodwill and is being amortized over two years.
The Company also issued 275,200 shares of restricted common stock in
connection with the transaction. The former employees of InVenGen LLC who
became employees of the Company are required to be employed by the Company
during the next two-year period in order for the restricted shares to be
released. If an employee leaves the Company during the next two-year period all
unvested shares for such employees are forfeited. As of December 31, 1999, no
shares have been forfeited. The Company recorded $1,376,000 of deferred stock
compensation in connection with these restricted shares that will be amortized
over the two-year period. The historical results of operations of InVenGen LLC
are not material to the Company.
The following table reflects unaudited pro forma combined results of
operations of the Company, DE and InVenGen on the basis that the acquisitions
had taken place at the beginning of 1998 (in thousands, except per share data).
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1999
------------ ------------
<S> <C> <C>
Revenue .............................................. $ 18,405 $ 35,321
Net loss attributable to common stockholders ......... (17,390) (15,960)
Basic and diluted loss per common share .............. $ (1.94) $ (1.23)
</TABLE>
In management's opinion, the unaudited pro forma combined results of
operations are not indicative of the actual results that would have occurred
had the acquisitions been consummated at the beginning of 1998 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,
---------------------
1998 1999
--------- ---------
<S> <C> <C>
Equipment ............................................... $1,520 $4,984
Purchased software ...................................... 201 1,156
Furniture and fixtures .................................. 329 540
Leasehold improvements .................................. 331 757
------ ------
$2,381 $7,437
Less: accumulated depreciation and amortization ......... 1,006 1,986
------ ------
Furniture and equipment -- net .......................... $1,375 $5,451
====== ======
</TABLE>
<PAGE>
5. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
December 31,
---------------------
1998 1999
--------- ---------
Accrued personnel related costs ......... $1,016 $1,538
Legal and professional fees ............. 370 765
Accrued media ........................... 50 1,945
Other ................................... 740 916
------ ------
$2,176 $5,164
====== ======
F-11
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
6. NOTES PAYABLE
Bank Loan Agreement
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 80% of eligible accounts receivable) and (ii) a Term Loan (the Loan)
in the aggregate amount of $1,200,000. The Line matured on June 30, 1999, and
bears interest at the prime rate plus 1.25%. In June 1999, as further amended
in September 1999, the commercial bank extended the expiration date of the Line
to June 30, 2000, and amended the financial covenants. The Loan was payable in
48 consecutive monthly installments of $25,000 beginning August 1, 1999, and
bears interest at the prime rate plus 1.75%. The Loan was repaid in full and
cancelled in September 1999. The Line is 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. There was
$1,700,000 outstanding under the Line and $600,000 outstanding under the Loan
as of December 31, 1998. There was no balance outstanding under the Line or the
Loan as of December 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. The warrant may be exercised at any
time until the tenth anniversary of the date of issuance of the 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 were 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 was required to make monthly installments including interest through
April 1998, as further described herein. Note No. 1 (original amount $15,000)
required monthly installments of $500 with interest at the prime rate plus 1%
(9.25% at December 31, 1998) on outstanding balances. Note No. 2 (original
amount $59,000) required monthly installments of $2,200 with interest at 8.75%.
Amounts outstanding under these notes at December 31, 1998 was $6,000, which
was repaid in full during 1999.
7. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1999
--------- --------
<S> <C> <C>
Unsecured stockholder loan with interest rate of 8.00% .......... $ 20 --
Term loan with interest rate of 9.00% ........................... 12 --
Capital lease obligations with interest rates of 5.00% to 19.00%
maturing through 2003 .......................................... 79 2,643
Term loan with interest rate of 9.50% ........................... 600 --
Term loan with interest rate of 9.34% ........................... 34 --
------ -----
745 2,643
Less current portion ............................................ 162 977
------ -----
$ 583 $1,666
====== ======
</TABLE>
Maturities of long-term debt are as follows (in thousands): 2000 -- $977;
2001 -- $861; 2002 -- $731 and 2003 -- $74.
F-12
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
8. STOCKHOLDERS' EQUITY
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) were 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 had demand and piggy back
registration rights, as defined.
Holders of Preferred Stock had 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 was 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.
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 was required
to redeem all shares of each respective Series of Preferred Stock.
The Preferred Stock voted on an as if converted basis.
Issuance of Series D Mandatorily Redeemable Convertible Preferred Stock
In September 1998, the Company sold 2,339,628 shares of Series D
mandatorily redeemable convertible preferred stock, with the same preferences
described above, to Safeguard Scientifics, Inc. (Safeguard) for $10,832,478. As
part of Safeguard's investment, Safeguard also has the right, under certain
conditions and with the Company's consent, to conduct an offering of the
Company's common stock to Safeguard stockholders.
Preferred Stock consisted of the following at December 31, 1997 and 1998
(in thousands, except per share data):
Issued and
Per Share Outstanding
December 31,
Liquidation -------------------
Value Authorized 1997 1998
Preferred Series ------------- ------------ -------- --------
Series A ......... $ 2.83 1,574 -- 1,385
Series B ......... $ 0.95 1,053 1,000 1,021
Series C ......... $ 1.68 596 596 596
Series D ......... $ 4.63 2,339 -- 2,339
----- ----- -----
5,562 1,596 5,341
===== ===== =====
Upon the closing of the Company's initial public offering in August 1999,
all of the outstanding shares of mandatorily redeemable preferred stock were
converted to shares of common stock on a one for one basis.
Reincorporation of the Company
In connection with the DE Merger in July 1998, the Company amended its
Articles of Incorporation to authorize 20,000,000 shares of Class A Common
Stock ($.001 par value), 2,000,000 shares of Class B
F-13
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Common Stock ($.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 had 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.
Initial Public Offering
In August 1999, the Company completed its Initial Public Offering of
securities and issued a total of 4,865,848 shares of common stock at $10.00 per
share (including a total of 692,250 shares issued to the underwriters upon
exercise of the option which the Company had granted to them solely to cover
overallotments). An additional 441,402 shares were sold by existing
stockholders at $10.00 per share. Upon the initial closing of the public
offering, all 5,341,096 of the outstanding shares of mandatorily redeemable
convertible preferred stock were converted to 5,341,096 shares of common stock.
Proceeds to the Company from its Initial Public Offering net of underwriting
discounts and costs of the offering were approximately $44.5 million. The
Company used a total of $2.9 million of the net proceeds to repay all
outstanding debt under its line of credit and term loan.
9. LEASES
The Company maintains operating and administrative offices in California,
New York, New Jersey, Pennsylvania and Washington D.C. The Company also leases
certain equipment under operating and capital leases. Total rent expense under
operating leases amounted to $213,000, $1,239,000 and $2,513,000 for the years
ended December 31, 1997, 1998 and 1999, respectively.
F-14
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Future minimum payments under non-cancelable leases are as follows (in
thousands):
Capital Operating
Year Ending December 31, Leases Leases
- ------------------------------------------------- --------- ----------
2000 .......................................... $1,275 $ 3,956
2001 .......................................... 1,040 5,159
2002 .......................................... 789 5,150
2003 .......................................... 77 5,027
2004 .......................................... -- 4,203
Thereafter ...................................... -- 31,039
------ -------
Total minimum lease payments .................... 3,181 $54,534
=======
Amount representing interest .................... 538
------
Present value of minimum lease payments ......... $2,643
======
At December 31, 1999, equipment included assets under capitalized lease
obligations of $2,717,000 less accumulated amortization of $293,000.
10. INCOME TAXES
The Company utilizes the asset and liability method of accounting for
income taxes as set forth in SFAS No. 109, "Accounting for Income Taxes." Under
the asset and liability method, deferred taxes are determined based on the
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes. Significant components of the Company's deferred taxes are as follows
(in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1999
Deferred Tax Assets: ----------- -----------
<S> <C> <C>
Book depreciation in excess of tax depreciation ........................ $ 2 $ 53
Net operation loss carryforwards ....................................... 2,758 3,880
Reserves and accruals not currently deductible for tax purposes ........ 143 697
Amortization ........................................................... 42 512
Other .................................................................. 5 308
-------- --------
2,950 5,450
Valuation allowance .................................................... (2,950) (5,450)
-------- --------
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 representing 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, 1998 and 1999.
At December 31, 1999, the Company had approximately $9.9 million of
Federal net operating loss carryforwards available to offset future Federal
taxable income. These Federal net operating loss carryforwards will expire
between 2010 and 2019, if not utilized. The Company also has state tax net
operating losses in various states of approximately $8.3 million. These state
net operating losses will expire through the year 2019 if not utilized.
F-15
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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.
11. OTHER INVESTMENTS
During 1997 and 1999, the Company obtained common stock of two separate
and unrelated early stage companies, as part of the consideration received for
services rendered by the Company. The Company accounts for these investments
under the cost method of accounting with no carrying value.
12. EMPLOYEE BENEFIT PLANS
The Company has an employee savings plan, which permits participants to
make contributions by salary reduction pursuant to section 401(k) of the
Internal Revenue Code. The plan provides for discretionary employer
contributions to eligible employees. The Company's contribution to the plan was
$29,000, $50,000 and $244,000 for the years ended December 31, 1997, 1998 and
1999 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, 1997,
1998 and 1999.
13. STOCK OPTION PLANS
The Company has four stock option plans currently in effect under which
future grants may be issued: the 1998 Performance Incentive Stock Option Plan
(the 1998 Incentive plan), 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 Incentive Plan effective September 21, 1998.
The 1998 Incentive Plan authorizes the grants of options to purchase up to
3,000,000 shares of authorized but unissued common shares. At December 31,
1999, 1,241,500 options under the 1998 Incentive Plan have been granted to
employees of the Company at prices ranging between $9.25 and $46.31, the
estimated fair value of the Company's common stock at the date of grant. Of
these options, 95,500 have been cancelled and 59,000 are currently exercisable.
These options will become exercisable in 2000 through 2003.
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 and 1999, 156,850 and 1,544,633 options respectively, under the 1998
Plan have been granted to employees of the Company at prices ranging between
$3.50 and $41.28, the estimated fair value of the Company's common stock at the
date of grant. Of these options, 31,272 were exercised, 205,425 have been
cancelled and 129,702 are currently exercisable. The options will become
exercisable in 2000 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 both December
31, 1998 and 1999, 581,757 options 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, 211,246 were
exercised, 151,209 have expired and been cancelled, 126,609 are currently
exercisable and the remaining options will become exercisable in 2000 through
2001.
F-16
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 both December 31, 1998 and 1999, 1,043,945 options under the 1996
Plan have been granted to employees of the Company, of which 120,766 have been
exercised and 195,445 have expired and have been cancelled. Of these options,
714,777 are currently exercisable and the remaining options will become
exercisable in 2000. No additional options may be granted under the 1996 Plan.
Stock options are to be granted with an exercise price at least equal to
the stock's fair market value at the date of grant. The Plans permit the
granting of options with exercise periods of no more than 10 years from the
date of grant, with further stipulations that no options may be granted after
the tenth anniversary of the adoption of the Plans. Options granted vest and
become exercisable 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. 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 cancelled ................................. (171,940) 1.99
Converted Digital Evolution Stock Options ......... 1,043,945 2.47
--------- -------
Outstanding at December 31, 1998 ..................... 1,603,984 $ 2.81
--------- -------
Options granted ................................... 2,629,283 15.31
Options exercised ................................. (359,081) 3.04
Options cancelled ................................. (473,214) 6.50
--------- -------
Outstanding at December 31, 1999 ..................... 3,400,972 $ 11.94
========= =======
</TABLE>
The following summarizes information about the Company's stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------- -------------------------------------
Weighted Average
Remaining Weighted Number Outstanding Weighted
Exercise Price Number Outstanding Contractual Average at December 31, Average
Range at December 31, 1999 Life (in years) Exercise Price 1999 Exercise Price
- --------------------- ---------------------- ----------------- ---------------- -------------------- ---------------
<S> <C> <C> <C> <C> <C>
$1.50 to 3.50 ....... 909,698 7.6 $ 2.47 808,362 $ 2.43
$3.85 to 5.00 ....... 667,574 9.1 $ 4.89 113,726 $ 4.60
$9.25 to 11.00 ...... 944,350 9.4 $ 9.64 87,500 $ 9.45
$18.13 to 26.69 ..... 550,500 9.7 $ 22.37 13,000 $ 22.94
$33.47 to 46.31 ..... 328,850 9.9 $ 41.56 7,500 $ 33.47
------- --- ------- ------- -------
3,400,972 9.0 $ 11.94 1,030,088 $ 3.75
========= === ======= ========= =======
</TABLE>
F-17
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The Company applies APB No. 25 and related interpretations in accounting
for its stock option plans. Had compensation cost been recognized pursuant to
SFAS No. 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 1999
---------- ------------ -------------
<S> <C> <C> <C> <C>
Net loss attributable to common
stockholders ................. As reported $ (290) $ (9,068) $ (15,305)
Pro forma (363) (9,507) (18,234)
Basic and diluted loss per
common share ................. As reported $ (.06) $ (1.36) $ (1.19)
Pro forma (.08) (1.43) (1.42)
</TABLE>
The per share weighted-average fair value of stock options issued by the
Company during 1997, 1998 and 1999 was $.56, $.85 and $15.31, respectively.
The following range of assumptions were used by the Company to determine
the fair value of stock options granted using the Black-Scholes option-price
model:
1997 1998 1999
--------- --------- ----------
Dividend yield ........................ 0% 0% 0%
Expected volatility ................... 0% 0% 100%
Average expected option life .......... 5 years 5 years 4 years
Risk-free interest rate ............... 6.00% 5.25% 5.49%
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 53% of accounts receivable at
December 31, 1998 and five customers representing 54% of accounts receivable at
December 31, 1999.
For the years ended December 31, 1997, 1998 and 1999, 40%, 36% and 48%
respectively, of the Company's revenue was generated from its top five
customers.
The Company performs its services primarily in North America, Asia-Pacific
and Europe as follows (in thousands):
Years Ended December 31,
-----------------------------------
1997 1998 1999
--------- ---------- ----------
North America ......... $6,061 $12,535 $32,788
Asia-Pacific .......... -- 1,001 2,150
Europe ................ -- 100 317
------ ------- -------
$6,061 $13,636 $35,255
====== ======= =======
15. RELATED PARTY TRANSACTIONS
The Company and Exist Corporation (formerly known as Juggernaut Partners,
LLC), Interactive Video Technologies, Inc. (IVT), and Chromazone, LLC
(Chromozone) are related parties because a common shareholder holds a material
ownership interest in the Company, Exist, IVT and Chromozone. The Company
provided professional services to all of these entities during the years ended
December 31, 1998 and 1999.
F-18
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 $8.9 million for
December 31, 1999. Accounts receivable from these services was $691,000 at
December 31, 1998, and $3.5 million at December 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 an employment agreement with its Chairman which provides
for a yearly base salary of $235,000 through July 2, 2000, which will renew for
a period of one year unless notice is given by the non-renewing party within 30
days. Additionally, the Company has an employment agreement with its President
and Chief Executive Officer which provides for a yearly base salary of $235,000
through July 30, 2000, 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 a party to legal proceedings and claims, which arise in the
ordinary course of business. In the opinion of management, the amount of the
ultimate liability with respect to these actions will not materially affect the
Company's financial position, results of operations or cash flows.
18. SUBSEQUENT EVENTS
Acquisition (unaudited)
In February 2000, the Company entered into a definitive merger agreement
to acquire by merger (the Merger) Soft Plus, Inc. (Soft Plus), a privately-held
e-solutions company. The Merger closed on March 8, 2000, and the Company issued
and 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 a one year $80 million note bearing interest at 6.2%
due to the selling shareholders. The Merger will be accounted for using the
purchase method of accounting. Accordingly, the purchase price will be
allocated to the fair value of the net assets acquired and liabilities assumed.
The balance of the purchase price will be allocated to goodwill and other
intangible assets and amortized over their estimated useful lives of
approximately five years.
In April 2000, the Company was notified of a complaint that was filed by
First Albany Corporation (FAC) against the Company and Soft Plus. FAC alleges
that Soft Plus had breached an agreement dated November 29, 1999 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 alleges that the defendants breached their obligations under the
initial agreement by failing to pay FAC the fees in excess of $6.1 million which
it was entitled to receive at various times commencing upon closing of the
Merger. Management of the Company intends to vigorously defend against FAC's
claims. While the outcome of litigation is inherently uncertain, management
believes that the ultimate resolution of this proceeding would not be likely to
have a material adverse effect on its business or financial condition.
Public Offering (unaudited)
In February 2000, the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission with respect
to an offering of its common stock.
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, June 30,
----------------------------- ---------------
1996 1997 1998
------------- ------------- ---------------
(unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ........................... $1,414,827 $1,528,301 $ 332,123
Accounts receivable, net of allowance for
doubtful accounts of $0, $165,400, and
$150,000 (unaudited) .............................. 159,676 1,827,501 1,388,549
Prepaid expenses and other current assets ........... 21,864 58,738 91,673
---------- ---------- ----------
Total current assets ................................. 1,596,367 3,414,540 1,812,345
PROPERTY AND EQUIPMENT, NET (Note 2) ................. 327,064 698,894 665,234
OTHER ASSETS ......................................... 21,699 42,939 44,456
---------- ---------- ----------
$1,945,130 $4,156,373 $2,522,035
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable and accrued expenses ............... $ 608,093 $ 585,496 $ 372,670
Deferred revenue .................................... 700,000 160,220 728,000
Loan from shareholders .............................. 174,729 -- --
Current portion of long-term debt (Note 3) .......... 9,750 9,053 10,307
Current portion of obligations under capital leases
(Note 7) .......................................... 24,174 30,418 25,674
---------- ---------- ----------
Total current liabilities ............................ 1,516,746 785,187 1,136,651
Obligations under capital leases (Note 7) ............ 11,968 28,699 20,221
LONG-TERM DEBT (Note 3) .............................. 43,248 34,195 28,921
---------- ---------- ----------
Total liabilities .................................... 1,571,962 848,081 1,185,793
---------- ---------- ----------
Series A Redeemable Preferred stock-no par value,
1,366,666 shares authorized; issued and
outstanding 250,000 in 1996 and 1,366,666 in
1997 and 1998 (unaudited), and (liquidation value
of $4,100,000) (Note 8) ............................. 694,761 4,044,759 4,044,759
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes
7, 8, 9, 10, and 11)
SHAREHOLDERS' DEFICIENCY (Note 8)
Class A -- no par value, common stock,
38,466,665 shares authorized; 20,299,985
shares issued and outstanding ..................... 2,000 2,000 2,000
Class B -- no par value, common stock,
6,096,000 shares authorized; none issued and
outstanding ....................................... -- -- --
Accumulated deficit ................................. (323,593) (738,467) (2,710,517)
------------ ------------ -----------
Total shareholders' deficiency ...................... (321,593) (736,467) (2,708,517)
------------ ------------ -----------
$1,945,130 $4,156,373 $2,522,035
=========== ========== ===========
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE>
Digital Evolution, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Years Ending December 31, Six Months Ending June 30,
------------------------- ------------------------------
1996 1997 1997 1998
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues ....................................... $ 2,504,774 $ 7,034,693 $ 3,662,182 $ 2,809,866
----------- ----------- ----------- -----------
OPERATING EXPENSES
Project personnel and related expenses ......... 1,378,214 4,330,710 1,720,430 2,560,528
Marketing and sales ............................ 8,845 268,083 110,299 372,167
Management and administration .................. 1,337,140 2,794,925 980,279 1,807,666
Depreciation ................................... 48,628 138,591 61,352 80,120
----------- ----------- ---------- -----------
Operating income (loss) ........................ (268,053) (497,616) 789,822 (2,010,615)
----------- ------------ ----------- -----------
Interest expense ............................... (34,120) (33,335) (13,919) (8,209)
Interest income ................................ 3,410 154,748 83,829 19,884
Assumed loan balance of related party (Note 5) (101,299) -- -- --
Other (expenses) income, net ................... (20,191) (38,671) (16,018) 26,890
----------- ------------ ----------- ------------
Net income (loss) .............................. $ (420,253) $ (414,874) $ 843,714 $(1,972,050)
=========== ============ =========== ============
Weighted average number of shares
outstanding:
Basic ......................................... 20,299,985 20,299,985 20,299,985 20,299,985
Diluted ....................................... 20,299,985 20,299,985 23,567,873 20,299,985
NET INCOME (LOSS) PER SHARE:
Basic ......................................... $ (.02) $ (.02) $ .04 $ (.10)
=========== ============ =========== ===========
Diluted ....................................... $ (.02) $ (.02) $ .03 $ (.10)
=========== ============ =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-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)
---------- ------ -- ---- ------------ ------------
Net loss for the six months
(unaudited) ....................... -- -- -- -- (1,972,050) (1,972,050)
---------- ------ -- ---- ------------ ------------
BALANCE AT JUNE 30, 1998
(unaudited) ....................... 20,299,985 $2,000 -- $ -- $ (2,710,517) $ (2,708,517)
========== ====== == ==== ============ ============
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE>
Digital Evolution, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ending December 31, Six Months Ending June 30,
------------------------------- ----------------------------------
1996 1997 1997 1998
-------------- -------------- --------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) .................................... $ (420,253) $ (414,874) $ 843,714 $ (1,972,050)
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating
activities:
Depreciation ...................................... 48,628 138,591 61,352 80,120
Bad debt expense .................................. 71,180 166,314 -- --
Assumed loan from related party ................... 101,299 -- -- --
Changes in assets and liabilities:
Accounts receivable ............................ (113,880) (1,834,139) (1,343,502) 438,952
Prepaid assets and other ....................... (12,165) (36,874) (76,329) (32,540)
Accounts payable and accrued
expenses ...................................... 535,381 (22,676) (304,526) (201,538)
Deferred revenue ............................... 700,000 (539,780) (390,000) 567,780
Other assets and liabilities ................... (14,666) (21,240) (11,083) (1,912)
---------- ------------ ------------ ------------
Net cash (used in) provided by operating activities ..... 895,524 (2,564,678) (1,220,374) (1,121,188)
---------- ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment .................. (236,356) (515,035) (121,508) (57,748)
Disposition of property and equipment ................ -- 4,692 -- --
---------- ------------ ------------ ------------
Net cash used in investing activities ................... (236,356) (510,343) (121,508) (57,748)
---------- ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from loans payable and capital leases........ 53,707 65,605 -- --
Payments on loans payable and capital leases ......... (50,372) (227,108) (196,046) (17,242)
Proceeds from redeemable preferred stock
issuance ............................................ 694,761 3,349,998 3,349,998 --
---------- ------------ ------------ ------------
Net cash (used in) provided by financing activities ..... 698,096 3,188,495 3,153,952 (17,242)
---------- ------------ ------------ ------------
Net (decrease) increase in cash and cash
equivalents ............................................ 1,357,264 113,474 1,812,070 (1,196,178)
Cash and cash equivalents, beginning of year ............ 57,563 1,414,827 1,414,827 1,528,301
---------- ------------ ------------ ------------
Cash and cash equivalents, end of year .................. $1,414,827 $ 1,528,301 $ 3,226,897 $ 332,123
========== ============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes ........................................ $ 800 $ 7,280 $ -- $ 3,156
Interest ............................................ 26,832 40,623 22,901 8,209
========== ============ ============ ============
NON CASH INVESTING AND FINANCING
ACTIVITIES
Purchases of equipment by capital leases ............. $ 23,979 $ 65,604 $ 65,604 $ --
Assumed loan from related party ...................... 101,299 -- -- --
========== ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE>
DIGITAL EVOLUTION, INC.
NOTES TO FINANCIAL STATEMENTS
(Information with respect to June 30, 1997 and 1998 is unaudited)
NOTE 1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES BUSINESS
Digital Evolution, Inc. (the Company) was incorporated in California on
May 10, 1994. The Company is a developer of proprietary technologies, with its
principal expertise in large scale inter-and intranet solutions, database and
electronic commerce applications, CD-Rom and interactive kiosk-based networks.
The Company's principal markets are the United States.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with initial
maturities of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method and includes the amortization of capital lease assets.
Equipment is depreciated over a five to seven year useful life. Leasehold
improvements are amortized over the term of the lease or the useful life, if
shorter.
Betterments and major renewals are capitalized and included in property,
plant, and equipment accounts while expenditures for maintenance and repairs
and minor renewals are charged to expense. When assets are retired or otherwise
disposed of, the assets and related allowances for depreciation and
amortization are eliminated from the accounts and any resulting gain or loss is
reflected in income.
Long-Lived Assets
Long-lived assets, such as property and equipment, are evaluated for
impairment when events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable through the estimated undiscounted
future cash flows from the use of these assets. When any such impairment
exists, the related assets will be written down to fair value. No impairment
losses have been recorded through December 31, 1997.
Software Development Costs
Development costs incurred in the research and development of new software
products and enhancements to existing software products are expensed as
incurred until technological feasibility has been established. After
technological feasibility is established, any additional development costs are
capitalized in accordance with Statement of Financial Accounting Standards
(SFAS) 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 1996 and 1997.
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 and have been classified as current liabilities under
the caption "deferred revenue."
F-25
<PAGE>
DIGITAL EVOLUTION, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information with respect to June 30, 1997 and 1998 is unaudited)
Taxes on Income
The Company accounts for income taxes in accordance with the provisions of
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 1996 and 1997, one customer accounted for 27% and 53%,
respectively, of total revenues. This same customer accounted for 0% and 55%,
respectively, of accounts receivables, in 1996 and 1997, 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, 1996 and 1997 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."
F-26
<PAGE>
DIGITAL EVOLUTION, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information with respect to June 30, 1997 and 1998 is unaudited)
Under the intrinsic value based method, compensation cost is the excess, if
any, of the quoted market price of the stock at grant date or other measurement
date over the amount an employee must pay to acquire the stock. The Company
makes pro forma disclosures of net income and earnings per share as if the fair
value based method of accounting had been applied as required by SFAS No. 123,
"Accounting for Stock-based Compensation."
Unaudited Interim Financial Information
The interim financial statements of the Company for the six months ended
June 30, 1997 and 1998, included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations relating to interim financial statements. In the opinion
of management, the accompanying unaudited interim financial statements reflect
all adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position of the Company at June 30, 1998, and the
results of its operations and its cash flows for the six months ended June 30,
1997 and 1998.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income", 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
F-27
<PAGE>
DIGITAL EVOLUTION, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information with respect to June 30, 1997 and 1998 is unaudited)
benefits and requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, SFAS No. 132 is effective for years beginning after December 15, 1997
and requires comparative information for earlier years to be restated, unless
such information is not readily available. Management believes the adoption of
this statement will have no material impact on the Company's financial
statements.
In June 1998, the Financial Accounting Standards Board issued 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:
<TABLE>
<CAPTION>
December 31, June 30,
------------------------ ---------
1996 1997 1998
-------- -------- ---------
(unaudited)
<S> <C> <C> <C>
Equipment ......................................... $364,053 $849,455 $907,203
Furniture and fixtures ............................ 60,164 71,834 71,834
Leasehold improvements ............................ 16,186 29,457 29,457
-------- -------- ---------
440,403 950,746 1,008,494
Accumulated depreciation and amortization ......... (113,339) (251,852) (343,260)
-------- -------- ---------
Property and equipment, net ....................... $327,064 $698,894 $ 665,234
======== ======== =========
</TABLE>
As of December 31, 1996 and 1997, included in equipment is $39,489 and
$105,093 respectively, of equipment with accumulated amortization of $10,600
and $30,024, respectively, under capital leases.
NOTE 3. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, June 30,
----------------------- ------------
1996 1997 1998
---------- ---------- ------------
(unaudited)
<S> <C> <C> <C>
Note payable to bank, secured by certain equipment,
monthly payments of $1,128, interest at 9.34%, matures
November 2001 ........................................ $52,998 $43,248 $39,228
------- ------- -------
52,998 43,248 39,228
Less current maturities ............................... 9,750 9,053 10,307
------- ------- -------
$43,248 $34,195 $28,921
======= ======= =======
</TABLE>
F-28
<PAGE>
DIGITAL EVOLUTION, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information with respect to June 30, 1997 and 1998 is unaudited)
NOTE 4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following:
<TABLE>
<CAPTION>
December 31, June 30,
------------------------- ------------
1996 1997 1998
----------- ----------- ------------
(unaudited)
<S> <C> <C> <C>
Accounts payable .................. $ 85,954 $162,699 $180,010
Accrued payroll ................... 79,242 214,672 --
Incentive bonus ................... 300,000 -- 75,000
Accrued vacation .................. 16,371 81,062 117,660
Other -- accrued expenses ......... 126,526 127,063 --
-------- -------- --------
$608,093 $585,496 $372,670
======== ======== ========
</TABLE>
NOTE 5. LOAN FROM STOCKHOLDER
During 1994, the Company and a related company obtained joint financing
from an affiliated company. The Company granted shares of Class A Common Stock
as compensation, which had no fair market value at the date of grant. The
Company was also a guarantor of the related company financing included in this
agreement. This related company defaulted in 1996 and the Company assumed their
loan in the amount of $101,299. This loan was fully paid down in 1997.
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%
==== ====
F-29
<PAGE>
DIGITAL EVOLUTION, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information with respect to June 30, 1997 and 1998 is unaudited)
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 ............................ $ -- $ --
========= =========
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 repreenting interest ................... (13,309)
--------
Present value of net minimum lease payments ... 59,117
Less: current portion ......................... (30,418)
--------
$ 28,699
========
Total rent expense under operating leases amounted to $114,641 and
$275,717 for the year ended December 31, 1996 and 1997, respectively.
NOTE 8. SHAREHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK
In January 1997, the Company effected a 3.93-for-one stock split. In
December 1997, the Company effected a five-for-one stock split. All applicable
share data have been retroactively restated to reflect the stock splits.
In November 1996 and February 1997, the Company sold Series A Preferred
Stock (Preferred Stock) in a private placement. The Company issued an aggregate
of 1,366,666 shares of its preferred stock in exchange for net proceeds of
$4,044,759. The holders of the preferred stock are entitled to cumulative
dividends at a rate of 6% of the original per share price of $3 (as adjusted
for January 1997 stock split). There are $238,687
F-30
<PAGE>
DIGITAL EVOLUTION, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information with respect to June 30, 1997 and 1998 is unaudited)
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).
NOTE 9. EARNINGS PER SHARE
Basic and diluted net loss per share were computed by dividing income
available to common stockholders by the weighted average number of shares of
common stock outstanding during the year.
<TABLE>
<CAPTION>
Years Ending December 31, Six Months Ending June 30,
------------------------------ --------------------------------
1996 1997 1997 1998
-------------- -------------- --------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net (loss) income .................................. $ (420,252) $ (414,874) $ 843,714 $ (1,972,050)
Less: Preferred dividends .......................... (45,000) (193,687) (110,000) (123,000)
---------- ---------- ---------- ------------
Income (loss) available to common stockholder ...... $ (465,252) $ (608,561) $ 733,714 $ (2,095,050)
========== ========== ========= ============
Weighted average shares of common stock
outstanding ....................................... 20,299,985 20,299,985 20,299,985 20,299,985
Shares of common stock issuable upon the assumed
conversion of preferred stock and the assumed
exercise of options ............................... -- -- 3,267,888 --
---------- ---------- ---------- ------------
Additional shares of common stock and common
stock equivalents for computation ................. 20,299,985 20,299,985 23,567,873 20,299,985
========== ========== ========== ============
Diluted net income (loss) per common share ......... $ (0.02) $ (.02) $ .03 $ (.10)
========== ========== ========== ============
</TABLE>
NOTE 10. EMPLOYEE RETIREMENT PLANS
The Company has sponsored a defined contribution retirement plan (the
Plan) which covers all employees meeting minimum service requirements. The Plan
qualifies as a deferred salary arrangement under Section 401(k) of the Internal
Revenue Code. Employee's make contributions from 1% -- 20% of their eligible
compensation. The Company may elect to make matching contributions, but, as of
December 31, 1997, has not elected to do so.
NOTE 11. STOCK OPTION PLAN
In November 1996, the Board of Directors adopted and the Company's
shareholders approved the 1996 Stock Option Plan (the 1996 Plan). The 1996 Plan
provides for the grant of options which qualify as incentive stock options
(Incentive Options) under Section 422 of the Internal Revenue Code of 1986, as
amended (the Code), to officers and employees of the Company and options which
do not so qualify (Non-Qualified Options) to officers, directors, employees and
consultants of the Company. Under the 1996 Plan, the Company may grant options
to purchase up to 6,096,000 shares of Class B common stock. Options to purchase
5,642,785 shares of common stock at an exercise price per share of $.54-$.70
(the estimated fair value of the shares on the date of grant) were granted to
certain employees in 1997. The options granted vest incrementally from one to
five years and are exercisable over a period of five years.
F-31
<PAGE>
DIGITAL EVOLUTION, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information with respect to June 30, 1997 and 1998 is unaudited)
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options. Under APB 25, because the
exercise price of the Company's employee stock options equals the fair value of
the underlying stock on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net income is required by SFAS No. 123,
and has been determined as if the Company had accounted for its employee stock
options under the fair value method of SFAS No. 123. The fair value of these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted average assumption for 1997; risk-free
interest rates of 6.57%; with no volatility factor; and a weighted average
expected life of the option of 5 years. The absence of a volatility factor in
the pricing model is permitted by SFAS No. 123, for non-public companies.
Under the accounting provisions of SFAS No. 123, the Company's net loss
and basic and diluted net loss per share would have been increased to the pro
forma amounts indicated below:
Year ended
December 31,
1997
-------------
Net loss as reported .................... $ (414,874)
Net loss pro forma ...................... (929,107)
Net loss per share as reported .......... (.02)
Net loss per share as pro forma ......... (.06)
A summary of the Company's stock option plan as of and for the year ended
December 31, 1997 is presented below:
<TABLE>
<CAPTION>
Weighted
Average
Shares Exercise Price
------------ ---------------
<S> <C> <C>
Outstanding at beginning of year ....................................... -- --
Granted ................................................................ 5,642,785 $ 0.54
Forfeited/canceled ..................................................... (74,620) $ 0.54
--------- ------
Outstanding at end of year ............................................. 5,568,165 $ 0.54
========= ======
Options exercisable at year-end ........................................ 1,733,030 $ 0.54
Weighted average fair value of options granted during the year ......... $ 0.15
======
</TABLE>
<PAGE>
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
Exercise Number Contractual Exercise Number 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
F-32
<PAGE>
DIGITAL EVOLUTION, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information with respect to June 30, 1997 and 1998 is unaudited)
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-33
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Soft Plus, Inc.:
We have audited the accompanying consolidated balance sheets of Soft Plus, Inc.
(the Company) and subsidiaries as of December 31, 1998 and 1999, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 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 Soft Plus, Inc. and
subsidiaries as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
Mountain View, California
February 11, 2000, except as to Note 7(d), which is as of March 1, 2000
F-34
<PAGE>
SOFT PLUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1999
Assets -------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................................. $ 336 $ 1,673
Trade accounts receivable, less allowance for doubtful accounts of $40 in
1998 and $307 in 1999 .................................................... 3,973 6,363
Income tax receivable ...................................................... -- 135
Costs and estimated earnings in excess of billings on contracts in progress 289 40
Other current assets ....................................................... 57 354
------ --------
Total current assets .................................................... 4,655 8,565
------ --------
Property and equipment, net ................................................. 253 1,233
Deferred financing costs .................................................... -- 1,658
Deferred tax assets ......................................................... -- 500
Other assets ................................................................ 74 195
------ --------
Total assets ................................................................ $4,982 $ 12,151
====== ========
</TABLE>
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity
<S> <C> <C>
Current liabilities:
Line of credit ............................................................. $ 350 $ 270
Trade accounts payable ..................................................... 394 1,176
Billings in excess of costs and estimated earnings on contracts in progress 24 --
Accrued expenses ........................................................... 1,351 3,351
Current portion of long-term debt .......................................... -- 491
Current portion of capital leases .......................................... -- 60
Income taxes payable ....................................................... 74 --
Deferred tax liabilities ................................................... 979 123
Deferred revenue ........................................................... 54 268
------ --------
Total current liabilities ............................................... 3,226 5,739
------ --------
Long-term debt, noncurrent portion .......................................... -- 1,577
Capital leases, noncurrent portion .......................................... -- 123
------ --------
Total liabilities ........................................................... 3,226 7,439
------ --------
Minority interest ........................................................... -- 17
------ --------
Commitments (Note 5)
Stockholders' equity:
Convertible preferred stock:
Series A, no par value; 2,000,000 shares authorized; 1,250,000 shares
issued and outstanding in 1998 and 1999, respectively (liquidation
preference of $500 in 1998 and 1999, respectively) ...................... 500 500
Series B, no par value; 1,000,000 shares authorized; -0- and 844,514
shares issued and outstanding in 1998 and 1999, respectively,
(liquidation preference of $-0- and $1,385 in 1998 and 1999,
respectively) ........................................................... -- 3,055
Common stock, no par value; 20,000,000 shares authorized; 10,228,334
and 13,180,384 shares issued and outstanding in 1998 and 1999,
respectively ............................................................ 264 56,885
Notes receivable ......................................................... (549) (1,391)
Deferred compensation expense ............................................ -- (52,698)
Retained earnings (accumulated deficit) .................................. 1,541 (1,656)
------ --------
Total stockholders' equity .............................................. 1,756 4,695
------ --------
Total liabilities and stockholders' equity .................................. $4,982 $ 12,151
====== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-35
<PAGE>
SOFT PLUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1997 1998 1999
------ ------- --------
<S> <C> <C> <C>
Consulting and development services, software licenses, and
software maintenance revenue ............................... $5,643 $15,334 $ 24,285
Cost of services and goods sold (excluding depreciation
expense of $-0-, $26 and $118 in 1997, 1998 and 1999,
respectively) .............................................. 3,513 7,713 13,364
------ ------- --------
Gross profit ............................................ 2,130 7,621 10,921
------ ------- --------
Operating expenses:
Research and development (excluding depreciation expense
of $0, $20 and $52 in 1997, 1998 and 1999, respectively).. 584 1,661 2,764
Selling, general and administrative (excluding depreciation
expense of $37, $8 and $39 in 1997, 1998 and 1999,
respectively) ............................................ 1,261 4,172 12,239
Depreciation ............................................... 37 55 209
------ ------- --------
Total operating expenses ................................ 1,882 5,888 15,212
------ ------- --------
Operating income (loss) ................................. 248 1,733 (4,291)
Interest income ............................................. 14 15 22
Interest expense ............................................ -- (3) (130)
------ ------- --------
Income (loss) before income taxes ....................... 262 1,745 (4,399)
Income tax expense (benefit) ................................ 109 708 (1,202)
------ ------ --------
Net income (loss) ....................................... $ 153 $ 1,037 $ (3,197)
====== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-36
<PAGE>
SOFT PLUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Convertible Preferred Stock
----------------------------------------------
Series A Series B Common Stock
---------------------- ---------------------- -------------------------
Shares Amount Shares Amount Shares Amount
------------ -------- ---------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balances as of December 31,
1996 ......................... 500,000 $ 200 -- $ -- 5,000,000 $ 2
Net income .................... -- -- -- -- -- --
------- ----- ------- ------- --------- --------
Balances as of December 31,
1997 ......................... 500,000 200 -- -- 5,000,000 2
Issuance of preferred stock
and common stock in
exchange for notes
receivable ................... 750,000 300 -- -- 4,975,000 249
Issuance of common stock
for cash ..................... -- -- -- -- 253,334 13
Net income .................... -- -- -- -- -- --
------- ----- ------- ------- --------- --------
Balances as of December 31,
1998 ......................... 1,250,000 500 -- -- 10,228,334 264
Stock options exercised ....... -- -- -- -- 902,050 45
Issuance of common stock in
exchange for notes
receivable ................... -- -- -- -- 1,730,000 842
Issuance of preferred stock
for cash ..................... -- -- 844,514 1,376 -- --
Issuance of warrant ........... -- -- -- 1,679 -- --
Issuance of common stock
for cash ..................... -- -- -- -- 130,000 65
Issuance of common stock
for services ................. -- -- -- -- 190,000 125
Compensation expense for
options ...................... -- -- -- -- -- 55,544
Amortization of deferred
compensation expense ......... -- -- -- -- -- --
Net loss ...................... -- -- -- -- -- --
--------- ----- ------- ------- ---------- --------
Balances as of December 31,
1999 ......................... 1,250,000 $ 500 844,514 $ 3,055 13,180,384 $ 56,885
========= ===== ======= ======= ========== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Retained
Deferred Earnings Total
Notes Compensation (Accumulated Stockholders'
Receivable Expense Deficit) Equity
------------ -------------- -------------- --------------
<S> <C> <C> <C> <C>
Balances as of December 31,
1996 ......................... $ -- $ -- $ 351 $ 553
Net income .................... -- -- 153 153
-------- --------- -------- ---------
Balances as of December 31,
1997 ......................... -- -- 504 706
Issuance of preferred stock
and common stock in
exchange for notes
receivable ................... (549) -- -- --
Issuance of common stock
for cash ..................... -- -- -- 13
Net income .................... -- -- 1,037 1,037
-------- --------- -------- ---------
Balances as of December 31,
1998 ......................... (549) -- 1,541 1,756
Stock options exercised ....... -- -- -- 45
Issuance of common stock in
exchange for notes
receivable ................... (842) -- -- --
Issuance of preferred stock
for cash ..................... -- -- -- 1,376
Issuance of warrant ........... -- -- -- 1,679
Issuance of common stock
for cash ..................... -- -- -- 65
Issuance of common stock
for services ................. -- -- -- 125
Compensation expense for
options ...................... -- (55,544) -- --
Amortization of deferred
compensation expense ......... -- 2,846 -- 2,846
Net loss ...................... -- -- (3,197) (3,197)
-------- --------- -------- ---------
Balances as of December 31,
1999 ......................... $ (1,391) $ (52,698) $ (1,656) $ 4,695
======== ========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-37
<PAGE>
SOFT PLUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1997 1998 1999
--------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................................... $ 153 $ 1,037 $ (3,197)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation ................................................................... 37 55 209
Amortization of deferred compensation expense .................................. -- -- 2,846
Issuance of common stock for services .......................................... -- -- 125
Amortization of discount on long term debt ..................................... -- -- 21
Changes in operating assets and liabilities:
Trade accounts receivable ..................................................... (470) (2,810) (2,390)
Income taxes receivable ....................................................... -- -- (135)
Deferred tax assets ........................................................... -- -- (500)
Costs and estimated earnings in excess of billings on contracts in progress ... -- (289) 249
Other current assets .......................................................... (26) (31) (297)
Other assets .................................................................. 49 (70) (121)
Deferred tax liabilities ...................................................... 98 635 (856)
Trade accounts payable ........................................................ 13 381 782
Billings in excess of costs and estimated earnings on contracts in progress ... 52 (29) (24)
Accrued expenses .............................................................. 137 1,087 2,000
Income taxes payable .......................................................... 10 73 (74)
Deferred revenue .............................................................. -- 54 214
------ -------- --------
Net cash provided by (used in) operating activities ........................ 53 93 (1,148)
------ -------- --------
Cash flows used in investing activities-- purchases of property and equipment .... (90) (226) (830)
------ -------- --------
Cash flows from financing activities:
Minority interest ............................................................... -- -- 17
Net proceeds from issuance of common stock ...................................... 2 13 65
Proceeds from notes receivable .................................................. 13 -- --
Proceeds from exercise of stock options ......................................... -- -- 45
Net proceeds from issuance of preferred stock ................................... -- -- 1,376
Proceeds from debt line ......................................................... -- -- 2,000
Repayment of debt line .......................................................... -- -- (81)
Payment of capital lease ........................................................ -- -- (27)
Proceeds from line of credit .................................................... -- 350 --
Repayment of line of credit ..................................................... -- -- (80)
------ -------- --------
Net cash provided by financing activities .................................. 15 363 3,315
------ -------- --------
Net (decrease) increase in cash and cash equivalents ............................. (22) 230 1,337
Cash and cash equivalents, beginning of year ..................................... 128 106 336
------ -------- --------
Cash and cash equivalents, end of year ........................................... $ 106 $ 336 $ 1,673
====== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year:
Income taxes ................................................................... $ -- $ -- $ 88
====== ======== ========
Interest ....................................................................... $ -- $ 3 $ 23
====== ======== ========
Noncash investing and financing activities:
Deferred compensation expense .................................................. $ -- $ -- $ 52,698
====== ======== ========
Warrant for Series B preferred stock issued in conjunction with debt line ...... $ -- $ -- $ 1,679
====== ======== ========
Issuance of common stock in exchange for notes receivable ...................... $ -- $ 249 $ 842
====== ======== ========
Issuance of preferred stock in exchange for notes receivable ................... $ -- $ 300 $ --
====== ======== ========
Property and equipment acquired under capital leases ........................... $ -- $ -- $ 210
====== ======== ========
Property and equipment acquired with debt ...................................... $ -- $ -- $ 150
====== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-38
<PAGE>
SOFT PLUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies and Practices
(a) Description of Business
Soft Plus (the Company) is a provider of e-solutions for the global
communications industry. Its e2e solution transforms enterprises into
eBusinesses by providing a unified Web-based view of all interactions to
agents, partners and customers. These views are seamlessly integrated with
back-end customer relationship management, billing and order management
applications. Soft Plus' technology, methodology and domain expertise
rapidly deliver end-to-end eBusiness Solutions (e2e Solutions(SM)). Founded
in Cupertino, California, in 1994, the Company has international offices
with more than 100 customers on five continents.
(b) Principles of Consolidation
The accompanying consolidated financial statements include the financial
statements of the Company and its wholly and majority owned subsidiaries.
All significant intercompany balances and transactions have been
eliminated in consolidation.
(c) Contract Accounting
Revenue from fixed fee contracts for services is recognized on the
percentage-of-completion method, measured by the percentage of costs
incurred to date to estimated total costs for each contract. Contract
costs include all direct material, labor, and subcontracting costs, and
those indirect costs related to contract performance such as indirect
labor and supply costs. General and administrative costs are charged to
expense as incurred.
Revenue from time and materials contracts for services is recognized based
on contract costs incurred during the year. Contract costs include all
direct material, labor, and subcontracting costs, and those indirect costs
related to contract performance such as indirect labor and supply costs.
General and administrative costs are charged to expense as incurred.
Provisions for estimated losses on contracts in progress are made in the
period in which such losses are determined. Changes in contract
requirements, estimated profitability, and final contract settlements may
result in revisions to costs and revenues and are recognized in the period
in which the revisions are determined. Claims are included in contract
revenue when realization is probable and the amount of cash to be received
can be reliably estimated.
The asset "costs and estimated earnings in excess of billings on contracts
in progress" represents revenue recognized in advance of billings. The
liability "billings in excess of costs and estimated earnings on contracts
in progress" represents billings in excess of revenue recognized.
(d) Software License Revenue Recognition
The Company recognizes revenue from software licenses in accordance with
the American Institute of Certified Public Accountants' Statement of
Position (SOP) 97-2, Software Revenue Recognition. Software license
revenue is recognized upon delivery and when persuasive evidence of an
arrangement exists, the fee is fixed and determinable, acceptance is
certain, collection is probable, and the arrangement does not involve
significant production, customization, or modification of the software.
Deferred revenue represents maintenance revenues from customer support
that has been deferred and is being recognized ratably over the term of
the maintenance agreement, typically 13 months.
(e) Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statement and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
F-39
<PAGE>
SOFT PLUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(f) Cash and Cash Equivalents
Cash and cash equivalents of $336,000 and $1,673,000 as of December 31,
1998 and 1999, respectively, consist of checking and money market accounts
with a bank. The Company considers all highly liquid debt instruments with
remaining maturities of three months or less when acquired to be cash
equivalents.
(g) Property and Equipment
Property and equipment are stated at cost. Depreciation on property and
equipment is calculated using the straight-line method over the estimated
useful lives of the assets. Computer equipment is depreciated over three
years and furniture and fixtures are depreciated over five years.
(h) Other Assets
Other assets consist principally of deposits under operating leases and
advances to employees for travel expenses.
(i) Research and Development, and Advertising
Research and development, and advertising costs are expensed as incurred.
Advertising costs amounted to $167,000 and $262,000 in 1998 and 1999,
respectively.
(j) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance is
established when necessary to reduce deferred tax assets to the amounts
expected to be realized.
(k) Foreign Currency
The Company considers the functional currency of its foreign subsidiaries
to be the U.S. dollar. Accordingly, the foreign subsidiaries' financial
statements are remeasured into U.S. dollars using the historical exchange
rate for nonmonetary items and the current exchange rate for monetary
items. Remeasurement gains and losses, as well as transaction gains and
losses, are included in the determination of net income and have been
immaterial to date.
(l) Comprehensive Income
Effective January 1, 1998, the Company adopted the provisions of the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards (SFAS) No. 130, Reporting of Comprehensive Income. SFAS No. 130
established standards for the display of comprehensive income and its
components in a full set of financial statements. Comprehensive income
includes all changes in equity during a period except those resulting from
the issuance of shares of stock and distributions to shareholders. There
were no differences between net income and comprehensive income during the
years ended December 31, 1997, 1998 and 1999.
(m) Stock-Based Compensation
SFAS No. 123, Accounting for Stock-Based Compensation, sets forth
accounting and reporting standards for stock-based employee compensation.
As permitted by SFAS No. 123, the Company accounts for stock option grants
using the intrinsic value method in accordance with Accounting
F-40
<PAGE>
SOFT PLUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Deferred compensation expense
associated with stock-based compensation is being amortized on a
straight-line basis over the vesting period of the individual award.
(n) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. SFAS requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying amount of
the assets exceeds the fair value of the assets. Assets to be disposed of
are reported at the lower of the carrying amount or fair value less costs
to sell.
(o) Software Development Costs
In compliance with SFAS No. 86, Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed, costs incurred in the
development of new software products and enhancements to existing software
products are expensed as incurred until technological feasibility has been
established. Development costs incurred after technology feasibility is
established have not been capitalized to date as such amounts have not
been material.
(2) Credit Facilities
In 1998, the Company secured a line of credit in the amount of $1,000,000,
bearing interest at prime plus 1% (9.5% as of December 31, 1999). As of
December 31, 1999, $270,000 was outstanding under the line of credit. The
line of credit expires July 10, 2000 and is secured by substantially all
of the Company's assets. In addition, the line of credit is guaranteed by
the officers of the Company. On January 31, 2000, the Company repaid all
amounts outstanding under the line of credit and terminated the line of
credit.
In 1999, the Company entered into a loan and security agreement with Venture
Lending and Leasing II, Inc. (Lendor). Lendor agreed to make term loans to
the Company up to a maximum of $5,000,000 bearing interest at 7.70%. The
loan and security agreement can be drawn down upon through December 31,
2000, and is secured by all assets of the Company. As of December 31, 1999,
$2,000,000 has been drawn under this agreement. Principal and interest is
due monthly with a lump sum payment of $180,000 due June 1, 2003.
As part of the loan and security agreement, the Company gave the Lendor a
warrant for 90,000 shares of Series B preferred stock, exercisable at $1.64
per share. The warrant, which expires on December 31, 2007, was valued at
$1,679,000 using the Black-Scholes options pricing model with the following
assumptions: risk-free interest rate of 6.66%; expected life of eight years;
expected volatility of 70%; and no dividends. The warrant is accounted for
as a discount to the term loans and is being amortized as interest expense
over the term of the loans.
F-41
<PAGE>
SOFT PLUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(3) Contracts in Progress
Information with respect to the billing status of services contracts in
progress as of December 31, 1998 and 1999, is as follows (in thousands):
1998 1999
------ ------
Costs incurred on contracts in progress $ 484 $ 776
Estimated earnings 615 745
------ ------
1,099 1,521
Less: billings to date 834 1,481
------ ------
$ 265 $ 40
====== ======
Included in the accompanying consolidated
balance sheets under the following captions:
Costs and estimated earnings in excess of
billings on contracts in progress $ 289 $ 40
Billings in excess of costs and estimated
earnings on contracts in progress (24) --
------ ------
$ 265 $ 40
====== ======
(4) Property and Equipment
Property and equipment as of December 31, 1998 and 1999, was comprised of the
following (in thousands):
1998 1999
-------- ---------
Computer equipment $ 287 $1,172
Furniture and fixtures 88 392
------ ------
375 1,564
Accumulated depreciation (122) (331)
------ ------
$ 253 $1,233
====== ======
(5) Leases
The Company has several noncancelable operating leases, primarily for office
space and apartments. These leases generally contain renewal options for
varying periods. The Company also entered into several capital leases in
fiscal 1999.
Future minimum lease payments under noncancelable operating leases with
initial or remaining lease terms in excess of one year as of December 31,
1999, are as follows (in thousand):
<TABLE>
<CAPTION>
Year Ending Operating Capital
December 31, Leases Leases
------------ ----------- --------
<S> <C> <C>
2000 $ 1,326 $ 93
2001 1,306 93
2002 1,210 90
2003 1,052 --
2004 1,049 --
Thereafter 80 --
------- -----
Total minimum lease payments $ 6,023 276
=======
Less interest related to capital lease payments (93)
-----
183
Less current portion of capital lease (60)
-----
Capital lease, noncurrent portion $ 123
=====
</TABLE>
F-42
<PAGE>
SOFT PLUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Total rent expense for 1997, 1998 and 1999 was $75,000, $328,000 and
$592,000, respectively.
(6) Preferred Stock
The rights and preferences of Series A preferred stock are as follows:
o Each share of preferred stock is convertible into one share of common
stock, at the option of the stockholder, subject to adjustments to prevent
dilution in the event of a stock split, stock dividend, combination, or
recapitalization.
o Each share will automatically convert into common stock in the event of the
closing of an underwritten public offering of the Company's common stock
resulting in proceeds of more than $7,500,000 for an offering price not
less than $4.00 per share.
o Consent of the holders of at least a majority of the shares of all
preferred stock shall be required for any action which alters or changes
the rights, preferences, or privileges; creates a new class of preferred
stock having preference over or parity with the shares of Series A
preferred stock; or which effects a merger, reorganization, or sale of
assets of the Company.
o In the event of any liquidation, dissolution, or winding up of the Company,
holders of Series A preferred stock are entitled to receive, in
preference to holders of common stock, the amount of $0.40 per share,
plus all declared but unpaid dividends prior to any distribution to the
holders of common stock. If funds are not available to sufficiently
satisfy the full preferential amount, the entire assets of the Company
will be distributed to the holders of preferred stock ratably based on
the total preferential amount of preferred stock held.
The rights and preferences of Series B preferred stock are as follows:
o Each share of preferred stock is convertible into one share of common
stock, at the option of the stockholder, subject to adjustments to
prevent dilution in the event of a stock split, stock dividend,
combination, or recapitalization.
o Each share will automatically convert into common stock in the event of the
closing of an underwritten public offering of the Company's common stock
resulting in proceeds of more than $7,500,000 for an offering price not
less than $5.00 per share.
o Consent of the holders of at least a majority of the shares of all
preferred stock shall be required for any action which alters or changes
the rights, preferences, or privileges; creates a new class of preferred
stock having preference over or parity with the shares of Series B
preferred stock; or which effects a merger, reorganization, or sale of
assets of the Company.
o In the event of any liquidation, dissolution, or winding up of the Company,
holders of Series B preferred stock are entitled to receive, in
preference to holders of Series A preferred stock and common stock, the
amount of $1.64 per share, plus all declared but unpaid dividends prior
to any distribution to the holders of Series A preferred stock and
common stock. If funds are not available to sufficiently satisfy the
full preferential amount, the entire assets of the Company will be
distributed to the holders of preferred stock ratably based on the total
preferential amount of Series B preferred stock held.
(7) Common Stock and Stock Option Plan
(a) Restricted Common Stock
In 1999, the Company granted 1,860,000 shares of restricted common stock
to employees, directors
F-43
<PAGE>
SOFT PLUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
and consultants in exchange for an average purchase price of approximately
$0.45 per share. The restrictions give the Company the right to repurchase
the stock for the original consideration received and expire ratably over
a four-year vesting period. In general, vesting is accelerated after the
Company is acquired or undergoes an initial public offering.
(b) Stock and Stock Option Plan
In 1997, the Company adopted a stock option plan (the 1997 Plan) pursuant
to which the Company's Board of Directors may grant stock options to
employees, directors and consultants. The 1997 Plan authorizes grants of
options to purchase up to 3,000,000 shares of authorized but unissued
common stock.
In 1999, the Company adopted a stock option plan (the 1999 Plan) pursuant to
which the Company's Board of Directors may grant stock options and stock
purchase rights to employees, directors and consultants. The 1999 Plan
authorizes grants of options to purchase up to 4,000,000 shares of
authorized but unissued common stock.
In 1999, the Company adopted a stock plan (the 1999 Stock Plan) which
replaces the 1997 Plan and 1999 Plan. Under the 1999 Stock Plan the
Company's Board of Directors may grant stock options and stock purchase
rights to employees, directors and consultants. The 1999 Stock Plan
authorizes grants of options and rights to purchase up to 1,815,646 shares
of authorized but unissued common stock.
Options generally have 10-year terms, vest ratably and become fully
exercisable after four years from the date of grant.
As of December 31, 1999, there were 208,646 additional shares available
for grant under the Plans. The per share weighted-average fair value of
stock options granted during 1997, 1998 and 1999 was $0.011, $0.014 and
$11.304, respectively, on the date of grant using the Black-Scholes
option-pricing model (excluding a volatility assumption) with the
following weighted-average assumptions: 1997 - expected dividend yield 0%,
risk-free interest rate of 6.06%, and an expected life of 5 years; 1998 -
expected dividend yield 0%, risk-free interest rate of 4.88%, and an
expected life of 4 years; and 1999 - expected dividend yield 0%, risk-free
interest rate of 6.03%, and an expected life of 4 years.
Stock option activity is summarized as follows:
Weighted-
Average
Number of Exercise
Shares Price
------------- ----------
Balances as of December 31, 1996 -- $ --
Granted 1,063,500 0.05
Exercised --
Forfeited (184,000) 0.05
--------- -----
Balances as of December 31, 1997 879,500 0.05
Granted 2,171,000 0.05
Exercised (3,334) 0.05
Forfeited (281,666) 0.05
--------- -----
Balances as of December 31, 1998 2,765,500 0.05
Granted 2,761,000 0.60
Exercised (902,050) 0.05
Forfeited (894,487) 0.14
--------- -----
Balances as of December 31, 1999 3,729,963 $ 0.43
========= ======
F-44
<PAGE>
SOFT PLUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
<TABLE>
<CAPTION>
Options Outstanding
--------------------------------------------
Options Exercisable
Weighted- ----------------------
average Weighted- Weighted-
Range of Number of remaining average Number average
exercise options contractual exercise of exercise
prices outstanding life (years) price options price
- ----------------- ------------- -------------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
$ .05 - .60 3,729,963 9.3 $ 0.43 830,837 $ 0.19
</TABLE>
(c) Stock Compensation
The Company uses the intrinsic value method prescribed by APB Opinion No. 25 in
accounting for its stock-based compensation arrangements for employees.
Compensation cost has been recognized for certain fixed stock options issuances
in 1999 in the accompanying financial statements because the fair value of the
underlying common stock exceeds the exercise price of the stock options at the
date of grant. No compensation cost has been recognized for stock options
granted at an exercise price equal to the fair market value of the stock on the
date of grant.
The Company has recorded deferred stock compensation expense of $55,544,000 for
the difference at the grant date between the exercise price and the fair value
of the common stock underlying the restricted stock and options granted for the
year ended December 31, 1999. These amounts are being amortized on a
straight-line basis over the vesting period, generally four years. Amortization
of deferred compensation of approximately $2,846,000 was recognized for the year
ended December 31, 1999. The amortization of the deferred compensation expense
was allocated to the functional expense categories based upon the employee's job
classification.
Had compensation cost for the Company's stock-based compensation plan been
determined consistent with the fair value approach set forth in SFAS No. 123,
the Company's net income (loss) for the three years ended December 31, 1999,
would have been as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1997 1998 1999
-------- --------- ------------
<S> <C> <C> <C>
Net income (loss) as reported $ 153 $1,037 $ (3,197)
Addtional stock-based compensation under SFAS No. 123 -- -- (2,921)
APB No. 25 compensation expense recorded -- -- 2,846
----- ------ --------
Net income (loss) pro forma $ 153 $1,037 $ (3,272)
===== ====== ========
</TABLE>
The fair value of each option was estimated on the date of grant using the
minimum value method with the following weighted-average assumptions: no
dividends, risk-free interest rate of 6.03% and expected life of four years for
the year ended December 31, 1999.
(d) Stock and Stock Option Rescission
During 1999, the Company discovered that securities issued under the 1997 stock
option plan and the 1999 stock option plan were issued in reliance on the
exemption from qualification in California provided by Section 25102(o) of the
California General Corporations Law. However, the notice required to be filed in
order to qualify for the exemption was not timely filed and consequently, the
exemption is not available to securities issued under the Plans. The Company is
in the process of granting a rescission offer to all of the holders of the
options issued under these Plans and all holders of stock which was purchased
pursuant to exercise of options issued under these Plans. Each common
stockholder will have the right to sell the common stock to the Company at the
exercise price per share plus 7% interest per annum. Each option holder will
have the right to sell his option to the Company at 20% of the exercise price
per share. At the conclusion of the rescission offer process, outstanding
options and stock issued pursuant to the Plans will
F-45
<PAGE>
SOFT PLUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
the Company at 20% of the exercise price per share. At the conclusion of the
rescission offer process, outstanding options and stock issued pursuant to the
Plans will be deemed to comply with California General Corporations Law.
As of December 31, 1999, 905,384 shares of common stock outstanding and
options to purchase 2,116,963 shares of common stock were subject to
recession. As of March 1, 2000, 425,787 shares of common stock and options
to purchase 1,704,213 shares of common stock were deemed to comply with
California General Corporations law and are no longer subject to recession.
The process has not yet been completed with respect to the remaining shares
and options. As of March 1, 2000, no optionholder or common stockholder had
accepted the Company's offer to rescind.
(8) Income Taxes
Income tax expense for the years ended December 31, 1997, 1998 and 1999,
consisted of (in thousands):
Current Deferred Total
--------- ------------ ------------
1997:
U.S. federal $ 8 $ 77 $ 85
State and local 2 22 24
----- -------- --------
$ 10 $ 99 $ 109
===== ======== ========
1998:
U.S. federal $ 58 $ 493 $ 551
State and local 15 142 157
----- -------- --------
$ 73 $ 635 $ 708
===== ======== ========
1999:
U.S. federal $ 16 $ (1,039) $ (1,023)
State and local 10 (350) (340)
Foreign 161 -- 161
----- -------- --------
$ 187 $ (1,389) $ (1,202)
===== ======== ========
The types of temporary differences that give rise to significant portions of
the Company's deferred tax assets and liabilities are set out below (in
thousands):
<TABLE>
<CAPTION>
1998 1999
----------- ---------
<S> <C> <C>
Deferred tax assets:
Accruals and reserves $ -- $ 834
State income taxes -- (42)
Other -- --
Net operating loss and credit carryforwards -- 398
Plant and equipment -- 3
------- ------
Gross deferred tax assets -- 1,193
Valuation allowance -- --
------- ------
Total deferred tax assets -- 1,193
Deferred tax liabilities:
Cash to accrual adjustments (979) (816)
------- ------
Cash to accrual adjustments (979) (816)
------- ------
Net deferred tax (liabilities) assets $ (979) $ 377
======= ======
</TABLE>
The Company was using cash basis accounting for the purposes of disclosing the
federal and state income tax for the years ended December 31, 1997 and 1998.
As of January 1, 1999, the Company is disclosing its federal and state income
tax using the accrual method.
F-46
<PAGE>
SOFT PLUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The difference between the statutory income tax rate of 34% and the
Company's effective tax rate is primarily due to state taxes, tax credits
and non-deductible stock compensation.
As of December 31, 1999, the Company had no federal operating loss
carryforwards for income tax reporting purposes and California operating
loss carryforwards of approximately $212,000. The California net operating
loss carryforwards expire in 2004.
The Company also has research and experimental tax credit aggregating
approximately $143,000 and $109,000 for federal and California purposes,
respectively. The federal credit carryforwards expire beginning in 2013
through 2019. The California credits carry over indefinitely until utilized.
There are also foreign tax credit carryforwards of approximately $161,000;
these credits expire in 2004.
(9) Related Party Transactions
The Company outsources a portion of its research and development to Digitools
International Pvt. Ltd. (Digitools). Family members of the Company's
stockholders are directors of Digitools. The total amount of research and
development payments to Digitools for the years ended December 31, 1997, 1998
and 1999, was $250,000, $929,000 and $360,000, respectively.
The Company has notes receivable in the amount of $549,000 as of December 31,
1998 and 1999, from three of its officers in consideration for common and
preferred stock issued to those officers in December 1998. The notes related
to common stock and notes related to preferred stock are due in April 2007 and
December 2008, respectively, and bear interest at a rate of 8% per annum.
Amounts loaned by the Company are secured by personal assets of the officers.
The Company has notes receivable in the amount of $843,000 as of December 31,
1999, from ten of its officers and employees in consideration for common stock
issued to those individuals in 1999. The notes have various terms and bear
interest at various rates. Amounts loaned by the Company are secured by
personal assets of the individuals.
Notes receivables totaling $639,000 from certain officers are to be forgiven
by the Company upon a change in control of the Company. (See note 12.)
(10) Business and Credit Concentration
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist primarily of trade accounts receivable. The Company
has not experienced significant credit losses in the past.
Two and three customers each accounted for more than 10% and in total
accounted for approximately 60% in 1998 and 33% in 1999, of the Company's
total revenues and comprised 59% and 24% of accounts receivable, as of
December 31, 1998 and 1999, respectively.
(11) Pension and Other Benefit Plans
The Company has a 401(k) retirement plan covering substantially all of its
employees. An employee is eligible to participate as of their date of hire.
The administrative costs of this plan are paid by the Company. Effective in
1999 the Company agreed to match 20% of the first $3,000 of employee
contributions. During 1999 the Company contributed $20,000 to the plan.
The Company also sponsors a cafeteria plan which provide pretax benefits for
child care and unreimbursed medical expenses to substantially all employees.
The administrative costs are paid by the Company. The Company made no
contributions to this plan in 1997, 1998 or 1999.
F-47
<PAGE>
SOFT PLUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(12) Subsequent Event (unaudited)
On February 1, 2000, the Company signed an agreement to merge (the Merger)
with U.S. Interactive, Inc. (USIT). The Merger closed on March 8, 2000. The
consideration received by the shareholders of the Company in exchange for all
of the outstanding shares and options of the Company was $20,000,000 in cash,
$80,000,000 in a promissory note from USIT, 3.4 million shares of USIT common
stock and 1.4 million options to acquire shares of USIT common stock.
F-48
<PAGE>
U.S. INTERACTIVE INC.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
On March 8, 2000, the Company acquired by Merger (the Merger) Soft Plus,
Inc. (Soft Plus), a California corporation with headquarters in Cupertino,
California, which provides e-CRM solutions, primarily to wireless communications
providers, other companies in the emerging communications industry and Internet
service providers. The Company paid to the Soft Plus shareholders: (i) 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, (ii) $20 million in cash, and (iii) a one year unsecured $80
million note payable, with interest of 6.2%, which is due and payable on the
earlier of March 8, 2001, or the receipt by the Company of not less than $80
million from the net proceeds of a public offering of the Company's capital
stock. As a result of the Merger, Soft Plus became the Company's wholly owned
Delaware subsidiary with the name U.S. Interactive Corp. (Delaware). The Merger
will be accounted for using the purchase method of accounting. Accordingly, the
purchase price will be allocated to the fair value of the net assets acquired
and liabilities assumed. The balance of the purchase price will be allocated to
goodwill and other intangible assets and amortized over their estimated useful
lives of approximately five years.
The unaudited combined pro forma balance sheet as of December 31, 1999,
reflects the Merger as if it occurred on December 31, 1999. The pro forma
statement of operations for the year ended December 31, 1999, reflects the
Merger as if it occurred on January 1, 1999. Since the following pro forma
financial statements are based upon the operating results of Soft Plus 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 Merger been completed on January 1, 1999, 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 Soft Plus. 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 historical audited consolidated financial statements and the
notes thereto of Soft Plus included elsewhere in this Prospectus.
F-49
<PAGE>
U.S. INTERACTIVE, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
December 31, 1999
------------------------- Pro Forma Pro Forma
Company Soft Plus Adjustments Combined
----------- ----------- ------------------- ------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................. $ 34,130 $ 1,673 $ (25,850)(a) $ 9,953
Accounts receivable ........................ 12,274 6,363 18,637
Fees and expenditures in excess of
billings ................................. 353 40 393
Prepaid expenses and other current
assets ................................... 2,383 489 -- 2,872
--------- --------- ---------- ---------
Total current assets .................... 49,140 8,565 (25,850) 31,855
--------- --------- ---------- ---------
Furniture and equipment, net ................ 5,451 1,233 6,684
Goodwill and other intangibles, net ......... 5,988 -- 363,175 (b) 369,163
Other assets ................................ 1,699 2,353 -- 4,052
--------- --------- ---------- ---------
Total Assets ................................ $ 62,278 $ 12,151 $ 337,325 $ 411,754
========= ========= ========== =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ........................... $ 2,641 $ 1,176 $ 3,817
Accrued expenses ........................... 5,164 3,351 8,515
Notes payable .............................. -- 270 80,000 (a) 80,270
Current portion of long-term debt .......... 977 551 1,528
Deferred income taxes ...................... -- 123 123
Deferred revenue ........................... -- 268 268
Billings in excess of fees and
expenditures ............................. 1,854 -- 1,854
--------- --------- ---------- ---------
Total current liabilities ............... 10,636 5,739 80,000 96,375
LONG-TERM DEBT, net of current
portion .................................... 1,666 1,700 3,366
--------- --------- ---------- ---------
Total Liabilities ........................... 12,302 7,439 80,000 99,741
Minority interest ........................... -- 17 17
STOCKHOLDERS' EQUITY:
Preferred stock ............................. -- 3,555 (3,555)(b) --
Common stock ................................ 21 56,885 (56,885)(b) 24
3 (a)
Additional paid-in capital ................. 80,581 -- 262,017 (a) 342,598
Notes receivable ........................... -- (1,391) 1,391 (b) --
Deferred stock compensation ................ (831) (52,698) 52,698 (b) (831)
Treasury stock, at cost .................... (5,055) -- -- (5,055)
Accumulated deficit ........................ (24,740) (1,656) 1,656 (b) (24,740)
--------- --------- ---------- ---------
Total Stockholders' Equity ................. 49,976 4,695 257,325 311,996
--------- --------- ---------- ---------
Total Liabilities and Stockholders'
Equity ..................................... $ 62,278 $ 12,151 $ 337,325 $ 411,754
========= ========= ========== =========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Financial Statements.
F-50
<PAGE>
U.S. INTERACTIVE, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the Year ended December 31, 1999
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31, 1999
----------------------------------------------------------------
Pro Forma Pro Forma
Company(1) Soft Plus Adjustments Combined
------------ ----------- ----------------- ---------------
<S> <C> <C> <C> <C>
Revenue ............................ $ 35,255 $ 24,285 $ 59,540
Operating costs and expenses:
Project personnel and related
expense ......................... 18,687 13,364 32,051
Management and administrative 17,370 8,583 25,953
Research and development .......... -- 2,764 2,764
Selling and marketing ............. 3,531 3,656 7,187
Depreciation and amortization ..... 10,510 209 72,600 (c) 83,319
--------- -------- ------ ---------
Total operating expenses ........ 50,098 28,576 72,600 151,274
--------- -------- ------ ---------
Operating loss ..................... (14,843) (4,291) (72,600) (91,734)
Other income (expense) net ......... 454 (108) (5,000)(d) (4,654)
--------- -------- ------- ---------
Net loss before tax benefit ........ (14,389) (4,399) (77,600) (96,388)
Income tax benefit ................ -- 1,202 (1,202)(f) --
--------- -------- ------- ---------
Net loss ........................... (14,389) (3,197) (78,802) (96,388)
Accretion of mandatorily
redeemable preferred stock to
redemption value .................. (916) -- -- (916)
--------- -------- ------- ---------
Net loss attributable to common
stockholders ...................... $ (15,305) $ (3,197) $ (78,802) $ (97,304)
========= ======== ========= =========
Pro forma net loss per common
share:
Basic and diluted ................. $ (1.19) $ (6.00)
========= =========
Weighted average shares
outstanding ....................... 12,826 16,217(e)
========= =========
</TABLE>
(1) Actual for the year ended December 31, 1999 (which includes a full year of
Digital Evolution's results of operations)
See accompanying notes to Unaudited Pro Forma Combined Financial Statements.
F-51
<PAGE>
U.S. INTERACTIVE, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited pro forma combined balance sheet as of December 31, 1999, gives
effect to the Merger as if it occurred on December 31, 1999. The unaudited
pro forma combined statement of operations for the year ended December 31,
1999, gives effect to the Merger as if it occurred on January 1, 1999.
The effects of the Merger 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 preliminary
estimate of their fair value. The preliminary allocation of the purchase
price will be subject to further adjustments, which are not anticipated to
be material, as the Company finalizes its allocation of its purchase price
in accordance with generally accepted accounting principles. The pro forma
adjustments related to the purchase price allocation of the Merger represent
management's best estimate of the effects of the Merger.
2. The pro forma balance sheet adjustments as of December 31, 1999, consist of:
(a) To record the consideration issued and paid by the Company in connection
with the Merger. Merger consideration consisted of the following (in
thousands):
Fair value of common stock and options issued $262,020
Cash paid at closing of the Merger 20,000
Note payable 80,000
Merger expenses 5,850
--------
Total consideration $367,870
========
(b) To eliminate the historical equity of Soft Plus and record the estimated
excess of the purchase price over the estimated fair value of the acquired
assets and assumed liabilities of $363 million which is recorded as
goodwill and other intangible assets. Such amount will be amortized over
its estimated useful life of approximately five years.
3. The pro forma statement of operations adjustments for the year ended
December 31, 1999, consist of:
(c) Depreciation and amortization expense has been adjusted to reflect the
amortization of goodwill and other intangibles associated with the Merger,
which have an estimated useful life of five years ($363 million divided by
five years equals approximately $72.6 million per year).
(d) Adjustment to reflect the interest expense on the $80 million note payable
issued in the Merger. Interest rate of 6.20% equals $5 million in interest
expense per year.
(e) Basic and diluted weighted average common shares outstanding and net loss
per share amounts have been adjusted to reflect the issuance of the 3.4
million shares of the Company's common stock in connection with the
Merger, as if the shares had been outstanding from January 1, 1999.
(f) 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-52
<PAGE>
================================================================================
3,225,433 Shares
[GRAPHIC OMITTED]
Common Stock
-------------------------
PROSPECTUS
, 2000
-------------------------
LEHMAN BROTHERS
CHASE H&Q
DEUTSCHE BANC ALEX. BROWN
FIRST UNION SECURITIES, INC.
ADAMS, HARKNESS & HILL, INC.
FIDELITY CAPITAL MARKETS
a division of National Financial Services Corporation
================================================================================
<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.
SEC registration fee ....................... $ 41,557
NASD filing fee ............................ 15,479
Transfer agent and registrar fees .......... 10,000
Printing and engraving ..................... 150,000
Legal fees ................................. 250,000
Nasdaq National Market listing fee ......... 17,500
Accounting fees ............................ 225,000
Miscellaneous .............................. 90,464
--------
Total .................................... $800,000
========
Item 14. Indemnification of Directors and Officers.
Under Section 145 of the Delaware General Corporation Law, as amended, 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 Amended
and Restated 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:
Preferred Stock
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.
II-1
<PAGE>
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 172,459
shares of its common stock upon the exercise of options granted to employees
under its stock option plans at exercise prices ranging from $1.50 to $5.00 per
share for an aggregate exercise price of $445,819.35.
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. Digital Evolution, Inc.
U.S. Interactive merged with Digital Evolution pursuant to an Agreement
and Plan of Merger dated as of July 2, 1998 which was privately negotiated
among the parties thereto. In connection with the merger, which became
effective as of July 2, 1998, U.S. Interactive issued to the three holders of
Digital Evolution common stock an aggregate of 4,383,954 shares of U.S.
Interactive common stock and to the three holders of Digital Evolution
preferred stock an aggregate of 1,573,533 shares of U.S. Interactive Series A
preferred stock. In addition, U.S. Interactive assumed the then outstanding
options to purchase Class B common stock of Digital Evolution which were held
by a total of approximately 118 persons, which options became options to
purchase a total of 1,043,945 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.
b. InVenGen LLC
On March 12, 1999, U.S. Interactive acquired the assets of InVenGen LLC,
an Internet professional services firm, pursuant to an Asset Purchase
Agreement. We issued 584,800 shares of our common stock in this acquisition,
which was accounted for using the purchase method of accounting. Under an
escrow agreement, 86,000 shares are being held to satisfy InVenGen's
indemnification obligations under the asset purchase agreement during the
one-year period following the closing.
In addition to the foregoing shares, 275,200 shares were being held in
escrow pending satisfaction of certain conditions relating to the continued
employment of the former InVenGen employees with U.S. Interactive during the
two-year period following the closing. Twenty-five percent of the shares are
being released every six months if the conditions under the agreement are met.
c. Soft Plus
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 Soft Plus' stock option
plans, which became options to purchase a total of 1,408,866 shares of our
common stock in the Merger.
II-2
<PAGE>
Shareholders of Soft Plus holding a total of approximately 2,880,351
unregistered shares of our common stock which they received in the Merger
signed an agreement requiring them to hold their shares for up to two years,
with the restriction to lapse with respect to 25% of the shares every six
months beginning on a date six months following the closing of the Merger.
Under a registration rights agreement, we agreed to register for resale up to
25% of the shares of our stock which are subject to the lock-up restrictions
when we are eligible to register shares of our common stock on Form S-3. We
granted additional limited registration rights under a registration rights
agreement covering the shares of our common stock issued in the Merger.
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 an affiliate of a
commercial bank in connection with two credit facilities extended by the bank
to U.S. Interactive. The warrant holder effected a cashless exercise of the
warrant on March 6, 2000, as a result of which U.S. Interactive issued a total
of 64,502 shares of its common stock to the warrant holder and its designees.
U.S. Interactive issued the warrant, and subsequently issued the shares of its
common stock upon exercise of 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 or
exercise of the warrant.
II-3
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
Exhibits marked by an (*) are filed herewith. Exhibits marked by (**) were
previously filed as part of this Registration Statement. Exhibits marked by a
(+) are to be filed by amendment. Unless otherwise indicated, all other
exhibits are incorporated herein by reference to the Registration Statement on
Form S-1 filed by U.S. Interactive, Inc. (Reg. No. 333-78751)
<TABLE>
<CAPTION>
Exhibit
Number Description
- ----------------- ---------------------------------------------------------------------------------------------------------
<S> <C>
**1.1 Form of Underwriting Agreement
1.2 Standby Stock Purchase Agreement, by and between U.S. Interactive and Safeguard Scientifics,
dated August 9, 1999
3.1 Amended and Restated Certificate of Incorporation
3.2 Amended and Restated Bylaws
4.1 See exhibits 3.1 and 3.2 for provisions of the Certificate of Incorporation and Bylaws defining rights
of holders of Common Stock
4.3 Second Amended and Restated Investors' Rights Agreement dated as of July 2, 1998
*5.1 Opinion of Dilworth Paxson LLP
**10.1 2000 Performance Incentive Plan
10.2 1998 Performance Incentive Plan and form of Stock Option Agreement
10.3 1998 Stock Option Plan and forms of Stock Option Agreement and Stock Purchase Agreement
10.4 1997 Stock Option Plan and forms of Stock Option Agreement and Stock Purchase Agreement
10.5 1996 Stock Option Plan and forms of Stock Option Agreement and Stock Purchase Agreement
**10.6 1999 Stock Plan of Soft Plus
**10.7 1999 Stock Option Plan of Soft Plus
**10.8 1997 Stock Option Plan of Soft Plus
10.9 Lease Agreement, dated May 14, 1998, between U.S. Interactive and BET Investments II, L.P.
10.10 Employment Agreement, dated July 2, 1998, between U.S. Interactive and Eric Pulier
10.11 Employment Agreement, dated July 30, 1999, between U.S. Interactive and Stephen T. Zarrilli
10.12 Severance Agreement, dated May 18, 1999, between U.S. Interactive and Richard J. Masterson
10.13 Severance Agreement, dated February 26, 1999, between U.S. Interactive and Larry W. Smith
10.14 Lease Agreement, dated March 30, 1999, between U.S. Interactive and Norton Plaza Associates
10.15 Professional Services and Consulting Agreement, dated as of January 6, 1999, by and between U.S.
Interactive and Juggernaut Partners LLC (now Exist Corporation), certain portions of which have
been omitted based upon a request for confidential treatment. The omitted portions have been sepa-
rately filed with the Commission.
10.16a Letter agreement between U.S. Interactive and Chromazone, dated April 6, 1999
**10.16b Professional Services and Consulting Agreement dated September 1, 1999, by and between U.S.
Interactive and Chromazone
**10.17a Agreement and Plan of Merger dated February 1, 2000, by and among U.S. Interactive, Inc., First
Acquisition Co., Soft Plus, Inc., Mohan Uttarwar, Vijay Uttarwar, Vinay Deshpande and O.P. Srini-
vasan
**10.17b Non-Negotiable Note, dated March 8, 2000, in the original principal amount of $80,000,000 by U.S.
Interactive, Inc., in favor of Mohan Uttarwar, as agent for the former Soft Plus Shareholders
**10.17c Registration Rights Agreement dated March 8, 2000, by and between U.S. Interactive, Inc., and cer-
tain stockholders of U.S. Interactive, Inc. owning more than 50,000 shares of the common stock of
U.S. Interactive acquired in the merger with the subsidiary of U.S. Interactive, Inc., First Acquisition
Co. (now known as U.S. Interactive Corp. (Delaware)) who delivered Lock-up and Market-out Agree-
ments to U.S. Interactive, Inc., in connection with the merger
**10.17d Escrow Agreement, dated March 8, 2000, by and among Soft Plus, Inc., U.S. Interactive, Inc., First
Acquisition Co., Mohan Uttarwar, on behalf of the Soft Plus Shareholders, and The Chase Manhat-
tan Trust Company, National Association
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
**10.17e Form of Lock-up and Market-out Letter Agreement delivered by each former Soft Plus, Inc. share-
holder who received 50,000 or more shares of common stock in the triangular merger among Soft
Plus, Inc., First Acquisition Co. (now known as U.S. Interactive Corp. (Delaware)), and U.S. Inter-
active and desired to enter into a Registration Rights Agreement with U.S. Interactive, Inc. in connection
with the merger
Employment Agreement, dated March 8, 2000, by and between U.S. Interactive, Inc. and Mohan
**10.17f Uttarwar
*10.18a Credit Agreement dated March 21, 2000, by and among U.S. Interactive, Inc. U.S. Interactive Corp.
(Delaware), PNC Bank, National Association, as a Bank and as Agent, and Progress Bank
*10.18b Stock Pledge Agreement dated March 21, 2000, between U.S. Interactive, Inc. and PNC Bank,
National Association
*10.18c Security Agreement dated March 21, 2000, between U.S. Interactive, Inc. and PNC Bank,
National Association
*10.18d Security Agreement dated March 21, 2000, between U.S. Interactive Corp. (Delaware) and
PNC Bank, National Association
*10.18e Patent, Trademark and Copyright Security Agreement dated March 21, 2000 between U.S. Interactive,
Inc. and PNC Bank, National Association
*10.18f Patent, Trademark and Copyright Security Agreement dated March 21, 2000 between U.S. Interactive
Corp. (Delaware) and PNC Bank, National Association
*23.1 Consent of KPMG LLP, independent public accountants
*23.2 Consent of KPMG LLP, independent public accountants
*23.3 Consent of Dilworth Paxson LLP (contained in its opinion in exhibit 5.1)
*23.4 Consent of BDO Seidman, LLP, independent public accountants
**24.1 Power of Attorney (included in signature pages hereof)
27.1 Financial Data Schedule
</TABLE>
(b) Financial Statement Schedule.
<TABLE>
<CAPTION>
Accounts Receivable Balance at Charged to
- Allowance for Beginning Costs and Writeoffs/ Balance at
Doubtful Accounts of Year Expenses Deductions End of 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
For the year ended December 31, 1999 ......... 526,036 588,320 (1,039,356) 75,000
</TABLE>
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of U.S.
Interactive pursuant to the foregoing provisions, or otherwise, U.S.
Interactive has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by U.S. Interactive of
expenses incurred or paid by a director, officer or controlling person of U.S.
Interactive in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, U.S. Interactive will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
U.S. Interactive hereby undertakes to provide to the underwriters at the
closing specified in the underwriting agreement, certificates in such
denomination and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
U.S. Interactive hereby undertakes that:
(i) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by U.S. Interactive pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(ii) 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-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
U.S. Interactive has duly caused this Amendment No. 2 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in King of Prussia, Upper Merion Township, Commonwealth of
Pennsylvania on this 11th day of April, 2000.
U.S. INTERACTIVE, INC.
By: /s/ Stephen T. Zarrilli
--------------------------
Stephen T. Zarrilli
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 2 to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Capacity Date
- ---------------------------------------------- ----------------------------------------------------- ---------------
<S> <C> <C>
*
- ------------------------- Director, Chairman of the Board April 11, 2000
Eric Pulier
/s/ Stephen T. Zarrilli
- ------------------------- Director, Chief Executive Officer and President April 11, 2000
Stephen T. Zarrilli (principal executive officer)
/s/ Philip L. Calamia
- ------------------------- Senior Vice President and Chief Financial Officer April 11, 2000
Philip L. Calamia (principal financial and accounting officer)
*
- ------------------------- Director, President of subsidiary U.S. Interactive April 11, 2000
Mohan Uttarwar Corp. (Delaware)
*
- ------------------------- Director April 11, 2000
Robert E. Keith, Jr.
*
- ------------------------- Director April 11, 2000
John D. Shulman
*
- ------------------------- Director April 11, 2000
E. Michael Forgash
*
- ------------------------- Director April 11, 2000
John H. Klein
*
- ------------------------- Director April 11, 2000
William C. Jennings
*
- ------------------------- Director April 11, 2000
Robert V. Napier
* By power of attorney
/s/ Stephen T. Zarrilli
- -------------------------
Stephen T. Zarrilli
Attorney-in-fact
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
Exhibits marked by an (*) are filed herewith. Exhibits marked by (**) were
previously filed as part of this Registration Statement. Exhibits marked by a
(+) are to be filed by amendment. Unless otherwise indicated, all other
exhibits are incorporated herein by reference to the Registration Statement on
Form S-1 filed by U.S. Interactive, Inc. (Reg. No. 333-78751)
<TABLE>
<CAPTION>
Exhibit
Number Description
- ----------------- ---------------------------------------------------------------------------------------------------------
<S> <C>
**1.1 Form of Underwriting Agreement
1.2 Standby Stock Purchase Agreement, by and between U.S. Interactive and Safeguard Scientifics,
dated August 9, 1999
3.1 Amended and Restated Certificate of Incorporation
3.2 Amended and Restated Bylaws
4.1 See exhibits 3.1 and 3.2 for provisions of the Certificate of Incorporation and Bylaws defining rights
of holders of Common Stock
4.3 Second Amended and Restated Investors' Rights Agreement dated as of July 2, 1998
*5.1 Opinion of Dilworth Paxson LLP
**10.1 2000 Performance Incentive Plan
10.2 1998 Performance Incentive Plan and form of Stock Option Agreement
10.3 1998 Stock Option Plan and forms of Stock Option Agreement and Stock Purchase Agreement
10.4 1997 Stock Option Plan and forms of Stock Option Agreement and Stock Purchase Agreement
10.5 1996 Stock Option Plan and forms of Stock Option Agreement and Stock Purchase Agreement
**10.6 1999 Stock Plan of Soft Plus
**10.7 1999 Stock Option Plan of Soft Plus
**10.8 1997 Stock Option Plan of Soft Plus
10.9 Lease Agreement, dated May 14, 1998, between U.S. Interactive and BET Investments II, L.P.
10.10 Employment Agreement, dated July 2, 1998, between U.S. Interactive and Eric Pulier
10.11 Employment Agreement, dated July 30, 1999, between U.S. Interactive and Stephen T. Zarrilli
10.12 Severance Agreement, dated May 18, 1999, between U.S. Interactive and Richard J. Masterson
10.13 Severance Agreement, dated February 26, 1999, between U.S. Interactive and Larry W. Smith
10.14 Lease Agreement, dated March 30, 1999, between U.S. Interactive and Norton Plaza Associates
10.15 Professional Services and Consulting Agreement, dated as of January 6, 1999, by and between U.S.
Interactive and Juggernaut Partners LLC (now Exist Corporation), certain portions of which have
been omitted based upon a request for confidential treatment. The omitted portions have been sepa-
rately filed with the Commission.
10.16a Letter agreement between U.S. Interactive and Chromazone, dated April 6, 1999
**10.16b Professional Services and Consulting Agreement dated September 1, 1999, by and between U.S.
Interactive and Chromazone
**10.17a Agreement and Plan of Merger dated February 1, 2000, by and among U.S. Interactive, Inc., First
Acquisition Co., Soft Plus, Inc., Mohan Uttarwar, Vijay Uttarwar, Vinay Deshpande and O.P. Srini-
vasan
**10.17b Non-Negotiable Note, dated March 8, 2000, in the original principal amount of $80,000,000 by U.S.
Interactive, Inc., in favor of Mohan Uttarwar, as agent for the former Soft Plus Shareholders
**10.17c Registration Rights Agreement dated March 8, 2000, by and between U.S. Interactive, Inc., and cer-
tain stockholders of U.S. Interactive, Inc. owning more than 50,000 shares of the common stock of
U.S. Interactive acquired in the merger with the subsidiary of U.S. Interactive, Inc., First Acquisition
Co. (now known as U.S. Interactive Corp. (Delaware)) who delivered Lock-up and Market-out Agree-
ments to U.S. Interactive, Inc., in connection with the merger
**10.17d Escrow Agreement, dated March 8, 2000, by and among Soft Plus, Inc., U.S. Interactive, Inc., First
Acquisition Co., Mohan Uttarwar, on behalf of the Soft Plus Shareholders, and The Chase Manhat-
tan Trust Company, National Association
**10.17e Form of Lock-up and Market-out Letter Agreement delivered by each former Soft Plus, Inc. share-
holder who received 50,000 or more shares of common stock in the triangular merger among Soft
Plus, Inc., First Acquisition Co. (now known as U.S. Interactive Corp. (Delaware)), and U.S. Inter-
active and desired to enter into a Registration Rights Agreement with U.S. Interactive, Inc. in connection
with the merger
Employment Agreement, dated March 8, 2000, by and between U.S. Interactive, Inc. and Mohan
**10.17f Uttarwar
*10.18a Credit Agreement dated March 21, 2000, by and among U.S. Interactive, Inc. U.S. Interactive Corp.
(Delaware), PNC Bank, National Association, as a Bank and as Agent, and Progress Bank
*10.18b Stock Pledge Agreement dated March 21, 2000, between U.S. Interactive, Inc. and PNC Bank,
National Association
*10.18c Security Agreement dated March 21, 2000, between U.S. Interactive, Inc. and PNC Bank,
National Association
*10.18d Security Agreement dated March 21, 2000, between U.S. Interactive Corp. (Delaware) and
PNC Bank, National Association
*10.18e Patent, Trademark and Copyright Security Agreement dated March 21, 2000 between U.S. Interactive,
Inc. and PNC Bank, National Association
*10.18f Patent, Trademark and Copyright Security Agreement dated March 21, 2000 between U.S. Interactive
Corp. (Delaware) and PNC Bank, National Association
*23.1 Consent of KPMG LLP, independent public accountants
*23.2 Consent of KPMG LLP, independent public accountants
*23.3 Consent of Dilworth Paxson LLP (contained in its opinion in exhibit 5.1)
*23.4 Consent of BDO Seidman, LLP, independent public accountants
**24.1 Power of Attorney (included in signature pages hereof)
27.1 Financial Data Schedule
</TABLE>
<PAGE>
[LETTERHEAD OF DILWORTH PAXSON LP]
Exhibit 5.1
April 11, 2000
The Board of Directors
U.S. Interactive, Inc.
2012 Renaissance Boulevard
King of Prussia, PA 19406
RE: Issuance and Sale of Common Stock Pursuant to
Registration Statement on Form S-1
(Reg. No. 333-32224)
---------------------------------------------
Dear Sirs:
We have acted as counsel for U.S. Interactive, Inc., a Delaware
corporation (the "Company"), in connection with the preparation of the
Registration Statement on Form S-1 referred to above filed by the
Company with the Securities and Exchange Commission pursuant to the Securities
Act of 1933, as amended, relating to the underwritten, public offering (the
"Offering") of up to a total of 3,225,433 shares (including certain shares
issuable upon exercise of an over-allotment option) (the "Shares"), of the
Company's Common Stock, par value $.001 per share. The Registration Statement
was initially filed on March 10, 2000. (The Registration Statement, as amended
to date, most recently by Amendment No. 2 dated April 11, 2000, including all
exhibits thereto, is referred to below as the "Registration Statement.")
The Shares consist of: (i) 3,000,000 previously unissued Shares to be
sold by the Company to underwriters whose representatives are named in the
Prospectus constituting a part of the Registration Statement (the "Underwriters'
Shares"); (ii) a total of 225,433 presently outstanding Shares to be sold by a
the Selling Stockholders named in the Registration Statement (the "Secondary
Shares"); and (iii) up to a total of 450,000 Shares issuable upon exercise of a
thirty-day option to be granted by the Company to the underwriters (the
"Over-allotment Shares") solely for the purpose of covering over-allotments.
In this connection, we have examined: (i) the Company's Amended and
Restated Certificate of Incorporation and Amended and Restated By-laws, each as
in effect on the date hereof; (ii) the resolutions and related minutes of the
Company's Board of Directors authorizing the Offering, the preparation and
filing of the Registration Statement, and the issuance of the Underwriters'
Shares, and the Over-allotment Shares; (iii) the Registration Statement,
including, among other exhibits, the form of Underwriting Agreement and (iv)
certain officers' certificates, corporate records and such other records and
documents as we have deemed appropriate or necessary for purposes of rendering
the opinions hereinafter expressed.
In rendering the opinions expressed below, we have assumed the
authenticity of all documents and records examined, the conformity with the
original documents of all documents submitted to us as copies and the
genuineness of all signatures.
Based upon and subject to the foregoing, we are of the opinion that:
1. The Underwriters' Shares have been duly authorized for
issuance and, when sold, paid for and delivered in accordance
with the terms of the Underwriting Agreement, will be legally
issued, fully paid and non-assessable;
2. The Secondary Shares are legally issued, and when sold, paid
for and delivered in accordance with the terms of the
Underwriting Agreement, will be fully paid and non-assessable;
and
3. The Over-allotment Shares have been duly authorized for
issuance and, if and when sold, paid for and delivered in
accordance with the terms of the Underwriting Agreement, will
be legally issued, fully paid and non-assessable.
<PAGE>
We are admitted to practice in the Commonwealth of Pennsylvania. We
have made such investigation of the General Corporate Law of the State of
Delaware (the "Delaware GCL") as we have considered appropriate for the purpose
of rendering the opinions expressed above. This opinion is limited to the
Delaware GCL, the applicable provisions of the Delaware Constitution decisions
interpreting the Delaware GCL and the Delaware Constitution.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference made to this Firm under the caption
"Legal Matters" in the Prospectus constituting a part of the Registration
Statement.
Sincerely yours,
/s/ Dilworth Paxson LLP
DILWORTH PAXSON LLP
cc. Lawrence F. Shay,
Senior Vice President,
General Counsel
and Secretary
<PAGE>
$15,000,000 REVOLVING CREDIT FACILITY
CREDIT AGREEMENT
by and among
U.S. INTERACTIVE, INC.
and
U.S. INTERACTIVE CORP. (DELAWARE)
and
THE BANKS PARTY HERETO
and
PNC BANK, NATIONAL ASSOCIATION, as Agent
Dated March 21, 2000
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT is dated March 21, 2000 and is made by and among
U.S. INTERACTIVE, INC., a Delaware corporation ("Parent") and U.S. INTERACTIVE
CORP. (DELAWARE), a Delaware corporation ("Corp") (Parent and Corp are
hereinafter referred to collectively as "Borrowers" and, individually, as a
"Borrower"), the BANKS (as hereinafter defined) and PNC BANK, NATIONAL
ASSOCIATION, in its capacity as agent for the Banks under this Agreement
(hereinafter referred to in such capacity as the "Agent").
WITNESSETH:
WHEREAS, the Borrowers have requested the Banks to provide a revolving
credit facility to the Borrowers in an aggregate principal amount not to exceed
$15,000,000; and
WHEREAS, the revolving credit and facility shall be used to finance the
acquisition of Soft Plus, Inc. pursuant to the terms of the Soft Plus
Transaction (as defined herein) and for general corporate purposes; and
WHEREAS, the Banks are willing to provide such credit upon the terms
and conditions hereinafter set forth;
NOW, THEREFORE, the parties hereto, in consideration of their mutual
covenants and agreements hereinafter set forth and intending to be legally bound
hereby, covenant and agree as follows:
1. CERTAIN DEFINITIONS
1.1 Certain Definitions.
In addition to words and terms defined elsewhere in this
Agreement, the following words and terms shall have the following meanings,
respectively, unless the context hereof clearly requires otherwise:
Account shall mean any account, contract right, general
intangible, chattel paper, instrument or document representing any right to
payment for goods sold or services rendered, whether or not earned by
performance and whether or not evidenced by a contract, instrument or document,
which is now owned or hereafter acquired by a Borrower.
Account Debtor shall mean any person which is or which may
become obligated to a Borrower under, with respect to, or on account of, an
Account.
Affiliate as to any Person shall mean any other Person (i)
which directly or indirectly controls, is controlled by, or is under common
control with such Person, (ii) which beneficially owns or holds 5% or more of
any class of the voting or other equity interests of such Person, or (iii) 5% or
more of any class of voting interests or other equity interests of which is
beneficially owned or held, directly or indirectly, by such Person. Control, as
used in this definition, shall mean the possession, directly or indirectly, of
the power to direct or cause the direction of the management or policies of a
Person, whether through the ownership of voting securities, by contract or
otherwise, including the power to elect a majority of the directors or trustees
of a corporation or trust, as the case may be.
<PAGE>
Agent shall mean PNC Bank, National Association, and
its successors and assigns.
Agent's Letter shall mean that certain confidential
letter, dated March 10, 2000, from
PNC Capital Markets to Parent, with respect to certain agency duties and fees.
Agreement shall mean this Credit Agreement, as the
same may be supplemented or amended from time to time, including all schedules
and exhibits.
Assignment and Assumption Agreement shall mean an
Assignment and Assumption Agreement by and among a Purchasing Bank, a Transferor
Bank and the Agent, as Agent and on behalf of the remaining Banks, substantially
in the form of Exhibit 1.1(A).
Banks shall mean the financial institutions named on
Schedule 1.1(B) and their respective successors and assigns as permitted
hereunder, each of which is referred to herein as a Bank.
Base Rate shall mean the higher of (i) the interest
rate per annum announced from time to time by the Agent at its Principal Office
as its then prime rate, which rate may not be the lowest rate then being charged
commercial borrowers by the Agent, or (ii) the Federal Funds Effective Rate,
plus one half percent (1/2% ) per annum.
Benefit Arrangement shall mean at any time an
"employee benefit plan," within the meaning of Section 3(3) of ERISA, which is
neither a Plan nor a Multiemployer Plan and which is maintained, sponsored or
otherwise contributed to by any member of the ERISA Group.
Borrowers shall mean U.S. Interactive, Inc. and U.S.
Interactive Corp. (Delaware) and Borrower shall mean any of them.
Borrower Agent shall mean Parent in its capacity as
Borrower Agent under the Borrower Agency Agreement.
Borrower Agency Agreement shall mean the Borrower
Agency Agreement executed and delivered by all of the Borrowers and the Borrower
Agent on the Closing Date pursuant to which the Borrower Agent is authorized to
act in certain circumstances on behalf of all of the Borrowers under or with
respect to the Loan Documents.
Borrowing Base shall mean an amount equal to 80% of
Eligible Accounts.
Borrowing Base Certificate shall mean the certificate
prepared and delivered by the Borrower Agent each month on the form attached
hereto as Exhibit 1.1(BB).
<PAGE>
Business Day shall mean any day other than a Saturday
or Sunday or a legal holiday on which commercial banks are authorized or
required to be closed for business in Philadelphia, Pennsylvania.
Closing Date shall mean the date hereof. The closing
shall take place at 10:00 a.m., Philadelphia time, on the Closing Date at the
offices of Buchanan Ingersoll Professional Corporation in Philadelphia or at
such other time and place as the parties agree.
Collateral shall mean the Pledged Collateral, the UCC
Collateral and the Intellectual Property Collateral.
Commercial Letter of Credit shall mean any Letter of
Credit which is a commercial letter of credit issued in respect of the purchase
of goods or services by one or more of the Borrowers in the ordinary course of
their business
Consideration shall mean with respect to any
Permitted Acquisition, the aggregate of (i) the cash paid by any of the
Borrowers, directly or indirectly, to the seller in connection therewith, (ii)
the Indebtedness incurred or assumed by any of the Borrowers, whether in favor
of the seller or otherwise and whether fixed or contingent, (iii) any Guaranty
given or incurred by any Borrower in connection therewith, and (iv) any other
consideration given or obligation incurred by any of the Borrowers in connection
therewith.
Dollar, Dollars, U.S. Dollars and the symbol $ shall
mean lawful money of the United States of America.
EBITDA for any period of determination shall mean (i)
the sum of net income, depreciation, amortization, other non-cash charges to net
income, interest expense and income tax expense minus (ii) non-cash credits to
net income, in each case of the Borrower and its Subsidiaries for such period
determined and consolidated in accordance with GAAP.
Eligible Accounts shall have the meaning provided on
Exhibit 1.1(EA).
ERISA shall mean the Employee Retirement Income
Security Act of 1974, as the same may be amended or supplemented from time to
time, and any successor statute of similar import, and the rules and regulations
thereunder, as from time to time in effect.
ERISA Group shall mean, at any time, Parent and all
members of a controlled group of corporations and all trades or businesses
(whether or not incorporated) under common control and all other entities which,
together with Parent, are treated as a single employer under Section 414 of the
Internal Revenue Code.
Existing Facility shall mean the secured $3,250,000
revolving credit facility provided to Parent by Progress Bank and the $4,000,000
facility provided by Venture Lending and Leasing II, Inc., the credit facility
provider for Soft Plus, the Indebtedness under both of which shall be repaid in
full on the Closing Date.
Expiration Date shall mean, with respect to the
Revolving Credit Commitments, December 7, 2000, provided, however, if on or
before December 7, 2000 the Soft Plus Seller Note has been paid in full, it
shall mean March 19, 2001, or such earlier date this Agreement is terminated in
accordance with its terms.
<PAGE>
Federal Funds Effective Rate for any day shall mean
the rate per annum (based on a year of 360 days and actual days elapsed and
rounded upward to the nearest 1/100 of 1%) announced by the Federal Reserve Bank
of New York (or any successor) on such day as being the weighted average of the
rates on overnight federal funds transactions arranged by federal funds brokers
on the previous trading day, as computed and announced by such Federal Reserve
Bank (or any successor) in substantially the same manner as such Federal Reserve
Bank computes and announces the weighted average it refers to as the "Federal
Funds Effective Rate" as of the date of this Agreement; provided, if such
Federal Reserve Bank (or its successor) does not announce such rate on any day,
the "Federal Funds Effective Rate" for such day shall be the Federal Funds
Effective Rate for the last day on which such rate was announced.
GAAP shall mean generally accepted accounting
principles as are in effect from time to time, subject to the provisions of
Section 1.3, and applied on a consistent basis both as to classification of
items and amounts.
Guaranty of any Person shall mean any obligation of
such Person guaranteeing or in effect guaranteeing any liability or obligation
of any other Person in any manner, whether directly or indirectly, including any
agreement to indemnify or hold harmless any other Person, any performance bond
or other suretyship arrangement and any other form of assurance against loss,
except endorsement of negotiable or other instruments for deposit or collection
in the ordinary course of business.
Indebtedness shall mean, as to any Person at any
time, any and all indebtedness, obligations or liabilities (whether matured or
unmatured, liquidated or unliquidated, direct or indirect, absolute or
contingent, or joint or several) of such Person for or in respect of: (i)
borrowed money, (ii) amounts raised under or liabilities in respect of any note
purchase or acceptance credit facility, (iii) reimbursement obligations
(contingent or otherwise) under any letter of credit, currency swap agreement,
interest rate swap, cap, collar or floor agreement or other interest rate
management device, (iv) any other transaction (including forward sale or
purchase agreements, capitalized leases and conditional sales agreements) having
the commercial effect of a borrowing of money entered into by such Person to
finance its operations or capital requirements (but not including trade payables
and accrued expenses incurred in the ordinary course of business which are not
represented by a promissory note or other evidence of indebtedness and which are
not more than thirty (30) days past due), or (v) any Guaranty of Indebtedness
for borrowed money.
Ineligible Security shall mean any security which may
not be underwritten or dealt in by member banks of the Federal Reserve System
under Section 16 of the Banking Act of 1933 (12 U.S.C. Section 24, Seventh), as
amended.
Insolvency Proceeding shall mean, with respect to any
Person, (a) a case, action or proceeding with respect to such Person (i) before
any court or any other Official Body under any bankruptcy, insolvency,
reorganization or other similar Law now or hereafter in effect, or (ii) for the
appointment of a receiver, liquidator, assignee, custodian, trustee,
sequestrator, conservator (or similar official) of any Borrower or otherwise
relating to the liquidation, dissolution, winding-up or relief of such Person,
or (b) any general assignment for the benefit of creditors, composition,
marshaling of assets for creditors, or other, similar arrangement in respect of
such Person's creditors generally or any substantial portion of its creditors;
undertaken under any Law.
<PAGE>
Intellectual Property Collateral shall mean all of
the property described in the Patent, Trademark and Copyright Security
Agreement.
Intercompany Subordination Agreement shall mean a
Subordination Agreement executed and delivered and among the Borrowers in favor
of the Agent on the Closing Date in respect of obligations or Indebtedness owing
by any Borrower to any other Borrower.
Internal Revenue Code shall mean the Internal Revenue
Code of 1986, as the same may be amended or supplemented from time to time, and
any successor statute of similar import, and the rules and regulations
thereunder, as from time to time in effect.
Joinder shall mean a joinder by a Person as a
Borrower under this Agreement and the other Loan Documents pursuant to the
Joinder and Assumption in the form of Exhibit 1.1(J).
Labor Contracts shall mean all collective bargaining
agreements among any Borrower or Subsidiary of a Borrower and its employees.
Law shall mean any law (including common law),
constitution, statute, treaty, regulation, rule, ordinance, opinion, release,
ruling, order, injunction, writ, decree, consent decree, bond, judgment,
authorization, lien or award of any Official Body.
Letter of Credit Borrowing shall mean an extension of
credit resulting from a drawing under any Letter of Credit which shall not have
been reimbursed on the date when made and shall not have been converted into a
Revolving Credit Loan under the terms of Exhibit 2.10.
Letters of Credit Outstanding shall mean at any time
the sum of (i) the aggregate undrawn face amount of outstanding Letters of
Credit and (ii) the aggregate amount of all unpaid and outstanding Reimbursement
Obligations.
Lien shall mean any mortgage, deed of trust, pledge,
lien, security interest, charge or other encumbrance or security arrangement of
any nature whatsoever, whether voluntarily or involuntarily given, including any
conditional sale or title retention arrangement, and any assignment, deposit
arrangement or lease intended as, or having the effect of, security and any
filed financing statement or other notice of any of the foregoing (whether or
not a lien or other encumbrance is created or exists at the time of the filing).
Loan Documents shall mean this Agreement, the
Borrower Agency Agreement, the Agent's Letter, the Intercompany Subordination
Agreement, the Notes, the Patent, Trademark and Copyright Security Agreement,
the Pledge Agreement, the Security Agreement, and any other instruments,
certificates or documents delivered or contemplated to be delivered hereunder or
thereunder or in connection herewith or therewith, as the same may be
supplemented or amended from time to time in accordance herewith or therewith,
and Loan Document shall mean any of the Loan Documents.
<PAGE>
Loans shall mean collectively and Loan shall mean
separately all Revolving Credit Loans or any Revolving Credit Loan.
Material Adverse Change shall mean any set of
circumstances or events which (a) has or would reasonably be expected to have
any material adverse effect whatsoever upon the validity or enforceability of
this Agreement or any other Loan Document, (b) is or would reasonably be
expected to be material and adverse to the business, properties, assets,
financial condition, results of operations or prospects of the Borrowers taken
as a whole, (c) impairs materially or would reasonably be expected to impair
materially the ability of the Borrowers taken as a whole to duly and punctually
pay or perform its Indebtedness, or (d) impairs materially or would reasonably
be expected to impair materially the ability of the Agent or any of the Banks,
to the extent permitted, to enforce their legal remedies pursuant to this
Agreement or any other Loan Document, to the fullest extent provided therein, at
law or in equity.
Multiemployer Plan shall mean any employee benefit
plan which is a "multiemployer plan" within the meaning of Section 4001(a)(3) of
ERISA and to which the Borrower or any member of the ERISA Group is then making
or accruing an obligation to make contributions or, within the preceding five
Plan years, has made or had an obligation to make such contributions.
Multiple Employer Plan shall mean a Plan which has
two or more contributing sponsors (including the Borrower or any member of the
ERISA Group) at least two of whom are not under common control, as such a plan
is described in Sections 4063 and 4064 of ERISA.
Non-US Subsidiary shall mean a Subsidiary of a
Borrower which is not organized in one of the fifty (50) states of the United
States of America or the District of Columbia, including those listed on
Schedule 5.1.3 hereof.
Obligations shall mean any obligation or liability of
any of the Borrowers to the Agent or any of the Banks, howsoever created,
arising or evidenced, whether direct or indirect, absolute or contingent, now or
hereafter existing, or due or to become due, under or in connection with this
Agreement, the Notes, the Agent's Letter, the Letters of Credit or any other
Loan Document.
Official Body shall mean any national, federal,
state, local or other government or political subdivision or any agency,
authority, bureau, central bank, commission, department or instrumentality of
either, or any court, tribunal, grand jury or arbitrator, in each case whether
foreign or domestic.
Participation Advance shall mean, with respect to any
Bank, such Bank's payment in respect of its participation in a Letter of Credit
Borrowing according to its Ratable Share pursuant to Exhibit 2.10.
Patent, Trademark and Copyright Security Agreement
shall mean, collectively, the two (2) Patent, Trademark and Copyright Collateral
Assignment executed and delivered on the Closing Date by each of the Borrowers
to the Agent for the benefit of the Banks.
<PAGE>
PBGC shall mean the Pension Benefit Guaranty
Corporation established pursuant to Subtitle A of Title IV of ERISA or any
successor.
Permitted Acquisition shall have the meaning provided
for such term in Section 7.2.6(2).
Person shall mean any individual, corporation,
partnership, limited liability company, association, joint-stock company, trust,
unincorporated organization, joint venture, government or political subdivision
or agency thereof, or any other entity.
Plan shall mean at any time an employee pension
benefit plan (including a Multiple Employer Plan, but not a Multiemployer Plan)
which is covered by Title IV of ERISA or is subject to the minimum funding
standards under Section 412 of the Internal Revenue Code and either (i) is
maintained by any member of the ERISA Group for employees of any member of the
ERISA Group or (ii) has at any time within the preceding five years been
maintained by any entity which was at such time a member of the ERISA Group for
employees of any entity which was at such time a member of the ERISA Group.
Pledge Agreement shall mean the Pledge Agreement
executed and delivered on the Closing Date by Parent to the Agent for the
benefit of the Banks in respect of all of the Subsidiary Shares.
Pledged Collateral shall mean the property of the
Borrowers in which security interests are to be granted under the Pledge
Agreement.
PNC Bank shall mean PNC Bank, National Association,
its successors and assigns.
Potential Default shall mean any event or condition
which with notice, passage of time or a determination by the Agent or the
Required Banks, or any combination of the foregoing, would constitute an Event
of Default.
Principal Office shall mean the main banking office
of the Agent in Philadelphia, Pennsylvania.
Prior Security Interest shall mean a valid and
enforceable perfected first-priority security interest under the Uniform
Commercial Code in the UCC Collateral and the Pledged Collateral which is
subject only to Liens for taxes not yet due and payable to the extent such
prospective tax payments are given priority by statute or Purchase Money
Security Interests as permitted hereunder.
Prohibited Transaction shall mean any prohibited
transaction as defined in Section 4975 of the Internal Revenue Code or Section
406 of ERISA for which neither an individual nor a class exemption has been
issued by the United States Department of Labor.
Projections shall have the meaning provided in
Section 5.1.9(ii).
Property shall mean all real property, both owned and
leased, of any Borrower or Subsidiary of a Borrower.
<PAGE>
Purchase Money Security Interest shall mean Liens
upon tangible personal property securing loans to any Borrower or Subsidiary of
a Borrower or deferred payments by such Borrower or Subsidiary for the purchase
of such tangible personal property.
Purchasing Bank shall mean a Bank which becomes a
party to this Agreement by executing an Assignment and Assumption Agreement.
Ratable Share shall mean the proportion that a Bank's
Commitment bears to the Commitments of all of the Banks.
Regulation U shall mean Regulation U, T, G or X as
promulgated by the Board of Governors of the Federal Reserve System, as amended
from time to time.
Reportable Event shall mean a reportable event
described in Section 4043 of ERISA and regulations thereunder with respect to a
Plan or Multiemployer Plan.
Required Banks shall mean
(i) if there are no Loans, Reimbursement
Obligations or Letter of Credit Borrowings outstanding, Banks whose Commitments
aggregate at least 66 2/3% of the Commitments of all of the Banks but in all
events two (2) Banks; or
(ii) if there are Loans, Reimbursement
Obligations, or Letter of Credit Borrowings outstanding, any Bank or group of
Banks if the sum of the Loans Reimbursement Obligations and Letter of Credit
Borrowings of such Banks then outstanding aggregates at least 66 2/3% of the
total principal amount of all of the Loans, Reimbursement Obligations and Letter
of Credit Borrowings then outstanding but in all events two (2) Banks.
Reimbursement Obligations and Letter of Credit Borrowings shall be deemed, for
purposes of this definition, to be in favor of the Agent and not a participating
Bank if such Bank has not made its Participation Advance in respect thereof and
shall be deemed to be in favor of such Bank to the extent of its Participation
Advance if it has made its Participation Advance in respect thereof.
Revolving Credit Commitment or Commitment shall mean,
as to any Bank at any time, the amount initially set forth opposite its name on
Schedule 1.1(B) in the column labeled "Amount of Commitment for Revolving Credit
Loans," and thereafter on Schedule I to the most recent Assignment and
Assumption Agreement, and Revolving Credit Commitments shall mean the aggregate
Revolving Credit Commitments of all of the Banks.
Revolving Credit Loans or Loans shall mean
collectively and Revolving Credit Loan or Loan shall mean separately all
Revolving Credit Loans or any Revolving Credit Loan made by the Banks or one of
the Banks to the Borrower pursuant to Section 2.1 or Paragraph 3(b) of Exhibit
2.10.
Revolving Credit Notes or Notes shall mean
collectively and Revolving Credit Note shall mean separately all the Revolving
Credit Notes of the evidencing the Revolving Credit Loans together with all
amendments, extensions, renewals, replacements, refinancings or refundings
thereof in whole or in part.
<PAGE>
Revolving Facility Usage shall mean at any time the
sum of the Revolving Credit Loans outstanding and the Letters of Credit
Outstanding.
Section 20 Subsidiary shall mean the Subsidiary of
the bank holding company controlling any Bank, which Subsidiary has been granted
authority by the Federal Reserve Board to underwrite and deal in certain
Ineligible Securities.
Security Agreement shall mean, collectively, the two
(2) security Agreements executed and delivered by each of the Borrowers to the
Agent for the benefit of the Banks in respect of all the UCC Collateral of all
of the Borrowers.
Soft Plus shall mean Soft Plus, Inc., a California
corporation, the separate corporate existence of which has ceased, and a party
to the Soft Plus Transaction.
Soft Plus Seller Note shall mean the unsecured
promissory note of Parent payable to the former shareholders of Soft Plus dated
March 8, 2000 in the original principal amount of $80,000,000.
Soft Plus Transaction shall mean the statutory
merger, effective March 8, 2000, by which Soft Plus merged with and into Corp
and the separate corporate existence of Soft Plus ceased, all pursuant to the
Agreement and Plan of Merger dated February 1, 2000.
Standard & Poor's shall mean Standard & Poor's
Ratings Services, a division of The McGraw-Hill Companies, Inc.
Standby Letter of Credit shall mean a Letter of
Credit issued to support obligations of one or more of the Borrower, contingent
or otherwise, which finance the working capital and business needs of the
Borrower incurred in the ordinary course of business.
Subsidiary of any Person at any time shall mean (i)
any corporation or trust of which 50% or more (by number of shares or number of
votes) of the outstanding capital stock or shares of beneficial interest
normally entitled to vote for the election of one or more directors or trustees
(regardless of any contingency which does or may suspend or dilute the voting
rights) is at such time owned directly or indirectly by such Person or one or
more of such Person's Subsidiaries, (ii) any partnership of which such Person is
a general partner or of which 50% or more of the partnership interests is at the
time directly or indirectly owned by such Person or one or more of such Person's
Subsidiaries, (iii) any limited liability company of which such Person is a
member or of which 50% or more of the limited liability company interests is at
the time directly or indirectly owned by such Person or one or more of such
Person's Subsidiaries or (iv) any corporation, trust, partnership, limited
liability company or other entity which is controlled or capable of being
controlled by such Person or one or more of such Person's Subsidiaries.
Transferor Bank shall mean the selling Bank pursuant
to an Assignment and Assumption Agreement.
UCC Collateral shall mean the property of the
Borrowers in which security interests are to be granted under the Security
Agreement.
<PAGE>
In addition to the foregoing definitions, the
following capitalized terms have the meanings given to them in the referenced
sections: Agent's Letter, Exhibit 10; Agent's Fee, Exhibit 10; Commitment Fee,
2.3; Event of Default, 8.1; Facility Fees, 2.4; Governmental Acts, Exhibit 2.10;
Historical Statements, 5.1.9; Interim Statements, 5.1.9; LLC Interests, 5.1.3;
Letter of Credit, Exhibit 2.10, Section 1; Letter of Credit Fee, Exhibit 2.10,
Section 2; Letter of Credit Sublimit, Exhibit 2.10, Section 1; Loan Request,
2.5; Notices, 10.6; Partnership Interests, 5.1.3; Permitted Acquisitions, 8.2.6;
Permitted Liens, 7.2.2; Pledged Shares, 5.1.17; Projections, 5.1.9;
Reimbursement Obligations, Exhibit 2.10, Section 3(b); Shares, 6.1.2; Subsidiary
Shares, 5.1.3; and Uniform Commercial Code, 5.1.16.
1.2 Construction.
Unless the context of this Agreement otherwise clearly
requires, the following rules of construction shall apply to this Agreement and
each of the other Loan Documents: (a) references to the plural include the
singular, the plural, the part and the whole; "or" has the inclusive meaning
represented by the phrase "and/or," and "including" has the meaning represented
by the phrase "including without limitation"; (b) references to "determination"
of or by the Agent or the Banks shall be deemed to include good-faith estimates
by the Agent or the Banks (in the case of quantitative determinations) and
good-faith beliefs by the Agent or the Banks (in the case of qualitative
determinations) and such determination shall be conclusive, absent manifest
error; (c) whenever the Agent or the Banks are granted the right herein to act
in its or their sole discretion or to grant or withhold consent such right shall
be exercised in good faith; (d) the words "hereof," "herein," "hereunder,"
"hereto" and similar terms in this Agreement or any other Loan Document refer to
this Agreement or such other Loan Document as a whole and not to any particular
provision of this Agreement or such other Loan Document; (e) the section and
other headings contained in this Agreement or such other Loan Document and the
Table of Contents, preceding this Agreement or such other Loan Document are for
reference purposes only and shall not control or affect the construction of this
Agreement or such other Loan Document or the interpretation thereof in any
respect; (f) article, section, subsection, clause, schedule and exhibit
references are to this Agreement or other Loan Document, as the case may be,
unless otherwise specified; (g) reference to any Person includes such Person's
successors and assigns but, if applicable, only if such successors and assigns
are permitted by this Agreement or such other Loan Document, as the case may be,
and reference to a Person in a particular capacity excludes such Person in any
other capacity; (h) reference to any agreement (including this Agreement and any
other Loan Document together with the schedules and exhibits hereto or thereto),
document or instrument means such agreement, document or instrument as amended,
modified, replaced, substituted for, superseded or restated; (i) relative to the
determination of any period of time, "from" means "from and including," "to"
means "to but excluding," and "through" means "through and including"; and (j)
references to "shall" and "will" are intended to have the same meaning.
1.3 Accounting Principles.
Except as otherwise provided in this Agreement, all
computations and determinations as to accounting or financial matters and all
financial statements to be delivered pursuant to this Agreement shall be made
and prepared in accordance with GAAP (including principles of consolidation
where appropriate), and all accounting or financial terms shall have the
meanings ascribed to such terms by GAAP; provided, however, that all accounting
terms used in Section 7.2 [Negative Covenants] (and all defined terms used in
the definition of any accounting term used in Section 7.2 shall have the meaning
given to such terms (and defined terms) under GAAP as in effect on the date
hereof applied on a basis consistent with those used in preparing the Historical
Statements referred to in Section 5.1.9((i)) [Historical Statements].
<PAGE>
2. REVOLVING CREDIT FACILITY
2.1 Revolving Credit Commitments.
Subject to the terms and conditions hereof and relying upon
the representations and warranties herein set forth, each Bank severally agrees
to make Revolving Credit Loans to the Borrowers and, subject to the terms and
conditions of Exhibit 2.10, issue Letters of Credit on behalf of the Borrowers,
at any time or from time to time on or after the date hereof to the Expiration
Date provided that after giving effect to such Loan the aggregate amount of
Revolving Credit Loans from such Bank shall not exceed such Bank's Revolving
Credit Commitment minus such Bank's Ratable Share of the Letters of Credit
Outstanding; provided that the outstanding principal amount of all Loans and
Letters of Credit Outstanding may not exceed the Borrowing Base. Within such
limits of time and amount and subject to the other provisions of this Agreement,
the Borrowers may borrow, repay and reborrow pursuant to this Section 2.1.
2.2 Nature of Banks' Obligations with Respect to Revolving
Credit Loans.
Provided that no Potential Default or Event of Default exists,
each Bank shall be obligated to participate in each request for Revolving Credit
Loans pursuant to Section 2.5 [Revolving Credit Loan Requests] in accordance
with its Ratable Share. The aggregate of each Bank's Revolving Credit Loans
outstanding hereunder to the Borrowers at any time shall never exceed its
Revolving Credit Commitment minus its Ratable Share of the Letter of Credit
Outstandings. The obligations of each Bank hereunder are several. The failure of
any Bank to perform its obligations hereunder shall not affect the Obligations
of the Borrowers to any other party. The Banks shall have no obligation to make
Revolving Credit Loans hereunder on or after the Expiration Date.
2.3 Commitment Fees.
Accruing from the date hereof until the Expiration Date, the
Borrowers agree to pay to the Agent for the account of each Bank, as
consideration for such Bank's Revolving Credit Commitment hereunder, a
nonrefundable commitment fee (the "Commitment Fee") equal to .30% per annum
(computed on the basis of a year of 360 days, and actual days elapsed) on the
average daily difference between the amount of (i) such Bank's Revolving Credit
Commitment as the same may be constituted from time to time and the (ii) the sum
of such Bank's Revolving Credit Loans plus its Ratable Share of Letters of
Credit Outstanding. All Commitment Fees shall be payable in arrears on the first
Business Day of each April, July, October and January after the date hereof and
on the Expiration Date or upon acceleration of the Notes.
<PAGE>
2.4 Revolving Credit Facility Fee.
The Borrowers agree to pay to the Agent for the account of
each Bank, as consideration for such Bank's Revolving Credit Commitment, a
nonrefundable facility fee ("Facility Fee") equal to .5% of such Bank's
Revolving Credit Commitment, payable on the Closing Date.
2.5 Revolving Credit Loan Requests.
Except as otherwise provided herein, the Borrower Agent may
from time to time prior to the Expiration Date request the Banks to make
Revolving Credit Loans by delivering to the Agent, not later than 10:00 a.m.,
Philadelphia time, one (1) Business Day prior to the proposed Borrowing Date
with respect to the making of a Revolving Credit Loan of a duly completed
request therefor substantially in the form of Exhibit 2.5 or a request by
telephone immediately confirmed in writing by letter or facsimile in such form
(each, a "Loan Request"), it being understood that the Agent may rely on the
authority of any individual making such a telephonic request without the
necessity of receipt of such written confirmation. Each Loan Request shall be
irrevocable and shall specify (i) the proposed Borrowing Date; (ii) the
aggregate amount of the proposed Loans comprising each Loan, which shall be in
integral multiples of $50,000. The Loan requested shall not be less than
$100,000 and shall not exceed the maximum amount available for Loans
2.6 Making Revolving Credit Loans.
The Agent shall, promptly after receipt by it of a Loan
Request pursuant to Section 2.5 [Revolving Credit Loan Requests], notify the
Banks of its receipt of such Loan Request specifying: (i) the proposed Borrowing
Date and the time and method of disbursement of the Revolving Credit Loans
requested thereby; (ii) the amount of each such Revolving Credit Loan and (iii)
the apportionment among the Banks of such Revolving Credit Loans as determined
by the Agent in accordance with Section 2.2 [Nature of Banks' Obligations]. Each
Bank shall remit the principal amount of each Revolving Credit Loan to the Agent
such that the Agent is able to, and the Agent shall, to the extent the Banks
have made funds available to it for such purpose and subject to Section 6.2
[Each Additional Loan], fund such Revolving Credit Loans to the Borrower in U.S.
Dollars and immediately available funds at the Principal Office prior to 2:00
p.m., Philadelphia time, on the applicable Borrowing Date, provided that if any
Bank fails to remit such funds to the Agent in a timely manner, the Agent may
elect in its sole discretion to fund with its own funds the Revolving Credit
Loans of such Bank on such Borrowing Date, and such Bank shall be subject to the
repayment obligation in Paragraph 16 of Exhibit 10.
2.7 Revolving Credit Notes.
The Obligation of the Borrower to repay the aggregate unpaid
principal amount of the Revolving Credit Loans made to it by each Bank, together
with interest thereon, shall be evidenced by a Revolving Credit Note dated the
Closing Date payable to the order of such Bank in a face amount equal to the
Revolving Credit Commitment of such Bank.
<PAGE>
2.8 Use of Proceeds.
The proceeds of the Revolving Credit Loans shall be used in
accordance with Section 7.1.10 [Use of Proceeds].
2.9 Nature of the Borrower's Obligations.
All of the Obligations and the other obligations duties,
promises undertakings, representations and warranties of the Borrowers to or for
the Agent, any Bank or the Banks under any Loan Document or otherwise in
connection with any Loan shall be joint and several.
2.10 Letter of Credit Subfacility.
The Letters of Credit, in the aggregate amount not to exceed
the Letter of Credit Sublimit, shall be described and governed by the provisions
of Exhibit 2.10.
3. INTEREST RATES
3.1 Interest Rate.
The Borrower shall pay interest in respect of the outstanding
unpaid principal amount of the Loans at the annual rate of interest set forth in
Section 3.1.1. If at any time the designated rate applicable to any Loan made by
any Bank exceeds such Bank's highest lawful rate, the rate of interest on such
Bank's Loan shall be limited to such Bank's highest lawful rate.
3.1.1 Revolving Credit Interest Rate.
The Revolving Credit Loans shall bear interest at a
fluctuating rate per annum (computed on the basis of a year of 360 days, and
actual days elapsed) equal to the Base Rate plus one half percent (0.5%), such
interest rate to change automatically from time to time effective as of the
effective date of each change in the Base Rate; or
3.1.2 Rate Quotations.
The Borrower may call the Agent on or before the date on
which a Loan Request is to be delivered to receive an indication of the Base
Rate then in effect, but it is acknowledged that such projection shall not be
binding on the Agent or the Banks nor affect the rate of interest which
thereafter is actually in effect when any Loan is made.
3.2 Interest After Default.
To the extent permitted by Law, upon the occurrence of an
Event of Default and until such time such Event of Default shall have been cured
or waived, each Obligation hereunder if not paid when due shall bear interest at
a rate per annum equal to the sum of the rate of interest applicable to the
Revolving Credit Loans plus an additional two percent (2%) per annum from the
time such Obligation becomes due and payable and until it is paid in full.
<PAGE>
3.2.1 Acknowledgment.
The Borrower acknowledges that the increase in rates
referred to in this Section 3.2 reflects, among other things, the fact that such
Loans or other amounts have become a substantially greater risk given their
default status and that the Banks are entitled to additional compensation for
such risk; and all such interest shall be payable by Borrowers upon demand by
Agent.
4. PAYMENTS
4.1 Payments.
All payments and prepayments to be made in respect of
principal, interest, Commitment Fees, Facility Fees, Letter of Credit Fees,
Agent's Fee or other fees or amounts due from the Borrower hereunder shall be
payable prior to 11:00 a.m., Philadelphia time, on the date when due without
presentment, demand, protest or notice of any kind, all of which are hereby
expressly waived by the Borrower, and without set-off, counterclaim or other
deduction of any nature, and an action therefor shall immediately accrue. Such
payments shall be made to the Agent at the Principal Office for the ratable
accounts of the Banks with respect to the Loans in U.S. Dollars and in
immediately available funds, and the Agent shall promptly distribute such
amounts to the Banks in immediately available funds, provided that in the event
payments are received by 11:00 a.m., Philadelphia time, by the Agent with
respect to the Loans and such payments are not distributed to the Banks on the
same day received by the Agent, the Agent shall pay the Banks the Federal Funds
Effective Rate with respect to the amount of such payments for each day held by
the Agent and not distributed to the Banks. The Agent's and each Bank's
statement of account, ledger or other relevant record shall be conclusive,
absent manifest error, as the statement of the amount of principal of and
interest on the Loans and other amounts owing under this Agreement and shall be
deemed an "account stated."
4.2 Pro Rata Treatment of Banks.
Each borrowing shall be allocated to each Bank according to
its Ratable Share and each payment or prepayment by the Borrower with respect to
principal, interest, Commitment Fees, Letter of Credit Fees, Facility Fees, or
other fees (except for the Agent's Fee) or amounts due from the Borrower
hereunder to the Banks with respect to the Loans, shall (except as provided in
Section 4.7 [Additional Compensation in Certain Circumstances]) be made in
proportion to the applicable Loans outstanding from each Bank and, if no such
Loans are then outstanding, in proportion to the Ratable Share of each Bank.
4.3 Interest Payment Dates.
Interest on Loans shall be due and payable in arrears on the
first Business Day of each month after the date hereof and on the Expiration
Date or upon acceleration of the Notes. Interest on mandatory prepayments of
principal under Section 4.5 [Mandatory Prepayments] shall be due on the date
such mandatory prepayment is due. Interest on the principal amount of each Loan
or other monetary Obligation shall be due and payable on demand after such
principal amount or other monetary Obligation becomes due and payable (whether
on the stated maturity date, upon acceleration or otherwise).
<PAGE>
4.4 Voluntary Prepayments.
4.4.1 Right to Prepay.
The Borrowers shall have the right at their option from
time to time to prepay the Loans in whole or part without premium or penalty at
any time. Whenever the Borrowers desire to prepay any part of the Loans, it
shall provide a prepayment notice to the Agent by 1:00 p.m. at least one (1)
Business Day prior to the date of prepayment of Loans setting forth the
following information: (x) the date, which shall be a Business Day, on which the
proposed prepayment is to be made; and (y) the total principal amount of such
prepayment, which shall not be less than $25,000. All prepayment notices shall
be irrevocable. The principal amount of the Loans for which a prepayment notice
is given, together with interest on such principal amount, shall be due and
payable on the date specified in such prepayment notice as the date on which the
proposed prepayment is to be made.
4.5 Mandatory Payment of Principal.
The Borrowers shall repay the principal amount of Loans to the
extent of any excess of Revolving Facility Usage over the Borrowing Base. Such
payment shall be made within two (2) Business Days of the determination by any
Borrower of any such excess.
4.6 Reduction of Commitment.
The Borrowers shall have the right at any time and from time
to time upon five (5) Business Days' prior written notice to the Agent to reduce
permanently in whole or in part, in a minimum amount of $1,000,000 and whole
multiples of $100,000 of principal, or terminate the Commitments, without
penalty or premium except as hereinafter set forth, provided that any such
reduction or termination shall be accompanied by prepayment of the Notes,
together with outstanding fees, and the full amount of interest accrued on the
principal sum to be prepaid, to the extent that the aggregate amount thereof
then outstanding exceeds the Commitment as so reduced or terminated. All notices
to reduce the Commitment shall be irrevocable.
4.7 Additional Compensation in Certain Circumstances.
4.7.1 Increased Costs or Reduced Return Resulting from
Taxes, Reserves, Capital Adequacy Requirements, Expenses,
Etc.
If any Law, guideline or interpretation or any change in
any Law, guideline or interpretation or application thereof by any Official Body
charged with the interpretation or administration thereof or compliance with any
request or directive (whether or not having the force of Law) of any central
bank or other Official Body:
(i) subjects any Bank to any tax or changes the
basis of taxation with respect to this Agreement, the Notes, the Loans or
payments by the Borrower of principal, interest, Commitment Fees, or other
amounts due from the Borrower hereunder or under the Notes (except for taxes on
the overall net income of such Bank),
<PAGE>
(ii) imposes, modifies or deems applicable any
reserve, special deposit or similar requirement against credits or commitments
to extend credit extended by, or assets (funded or contingent) of, deposits with
or for the account of, or other acquisitions of funds by, any Bank, or
(iii) imposes, modifies or deems applicable any
capital adequacy or similar requirement (A) against assets (funded or
contingent) of, or letters of credit, other credits or commitments to extend
credit extended by, any Bank, or (B) otherwise applicable to the obligations of
any Bank under this Agreement,
and the result of any of the foregoing is to increase the cost to, reduce the
income receivable by, or impose any expense (including loss of margin) upon any
Bank with respect to this Agreement, the Notes or the making, maintenance or
funding of any part of the Loans (or, in the case of any capital adequacy or
similar requirement, to have the effect of reducing the rate of return on any
Bank's capital, taking into consideration such Bank's customary policies with
respect to capital adequacy) by an amount which such Bank in its sole and
reasonable discretion deems to be material, such Bank shall from time to time
notify the Borrowers and the Agent of the amount determined in good faith (using
any averaging and attribution methods employed in good faith) by such Bank to be
necessary to compensate such Bank for such increase in cost, reduction of
income, additional expense or reduced rate of return. Such notice shall set
forth in reasonable detail the basis for such determination. Such amount shall
be due and payable by the Borrowers to such Bank ten (10) Business Days after
such notice is given.
4.7.2 Indemnity.
In addition to the compensation required by Section 4.7.1
[Increased Costs, Etc.], the Borrowers shall indemnify each Bank against all
liabilities, losses or expenses (including loss of margin, any loss or expense
incurred in liquidating or employing deposits from third parties) which such
Bank reasonably and actually sustains or incurs as a direct consequence of any
(i) attempt by the Borrowers to revoke (expressly,
by later inconsistent notices or otherwise) in whole or part any Loan Requests
under Section 2.5 [Revolving Credit Loan Requests] or to revoke notice relating
to prepayments under Section 4.4 [Voluntary Prepayments], or
(ii) default by the Borrowers in the performance or
observance of any covenant or condition contained in this Agreement or any other
Loan Document, including any failure of the Borrower to pay when due (by
acceleration or otherwise) any principal, interest, Agent's Fee, Commitment Fee,
Letter of Credit Fee, or any other amount due hereunder.
If any Bank sustains or incurs any such loss or expense, it
shall from time to time notify the Borrowers of the amount determined in good
faith by such Bank (which determination may include such assumptions,
allocations of costs and expenses and averaging or attribution methods as such
Bank shall deem reasonable) to be necessary to indemnify such Bank for such loss
or expense. Such notice shall set forth in reasonable detail the basis for such
determination. Such amount shall be due and payable by the Borrowers to such
Bank ten (10) Business Days after such notice is given.
<PAGE>
5. REPRESENTATIONS AND WARRANTIES
5.1 Representations and Warranties.
The Borrowers, jointly and severally, represent and warrant to
the Agent and each of the Banks as follows:
5.1.1 Organization and Qualification.
Each Borrower and each Subsidiary of each Borrower is a
corporation, partnership or limited liability company duly organized, validly
existing and in good standing (or the equivalent thereof, if any) under the laws
of its jurisdiction of organization. Each Borrower and each Subsidiary of each
Borrower has the lawful power to own or lease its properties and to engage in
the business it presently conducts or proposes to conduct. Each Borrower and
each Subsidiary of each Borrower is duly licensed or qualified and in good
standing in each jurisdiction listed on Schedule 5.1.1 and in all other
jurisdictions where the property owned or leased by it or the nature of the
business transacted by it or both makes such licensing or qualification
necessary, except where the failure to do so would not result in a Material
Adverse Change.
5.1.2 Capitalization and Ownership.
The authorized capital stock of Parent are described on
Schedule 5.1.2. All of the shares of capital stock of Parent (collectively, the
"Shares") have been validly issued and are fully paid and nonassessable. There
are no options, warrants or other rights outstanding to purchase any such shares
except as indicated on Schedule 5.1.2.
5.1.3 Subsidiaries.
Schedule 5.1.3 states the name of each of Parent's
Subsidiaries (including Corp), its jurisdiction of incorporation, its authorized
capital stock, the issued and outstanding shares (referred to herein as the
"Subsidiary Shares") and the owners thereof if it is a corporation, its
outstanding partnership interests (the "Partnership Interests") if it is a
partnership and its outstanding limited liability company interests, interests
assigned to managers thereof and the voting rights associated therewith (the
"LLC Interests") if it is a limited liability company. Except as set forth on
Schedule 5.1.3, the Borrower and each Subsidiary of the Borrower has good and
valid title to all of the Subsidiary Shares, Partnership Interests and LLC
Interests it purports to own, free and clear in each case of any Lien. All
Subsidiary Shares, Partnership Interests and LLC Interests have been validly
issued, and all Subsidiary Shares are fully paid and nonassessable. All capital
contributions and other consideration required to be made or paid in connection
with the issuance of the Partnership Interests and LLC Interests have been made
or paid, as the case may be. There are no options, warrants or other rights
outstanding to purchase any such Subsidiary Shares, Partnership Interests or LLC
Interests except as indicated on Schedule 5.1.3. Each Subsidiary of Parent and
of each Borrower is also a Borrower hereunder, except the Non-US Subsidiaries
listed on Schedule 5.1.3.
<PAGE>
5.1.4 Power and Authority.
Each Borrower has full power to enter into, execute,
deliver and carry out this Agreement and the other Loan Documents to which it is
a party, to incur the Indebtedness contemplated by the Loan Documents and to
perform its Obligations under the Loan Documents to which it is a party, and all
such actions have been duly authorized by all necessary proceedings on its part.
5.1.5 Validity and Binding Effect.
This Agreement has been duly and validly executed and
delivered by each Borrower, and each other Loan Document which any Borrower is
required to execute and deliver on or after the date hereof will have been duly
executed and delivered by such Borrower on the required date of delivery of such
Loan Document. This Agreement and each other Loan Document constitutes, or will
constitute, legal, valid and binding obligations of each Borrower which is or
will be a party thereto on and after its date of delivery thereof, enforceable
against such Borrower in accordance with its terms, except to the extent that
enforceability of any of such Loan Document may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting the
enforceability of creditors' rights generally or limiting the right of specific
performance.
5.1.6 No Conflict.
Neither the execution and delivery of this Agreement or
the other Loan Documents by any Borrower nor the consummation of the
transactions herein or therein contemplated or compliance with the terms and
provisions hereof or thereof by any of them will conflict with, constitute a
default under or result in any breach of (i) the terms and conditions of the
certificate of incorporation, bylaws, certificate of limited partnership,
partnership agreement, certificate of formation, limited liability company
agreement or other organizational documents of any Borrower or (ii) any Law or
any material agreement or instrument or order, writ, judgment, injunction or
decree to which any Borrower or any of its Subsidiaries is a party or by which
it or any of its Subsidiaries is bound or to which it is subject, or result in
the creation or enforcement of any Lien, charge or encumbrance whatsoever upon
any property (now or hereafter acquired) of any Borrower or any of its
Subsidiaries (other than Liens granted under the Loan Documents).
5.1.7 Litigation.
There are no actions, suits, proceedings or investigations
pending or, to the knowledge of any Borrower, threatened against such Borrower
or any Subsidiary of such Borrower at law or equity before any Official Body
which individually or in the aggregate would result in any Material Adverse
Change. To the best of the Borrowers knowledge, none of the Borrowers or any
Subsidiaries of any Borrower is in violation of any order, writ, injunction or
any decree of any Official Body applicable to it which would result in any
Material Adverse Change.
<PAGE>
5.1.8 Title to Properties.
The real property owned or leased by each Borrower and each
Subsidiary of each Borrower is described on Schedule 5.1.8. Each Borrower and
each Subsidiary of each Borrower has good and marketable title to or valid
leasehold interest in all properties, assets and other rights which it purports
to own or lease or which are reflected as owned or leased on its books and
records, free and clear of all Liens and encumbrances except Permitted Liens,
and subject to the terms and conditions of the applicable leases. All leases of
property are in full force and effect without the necessity for any consent
which has not previously been obtained upon consummation of the transactions
contemplated hereby.
5.1.9 Financial Statements.
(i) Historical Statements. The Borrowers have
delivered to the Agent copies of their audited year-end financial statements for
and as of the end of the fiscal year ending December 31, 1999. In addition, the
Borrowers have delivered to the Agent copies of their pro forma combined
financial statements for Parent and U.S. Interactive Corp. (Delaware) and Soft
Plus for the fiscal year ended December 31, 1999 (together, the "Historical
Statements"). The Historical Statements were compiled from the books and records
maintained by Parent and Soft Plus' management, are correct and complete and
fairly represent the consolidated financial condition of Parent and its
Subsidiaries as of their dates and the results of operations for the fiscal
periods then ended and have been prepared in accordance with GAAP consistently
applied (except as noted), subject (in the case of the Interim Statements) to
normal year-end audit adjustments.
(ii) Projections. The Borrower has delivered to the
Agent financial projections of Parent and its Subsidiaries for the fiscal years
2000 and 2001 derived from various assumptions of the Borrower's management (the
"Projections"). The Projections represent Borrower's current estimate of a
reasonable range of possible results in light of the history of the business,
present and reasonably foreseeable conditions and the current intentions of
Parent's management. The Projections accurately reflect the liabilities of
Parent and its Subsidiaries in all material respects upon consummation of the
transactions contemplated hereby as of the Closing Date.
(iii) Accuracy of Financial Statements. Neither
Parent nor any Subsidiary of the Borrower has any material liabilities,
contingent or otherwise, or forward or long-term commitments that are not
disclosed in the Historical Statements or in the notes thereto, and except as
disclosed therein there are no material unrealized or anticipated losses from
any commitments of the Borrower or any Subsidiary of the Borrower which will
cause a Material Adverse Change. Since December 31, 1999, no Material Adverse
Change has occurred.
5.1.10 Margin Stock; Section 20 Subsidiaries.
5.1.10.1 Margin Stock.
None of the Borrowers or any Subsidiaries of any
Borrower engages or intends to engage principally, or as one of its important
activities, in the business of extending credit for the purpose, immediately,
incidentally or ultimately, of purchasing or carrying margin stock (within the
meaning of Regulation U). No part of the proceeds of any Loan has been or will
be used, immediately, incidentally or ultimately, to purchase or carry any
margin stock or to extend credit to others for the purpose of purchasing or
carrying any margin stock or to refund Indebtedness originally incurred for such
purpose, or for any purpose which entails a violation of or which is
inconsistent with the provisions of the regulations of the Board of Governors of
the Federal Reserve System. None of the Borrowers or any Subsidiary of any
Borrower holds or intends to hold margin stock in such amounts that more than
25% of the reasonable value of the assets of any Borrower or Subsidiary of any
Borrower are or will be represented by margin stock.
<PAGE>
5.1.10.2 Section 20 Subsidiaries.
The Borrowers do not intend to use and shall not
use any portion of the proceeds of the Loans, directly or indirectly, to
purchase during the underwriting period, or for thirty (30) days thereafter,
Ineligible Securities being underwritten by a Section 20 Subsidiary.
5.1.11 Full Disclosure.
To the best knowledge of the Borrowers, neither this
Agreement nor any other Loan Document, nor any certificate, statement, agreement
or other documents furnished to the Agent or any Bank in connection herewith or
therewith, contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained herein and
therein, in light of the circumstances under which they were made, not
misleading.
5.1.12 Taxes.
All federal, state, local and other tax returns required
to have been filed with respect to each Borrower and each Subsidiary of each
Borrower (other than for minor use taxes the non-payment of which would not
cause a Material Adverse Change) have been filed, and payment or adequate
provision has been made for the payment of all taxes, fees, assessments and
other governmental charges which have or may become due pursuant to said returns
or to assessments received, except to the extent that such taxes, fees,
assessments and other charges are being contested in good faith by appropriate
proceedings diligently conducted or for which an extension to file has been
timely and properly requested and for which such reserves or other appropriate
provisions, if any, as shall be required by GAAP shall have been made. There are
no agreements or waivers extending the statutory period of limitations
applicable to any federal income tax return of any Borrower or Subsidiary of any
Borrower for any period, except for extensions lawfully requested by the
Borrowers for the filing of the most current fiscal year's tax return.
5.1.13 Consents and Approvals.
Except for the filing of financing statements in the state
and county filing offices, no consent, approval, exemption, order or
authorization of, or a registration or filing with, any Official Body or any
other Person is required by any Law or any agreement in connection with the
execution, delivery and carrying out of this Agreement and the other Loan
Documents by any Borrower, except as listed on Schedule 5.1.13, all of which
shall have been obtained or made on or prior to the Closing Date except as
otherwise indicated on Schedule 5.1.13.
<PAGE>
5.1.14 No Event of Default; Compliance with Instruments.
To the best knowledge of the Borrowers, no event has
occurred and is continuing and no condition exists or will exist after giving
effect to the borrowings or other extensions of credit to be made on the Closing
Date under or pursuant to the Loan Documents which constitutes an Event of
Default or Potential Default. None of the Borrowers or any Subsidiaries of any
Borrower is in violation of (i) any term of its certificate of incorporation,
bylaws, certificate of limited partnership, partnership agreement, certificate
of formation, limited liability company agreement or other organizational
documents or (ii) any material agreement or instrument to which it is a party or
by which it or any of its properties may be subject or bound where such
violation would constitute a Material Adverse Change.
5.1.15 Patents, Trademarks, Copyrights, Licenses, Etc.
Each Borrower and each Subsidiary of each Borrower owns or
possesses all the material patents, trademarks, service marks, trade names,
copyrights, licenses, registrations, franchises, permits and rights necessary to
own and operate its properties and to carry on its business as presently
conducted and planned to be conducted by such Borrower or Subsidiary, without
known possible, alleged or actual conflict with the rights of others. All
material patents, trademarks, service marks, trade names, copyrights, licenses,
registrations, franchises and permits of each Borrower and each Subsidiary of
each Borrower are listed and described on Schedule 5.1.15.
5.1.16 Security Interests.
The Liens and security interests granted to the Agent for
the benefit of the Banks pursuant to the Patent, Trademark and Copyright
Security Agreement, the Pledge Agreement and the Security Agreement in the
Collateral (other than the Real Property) constitute and will continue to
constitute Prior Security Interests under the Uniform Commercial Code as in
effect in each applicable jurisdiction (the "Uniform Commercial Code") or other
applicable Law entitled to all the rights, benefits and priorities provided by
the Uniform Commercial Code or such Law, once the Liens existing under Existing
Facilities are removed of record. Upon the filing of financing statements
relating to said security interests in each office and in each jurisdiction
where required in order to perfect the security interests described above,
taking possession of any stock certificates or other certificates evidencing the
Pledged Collateral, recordation of the Patent, Trademark and Copyright Security
Agreement in the United States Patent and Trademark Office and United States
Copyright Office, as applicable, and removal of the Liens existing under the
Existing Facilities, all such action as is necessary or advisable to establish
such rights of the Agent will have been taken, and there will be upon execution
and delivery of the Patent, Trademark and Copyright Security Agreement, the
Pledge Agreement and the Security Agreement, such filings and such taking of
possession, no necessity for any further action in order to preserve, protect
and continue such rights, except the filing of continuation statements with
respect to such financing statements within six months prior to each five-year
anniversary of the filing of such financing statements. All filing fees and
other expenses in connection with each such action have been or will be paid by
the Borrowers.
<PAGE>
5.1.17 Status of the Pledged Collateral.
All the shares of capital stock (the "Pledged Shares"),
Partnership Interests or LLC Interests included in the Pledged Collateral to be
pledged pursuant to the Pledge Agreement are or will be upon issuance validly
issued and nonassessable and owned beneficially and of record by the pledgor
free and clear of any Lien or restriction on transfer, except as otherwise
provided by the Pledge Agreement and except as the right of the Banks to dispose
of the Pledged Shares, Partnership Interests or LLC Interests may be limited by
the Securities Act of 1933, as amended, and the regulations promulgated by the
Securities and Exchange Commission thereunder and by applicable state securities
laws. There are no shareholder, partnership, limited liability company or other
agreements or understandings with respect to the Pledged Shares, Partnership
Interests or LLC Interests included in the Pledged Collateral except for the
partnership agreements and limited liability company agreements described on
Schedule 5.1.17. The Borrowers have delivered true and correct copies of such
partnership agreements and limited liability company agreements to the Agent.
5.1.18 Insurance.
Schedule 5.1.18 lists all insurance policies and other
bonds to which any Borrower or Subsidiary of any Borrower is a party, all of
which are valid and in full force and effect. No notice has been given or claim
made and no grounds exist to cancel or avoid any of such policies or bonds or to
reduce the coverage provided thereby. Such policies and bonds provide adequate
coverage from reputable and financially sound insurers in amounts sufficient to
insure the assets and risks of each Borrower and each Subsidiary of each
Borrower in accordance with prudent business practice in the industry of the
Borrowers and their Subsidiaries and shall show the Agent as loss payee.
5.1.19 Compliance with Laws.
The Borrowers and their Subsidiaries are in compliance in
all material respects with all applicable Laws in all jurisdictions in which any
Borrower or Subsidiary of any Borrower is presently or will be doing business
except where the failure to do so would not result in a Material Adverse Change.
5.1.20 Material Contracts; Burdensome Restrictions.
Schedule 5.1.20 lists all material contracts relating to
the business operations of ach Borrower and each Subsidiary of any Borrower,
including all employee benefit plans and Labor Contracts. All such material
contracts are valid, binding and enforceable upon such Borrower or Subsidiary
and each of the other parties thereto in accordance with their respective terms,
and there is no default thereunder, to the Borrowers' knowledge, with respect to
parties other than such Borrower or Subsidiary. None of the Borrowers or their
Subsidiaries is bound by any contractual obligation, or subject to any
restriction in any organization document, or any requirement of Law which could
result in a Material Adverse Change.
5.1.21 Investment Companies; Regulated Entities.
None of the Borrowers or any Subsidiaries of any Borrower
is an "investment company" registered or required to be registered under the
Investment Company Act of 1940 or under the "control" of an
<PAGE>
"investment company" as such terms are defined in the Investment Company Act of
1940 and shall not become such an "investment company" or under such "control."
None of the Borrowers or any Subsidiaries of any Borrower is subject to any
other Federal state statute or regulation limiting its ability to incur
Indebtedness for borrowed money.
5.1.22 Plans and Benefit Arrangements.
Except as set forth on Schedule 5.1.22:
(i) Parent and each other member of the ERISA Group
are in compliance in all material respects with any applicable provisions of
ERISA with respect to all Benefit Arrangements, Plans and Multiemployer Plans.
There has been no Prohibited Transaction with respect to any Benefit Arrangement
or any Plan or, to the best knowledge of Parent, with respect to any
Multiemployer Plan or Multiple Employer Plan, which could result in any material
liability of the Borrower or any other member of the ERISA Group. To the best
knowledge of Parent, Parent and all other members of the ERISA Group have made
when due any and all payments required to be made under any agreement relating
to a Multiemployer Plan or a Multiple Employer Plan or any Law pertaining
thereto. With respect to each Plan and Multiemployer Plan, the Borrower and each
other member of the ERISA Group, to the best of their knowledge (i) have
fulfilled in all material respects their obligations under the minimum funding
standards of ERISA, (ii) have not incurred any liability to the PBGC, and (iii)
have not had asserted against them any penalty for failure to fulfill the
minimum funding requirements of ERISA.
(ii) To the best of each Borrower's knowledge, each
Multiemployer Plan and Multiple Employer Plan is able to pay benefits thereunder
when due.
(iii) No Borrower nor any other member of the ERISA
Group has instituted or currently intends to institute proceedings to terminate
any Plan.
(iv) To the best knowledge of the Borrowers, no
event requiring notice to the PBGC under Section 302(f)(4)(A) of ERISA has
occurred or is reasonably expected to occur with respect to any Plan, and no
amendment with respect to which security is required under Section 307 of ERISA
has been made or is reasonably expected to be made to any Plan.
(v) The aggregate actuarial present value of all
benefit liabilities (whether or not vested) under each Plan, determined on a
plan termination basis, as disclosed in, and as of the date of, the most recent
actuarial report for such Plan, if any, does not exceed the aggregate fair
market value of the assets of such Plan.
(vi) To the best knowledge of the Borrowers, no
Borrower nor any other member of the ERISA Group has incurred or reasonably
expects to incur any material withdrawal liability under ERISA to any
Multiemployer Plan or Multiple Employer Plan. No Borrower nor any other member
of the ERISA Group has been notified by any Multiemployer Plan or Multiple
Employer Plan that such Multiemployer Plan or Multiple Employer Plan has been
terminated within the meaning of Title IV of ERISA and, to the best knowledge of
each Borrower, no Multiemployer Plan or Multiple Employer Plan is reasonably
expected to be reorganized or terminated, within the meaning of Title IV of
ERISA.
<PAGE>
(vii) To the extent that any Benefit Arrangement is
insured, the Borrower and all other members of the ERISA Group have paid when
due all premiums required to be paid for all periods through the Closing Date.
To the extent that any Benefit Arrangement is funded other than with insurance,
Parent and all other members of the ERISA Group have made when due all
contributions required to be paid for all periods through the Closing Date.
(viii) All Plans, Benefit Arrangements and
Multiemployer Plans have been administered in accordance with their terms and
applicable Law.
5.1.23 Employment Matters.
Each of the Borrowers and each of their Subsidiaries is in
compliance with the Labor Contracts and all applicable federal, state and local
labor and employment Laws including those related to equal employment
opportunity and affirmative action, labor relations, minimum wage, overtime,
child labor, medical insurance continuation, worker adjustment and relocation
notices, immigration controls and worker and unemployment compensation, where
the failure to comply would result in a Material Adverse Change. There are no
outstanding grievances, arbitration awards or appeals therefrom arising out of
the Labor Contracts or current or threatened strikes, picketing, handbilling or
other work stoppages or slowdowns at facilities of any of the Borrowers or any
of their Subsidiaries which in any case would constitute a Material Adverse
Change. The Borrowers have delivered to the Agent true and correct copies of
each of the Labor Contracts.
5.1.24 Environmental Matters.
(i) None of the Borrowers or any Subsidiary has
received any notice, alert, citation or complaint relating to any hazardous
material, waste or any environmental law regulation or order and has no reason
to believe that it will receive any of the foregoing.
(ii) There are no regulated substances present on,
in, under, or emanating from, or to Borrowers' knowledge emanating to, the
Property or any portion thereof which result in any event described in items (i)
of this Section 5.1.24.
5.1.25 Year 2000.
The Borrowers and their Subsidiaries have reviewed the
areas within their business and operations which would be adversely affected by,
and have developed or are developing a program to address on a timely basis, the
risk that certain computer applications used by the Borrowers and their
Subsidiaries (or any of their respective material suppliers, customers or
vendors) may be unable to recognize and perform properly date-sensitive
functions involving dates prior to and after December 31, 1999 (the "Year 2000
Problem"). The Year 2000 Problem will not result in any Material Adverse Change.
<PAGE>
5.1.26 Senior Debt Status.
The Obligations of each Borrower under this Agreement, the
Notes, and each of the other Loan Documents to which it is a party do rank and
will rank at least pari passu in priority of payment with all other Indebtedness
of such Borrower except Indebtedness of such Borrower to the extent secured by
Permitted Liens. There is no Lien upon or with respect to any of the properties
or income of any Borrower or Subsidiary of any Borrower which secures
indebtedness or other obligations of any Person except for Permitted Liens.
5.2 Updates to Schedules.
Should any of the information or disclosures provided on any
of the Schedules attached hereto become outdated or incorrect in any material
respect, the Borrowers shall promptly provide the Agent in writing with such
revisions or updates to such Schedule as may be necessary or appropriate to
update or correct same; provided, however, that no Schedule shall be deemed to
have been amended, modified or superseded by any such correction or update, nor
shall any breach of warranty or representation resulting from the inaccuracy or
incompleteness of any such Schedule be deemed to have been cured thereby, unless
and until the Required Banks, according to the standards set forth in Section
10.1, shall have accepted in writing such revisions or updates to such Schedule.
6. CONDITIONS OF LENDING
The obligation of each Bank to make Loans and to issue Letters of
Credit hereunder is subject to the performance by each of the Borrowers of its
Obligations to be performed hereunder at or prior to the making of any such
Loans or issuance of such Letters of Credit and to the satisfaction of the
following further conditions:
6.1 First Loans.
On the Closing Date:
6.1.1 Officer's Certificate.
The representations and warranties of each of the
Borrowers contained in Section 5 and in each of the other Loan Documents shall
be true and accurate in all material respects on and as of the Closing Date with
the same effect as though such representations and warranties had been made on
and as of such date (except representations and warranties which relate solely
to an earlier date or time, which representations and warranties shall be true
and correct in all material respects on and as of the specific dates or times
referred to therein), and each of the Borrowers shall have performed and
complied in all material respects with all covenants and conditions hereof and
thereof; no Event of Default or Potential Default shall have occurred and be
continuing or shall exist; and, on the date of any Loan Request delivered after
the Closing Date,there shall be delivered to the Agent for the benefit of each
Bank a certificate of each of the Borrowers, dated the Closing Date and signed
by the Chief Executive Officer, President or Chief Financial Officer of the
Borrower Agent, to each such effect.
<PAGE>
6.1.2 Secretary's Certificate.
There shall be delivered to the Agent for the benefit of
each Bank a certificate dated the Closing Date and signed by the Secretary or an
Assistant Secretary of each of the Borrowers, certifying as appropriate as to:
(i) all action taken by each Borrower in connection
with this Agreement and the other Loan Documents;
(ii) the names of the officer or officers authorized
to sign this Agreement and the other Loan Documents and the true signatures of
such officer or officers and specifying the officers authorized to act on behalf
of each Borrower for purposes of this Agreement and the true signatures of such
officers, on which the Agent and each Bank may conclusively rely; and
(iii) copies of its organizational documents,
including its certificate of incorporation, bylaws, certificate of limited
partnership, partnership agreement, certificate of formation, and limited
liability company agreement as in effect on the Closing Date certified by the
appropriate state official where such documents are filed in a state office
together with certificates from the appropriate state officials as to the
continued existence and good standing of each Borrower in each state where
organized or qualified to do business.
6.1.3 Delivery of Loan Documents.
This Agreement, Borrower Agency Agreement, Notes, Patent,
Trademark and Copyright Security Agreement, Pledge Agreement, Intercompany
Subordination Agreement and Security Agreement shall have been duly executed and
delivered to the Agent for the benefit of the Banks, together with all
appropriate financing statements and appropriate stock powers and certificates
evidencing the Pledged Shares, the Partnership Interests and the LLC Interests.
6.1.4 Opinion of Counsel.
There shall be delivered to the Agent for the benefit of
each Bank a written opinion of Dilworth Paxson, LLP, counsel for the Borrowers
(who may rely on the opinions of such other counsel as may be acceptable to the
Agent), dated the Closing Date and in form and substance reasonably satisfactory
to the Agent and its counsel as to such matters incident to the transactions
contemplated herein as the Agent may reasonably request.
6.1.5 Legal Details.
All legal details and proceedings in connection with the
transactions contemplated by this Agreement and the other Loan Documents shall
be in form and substance reasonably satisfactory to the Agent and counsel for
the Agent, and the Agent shall have received all such other counterpart
originals or certified or other copies of such documents and proceedings in
connection with such transactions, in form and substance reasonably satisfactory
to the Agent and said counsel, as the Agent or said counsel may reasonably
request.
<PAGE>
6.1.6 Payment of Fees.
The Borrower shall have paid or caused to be paid to the
Agent for itself and for the account of the Banks to the extent not previously
paid the Facility Fees, all other commitment and other fees accrued through the
Closing Date and the costs and expenses for which the Agent and the Banks are
entitled to be reimbursed.
6.1.7 Intentionally Omitted..
6.1.8 Consents.
All material consents required to effectuate the
transactions contemplated hereby as set forth on Schedule 5.1.13 shall have been
obtained.
6.1.9 Intentionally Omitted.
6.1.10 No Violation of Laws.
The making of the Loans and the issuance of the Letters of
Credit shall not contravene any Law applicable to any Borrower or any of the
Banks.
6.1.11 No Actions or Proceedings.
No action, proceeding, investigation, regulation or
legislation shall have been instituted, threatened or proposed before any court,
governmental agency or legislative body to enjoin, restrain or prohibit, or to
obtain damages in respect of, this Agreement, the other Loan Documents or the
consummation of the transactions contemplated hereby or thereby or which, in the
Agent's sole and reasonable discretion, would make it inadvisable to consummate
the transactions contemplated by this Agreement or any of the other Loan
Documents.
6.1.12 Insurance Policies; Certificates of Insurance;
Endorsements.
The Borrowers shall have delivered evidence acceptable to
the Agent that adequate insurance in compliance with Section 7.1.3 [Maintenance
of Insurance] is in full force and effect and that all premiums then due thereon
have been paid, together with a evidence of coverage satisfactory to the Agent,
with additional insured, mortgagee and lender loss payable special endorsements
attached thereto in form and substance satisfactory to the Agent and its counsel
naming the Agent as additional insured and lender loss payee.
<PAGE>
6.1.13 Intentionally Omitted.
6.1.14 Intentionally Omitted.
6.1.15 Repayment of Existing Facility.
The Borrowers shall repay with proceeds of the Loans all
of the Indebtedness and satisfied the other related obligations under the
Existing Facility and shall have delivered fully executed UCC-3 (or UCC-2 in
California) termination statements and all other satisfaction or discharge items
so as to evidence, when filed, the Agent's Prior Security Interest in all of the
Collateral, subject to the Permitted Liens.
6.2 Each Additional Loan or Letter of Credit.
At the time of making any Loans or issuing any Letters of
Credit or issuing any other than Loans made or Letters of Credit issued on the
Closing Date and after giving effect to the proposed extensions of credit: the
representations and warranties of the Borrowers contained in Section 5 and in
the other Loan Documents shall be true in all material respects on and as of the
date of such additional Loan with the same effect as though such representations
and warranties had been made on and as of such date (except representations and
warranties which expressly relate solely to an earlier date or time, which
representations and warranties shall be true and correct on and as of the
specific dates or times referred to therein) and the Borrowers shall have
performed and complied in all material respects with all covenants and
conditions hereof; no Event of Default or Potential Default shall have occurred
and be continuing or shall exist; the making of the Loans or issuance of such
Letter of Credit shall not contravene any Law applicable to any Borrower or
Subsidiary of any Borrower or any of the Banks; and the Borrowers shall have
delivered to the Agent a duly executed and completed Loan Request or application
for a Letter of Credit as the case may be.
7. COVENANTS
7.1 Affirmative Covenants.
The Borrowers, jointly and severally, covenant and agree that
until payment in full of the Loans, Reimbursement Obligations and Letter of
Credit Borrowings and interest thereon, satisfaction of all of the Borrowers'
other Obligations under the Loan Documents and termination of the Commitments,
and expiration or termination of all Letters of Credit, the Borrowers shall
comply at all times with the following affirmative covenants:
7.1.1 Preservation of Existence, Etc.
Each Borrower shall, and shall cause each of its
Subsidiaries to, maintain its legal existence as a corporation, limited
partnership or limited liability company and its license or qualification and
good standing in each jurisdiction in which its ownership or lease of property
or the nature of its business makes such license or qualification necessary,
except where the failure to so maintain such license or qualification would not
result in a Material Adverse Change and except as otherwise expressly permitted
in Section 7.2.6 [Liquidations, Mergers, Etc.].
<PAGE>
7.1.2 Payment of Liabilities, Including Taxes, Etc.
Each Borrower shall, and shall cause each of its
Subsidiaries to, duly pay and discharge all liabilities to which it is subject
or which are asserted against it, promptly as and when the same shall become due
and payable, including all taxes, assessments and governmental charges upon it
or any of its properties, assets, income or profits, prior to the date on which
penalties attach thereto, except to the extent that such liabilities, including
taxes, assessments or charges, are being contested in good faith and by
appropriate and lawful proceedings diligently conducted and for which such
reserve or other appropriate provisions, if any, as shall be required by GAAP
shall have been made, but only to the extent that failure to discharge any such
liabilities would not result in any additional liability which would adversely
affect to a material extent the financial condition of any Borrower or
Subsidiary of any Borrower or which would affect the Collateral, provided that
the Borrowers and their Subsidiaries will pay all such liabilities forthwith
upon the commencement of proceedings to foreclose any Lien which may have
attached as security therefor.
7.1.3 Maintenance of Insurance.
Each Borrower will maintain or cause to be maintained,
with financially sound and reputable insurers, public liability and property
damage insurance with respect to its business and properties and the business
and properties of its Subsidiaries against loss or damage of the kinds
customarily carried or maintained by Persons of established reputation engaged
in similar businesses and in amounts acceptable to Agent and will deliver
evidence thereof to Agent. The Borrowers shall cause, pursuant to endorsements
and assignments in form and substance reasonably satisfactory to Agent, the
Agent, for the benefit of Agent and Banks, to be named as lender's loss payee in
the case of casualty insurance, Agent, for the benefit of Agent and Banks, to be
named as additional insured in the case of all liability insurance and Agent,
for the benefit of Agent and Banks, to be named as assignee in the case of all
business interruption insurance; provided, that notwithstanding the foregoing,
in the absence of a Potential Default or an Event of Default, the Borrowers may
receive and retain proceeds from such casualty policies to the extent that such
proceeds are less than or equal to $7,500,000.
7.1.4 Maintenance of Properties and Leases.
Each Borrower shall, and shall cause each of its
Subsidiaries to, maintain in good repair, working order and condition (ordinary
wear, tear and obsolescence excepted) in accordance with the general practice of
other businesses of similar character and size, all of those properties useful
and necessary to its business, and from time to time, such Borrower will make or
cause to be made all appropriate repairs, renewals or replacements thereof.
7.1.5 Maintenance of Patents, Trademarks, Etc.
Each Borrower shall, and shall cause each of its
Subsidiaries to, maintain in full force and effect all patents, trademarks,
service marks, trade names, copyrights, licenses, franchises, permits and other
authorizations necessary for the ownership and operation of its properties and
business if the failure so to maintain the same would result in a Material
Adverse Change.
<PAGE>
7.1.6 Visitation Rights.
Each Borrower shall, and shall cause each of its
Subsidiaries to, permit any of the officers or authorized employees, agents or
representatives of the Agent or any of the Banks to visit as often as
semi-annually at the Borrowers' expense and inspect any of its properties and to
examine and make excerpts from its books and records and discuss its business
affairs, finances and accounts with its officers, all in such detail and at such
reasonable times during ordinary business hours and as often as any of the Banks
may reasonably request, provided that each Bank shall provide the Borrowers and
the Agent with reasonable notice prior to any visit or inspection. In the event
any Bank desires to visit and inspect any Borrower, such Bank shall make a
reasonable effort to conduct such visit and inspection contemporaneously with
any and inspection to be performed by the Agent. The Agent, at the sole cost and
expense of the Borrowers, may obtain appraisals or valuations of the Borrowers'
and their Subsidiaries' assets, including the Collateral and all Accounts as the
Agent may require in form and substance satisfactory to the Agent in all
respects.
7.1.7 Keeping of Records and Books of Account.
The Borrowers shall, and shall cause each Subsidiary of
the Borrower to, maintain and keep commercially reasonable books of record and
account which enable the Borrower and its Subsidiaries to issue financial
statements in accordance with GAAP and as otherwise required by applicable Laws
of any Official Body having jurisdiction over the Borrowers or any Subsidiary of
the Borrowers, and in which full, true and correct entries shall be made in all
material respects of all its dealings and business and financial affairs.
7.1.8 Plans and Benefit Arrangements.
Parent shall, and shall cause each other member of the
ERISA Group to, comply with ERISA, the Internal Revenue Code and other
applicable Laws applicable to Plans and Benefit Arrangements except where such
failure, alone or in conjunction with any other failure, would not result in a
Material Adverse Change. Without limiting the generality of the foregoing, the
Borrower shall cause all of its Plans and all Plans maintained by any member of
the ERISA Group to be funded in material accordance with the minimum funding
requirements of ERISA and shall make, and cause each member of the ERISA Group
to make, in a timely manner, all contributions due to Plans, Benefit
Arrangements and Multiemployer Plans.
7.1.9 Compliance with Laws.
Each Borrower shall, and shall cause each of its
Subsidiaries to, comply with all applicable Laws in all respects, provided that
it shall not be deemed to be a violation of this Section 7.1.9 if any failure to
comply with any Law would not result in fines, penalties, remediation costs,
other similar liabilities or injunctive relief which in the aggregate would
result in a Material Adverse Change.
7.1.10 Use of Proceeds.
The Borrowers will use the Letters of Credit and the
proceeds of the Loans only for (i) financing a portion of the Soft Plus
Transaction (ii) general corporate purposes and for working capital, (iii) to
finance Permitted Acquisitions, or (iv) to repay and terminate Indebtedness
<PAGE>
outstanding under the Existing Facility. The Borrowers shall not use the
proceeds of the Loans and the Letters of Credit for any purpose which
contravenes any applicable Law or any provision hereof.
7.1.11 Further Assurances.
Each Borrower shall, from time to time, at its expense,
faithfully preserve and protect the Agent's Lien on and Prior Security Interest
in the Collateral as a continuing first priority perfected Lien, subject only to
Permitted Liens, and shall do such other acts and things as the Agent in its
sole discretion may deem necessary or advisable from time to time in order to
preserve, perfect and protect the Liens granted under the Loan Documents and to
exercise and enforce its rights and remedies thereunder with respect to the
Collateral.
7.1.12 Subordination of Intercompany Loans.
Each Borrower shall cause any intercompany Indebtedness,
loans or advances owed by any Borrower to any other Borrower to be subordinated
pursuant to the terms of the Intercompany Subordination Agreement.
7.1.13 Maintenance of Bank Accounts.
Commencing on or before June 30, 2000, Parent and each
other Borrower shall maintain their primary operating and treasury function
accounts, and at least 50% (measured by Dollar amount) of their investment
accounts, at PNC Bank or Affiliates thereof.
7.1.14 Landlord's Waiver.
Within forty-five (45) days after the date of this
Agreement, the Borrowers shall use their best efforts to deliver to Agent an
executed Landlord's Waiver in substantially the form of that used in the
Existing Facility from the lessor of the leased Collateral location where the
books and records of the Borrowers are maintained. Within sixty (60) days after
the date of this Agreement, the Borrowers shall use their best efforts to
deliver to the Agent an executed Landlord's Waiver in substantially the form of
that used in the Existing Facility from the lessor for each other leased
Collateral location, as listed on Schedule A to the Security Agreement. Such
Landlord's Waivers shall be substantially in the form delivered to Progress Bank
in connection with the Existing Facility.
7.1.15 Non-US Subsidiary Pledge.
Within sixty (60) days after the date of this Agreement,
Corp shall use its best efforts to execute and deliver to the Agent a pledge
agreement (in the form of the Pledge Agreement) with respect to the Non-US
Subsidiaries, and all stock certificates and stock powers requested by Agent
with respect thereto; upon such delivery, the definition of Collateral shall
include such stock and the definition of Pledge Agreement shall include such
pledge agreement.
<PAGE>
7.2 Negative Covenants.
The Borrowers, jointly and severally, covenant and agree that
until payment in full of the Loans, Reimbursement Obligations, Letter of Credit
Borrowings and interest thereon, satisfaction of all of the Borrowers' other
Obligations hereunder, expiration or termination of all Letters of Credit and
termination of the Commitments, the Borrowers shall comply with the following
negative covenants:
7.2.1 Indebtedness.
Each of the Borrowers shall not, and shall not permit any
of its Subsidiaries to, at any time create, incur, assume or suffer to exist any
Indebtedness, except:
(i) Indebtedness under the Loan Documents;
(ii) Existing Indebtedness as set forth on Schedule
7.2.1 (including any extensions or renewals thereof, provided there is no
increase in the amount thereof or other significant change in the terms thereof
unless otherwise specified on Schedule 7.2.1);
(iii) Capitalized and operating leases as and to the
extent not prohibited by this Agreement;
(iv) Indebtedness secured by Purchase Money Security
Interests not exceeding $5,000,000;
(v) Indebtedness of a Borrower to another Borrower
which is subordinated in accordance with the provisions of Section 7.1.12
[Subordination of Intercompany Loans]; and
(vi) Aggregate Indebtedness of each Borrower not in
excess of $5,000,000 incurred in connection with Permitted Acquisitions.
7.2.2 Liens.
Each of the Borrowers shall not, and shall not permit any
of its Subsidiaries to, at any time create, incur, assume or suffer to exist any
Lien on any of its property or assets, tangible or intangible, now owned or
hereafter acquired, or agree or become liable to do so, except as follows (such
following exceptions referred to herein as "Permitted Liens"):
(i) Liens for taxes, assessments, or similar
charges, incurred in the ordinary course of business and which are not yet due
and payable after the expiration of all applicable grace and cure periods;
(ii) Pledges or deposits made in the ordinary course
of business to secure payment of workers' compensation, or to participate in any
fund in connection with workers' compensation, unemployment insurance, old-age
pensions or other social security programs;
<PAGE>
(iii) Liens of mechanics, materialmen, warehousemen,
carriers, or other like Liens, securing obligations incurred in the ordinary
course of business that are not yet due and payable and Liens of landlords
securing obligations to pay lease payments that are not yet due and payable or
in default, following the expiration of all applicable grace and cure periods;
(iv) Good-faith pledges or deposits made in the
ordinary course of business to secure performance of bids, tenders, contracts
(other than for the repayment of borrowed money) or leases, not in excess of the
aggregate amount due thereunder, or to secure statutory obligations, or surety,
appeal, indemnity, performance or other similar bonds required in the ordinary
course of business; (v) Encumbrances consisting of zoning restrictions,
easements or other restrictions on the use of real property, none of which
materially impairs the use of such property or the value thereof, and none of
which is violated in any material respect by existing or proposed structures or
land use;
(vi) Liens, security interests and mortgages in
favor of the Agent for the benefit of the Banks;
(vii) Liens on property leased by any Borrower or
Subsidiary of a Borrower under capital and operating leases not prohibited by
this Agreement securing obligations of such Borrower or Subsidiary to the lessor
under such leases;
(viii) Any Lien existing on the date of this
Agreement and described on Schedule 7.2.2, provided that the principal amount
secured thereby is not hereafter increased, and no additional assets become
subject to such Lien;
(ix) Purchase Money Security Interests, provided
that the aggregate amount of loans and deferred payments secured by
such Purchase Money Security Interests shall not exceed $5,000,000 (excluding
for the purpose of this computation any loans or deferred payments secured by
Liens described on Schedule 7.2.2); and
(x) The following, (A) if the validity or amount
thereof is being contested in good faith by appropriate and lawful proceedings
diligently conducted so long as levy and execution thereon have been stayed and
continue to be stayed or (B) if a final judgment is entered and such judgment is
discharged within thirty (30) days of entry, and in either case they do not
materially adversely affect the Collateral or, in the aggregate, materially
impair the ability of any Borrower to perform its Obligations hereunder or under
the other Loan Documents:
(1) Claims or Liens for taxes, assessments or charges due
and payable and subject to interest or penalty, provided that the applicable
Borrower maintains such reserves or other appropriate provisions as shall be
required by GAAP and pays all such taxes, assessments or charges forthwith upon
the commencement of proceedings to foreclose any such Lien;
(2) Claims, Liens or encumbrances upon, and defects of
title to, real or personal property other than the Collateral, including any
attachment of personal or real property or other legal process prior to
adjudication of a dispute on the merits; or
<PAGE>
(3) Claims or Liens of mechanics, materialmen,
warehousemen, carriers, or other statutory nonconsensual Liens.
(4) Liens resulting from final judgments or orders
described in Section 8.1.6.
7.2.3 Guaranties.
Each of the Borrowers shall not, and shall not permit any
of its Subsidiaries to, at any time, directly or indirectly, become or be liable
in respect of any Guaranty, or assume, guarantee, become surety for, endorse or
otherwise agree, become or remain directly or contingently liable upon or with
respect to any obligation or liability of any other Person, not an Affiliate of
either Borrower, except for Guaranties of Indebtedness of the Borrowers
permitted hereunder; provided that under no circumstances shall any Borrower
violate Section 7.2.1 hereof.
7.2.4 Loans and Investments.
Each of the Borrowers shall not, and shall not permit any
of its Subsidiaries to, at any time make or suffer to remain outstanding any
loan or advance to, or purchase, acquire or own any stock, bonds, notes or
securities of, or any partnership interest (whether general or limited) or
limited liability company interest in, or any other investment or interest in,
or make any capital contribution to, any other Person, or agree, become or
remain liable to do any of the foregoing, except:
(i) trade credit extended on usual and customary
terms in the ordinary course of business;
(ii) advances to employees to meet expenses incurred
by such employees in the ordinary course of business;
(iii) loans, advances and investments in other
Borrowers;
(iv) the following permitted investments: (i) direct
obligations of the United States of America or any agency or instrumentality
thereof or obligations backed by the full faith and credit of the United States
of America maturing in twelve (12) months or less from the date of acquisition;
(ii) commercial paper maturing in 180 days or less rated not lower than A-1, by
Standard & Poor's or P-1 by Moody's Investors Service, Inc. on the date of
acquisition; and (iii) demand deposits, time deposits or certificates of deposit
maturing within one year in commercial banks whose obligations are rated A-1, A
or the equivalent or better by Standard & Poor's on the date of acquisition; and
(v) loans and investments not to exceed $10,000,000
which have been described in a writing provided to the Banks on or before the
date hereof.
<PAGE>
7.2.5 Dividends and Related Distributions.
Each of the Borrowers shall not, and shall not permit any
of its Subsidiaries to, make or pay, or agree to become or remain liable to make
or pay, any dividend or other distribution of any nature (whether in cash,
property, securities or otherwise) on account of or in respect of its shares of
capital stock, partnership interests or limited liability company interests on
account of the purchase, redemption, retirement or acquisition of its shares of
capital stock (or warrants, options or rights therefor), partnership interests
or limited liability company interests, except dividends or other distributions
payable to another Borrower.
7.2.6 Liquidations, Mergers, Consolidations, Acquisitions.
Each of the Borrowers shall not, and shall not permit any
of its Subsidiaries to, dissolve, liquidate or wind-up its affairs, or become a
party to any merger or consolidation, or acquire by purchase, lease or otherwise
all or substantially all of the assets or capital stock of any other Person,
provided that
(1) any Borrower other than Parent may consolidate or
merge into another Borrower which is wholly-owned by one or more of the other
Borrowers, and
(2) any Borrower may acquire, whether by purchase or by
merger, (A) all of the ownership interests of another Person or (B)
substantially all of assets of another Person or of a business or division of
another Person (each an "Permitted Acquisition"), provided that each of the
following requirements is met:
(i) if the Borrowers are acquiring the ownership
interests in such Person, such Person shall execute a Joinder and join this
Agreement as a Guarantor pursuant to Section 10.18 [Joinder of Borrowers] on or
before the date of such Permitted Acquisition;
(ii) the Borrowers, such Person and its owners, as
applicable, shall grant Liens in the assets of or acquired from and stock or
other ownership interests in such Person and otherwise comply with Section 10.18
[Joinder of Guarantors] on or before the date of such Permitted Acquisition.
(iii) the board of directors or other equivalent
governing body of such Person shall have approved such Permitted Acquisition
and, if the Borrowers shall use any portion of the Loans to fund such Permitted
Acquisition, the Borrowers also shall have delivered to the Banks written
evidence of the approval of the board of directors (or equivalent body) of such
Person for such Permitted Acquisition,
(iv) the business acquired, or the business
conducted by the Person whose ownership interests are being acquired, as
applicable, shall be substantially the same as one or more line or lines of
business conducted by the Borrowers and shall comply with Section 7.2.10
[Continuation of or Change in Business],
(v) no Potential Default or Event of Default shall
exist immediately prior to and after giving effect to such Permitted
Acquisition,
<PAGE>
(vi) the Borrowers shall demonstrate that they shall
be in compliance with the covenants contained in Sections 7.2.15, 7.2.16 and
7.2.17 after giving effect to such Permitted Acquisition (including in such
computation Indebtedness or other liabilities assumed or incurred in connection
with such Permitted Acquisition but excluding income earned or expenses incurred
by the Person, business or assets to be acquired prior to the date of such
Permitted Acquisition) by delivering at least five (5) Business Days prior to
such Permitted Acquisition a certificate in the form of Exhibit 7.2.6 evidencing
such compliance.
(vii) the Consideration paid by the Borrowers for
all Permitted Acquisitions made during each twelve (12) month period ending on
the anniversary of the date of this Agreement, of the Borrowers shall not exceed
$50,000,000 (comprised of up to $10,000,000 in cash and the remainder in stock)
and shall not violate the terms of Section 7.2.4 hereof; and
(viii) the Borrowers shall deliver to the Agent at
least five (5) Business Days before such Permitted Acquisition copies of any
agreements entered into or proposed to be entered into by such Borrowers in
connection with such Permitted Acquisition and shall deliver to the Agent such
other information about such Person or its assets as any Borrower may reasonably
require.
7.2.7 Dispositions of Assets or Subsidiaries.
Each of the Borrowers shall not, and shall not permit any
of its Subsidiaries to, sell, convey, assign, lease, abandon or otherwise
transfer or dispose of, voluntarily or involuntarily, any of its properties or
assets, tangible or intangible (including sale, assignment, discount or other
disposition of accounts, contract rights, chattel paper, equipment or general
intangibles with or without recourse or of capital stock, shares of beneficial
interest, partnership interests or limited liability company interests of a
Subsidiary of such Borrower), except:
(i) transactions involving the sale of inventory in
the ordinary course of business;
(ii) any sale, transfer or lease of assets in the
ordinary course of business which are no longer necessary or required in the
conduct of such Borrower's or such Subsidiary's business;
(iii) any sale, transfer or lease of assets by any
wholly owned Subsidiary of such Borrower to another Borrower;
(iv) any sale, transfer or lease of assets in the
ordinary course of business which are replaced by substitute assets, provided
such substitute assets are subject to the Agent's Prior Security Interest; or
(v) any sale, transfer or lease of assets, other
than those specifically excepted pursuant to clauses (i) through (iv) above,
which is approved by the Required Banks.
<PAGE>
7.2.8 Affiliate Transactions.
Each of the Borrowers shall not, and shall not permit any
of its Subsidiaries to, enter into or carry out any transaction (including
purchasing property or services from or selling property or services to any
Affiliate of any Borrower) unless such transaction is not otherwise prohibited
by this Agreement, is entered into in the ordinary course of business upon fair
and reasonable arm's-length terms and conditions which are in accordance with
all applicable Law.
7.2.9 Subsidiaries, Partnerships and Joint Ventures.
Each of the Borrowers shall not, and shall not permit any
of its Subsidiaries to, own or create directly or indirectly any Subsidiaries
other than (i) any Subsidiary which has joined this Agreement as Borrower on the
Closing Date; and (ii) any Subsidiary formed after the Closing Date which joins
this Agreement as Borrower pursuant to Section 10.18 [Joinder], provided that
the Required Banks shall have consented to such formation and joinder and that
such Subsidiary and the Borrowers, as applicable, shall grant and cause to be
perfected first priority Liens to the Agent for the benefit of the Banks in the
assets held by, and stock of or other ownership interests in, such Subsidiary.
Each of the Borrowers shall not become or agree to (1) become a general or
limited partner in any general or limited partnership, except that the Borrowers
may be general or limited partners in other Borrowers, (2) become a member or
manager of, or hold a limited liability company interest in, a limited liability
company, except that the Borrowers may be members or managers of, or hold
limited liability company interests in, other Borrowers, or (3) become a joint
venturer or hold a joint venture interest in any joint venture. Nothing in this
Section 7.2.9 shall prohibit a transaction otherwise permitted by Section 7.2.4
[Loans and Investment] or Section 7.2.6 [Liquidations, Mergers, Consolidations,
Acquisitions] provided that incident to such transaction either (i) a
wholly-owned Subsidiary of Parent, intended to remain a wholly-owned Subsidiary,
shall become a Borrower hereunder as required by this Section 7.2.9, or (ii) if
such investment does not represent a wholly-owned Subsidiary or is not intended
to remain a wholly-owned Subsidiary, then (A) 100% of the Borrowers' interest
in, or arising under, such transaction is pledged as Collateral to the Agent on
behalf of the Banks and (B) the assets of such Subsidiary shall not be pledged
to any Person other than the Agent.
7.2.10 Continuation of or Change in Business.
Each of the Borrowers shall not, and shall not permit any
of its Subsidiaries to, engage in any business other than providing strategic,
marketing and technical services and support with respect to connection to and
use of the internet and related media and services substantially as conducted
and operated by such Borrower or Subsidiary during the present fiscal year, and
such Borrower or Subsidiary shall not permit any material change in such
business.
7.2.11 Plans and Benefit Arrangements.
Each of the Borrowers shall not, and shall not permit any
of its Subsidiaries to:
<PAGE>
(i) fail to satisfy the minimum funding requirements
of ERISA and the Internal Revenue Code with respect to any Plan within any
applicable grace period and time to cure;
(ii) request a minimum funding waiver from the
Internal Revenue Service with respect to any Plan;
(iii) engage in a Prohibited Transaction with any
Plan, Benefit Arrangement or Multiemployer Plan which, alone or in conjunction
with any other circumstances or set of circumstances resulting in liability
under ERISA, would result in a Material Adverse Change;
(iv) permit the aggregate actuarial present value of
all benefit liabilities (whether or not vested) under each Plan, determined on a
plan termination basis, as disclosed in the most recent actuarial report
completed with respect to such Plan, to exceed, as of any actuarial valuation
date, the fair market value of the assets of such Plan;
(v) fail to make when due any contribution to any
Multiemployer Plan that Parent or any member of the ERISA Group may be required
to make under any agreement relating to such Multiemployer Plan, or any Law
pertaining thereto;
(vi) withdraw (completely or partially) from any
Multiemployer Plan or withdraw (or be deemed under Section 4062(e) of ERISA to
withdraw) from any Multiple Employer Plan, where any such withdrawal is likely
to result in a material liability of the Borrower or any member of the ERISA
Group;
(vii) terminate, or institute proceedings to
terminate, any Plan, where such termination is likely to result in a material
liability to the Borrower or any member of the ERISA Group;
(viii) make any amendment to any Plan with respect
to which security is required under Section 307 of ERISA; or
(ix) fail to give any and all notices and make all
disclosures and governmental filings required under ERISA or the Internal
Revenue Code, where such failure is likely to result in a Material Adverse
Change.
7.2.12 Fiscal Year.
The Borrowers shall not, and shall not permit any
Subsidiary of any Borrower to, change its fiscal year from the twelve-month
period ending December 31.
7.2.13 Issuance of Stock.
Each of the Borrowers other than Parent shall not, and
shall not permit any of its Subsidiaries to, issue any additional shares of its
capital stock or any options, warrants or other rights in respect thereof.
<PAGE>
7.2.14 Changes in Organizational Documents.
Each of the Borrowers shall not, and shall not permit any
of its Subsidiaries to, amend in any respect its certificate of incorporation
(including any provisions or resolutions relating to capital stock), by-laws,
certificate of limited partnership, partnership agreement, certificate of
formation, limited liability company agreement or other organizational documents
without providing at least twenty (20) calendar days' prior written notice to
the Agent and the Banks and, in the event such change would be materially
adverse to the Banks as determined by the Agent in its sole discretion,
obtaining the prior written consent of the Required Banks, it being understood
that a change in the name of a Non-US Subsidiary will not constitute, by itself,
a material adverse change.
7.2.15 Minimum Quick Ratio.
The Borrowers shall not permit the ratio of (x) cash plus
Accounts to (y) current liabilities (less deferred revenue and principal of Soft
Plus Note) (calculated according to GAAP), plus Revolving Facility Usage
calculated as of the end of each fiscal quarter to be less than (i) 1.0 to 1.0
through the end of the quarter in which a secondary offering of Parent's common
stock is effective and (ii) 1.5 to 1.0 thereafter.
7.2.16 Minimum EBITDA.
The Borrowers shall not permit after December 31, 2000
their consolidated EBITDA to be less than zero ($0), as of the end of each
calendar quarter.
7.2.17 Minimum Net Income.
The Borrowers shall not permit their consolidated adjusted
net income, measured as of the end of each fiscal quarter, commencing with the
quarter ending March 31, 2000, to be less than the amounts set forth below for
the periods indicated.
Quarter Ended Minimum Net Income (Loss) ($)
------------- -----------------------------
March 31, 2000 (5,000,000)
June 30, 2000 (4,000,000)
September 30, 2000 (1,250,000)
December 31, 2000 and thereafter 0
As used herein, "adjusted net income" shall mean (i) net income as defined under
GAAP, plus (ii) goodwill amortization incident to the Soft Plus Transaction,
plus (iii) goodwill amortization incident to Permitted Acquisitions.
7.3 Reporting Requirements.
The Borrowers, jointly and severally, covenant and agree that
until payment in full of the Loans, Reimbursement Obligations and Letter of
Credit Borrowings and interest thereon, expiration or termination of all Letters
of Credit, satisfaction of all of the Borrowers' other Obligations hereunder and
under the other Loan Documents and termination of the Commitments, the Borrowers
will furnish or cause to be furnished to the Agent and each of the Banks the
financial reports and other information set forth on Exhibit 7.3.
<PAGE>
8. DEFAULT
8.1 Events of Default.
An Event of Default shall mean the occurrence or existence of
any one or more of the following events or conditions (whatever the reason
therefor and whether voluntary, involuntary or effected by operation of Law):
8.1.1 Payments Under Loan Documents.
The Borrowers shall fail to pay any principal of any Loan
(including scheduled installments, mandatory prepayments or the payment due at
maturity), Reimbursement Obligation or Letter of Credit Borrowing or shall fail
to pay any interest on any Loan, Reimbursement Obligation or Letter of Credit
Borrowing or any other amount owing hereunder or under the other Loan Documents
after such principal, interest or other amount becomes due in accordance with
the terms hereof or thereof;
8.1.2 Breach of Warranty.
Any representation or warranty made at any time by any of
the Borrowers herein or by any of the Borrowers in any other Loan Document, or
in any certificate, other instrument or statement furnished pursuant to the
provisions hereof or thereof, shall prove to have been false or misleading in
any material respect as of the time it was made or furnished;
8.1.3 Breach of Negative Covenants or Visitation Rights.
Any of the Borrowers shall default in the observance or
performance of any covenant contained in Section 7.1.6 [Visitation Rights] or
Section 7.2 [Negative Covenants];
8.1.4 Breach of Other Covenants.
Any of the Borrowers shall default in the observance or
performance of any other covenant, condition or provision hereof or of any other
Loan Document and such default shall continue unremedied for ten (10) Business
Days after the date of notice of such default from Agent to the Borrowers (such
grace period to be applicable only in the event such default can be remedied by
corrective action of the Borrowers as determined by the Agent in its sole
discretion);
8.1.5 Defaults in Other Agreements or Indebtedness.
A default or event of default shall occur at any time
under the terms of any other agreement involving borrowed money or the extension
of credit or any other Indebtedness under which any Borrower or Subsidiary of
any Borrower may be obligated as a borrower or guarantor in excess of $2,000,000
in the aggregate, and such breach, default or event of default consists of the
failure to pay (beyond any period of grace permitted with respect thereto,
whether waived or not) any indebtedness when due (whether at stated maturity, by
acceleration or otherwise) or if such breach or default permits or causes the
<PAGE>
acceleration of any indebtedness (whether or not such right shall have been
waived) or the termination of any commitment to lend;
8.1.6 Final Judgments or Orders.
Any final judgments or orders for the payment of money in
excess of $2,000,000 in the aggregate shall be entered against any Borrower by a
court having jurisdiction in the premises, which judgment is not discharged,
vacated, bonded or stayed pending appeal within a period of thirty (30) days
from the date of entry;
8.1.7 Loan Document Unenforceable.
Any of the Loan Documents shall cease to be legal, valid
and binding agreements enforceable against the party executing the same or such
party's successors and assigns (as permitted under the Loan Documents) in
accordance with the respective terms thereof or shall in any way be terminated
(except in accordance with its terms) or become or be declared ineffective or
inoperative or shall in any way be challenged or contested or cease to give or
provide the respective Liens, security interests, rights, titles, interests,
remedies, powers or privileges intended to be created thereby;
8.1.8 Uninsured Losses; Proceedings Against Assets.
There shall occur any material uninsured damage to or
loss, theft or destruction of any of the Collateral in excess of $1,000,000 or
the Collateral or any other of the Borrowers' or any of their Subsidiaries'
assets are attached, seized, levied upon or subjected to a writ or distress
warrant; or such come within the possession of any receiver, trustee, custodian
or assignee for the benefit of creditors and the same is not cured within thirty
(30) days thereafter;
8.1.9 Notice of Lien or Assessment.
A notice of Lien or assessment in excess of $1,000,000
which is not a Permitted Lien is filed of record with respect to all or any part
of any of the Borrowers' or any of their Subsidiaries' assets by the United
States, or any department, agency or instrumentality thereof, or by any state,
county, municipal or other governmental agency, including the PBGC, or any taxes
or debts owing at any time or times hereafter to any one of these becomes
payable and the same is not paid, discharged or stayed within thirty (30) days
after the same becomes payable;
8.1.10 Insolvency.
Any Borrower or any Subsidiary of a Borrower ceases to be
solvent or admits in writing its inability to pay its debts as they mature;
8.1.11 Events Relating to Plans and Benefit Arrangements.
Any of the following occurs: (i) any Reportable Event,
which the Agent determines in good faith constitutes grounds for the termination
of any Plan by the PBGC or the appointment of a trustee to administer or
liquidate any Plan, shall have occurred and be continuing; (ii) proceedings
shall have been instituted or other action taken to terminate any Plan, or a
<PAGE>
termination notice shall have been filed with respect to any Plan; (iii) a
trustee shall be appointed to administer or liquidate any Plan; (iv) the PBGC
shall give notice of its intent to institute proceedings to terminate any Plan
or Plans or to appoint a trustee to administer or liquidate any Plan; and, in
the case of the occurrence of (i), (ii), (iii) or (iv) above, the Agent
determines in good faith that the amount of the Borrowers' liability is likely
to exceed 10% of its Consolidated Tangible Net Worth; (v) the Borrower or any
member of the ERISA Group shall fail to make any contributions when due to a
Plan or a Multiemployer Plan; (vi) the Borrower or any other member of the ERISA
Group shall make any amendment to a Plan with respect to which security is
required under Section 307 of ERISA; (vii) the Borrowers or any other member of
the ERISA Group shall withdraw completely or partially from a Multiemployer
Plan; (viii) the Borrowers or any other member of the ERISA Group shall withdraw
(or shall be deemed under Section 4062(e) of ERISA to withdraw) from a Multiple
Employer Plan; or (ix) any applicable Law is adopted, changed or interpreted by
any Official Body with respect to or otherwise affecting one or more Plans,
Multiemployer Plans or Benefit Arrangements and, with respect to any of the
events specified in (v), (vi), (vii), (viii) or (ix), the Agent determines in
good faith that any such occurrence would be reasonably likely to materially and
adversely affect the total enterprise represented by the Borrower and the other
members of the ERISA Group;
8.1.12 Cessation of Business.
Any Borrower or Subsidiary of a Borrower ceases to conduct
its business as contemplated, except as expressly permitted under Section 7.2.6
[Liquidations, Mergers, Etc.] or Section 7.2.7, or any Borrower or Subsidiary of
a Borrower is enjoined, restrained or in any way prevented by court order from
conducting all or any material part of its business and such injunction,
restraint or other preventive order is not dismissed within thirty (30) days
after the entry thereof;
8.1.13 Change of Control.
Any person or group of persons not stockholders of Parent
on the Closing Date (within the meaning of Sections 13(d) or 14(a) of the
Securities Exchange Act of 1934, as amended) shall have acquired beneficial
ownership of (within the meaning of Rule 13d-3 promulgated by the Securities and
Exchange Commission under said Act) 25% or more of the voting capital stock of
Parent;
8.1.14 Involuntary Proceedings.
A proceeding shall have been instituted in a court having
jurisdiction in the premises seeking a decree or order for relief in respect of
any Borrower or Subsidiary of a Borrower in an involuntary case under any
applicable bankruptcy, insolvency, reorganization or other similar law now or
hereafter in effect, or for the appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator, conservator (or similar official) of any
Borrower or Subsidiary of a Borrower for any substantial part of its property,
or for the winding-up or liquidation of its affairs, and such proceeding shall
remain undismissed or unstayed and in effect for a period of sixty (60)
consecutive days or such court shall enter a decree or order granting any of the
relief sought in such proceeding; or
<PAGE>
8.1.15 Voluntary Proceedings.
Any Borrower or Subsidiary of a Borrower shall commence a
voluntary case under any applicable bankruptcy, insolvency, reorganization or
other similar law now or hereafter in effect, shall consent to the entry of an
order for relief in an involuntary case under any such law, or shall consent to
the appointment or taking possession by a receiver, liquidator, assignee,
custodian, trustee, sequestrator, conservator (or other similar official) of
itself or for any substantial part of its property or shall make a general
assignment for the benefit of creditors, or shall fail generally to pay its
debts as they become due, or shall take any action in furtherance of any of the
foregoing.
8.2 Consequences of Event of Default.
8.2.1 Events of Default Other Than Bankruptcy, Insolvency
or Reorganization Proceedings.
If an Event of Default specified under Sections 8.1.1
through 8.1.13 shall occur and be continuing, the Banks and the Agent shall be
under no further obligation to make Loans or issue Letters of Credit, as the
case may be, and the Agent may, and upon the request of the Required Banks,
shall by written notice to the Borrowers, declare the unpaid principal amount of
the Notes then outstanding and all interest accrued thereon, any unpaid fees and
all other Indebtedness of the Borrowers to the Banks hereunder and thereunder to
be forthwith due and payable, and the same shall thereupon become and be
immediately due and payable to the Agent for the benefit of each Bank without
presentment, demand, protest or any other notice of any kind, all of which are
hereby expressly waived, and require the Borrowers to, and the Borrowers shall
thereupon, deposit in a non-interest-bearing account with the Agent, as cash
collateral for its Obligations under the Loan Documents, an amount equal to the
maximum amount currently or at any time thereafter available to be drawn on all
outstanding Letters of Credit, and the Borrower and the Borrower hereby pledges
to the Agent and the Banks, and grants to the Agent and the Banks a security
interest in, all such cash as security for such Obligations. Upon the curing of
all existing Events of Default to the satisfaction of the Required Banks, the
Agent shall return such cash collateral to the Borrowers.
8.2.2 Bankruptcy, Insolvency or Reorganization
Proceedings.
If an Event of Default specified under Section 8.1.14
[Involuntary Proceedings] or 8.1.15 [Voluntary Proceedings] shall occur, the
Banks shall be under no further obligations to make Loans hereunder and the
unpaid principal amount of the Loans then outstanding and all interest accrued
thereon, any unpaid fees and all other Indebtedness of the Borrower to the Banks
hereunder and thereunder shall be immediately due and payable, without
presentment, demand, protest or notice of any kind, all of which are hereby
expressly waived; and
8.2.3 Set-off.
If an Event of Default shall occur and be continuing, any
Bank to whom any Obligation is owed by any Borrower hereunder or under any other
Loan Document or any participant of such Bank which has agreed in writing to be
bound by the provisions of Exhibit 10 and any branch, Subsidiary or Affiliate of
such Bank or participant anywhere in the world shall have the right, in addition
<PAGE>
to all other rights and remedies available to it, without notice to such
Borrower, to set-off against and apply to the then unpaid balance of all the
Loans and all other Obligations of the Borrowers and the other Borrowers
hereunder or under any other Loan Document, any debt owing to, and any other
funds held in any manner for the account of, the Borrowers or such other
Borrower by such Bank or participant or by such branch, Subsidiary or Affiliate,
including all funds in all deposit accounts (whether time or demand, general or
special, provisionally credited or finally credited, or otherwise) now or
hereafter maintained by the Borrower or such other Borrower for its own account
(but not including funds held in custodian or trust accounts) with such Bank or
participant or such branch, Subsidiary or Affiliate. Such right shall exist
whether or not any Bank or the Agent shall have made any demand under this
Agreement or any other Loan Document, whether or not such debt owing to or funds
held for the account of the Borrowers or such other Borrower is or are matured
or unmatured and regardless of the existence or adequacy of any Collateral,
Guaranty or any other security, right or remedy available to any Bank or the
Agent; and
8.2.4 Suits, Actions, Proceedings.
If an Event of Default shall occur and be continuing, and
whether or not the Agent shall have accelerated the maturity of Loans pursuant
to any of the foregoing provisions of this Section 8.2, the Agent, if any Bank
is owed any amount with respect to the Loans, may proceed to protect and enforce
the Agent or any Banks rights by suit in equity, action at law and/or other
appropriate proceeding, whether for the specific performance of any covenant or
agreement contained in this Agreement or the other Loan Documents, including as
permitted by applicable Law the obtaining of the appointment of a receiver, and,
if such amount shall have become due, by declaration or otherwise, proceed to
enforce the payment thereof or any other legal or equitable right of the Agent
or such Bank; and
8.2.5 Application of Proceeds.
From and after the date on which the Agent has taken any
action pursuant to this Section 8.2 and until all Obligations of the Borrowers
have been paid in full, any and all proceeds received by the Agent from any sale
or other disposition of the Collateral, or any part thereof, or the exercise of
any other remedy by the Agent, shall be applied as follows:
(i) first, to reimburse the Agent for out-of-pocket
costs, expenses and disbursements, including reasonable attorneys' and
paralegals' fees and legal expenses, incurred by the Agent or the Banks in
connection with realizing on the Collateral or collection of any Obligations of
any of the Borrowers under any of the Loan Documents, including advances made by
the Banks or any one of them or the Agent for the reasonable maintenance,
preservation, protection or enforcement of, or realization upon, the Collateral,
including advances for taxes, insurance, repairs and the like and reasonable
expenses incurred to sell or otherwise realize on, or prepare for sale or other
realization on, any of the Collateral;
(ii) second, to the repayment of all Indebtedness
then due and unpaid of the Borrowers to the Banks incurred under this Agreement
or any of the other Loan Documents, whether of principal, interest, fees,
expenses or otherwise, in such manner as the Agent may determine in its
discretion; and
<PAGE>
(iii) the balance, if any, as required by Law.
8.2.6 Other Rights and Remedies.
In addition to all of the rights and remedies contained in
this Agreement or in any of the other Loan Documents the Agent shall have all of
the rights and remedies of a secured party under the Uniform Commercial Code or
other applicable Law, all of which rights and remedies shall be cumulative and
non-exclusive, to the extent permitted by Law. The Agent may, and upon the
request of the Required Banks shall, exercise all post-default rights granted to
the Agent and the Banks under the Loan Documents or applicable Law.
8.3 Notice of Sale.
Any notice required to be given by the Agent of a sale, lease,
or other disposition of the Collateral or any other intended action by the
Agent, if given ten (10) days prior to such proposed action, shall constitute
commercially reasonable and fair notice thereof to the Borrowers.
9. THE AGENT
In addition to the other provisions set forth in this
Agreement, the Agent's rights and obligations are described in and governed by
the provisions of Exhibit 10.
10. MISCELLANEOUS
10.1 Modifications, Amendments or Waivers.
With the written consent of the Required Banks, the Agent,
acting on behalf of all the Banks, and the Borrower Agent, on behalf of the
Borrowers, may from time to time enter into written agreements amending or
changing any provision of this Agreement or any other Loan Document or the
rights of the Banks or the Borrowers hereunder or thereunder, or may grant
written waivers or consents to a departure from the due performance of the
Obligations of the Borrowers hereunder or thereunder; any such agreement, waiver
or consent made with such written consent shall be effective to bind all of the
Banks and the Borrowers; provided, that, without the written consent of all the
Banks, no such agreement, waiver or consent may be made which will:
10.1.1 Increase of Commitment; Extension or Expiration
Date.
Increase the amount of the Revolving Credit Commitment of
any Bank hereunder or extend the Expiration Date;
10.1.2 Extension of Payment; Reduction of Principal
Interest or Fees; Modification Terms of Payment.
Whether or not any Loans are outstanding, extend the time
for payment of principal or interest of any Loan (excluding the due date of any
mandatory prepayment of a Loan or any mandatory Commitment reduction in
connection with such a mandatory prepayment hereunder except for mandatory
reductions of the Commitments on the Expiration Date), the Commitment Fee or any
<PAGE>
other fee payable to any Bank, or reduce the principal amount of or the rate of
interest borne by any Loan or reduce the Commitment Fee or any other fee payable
to any Bank, or otherwise affect the terms of payment of the principal of or
interest of any Loan, the Commitment Fee or any other fee payable to any Bank;
10.1.3 Release of Collateral or Guarantor.
Except for sales of assets permitted by Section 7.2.7
[Disposition of Assets or Subsidiaries], release any Collateral consisting of
capital stock or other ownership interests of any Borrower or its Subsidiary or
substantially all of the assets of any Borrower, or any other security for any
of the Borrowers' Obligations; or
10.1.4 Miscellaneous
Amend Section 4.2 [Pro Rata Treatment of Banks],
Paragraphs 6 or 13 of Exhibit 10 [Exculpatory Provisions, Etc.; Equalization of
Banks] or this Section 10.1, alter any provision regarding the pro rata
treatment of the Banks, change the definition of Required Banks, or change any
requirement providing for the Banks or the Required Banks to authorize the
taking of any action hereunder;
provided, further, that no agreement, waiver or consent which would modify the
interests, rights or obligations of the Agent in its capacity as Agent or as the
issuer of Letters of Credit shall be effective without the written consent of
the Agent.
10.2 No Implied Waivers; Cumulative Remedies; Writing
Required.
No course of dealing and no delay or failure of the Agent or
any Bank in exercising any right, power, remedy or privilege under this
Agreement or any other Loan Document shall affect any other or future exercise
thereof or operate as a waiver thereof, nor shall any single or partial exercise
thereof or any abandonment or discontinuance of steps to enforce such a right,
power, remedy or privilege preclude any further exercise thereof or of any other
right, power, remedy or privilege. The rights and remedies of the Agent and the
Banks under this Agreement and any other Loan Documents are cumulative and not
exclusive of any rights or remedies which they would otherwise have. Any waiver,
permit, consent or approval of any kind or character on the part of any Bank of
any breach or default under this Agreement or any such waiver of any provision
or condition of this Agreement must be in writing and shall be effective only to
the extent specifically set forth in such writing.
10.3 Reimbursement and Indemnification of Banks by the
Borrower; Taxes.
The Borrowers agree unconditionally upon demand to pay or
reimburse to each Bank (other than the Agent, as to which the Borrower's
Obligations are set forth in Paragraph 5 of Exhibit 10 [Reimbursement of Agent
By Borrower, Etc.]) and to save such Bank harmless against (i) liability for the
payment of all reasonable out-of-pocket costs, expenses and disbursements
(including fees and expenses of outside counsel for each Bank except with
respect to (a) and (b) below), incurred by such Bank (a) in connection with the
administration and interpretation of this Agreement, and other instruments and
documents to be delivered hereunder, (b) relating to any amendments, waivers or
consents pursuant to the provisions hereof, (c) in connection with the
enforcement of this Agreement or any other Loan Document, or collection of
amounts due hereunder or thereunder or the proof and allowability of any claim
<PAGE>
arising under this Agreement or any other Loan Document, whether in bankruptcy
or receivership proceedings or otherwise, and (d) in any workout or
restructuring or in connection with the protection, preservation, exercise or
enforcement of any of the terms hereof or of any rights hereunder or under any
other Loan Document or in connection with any foreclosure, collection or
bankruptcy proceedings, or (ii) all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements of any
kind or nature whatsoever which may be imposed on, incurred by or asserted
against such Bank, in its capacity as such, in any way relating to or arising
out of this Agreement or any other Loan Documents or any action taken or omitted
by such Bank hereunder or thereunder, provided that the Borrowers shall not be
liable for any portion of such liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements (A) if
the same results from such Bank's gross negligence or willful misconduct, or (B)
if the Borrower was not given notice of the subject claim and the opportunity to
participate in the defense thereof, at its expense (except that the Borrowers
shall remain liable to the extent such failure to give notice does not result in
a loss to the Borrowers), or (C) if the same results from a compromise or
settlement agreement entered into without the consent of the Borrowers, which
shall not be unreasonably withheld. The Banks will attempt to minimize the fees
and expenses of legal counsel for the Banks which are subject to reimbursement
by the Borrower hereunder by considering the usage of one law firm to represent
the Banks and the Agent if appropriate under the circumstances. The Borrowers
agree unconditionally to pay all stamp, document, transfer, recording or filing
taxes or fees and similar impositions now or hereafter determined by the Agent
or any Bank to be payable in connection with this Agreement or any other Loan
Document, and the Borrowers agree unconditionally to save the Agent and the
Banks harmless from and against any and all present or future claims,
liabilities or losses with respect to or resulting from any omission to pay or
delay in paying any such taxes, fees or impositions.
10.4 Holidays.
Whenever payment of a Loan to be made or taken hereunder shall
be due on a day which is not a Business Day such payment shall be due on the
next Business Day and such extension of time shall be included in computing
interest and fees, except that the Loans shall be due on the Business Day
preceding the Expiration Date if the Expiration Date is not a Business Day.
Whenever any payment or action to be made or taken hereunder (other than payment
of the Loans) shall be stated to be due on a day which is not a Business Day,
such payment or action shall be made or taken on the next following Business Day
and such extension of time shall not be included in computing interest or fees,
if any, in connection with such payment or action.
10.5 Funding by Branch, Subsidiary or Affiliate.
10.5.1 Notional Funding.
Each Bank shall have the right from time to time, without
notice to the Borrowers, to deem any branch, Subsidiary or Affiliate (which for
the purposes of this Section 10.5 shall mean any corporation or association
which is directly or indirectly controlled by or is under direct or indirect
common control with any corporation or association which directly or indirectly
controls such Bank) of such Bank to have made, maintained or funded any Loan
provided that immediately following (on the assumption that a payment were then
due from the Borrowers to such other office), and as a result of such change,
the Borrowers would not be under any greater financial obligation pursuant to
<PAGE>
Section 4.7 [Additional Compensation in Certain Circumstances] than it would
have been in the absence of such change. Notional funding offices may be
selected by each Bank without regard to such Bank's actual methods of making,
maintaining or funding the Loans or any sources of funding actually used by or
available to such Bank.
10.5.2 Actual Funding.
Each Bank shall have the right from time to time to make
or maintain any Loan by arranging for a branch, Subsidiary or Affiliate of such
Bank to make or maintain such Loan subject to the last sentence of this Section
10.5.2. If any Bank causes a branch, Subsidiary or Affiliate to make or maintain
any part of the Loans hereunder, all terms and conditions of this Agreement
shall, except where the context clearly requires otherwise, be applicable to
such part of the Loans to the same extent as if such Loans were made or
maintained by such Bank, but in no event shall any Bank's use of such a branch,
Subsidiary or Affiliate to make or maintain any part of the Loans hereunder
cause such Bank or such branch, Subsidiary or Affiliate to incur any cost or
expenses payable by the Borrower hereunder or require the Borrowers to pay any
other compensation to any Bank (including any expenses incurred or payable
pursuant to Section 4.7 [Additional Compensation in Certain Circumstances])
which would otherwise not be incurred.
10.6 Notices.
All notices, requests, demands, directions and other
communications (as used in this Section 10.6, collectively referred to as
"notices") given to or made upon any party hereto under the provisions of this
Agreement shall be by telephone or in writing (including by means of electronic
transmission (i.e., "e-mail") or facsimile transmission or by setting forth such
notice on a site on the World Wide Web [a "website posting"] if notice of such
website posting, including the information necessary to access such website, has
previously been delivered to the applicable parties hereto by another method of
notice permitted hereunder, unless otherwise expressly permitted hereunder and
shall be delivered or sent by facsimile to the respective parties at the
addresses and numbers set forth under their respective names on Schedule 1.1(B)
hereof or in accordance with any subsequent unrevoked written direction from any
party to the others. No notices to a Borrower of Potential Defaults or Events of
Default shall be made solely by a website posting. All notices shall, except as
otherwise expressly herein provided, be effective (a) in the case of facsimile,
when received, (b) in the case of hand-delivered notice, when hand-delivered,
(c) in the case of telephone, when telephoned, provided, however, that in order
to be effective, telephonic notices must be confirmed in writing no later than
the next day by letter or facsimile, (d) if given by mail, four (4) days after
such communication is deposited in the mail with first-class postage prepaid,
return receipt requested, (e) if by electronic transmission, when actually
received, (f) if by website posting, upon delivery of a notice (including the
information necessary to access such website) by another means permitted
hereunder and (g) if given by any other means (including by air courier), when
delivered; provided, that notices to the Agent shall not be effective until
received. Any Bank giving any notice to any Borrower shall simultaneously send a
copy thereof to the Agent, and the Agent shall promptly notify the other Banks
of the receipt by it of any such notice.
<PAGE>
10.7 Severability.
The provisions of this Agreement are intended to be
severable. If any provision of this Agreement shall be held invalid or
unenforceable in whole or in part in any jurisdiction, such provision shall, as
to such jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without in any manner affecting the validity or enforceability
thereof in any other jurisdiction or the remaining provisions hereof in any
jurisdiction.
10.8 Governing Law.
Each Letter of Credit, Section 2.10 [Letter of Credit
Subfacility] and Exhibit 2.10 shall be subject to the Uniform Customs and
Practice for Documentary Credits (1993 Revision), International Chamber of
Commerce Publication No. 500, as the same may be revised or amended from time to
time, and to the extent not inconsistent therewith, the internal laws of the
Commonwealth of Pennsylvania without regard to its conflict of laws principles
and the balance of this Agreement shall be deemed to be a contract under the
Laws of the Commonwealth of Pennsylvania and for all purposes shall be governed
by and construed and enforced in accordance with the internal laws of the
Commonwealth of Pennsylvania without regard to its conflict of laws principles.
10.9 Prior Understanding.
This Agreement and the other Loan Documents supersede all
prior understandings and agreements (excluding the Agent's Letter, as described
in Exhibit 10), whether written or oral, between the parties hereto and thereto
relating to the transactions provided for herein and therein, including any
prior confidentiality agreements and commitments.
10.10 Duration; Survival.
All representations and warranties of the Borrowers
contained herein or made in connection herewith shall survive the making of
Loans and issuance of Letters of Credit and shall not be waived by the execution
and delivery of this Agreement, any investigation by the Agent or the Banks, the
making of Loans, issuance of Letters of Credit, or payment in full of the Loans.
All covenants and agreements of the Borrowers contained in Sections 7.1
[Affirmative Covenants], 7.2 [Negative Covenants] and 7.3 [Reporting
Requirements] and Exhibit 8.3 herein shall continue in full force and effect
from and after the date hereof so long as the Borrower may borrow or request
Letters of Credit hereunder and until termination of the Commitments and payment
in full of the Loans and expiration or termination of all Letters of Credit. All
covenants and agreements of the Borrower contained herein relating to the
payment of principal, interest, premiums, additional compensation or expenses
and indemnification, including those set forth in the Notes, Section 4
[Payments], Paragraphs 5 and 7 of Exhibit 10 [Reimbursement of Agent by
Borrower, Etc.; Reimbursement of Agent by Banks, Etc.] and 10.3 [Reimbursement
of Banks by Borrower; Etc.], shall survive payment in full of the Loans,
expiration or termination of the Letters of Credit and termination of the
Commitments.
<PAGE>
10.11 Successors and Assigns.
(i) This Agreement shall be binding upon and shall
inure to the benefit of the Banks, the Agent, the Borrowers and their respective
successors and assigns, except that none of the Borrowers may assign or transfer
any of its rights and Obligations hereunder or any interest herein. Each Bank
may, at its own cost, make assignments of or sell participations in all or any
part of its Commitments and the Loans made by it to one or more banks or other
entities, subject to the consent of the Borrowers and the Agent with respect to
any assignee, such consent not to be unreasonably withheld, provided that (1) no
consent of the Borrower shall be required (A) if an Event of Default exists and
is continuing, or (B) in the case of an assignment by a Bank to an Affiliate of
such Bank, and (2) any assignment by a Bank to a Person other than an Affiliate
of such Bank may not be made in amounts less than the lesser of $2,500,000 or
the amount of the assigning Bank's Commitment. In the case of an assignment,
upon receipt by the Agent of the Assignment and Assumption Agreement, the
assignee shall have, to the extent of such assignment (unless otherwise provided
therein), the same rights, benefits and obligations as it would have if it had
been a signatory Bank hereunder, the Commitments shall be adjusted accordingly,
and upon surrender of any Note subject to such assignment, the Borrowers shall
execute and deliver a new Note to the assignee in an amount equal to the amount
of the Revolving Credit Commitment assumed by it and a new Revolving Credit Note
to the assigning Bank in an amount equal to the Revolving Credit Commitment
retained by it hereunder. Any Bank which assigns any or all of its Commitment or
Loans to a Person other than an Affiliate of such Bank shall pay to the Agent a
service fee in the amount of $3,500 for each assignment. In the case of a
participation, the participant shall only have the rights specified in Section
8.2.3 [Set-off] (the participant's rights against such Bank in respect of such
participation to be those set forth in the agreement executed by such Bank in
favor of the participant relating thereto and not to include any voting rights
except with respect to changes of the type referenced in Sections 10.1.1
[Increase of Commitment, Etc.], 10.1.2 [Extension of Payment, Etc.], or 10.1.3
[Release of Collateral or Guarantor]), all of such Bank's obligations under this
Agreement or any other Loan Document shall remain unchanged, and all amounts
payable by any Borrower hereunder or thereunder shall be determined as if such
Bank had not sold such participation.
(ii) Any assignee or participant which is not
incorporated under the Laws of the United States of America or a state thereof
shall deliver to the Borrowers and the Agent the form of certificate described
in Section 10.17 [Tax Withholding Clause] relating to federal income tax
withholding. Each Bank may furnish any publicly available information concerning
any Borrower or its Subsidiaries and any other information concerning any
Borrower or its Subsidiaries in the possession of such Bank from time to time to
assignees and participants (including prospective assignees or participants),
provided that such assignees and participants agree to be bound by the
provisions of Section 10.12 [Confidentiality].
(iii) Notwithstanding any other provision in this
Agreement, any Bank may at any time pledge or grant a security interest in all
or any portion of its rights under this Agreement, its Note and the other Loan
Documents to any Federal Reserve Bank in accordance with Regulation A of the FRB
or U.S. Treasury Regulation 31 CFR Section 203.14 without notice to or consent
of the Borrower or the Agent. No such pledge or grant of a security interest
shall release the Transferor Bank of its obligations hereunder or under any
other Loan Document.
<PAGE>
10.12 Confidentiality.
10.12.1 General.
The Agent and the Banks each agree to keep confidential
all information obtained from any Borrower or its Subsidiaries which is
nonpublic and confidential or proprietary in nature (including any information
the Borrowers specifically designate as confidential), except as provided below,
and to use such information only in connection with their respective capacities
under this Agreement and for the purposes contemplated hereby. The Agent and the
Banks shall be permitted to disclose such information (i) to outside legal
counsel, accountants and other professional advisors who need to know such
information in connection with the administration and enforcement of this
Agreement, subject to agreement of such Persons to maintain the confidentiality,
(ii) to assignees and participants as contemplated by Section 10.11, (iii) to
the extent requested by any bank regulatory authority or, as otherwise required
by applicable Law or by any subpoena or similar legal process, or in connection
with any investigation or proceeding arising out of the transactions
contemplated by this Agreement, (iv) if it becomes publicly available other than
as a result of a breach of this Agreement or becomes available from a source not
known to be subject to confidentiality restrictions, or (v) if the Borrowers
shall have consented to such disclosure.
10.12.2 Sharing Information With Affiliates of the Banks.
Each Borrower acknowledges that from time to time
financial advisory, investment banking and other services may be offered or
provided to the Borrowers or one or more of its Affiliates (in connection with
this Agreement or otherwise) by any Bank or by one or more Subsidiaries or
Affiliates of such Bank and each of the Borrowers hereby authorizes each Bank to
share any information delivered to such Bank by such Borrower and its
Subsidiaries pursuant to this Agreement on a need-to-know basis, or in
connection with the decision of such Bank to enter into this Agreement, to any
such Subsidiary or Affiliate of such Bank, it being understood that any such
Subsidiary or Affiliate of any Bank receiving such information shall be bound by
the provisions of Section 10.12.1 as if it were a Bank hereunder; provided,
however, that Agent shall not share any such information without the prior
written consent of the Parent. Such authorization shall survive the repayment of
the Loans and other Obligations and the termination of the Commitments.
10.13 Counterparts.
This Agreement may be executed by different parties hereto on
any number of separate counterparts, each of which, when so executed and
delivered, shall be an original, and all such counterparts shall together
constitute one and the same instrument.
10.14 Agent's or Bank's Consent.
Whenever the Agent's or any Bank's consent is required to be
obtained under this Agreement or any of the other Loan Documents as a condition
to any action, inaction, condition or event, the Agent and each Bank shall be
authorized to give or withhold such consent in its sole and absolute discretion
and to condition its consent upon the giving of additional collateral, the
payment of money or any other matter.
<PAGE>
10.15 Exceptions.
The representations, warranties and covenants contained herein
shall be independent of each other, and no exception to any representation,
warranty or covenant shall be deemed to be an exception to any other
representation, warranty or covenant contained herein unless expressly provided,
nor shall any such exceptions be deemed to permit any action or omission that
would be in contravention of applicable Law.
10.16 CONSENT TO FORUM; WAIVER OF JURY TRIAL.
EACH BORROWER HEREBY IRREVOCABLY CONSENTS TO THE NONEXCLUSIVE
JURISDICTION OF THE COURT OF COMMON PLEAS OF PHILADELPHIA COUNTY AND THE UNITED
STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA, AND WAIVES
PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT AND CONSENTS THAT ALL SUCH
SERVICE OF PROCESS BE MADE BY CERTIFIED OR REGISTERED MAIL DIRECTED TO SUCH
BORROWER AT THE ADDRESSES PROVIDED FOR IN SECTION 10.6 AND SERVICE SO MADE SHALL
BE DEEMED TO BE COMPLETED UPON ACTUAL RECEIPT THEREOF. EACH BORROWER WAIVES ANY
OBJECTION TO JURISDICTION AND VENUE OF ANY ACTION INSTITUTED AGAINST IT AS
PROVIDED HEREIN AND AGREES NOT TO ASSERT ANY DEFENSE BASED ON LACK OF
JURISDICTION OR VENUE. EACH BORROWER, THE AGENT AND THE BANKS HEREBY WAIVE TRIAL
BY JURY IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT
OF OR RELATED TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE COLLATERAL TO
THE FULL EXTENT PERMITTED BY LAW.
10.17 Tax Withholding Clause.
Each Bank or assignee or participant of a Bank that is not
incorporated under the Laws of the United States of America or a state thereof
agrees that it will deliver to each of the Borrower and the Agent two (2) duly
completed copies of the following: (i) Internal Revenue Service Form W-9, 4224
or 1001, or other applicable form prescribed by the Internal Revenue Service,
certifying that such Bank, assignee or participant is entitled to receive
payments under this Agreement and the other Loan Documents without deduction or
withholding of any United States federal income taxes, or is subject to such tax
at a reduced rate under an applicable tax treaty, or (ii) Internal Revenue
Service Form W-8 or other applicable form or a certificate of such Bank,
assignee or participant indicating that no such exemption or reduced rate is
allowable with respect to such payments. Each Bank, assignee or participant
required to deliver to the Borrower and the Agent a form or certificate pursuant
to the preceding sentence shall deliver such form or certificate as follows: (A)
each Bank which is a party hereto on the Closing Date shall deliver such form or
certificate at least five (5) Business Days prior to the first date on which any
interest or fees are payable by the Borrower hereunder for the account of such
Bank; (B) each assignee or participant shall deliver such form or certificate at
least five (5) Business Days before the effective date of such assignment or
participation (unless the Agent in its sole discretion shall permit such
assignee or participant to deliver such form or certificate less than five (5)
Business Days before such date in which case it shall be due on the date
specified by the Agent). Each Bank, assignee or participant which so delivers a
Form W-8, W-9, 4224 or 1001 further undertakes to deliver to each of the
Borrower and the Agent two (2) additional copies of such form (or a successor
<PAGE>
form) on or before the date that such form expires or becomes obsolete or after
the occurrence of any event requiring a change in the most recent form so
delivered by it, and such amendments thereto or extensions or renewals thereof
as may be reasonably requested by the Borrower or the Agent, either certifying
that such Bank, assignee or participant is entitled to receive payments under
this Agreement and the other Loan Documents without deduction or withholding of
any United States federal income taxes or is subject to such tax at a reduced
rate under an applicable tax treaty or stating that no such exemption or reduced
rate is allowable. The Agent shall be entitled to withhold United States federal
income taxes at the full withholding rate unless the Bank, assignee or
participant establishes an exemption or that it is subject to a reduced rate as
established pursuant to the above provisions.
10.18 Joinder of Borrowers.
Except for the Any Subsidiary of any Borrower which is
required to join this Agreement as a Borrower pursuant to Section 7.2.9
[Subsidiaries, Partnerships and Joint Ventures] shall execute and deliver to the
Agent (i) a Joinder in substantially the form attached hereto as Exhibit 1.1(J)
pursuant to which it shall join as a Borrower each of the documents to which the
Borrowers are parties; (ii) documents in the forms described in Section 6.1
[First Loans] modified as appropriate to relate to such Subsidiary; and (iii)
documents necessary to grant and perfect Prior Security Interests to the Agent
for the benefit of the Banks in all Collateral held by such Subsidiary. Except
with respect to the Non-US Subsidiaries, the Borrowers shall deliver such
Joinder and related documents to the Agent within five (5) Business Days after
the date of the filing of such Subsidiary's articles of incorporation if the
Subsidiary is a newly-formed corporation, the date of the filing of its
certificate of limited partnership if it is a newly-formed limited partnership
or the date of its organization if it is a newly-formed entity other than a
limited partnership or corporation or the date of its acquisition by any
Borrower.
[SIGNATURES APPEAR ON THE NEXT PAGE.]
<PAGE>
IN WITNESS WHEREOF, the parties hereto, by their officers thereunto
duly authorized, have executed this Agreement as of the day and year first above
written.
ATTEST: U.S. INTERACTIVE, INC.
_________________________________ By:_________________________________
Title:______________________________
[Seal]
ATTEST: U.S. INTERACTIVE CORP.
(DELAWARE)
_________________________________ By:_________________________________
Title:______________________________
[Seal]
PNC BANK, NATIONAL
ASSOCIATION, as a Bank and as Agent
By:_________________________________
Title:______________________________
PROGRESS BANK, as a Bank
By:_________________________________
Title:______________________________
<PAGE>
SCHEDULE 1.1(B)
COMMITMENTS OF BANKS AND ADDRESSES FOR NOTICES
Page 1 of 2
Part 1 - Commitments of Banks and Addresses for Notices to Banks
Amount of
Commitment for
Revolving Credit Ratable
Bank Loans Share
---- ---------------- -------
Name: PNC Bank,
National Association
Address: 1600 Market Street
Philadelphia, PA 19103
Attention: Joseph G. Meterchick
Telephone: (215) 585-4744 $9,500,000 63.33%
Telecopy: (215) 585-6987
Name: Progress Bank
Address: Four Sentry Parkway
Blue Bell, PA 19422
Attention: Liz Lambert
Telephone (610) 941-2202
Telecopy: (610) 941-4827 $5,500,000 36.67%
------
Total $15,000,000 100%
<PAGE>
SCHEDULE 1.1(B)
COMMITMENTS OF BANKS AND ADDRESSES FOR NOTICES
Page 2 of 2
AGENT:
Name: PNC Bank, National Association
Address: 1600 Market Street
Philadelphia, PA 19103
Attention: Douglas O. Winters
Telephone: (215) 585-6966
Telecopy: (215) 585-7669
e-mail: [email protected]
Part 2 - Addresses for Notices to Borrower:
BORROWER AGENT:
Name: U.S. Interactive, Inc.
Address: 2012 Renaissance Boulevard
King of Prussia, PA 19406
Attention: Philip L. Calamia
Telephone: (610) 382-8808
Telecopy: ( ) -
e-mail: [email protected]
With a copy to:
Name: Dilworth Paxson, LLP
Address: 3200 Mellon Bank Center
1735 Market Street
Philadelphia, PA 19103
Attention: Michael D. Ecker, Esquire
Telephone: (215) 575-7180
Telecopy: (215) 575-7200
e-mail: [email protected]
Name: U.S. Interactive Corp. (Delaware)
Name: U.S. Interactive, Inc.
Address: 2012 Renaissance Boulevard
King of Prussia, PA 19406
<PAGE>
Attention: Mr. Philip L. Calamia
Telephone: (610) 382-8808
Telecopy: ( ) -
e-mail: [email protected]
With a copy to:
Name: Dilworth Paxson, LLP
Address: 3200 Mellon Bank Center
1735 Market Street
Philadelphia, PA 19103
Attention: Michael D. Ecker, Esquire
Telephone: (215) 575-7180
Telecopy: (215) 575-7200
e-mail: [email protected]
<PAGE>
EXHIBIT 1.1(EA)
DEFINITION OF ELIGIBLE ACCOUNTS
Qualified Accounts - An account arising in the ordinary course of a
Borrower's business from the sale of goods or rendering of services, provided
that no Account shall be a Qualified Account if:
(i) it arises out of a sale made by a Borrower to a Subsidiary,
any Affiliate of the Borrower or to a Person controlled by an
Affiliate of a Borrower; or
(ii) it is due or unpaid more than 90 days after the original
invoice date; or
(iii) the Account is either: (x) owed by an Account Debtor to the
extent its Accounts exceed 15% of all Qualified Accounts,
measured by Dollar amount or (y) owned by an Account Debtor,
fifty percent (50%) of whose Accounts are delinquent more than
ninety (90) days and are in excess of $200,000; or
(iv) any covenant, representation or warranty contained in any
agreement with respect to such Account has been breached; or
(v) the Account Debtor is also a Borrower's creditor, vendor or
supplier; or
(vi) the Account Debtor has commenced a voluntary case under the
federal bankruptcy laws, as now constituted or hereafter
amended, or made an assignment for the benefit of creditors,
or a decree or order for relief has been entered by a court
having jurisdiction over the Account Debtor in an involuntary
case under the federal bankruptcy laws, as now constituted or
hereafter amended or any other petition or other application
for relief under the federal bankruptcy laws has been filed
against the Account Debtor, or if the Account Debtor has
failed, suspended business, ceased to be Solvent, or consented
to or suffered the appointment of a receiver, trustee,
liquidator or custodian to be appointed for it or for all or a
significant portion of its assets or affairs, or if there is
any reason known to any Borrower that such Account is not
readily collectible; or
(vii) it arises from a sale to an Account Debtor outside the United
States; or
(viii) it arises from a sale to an Account Debtor on a bill-and-hold,
guaranteed sale, sale-or-return, sale-on-approval, consignment
or any other conditional, repurchase or return basis; or
(ix) the Account Debtor is the United States of America or any
department, agency or instrumentality thereof, unless the
applicable Borrower assigns its right to payment of such
Account to Lender, for the benefit of Lender, in a manner
<PAGE>
satisfactory to Leader, so as to comply with the Assignment of
Claims Act of 1940 (31 U.S.C.ss.203 et seq., as amended); or
(x) the Account is not at all times subject to Leader's duly
perfected, first priority security interest or is subject to a
Lien other than a Permitted Lien; or
(xi) the goods giving rise to such Account have not been delivered
to and accepted by the Account Debtor or the services giving
rise to such Account have not been performed by the applicable
Borrower and accepted by the Account Debtor or the Account
otherwise does not represent a final sale; or
(xii) the Account is evidenced by chattel paper or an instrument of
any kind, or has been reduced to judgment; or
(xiii) the applicable Borrower has made any agreement with the
Account Debtor for, or the Account Debtor has otherwise
claimed or has a right to, any offset against, deduction
therefrom or reduction thereto, except for discounts or
allowances which are made in the ordinary course of business
for prompt payment and which discounts or allowances are
reflected in the calculation of the face value of each invoice
or any statement (or attachment thereto) related to such
Account; or
(xiv) it represents finance charges or interest, to such extent; or
(xv) it represents a retainer (including, but not limited to,
project retainages); or
(xvi) it arises out of a sale made by a Borrower to an employee,
officer or director of a Borrower or any immediate family
member thereof; or
(xvii) it represents that portion of any commissions payable to a
Borrower in excess of $20,000.00 at any one time due to all
Borrowers in the aggregate; or
(xviii) it is based on an invoice without a definite due date or is
based on a pre-billed invoice; or
(xix) it is subject to litigation or arbitration; or
(xx) it arises from a sale to an Account Debtor on a
cash-on-delivery or sight draft basis; or
(xxi) the Account is otherwise deemed unacceptable by Lender in its
reasonable discretion.
In computing the amount of Qualified Accounts, all credit memos issued by
each Borrower shall be deducted from such amount.
<PAGE>
EXHIBIT 2.10
LETTER OF CREDIT PROVISIONS
1. Issuance of Letters of Credit.
Borrower may request the issuance of a letter of credit (each,
along with the letters of credit listed on Schedule 2.10 hereof, a "Letter of
Credit") on behalf of itself by delivering to the Agent a completed application
and agreement for letters of credit in such form as the Agent may specify from
time to time by no later than 10:00 a.m., Philadelphia time, at least two (2)
Business Days, or such shorter period as may be agreed to by the Agent, in
advance of the proposed date of issuance. The letters of credit issued by
Progress Bank under the Existing Facility in the aggregate face amount of
$752,805.95 shall be "Letters of Credit." Each Letter of Credit shall be either
a Standby Letter of Credit or a Commercial Letter of Credit. Subject to the
terms and conditions hereof and in reliance on the agreements of the other Banks
set forth in this Exhibit 2.10, the Agent will issue a Letter of Credit provided
that each Letter of Credit shall (A) have a maximum term ending of twelve (12)
months from the date of issuance, and (B) in no event expire later than ten (10)
Business Days prior to the Expiration Date and providing that in no event shall
(i) the Letters of Credit Outstanding exceed, at any one time, $2,000,000 (the
"Letter of Credit Sublimit") or (ii) the Revolving Facility Usage exceed, at any
one time, the Revolving Credit Commitments. To the extent any Letter of Credit
is scheduled to expire on or after the Expiration Date, such Letter of Credit
shall be cash collateralized in a manner satisfactory to the Agent in an amount
equal to 105% of the face amount of each such Letter of Credit.
2. Letter of Credit Fees.
The Borrower shall pay to the Agent for the ratable account of
the Banks a fee (the "Letter of Credit Fee") equal to 1.50% per annum (computed
on the basis of a year of 360 days and actual days elapsed), which fee shall be
computed on the daily average Letters of Credit Outstanding and shall be payable
quarterly in arrears commencing with the first Business Day of each April, July,
October and January following issuance of each Letter of Credit and on the
Expiration Date. The Borrower shall also pay to the Agent for the Agent's sole
account the Agent's then in effect customary fees and administrative expenses
payable with respect to the Letters of Credit as the Agent may generally charge
or incur from time to time in connection with the issuance, maintenance,
modification (if any), assignment or transfer (if any), negotiation, and
administration of Letters of Credit.
3. Disbursements, Reimbursement.
(a) Immediately upon the Issuance of each Letter of
Credit, each Bank shall be deemed to, and hereby irrevocably and unconditionally
agrees to, purchase from the Agent a participation in such Letter of Credit and
each drawing thereunder in an amount equal to such Bank's Ratable Share of the
maximum amount available to be drawn under such Letter of Credit and the amount
of such drawing, respectively.
<PAGE>
(b) In the event of any request for a drawing under a
Letter of Credit by the beneficiary or transferee thereof, the Agent will
promptly notify the Borrower. Provided that it shall have received such notice,
the Borrower shall reimburse (such obligation to reimburse the Agent shall
sometimes be referred to as a "Reimbursement Obligation") the Agent prior to
12:00 noon, Philadelphia time on each date that an amount is paid by the Agent
under any Letter of Credit (each such date, an "Drawing Date") in an amount
equal to the amount so paid by the Agent. In the event the Borrower fails to
reimburse the Agent for the full amount of any drawing under any Letter of
Credit by 12:00 noon, Philadelphia time, on the Drawing Date, the Agent will
promptly notify each Bank thereof, and the Borrower shall be deemed to have
requested that Revolving Credit Loans be made by the Banks to be disbursed on
the Drawing Date under such Letter of Credit, subject to the amount of the
unutilized portion of the Revolving Credit Commitment and subject to the
conditions set forth in Section 6.2 [Each Additional Loan] other than any notice
requirements. Any notice given by the Agent pursuant to this Paragraph 3 may be
oral if immediately confirmed in writing; provided that the lack of such an
immediate confirmation shall not affect the conclusiveness or binding effect of
such notice. Notwithstanding anything contained herein to the contrary, an Event
of Default shall not have occurred if a Reimbursement Obligation which is not
paid is converted into a Revolving Credit Loan subject to the conditions set
forth in this Agreement.
(c) Each Bank shall upon any notice pursuant to
Paragraph 3(b) of this Exhibit 2.10 make available to the Agent an amount in
immediately available funds equal to its Ratable Share of the amount of the
drawing, whereupon the participating Banks shall (subject to Paragraph 2(d) of
this Exhibit 2.10) each be deemed to have made a Revolving Credit Loan to the
Borrower in that amount. If any Bank so notified fails to make available to the
Agent for the account of the Agent the amount of such Bank's Ratable Share of
such amount by no later than 2:00 p.m., Philadelphia time on the Drawing Date,
then interest shall accrue on such Bank's obligation to make such payment, from
the Drawing Date to the date on which such Bank makes such payment (i) at a rate
per annum equal to the Federal Funds Effective Rate during the first three days
following the Drawing Date and (ii) at a rate per annum equal to the rate
applicable to Loans on and after the fourth day following the Drawing Date. The
Agent will promptly give notice of the occurrence of the Drawing Date, but
failure of the Agent to give any such notice on the Drawing Date or in
sufficient time to enable any Bank to effect such payment on such date shall not
relieve such Bank from its obligation under this Paragraph 3(c).
(d) With respect to any unreimbursed drawing that is
not converted into Revolving Credit Loans to the Borrower in whole or in part as
contemplated by Paragraph 3(b) of this Exhibit 2.10, because of the Borrower's
failure to satisfy the conditions set forth in Section 6.2 [Each Additional
Loan] other than any notice requirements or for any other reason, the Borrower
shall be deemed to have incurred from the Agent a Letter of Credit Borrowing in
the amount of such drawing. Such Letter of Credit Borrowing shall be due and
payable on demand (together with interest) and shall bear interest at the rate
per annum applicable to the Revolving Credit Loans. Each Bank's payment to the
Agent pursuant to Paragraph 3(c) shall be deemed to be a payment in respect of
its participation in such Letter of Credit Borrowing and shall constitute a
Participation Advance from such Bank in satisfaction of its participation
obligation under this Paragraph 3.
<PAGE>
4. Repayment of Participation Advances.
(a) Upon (and only upon) receipt by the Agent for its
account of immediately available funds from the Borrower (i) in reimbursement of
any payment made by the Agent under the Letter of Credit with respect to which
any Bank has made a Participation Advance to the Agent, or (ii) in payment of
interest on such a payment made by the Agent under such a Letter of Credit, the
Agent will pay to each Bank, in the same funds as those received by the Agent,
the amount of such Bank's Ratable Share of such funds, except the Agent shall
retain the amount of the Ratable Share of such funds of any Bank that did not
make a Participation Advance in respect of such payment by Agent.
(b) If the Agent is required at any time to return to
any Borrower, or to a trustee, receiver, liquidator, custodian, or any official
in any Insolvency Proceeding, any portion of the payments made by any Borrower
to the Agent pursuant to Paragraph 4(a) in reimbursement of a payment made under
the Letter of Credit or interest or fee thereon, each Bank shall, on demand of
the Agent, forthwith return to the Agent the amount of its Ratable Share of any
amounts so returned by the Agent plus interest thereon from the date such demand
is made to the date such amounts are returned by such Bank to the Agent, at a
rate per annum equal to the Federal Funds Effective Rate in effect from time to
time.
5. Documentation.
Each Borrower agrees to be bound by the terms of the Agent's
application and agreement for letters of credit and the Agent's written
regulations and customary practices relating to letters of credit, though such
interpretation may be different from the such Borrower's own. In the event of a
conflict between such application or agreement and this Agreement, this
Agreement shall govern. It is understood and agreed that, except in the case of
gross negligence or willful misconduct, the Agent shall not be liable for any
error, negligence and/or mistakes, whether of omission or commission, in
following any Borrower's instructions or those contained in the Letters of
Credit or any modifications, amendments or supplements thereto.
6. Determinations to Honor Drawing Requests.
In determining whether to honor any request for drawing under
any Letter of Credit by the beneficiary thereof, the Agent shall be responsible
only to determine that the documents and certificates required to be delivered
under such Letter of Credit have been delivered and that they comply on their
face with the requirements of such Letter of Credit.
<PAGE>
7. Nature of Participation and Reimbursement Obligations.
Each Bank's obligation in accordance with this Agreement to
make the Revolving Credit Loans or Participation Advances, as contemplated by
Paragraph 3 of this Exhibit 2.10, as a result of a drawing under a Letter of
Credit, and the Obligations of the Borrower to reimburse the Agent upon a draw
under a Letter of Credit, shall be absolute, unconditional and irrevocable, and
shall be performed strictly in accordance with the terms of this Exhibit 2.10
under all circumstances, including without limitation, the following
circumstances: (i) any set-off, counterclaim, recoupment, defense or other right
which such Bank may have against the Agent, the Borrower or any other Person for
any reason whatsoever; the failure of any Borrower or any other Person to
comply, in connection with a Letter of Credit Borrowing, with the conditions set
forth in Section 2.1 [Revolving Credit Commitments], 2.5 [Revolving Credit Loan
Requests], 2.6 [Making Revolving Credit Loans] or 6.2 [Each Additional Loan] or
as otherwise set forth in this Agreement for the making of a Revolving Credit
Loan, it being acknowledged that such conditions are not required for the making
of a Letter of Credit Borrowing and the obligation of the Banks to make
Participation Advances under Paragraph 3 of this Exhibit 2.10; (ii) any lack of
validity or enforceability of any Letter of Credit; the existence of any claim,
set-off, defense or other right which any Borrower or any Bank may have at any
time against a beneficiary or any transferee of any Letter of Credit (or any
Persons for whom any such transferee may be acting), the Agent or any Bank or
any other Person or, whether in connection with this Agreement, the transactions
contemplated herein or any unrelated transaction; and (iii) any draft, demand,
certificate or other document presented under any Letter of Credit proving to be
forged, fraudulent, invalid or insufficient in any respect or any statement
therein being untrue or inaccurate in any respect even if the Agent has been
notified thereof.
8. Indemnity.
In addition to amounts payable as provided in Paragraph 5 of Exhibit 10
[Reimbursement of Agent by Borrower, Etc.], the Borrower hereby agrees to
protect, indemnify, pay and save harmless the Agent from and against any and all
claims, demands, liabilities, damages, losses, costs, charges and expenses
(including reasonable fees, expenses and disbursements of counsel and allocated
costs of internal counsel) which the Agent may incur or be subject to as a
consequence, direct or indirect, of (i) the issuance of any Letter of Credit,
other than as a result of (A) the gross negligence or willful misconduct of the
Agent as determined by a final judgment of a court of competent jurisdiction or
(B) subject to the following clause (ii), the wrongful dishonor by the Agent of
a proper demand for payment made under any Letter of Credit, or (ii) the failure
of the Agent to honor a drawing under any such Letter of Credit as a result of
any act or omission, whether rightful or wrongful, of any present or future de
jure or de facto government or governmental authority (all such acts or
omissions herein called "Governmental Acts").
<PAGE>
9. Liability for Acts and Omissions.
As between any Borrower and the Agent, such Borrower assumes all risks of the
acts and omissions of, or misuse of the Letters of Credit by, the respective
beneficiaries of such Letters of Credit. In furtherance and not in limitation of
the foregoing, the Agent shall not be responsible for: (i) the form, validity,
sufficiency, accuracy, genuineness or legal effect of any document submitted by
any party in connection with the application for an issuance of any such Letter
of Credit, even if it should in fact prove to be in any or all respects invalid,
insufficient, inaccurate, fraudulent or forged (even if the Agent shall have
been notified thereof); (ii) the validity or sufficiency of any instrument
transferring or assigning or purporting to transfer or assign any such Letter of
Credit or the rights or benefits thereunder or proceeds thereof, in whole or in
part, which may prove to be invalid or ineffective for any reason; (iii) the
failure of the beneficiary of any such Letter of Credit, or any other party to
which such Letter of Credit may be transferred, to comply fully with any
conditions required in order to draw upon such Letter of Credit or any other
claim of any Borrower against any beneficiary of such Letter of Credit, or any
such transferee, or any dispute between or among any Borrower and any
beneficiary of any Letter of Credit or any such transferee; (iv) errors,
omissions, interruptions or delays in transmission or delivery of any messages,
by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher;
(v) errors in interpretation of technical terms; (vi) any loss or delay in the
transmission or otherwise of any document required in order to make a drawing
under any such Letter of Credit or of the proceeds thereof; (vii) the
misapplication by the beneficiary of any such Letter of Credit of the proceeds
of any drawing under such Letter of Credit; or (viii) any consequences arising
from causes beyond the control of the Agent, including any Governmental Acts,
and none of the above shall affect or impair, or prevent the vesting of, any of
the Agent's rights or powers hereunder. Nothing in the preceding sentence shall
relieve the Agent from liability for the Agent's gross negligence or willful
misconduct in connection with actions or omissions described in such clauses (i)
through (viii) of such sentence.
<PAGE>
EXHIBIT 7.3
REPORTING REQUIREMENTS
1. Quarterly Financial Statements.
As soon as available and in any event within forty-five (45) calendar
days after the end of each of the first three fiscal quarters in each fiscal
year, financial statements of the Parent, consisting of a consolidated and
consolidating balance sheet as of the end of such fiscal quarter and related
consolidated and consolidating statements of income and of stockholders' equity
and consolidated cash flows for the fiscal quarter then ended and the fiscal
year through that date, all in reasonable detail and certified (subject to
normal year-end audit adjustments) by the Chief Executive Officer, President or
Chief Financial Officer of Parent as having been prepared in accordance with
GAAP, consistently applied, and setting forth in comparative form the respective
financial statements for the corresponding date and period in the previous
fiscal year.
2. Annual Financial Statements.
As soon as available and in any event within ninety (90) days after the
end of each fiscal year of Parent, financial statements of Parent consisting of
a consolidated and consolidating balance sheet as of the end of such fiscal
year, and related consolidated and consolidating statements of income and of
stockholders' equity and consolidated cash flows for the fiscal year then ended,
all in reasonable detail and setting forth in comparative form the financial
statements as of the end of and for the preceding fiscal year, and certified by
independent certified public accountants of nationally recognized standing
satisfactory to the Agent. The certificate or report of accountants shall be
free of qualifications (other than any consistency qualification that may result
from a change in the method used to prepare the financial statements as to which
such accountants concur) and shall not indicate the occurrence or existence of
any event, condition or contingency which would materially impair the prospect
of payment or performance of any covenant, agreement or duty of any Borrower
under any of the Loan Documents. The Borrowers shall deliver with such financial
statements and certification by their accountants a letter of such accountants
to the Agent and the Banks substantially (i) to the effect that, based upon
their ordinary and customary examination of the affairs of the Borrowers,
performed in connection with the preparation of such consolidated financial
statements, and in accordance with generally accepted auditing standards, they
are not aware of the existence of any condition or event which constitutes an
Event of Default or Potential Default or, if they are aware of such condition or
event, stating the nature thereof and confirming the Borrowers' calculations
with respect to the certificate to be delivered pursuant to paragraph 4 of this
Exhibit 7.3 with respect to such financial statements and (ii) to the effect
that the Banks are intended to rely upon such accountant's certification of the
annual financial statements and that such accountants authorize the Borrowers to
deliver such reports and certificate to the Banks on such accountants' behalf.
<PAGE>
3. Certificate of the Borrower.
Concurrently with the financial statements of the Borrowers furnished
to the Agent and to the Banks pursuant to paragraphs 1 and 2 of this Exhibit
7.3, a certificate of Parent signed by the Chief Executive Officer, President or
Chief Financial Officer of Parent, in the form of Exhibit 7.3.4, to the effect
that, except as described pursuant to paragraph 4 of this Exhibit 7.3, (i) the
representations and warranties of the Borrowers contained in Section 5.1 and in
the other Loan Documents are true on and as of the date of such certificate with
the same effect as though such representations and warranties had been made on
and as of such date (except representations and warranties which expressly
relate solely to an earlier date or time) and the Borrowers have performed and
complied with all covenants and conditions hereof, (ii) no Event of Default or
Potential Default exists and is continuing on the date of such certificate and
(iii) containing calculations in sufficient detail to demonstrate compliance as
of the date of such financial statements with all financial covenants contained
in Sections 7.2.15, 7.2.16 and 7.2.17.
4. Notice of Default.
Promptly after any officer of any Borrower has learned of the
occurrence of an Event of Default or Potential Default, a certificate signed by
the Chief Executive Officer, President or Chief Financial Officer of such
Borrower setting forth the details of such Event of Default or Potential Default
and the action which the such Borrower proposes to take with respect thereto.
5. Notice of Litigation.
Promptly after the commencement thereof, notice of all actions, suits,
proceedings or investigations before or by any Official Body or any other Person
against any Borrower or Subsidiary of any Borrower which relate to the
Collateral, involve a claim or series of claims in excess of $1,000,000 or which
if adversely determined would result in a Material Adverse Change.
6. Certain Events.
Written notice to the Agent:
(a) at least thirty (30) calendar days prior thereto, with
respect to any proposed sale or transfer of assets described in Section
7.2.7(iv) or 7.2.7(v).
(b) within the time limits set forth in Section 7.2.14.
[Changes in Organizational Documents], any amendment to the organizational
documents of any Borrower;
(c) at least thirty (30) calendar days prior thereto, with
respect to any change in any Borrower's locations from the locations set forth
in Schedule A to the Security Agreement; and
(d) on the tenth (10th) calendar day of every month, a
completed Borrowing Base Certificate in respect of the month most recently
ended.
<PAGE>
7. Budgets, Forecasts, Other Reports and Information.
Promptly upon their becoming available to the Borrowers:
(a) the annual budget and any forecasts or projections of
Parent and its Subsidiaries, to be supplied not later than thirty (30) days
prior to commencement of the fiscal year to which any of the foregoing may be
applicable,
(b) any reports including management letters submitted to
Parent by independent accountants in connection with any annual, interim or
special audit,
(c) any reports, notices or proxy statements generally
distributed by Parent to its stockholders on a date no later than the date
supplied to such stockholders,
(d) regular or periodic reports, including Forms 10-K, 10-Q
and 8-K, registration statements and prospectuses, filed by Parent with the
Securities and Exchange Commission,
(e) a copy of any order in any proceeding to which any
Borrower is a party issued by any Official Body, and
(f) such other reports and information as any of the Banks may
from time to time reasonably request. The Borrowers shall also notify the Banks
promptly upon becoming aware of the enactment or adoption of any Law which would
result in a Material Adverse Change.
8. Notices Regarding Plans and Benefit Arrangements; Certain Events.
Promptly upon becoming aware of the occurrence thereof, notice
(including the nature of the event and, when known, any action taken or
threatened by the Internal Revenue Service or the PBGC with respect thereto) of:
(a) any Reportable Event with respect to any Borrower or any
other member of the ERISA Group (regardless of whether the obligation to report
said Reportable Event to the PBGC has been waived),
(b) any Prohibited Transaction which could subject any
Borrower or any other member of the ERISA Group to a civil penalty assessed
pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the
Internal Revenue Code in connection with any Plan, any Benefit Arrangement or
any trust created thereunder,
(c) any assertion of material withdrawal liability with
respect to any Multiemployer Plan,
(d) any partial or complete withdrawal from a Multiemployer
Plan by any Borrower or any other member of the ERISA Group under Title IV of
ERISA (or assertion thereof), where such withdrawal is likely to result in
material withdrawal liability,
<PAGE>
(e) any cessation of operations (by any Borrower or any other
member of the ERISA Group) at a facility in the circumstances described in
Section 4062(e) of ERISA,
(f) withdrawal by any Borrower or any other member of the
ERISA Group from a Multiple Employer Plan,
(g) a failure by any Borrower or any other member of the ERISA
Group to make a payment to a Plan required to avoid imposition of a Lien under
Section 302(f) of ERISA,
(h) the adoption of an amendment to a Plan requiring the
provision of security to such Plan pursuant to Section 307 of ERISA, or
(i) any change in the actuarial assumptions or funding methods
used for any Plan, where the effect of such change is to materially increase or
materially reduce the unfunded benefit liability or obligation to make periodic
contributions.
9. Notices of Involuntary Termination and Annual Reports
Promptly after receipt thereof, copies of (a) all notices received by
any Borrower or any other member of the ERISA Group of the PBGC's intent to
terminate any Plan administered or maintained by any Borrower or any member of
the ERISA Group, or to have a trustee appointed to administer any such Plan; and
(b) at the request of the Agent or any Bank each annual report (IRS Form 5500
series) and all accompanying schedules, the most recent actuarial reports, the
most recent financial information concerning the financial status of each Plan
administered or maintained by the Borrower or any other member of the ERISA
Group, and schedules showing the amounts contributed to each such Plan by or on
behalf of any Borrower or any other member of the ERISA Group in which any of
their personnel participate or from which such personnel may derive a benefit,
and each Schedule B (Actuarial Information) to the annual report filed by any
Borrower or any other member of the ERISA Group with the Internal Revenue
Service with respect to each such Plan.
10. Notice of Voluntary Termination
Promptly upon the filing thereof, copies of any Form 5310, or any
successor or equivalent form to Form 5310, filed with the PBGC in connection
with the termination of any Plan.
<PAGE>
EXHIBIT 10
AGENT PROVISIONS
1. Appointment.
Each Bank hereby irrevocably designates, appoints and authorizes PNC Bank
to act as Agent for such Bank under this Agreement and to execute and deliver or
accept on behalf of each of the Banks the other Loan Documents. Each Bank hereby
irrevocably authorizes, and each holder of any Note by the acceptance of a Note
shall be deemed irrevocably to authorize, the Agent to take such action on its
behalf under the provisions of this Agreement and the other Loan Documents and
any other instruments and agreements referred to herein, and to exercise such
powers and to perform such duties hereunder as are specifically delegated to or
required of the Agent by the terms hereof, together with such powers as are
reasonably incidental thereto. PNC Bank agrees to act as the Agent on behalf of
the Banks to the extent provided in this Agreement.
2. Delegation of Duties.
The Agent may perform any of its duties hereunder by or through agents or
employees (provided such delegation does not constitute a relinquishment of its
duties as Agent) and, subject to Paragraphs 5 and 6 of this Exhibit 10, shall be
entitled to engage and pay for the advice or services of any attorneys,
accountants or other experts concerning all matters pertaining to its duties
hereunder and to rely upon any advice so obtained.
3. Nature of Duties; Independent Credit Investigation.
The Agent shall have no duties or responsibilities except those expressly
set forth in this Agreement and no implied covenants, functions,
responsibilities, duties, obligations, or liabilities shall be read into this
Agreement or otherwise exist. The duties of the Agent shall be mechanical and
administrative in nature; the Agent shall not have by reason of this Agreement a
fiduciary or trust relationship in respect of any Bank; and nothing in this
Agreement, expressed or implied, is intended to or shall be so construed as to
impose upon the Agent any obligations in respect of this Agreement except as
expressly set forth herein. Without limiting the generality of the foregoing,
the use of the term "agent" in this Agreement with reference to the Agent is not
intended to connote any fiduciary or other implied (or express) obligations
arising under agency doctrine of any applicable Law. Instead, such term is used
merely as a matter of market custom, and is intended to create or reflect only
an administrative relationship between independent contracting parties. Each
Bank expressly acknowledges (i) that the Agent has not made any representations
or warranties to it and that no act by the Agent hereafter taken, including any
review of the affairs of any of the Borrowers, shall be deemed to constitute any
representation or warranty by the Agent to any Bank; (ii) that it has made and
will continue to make, without reliance upon the Agent, its own independent
investigation of the financial condition and affairs and its own appraisal of
the creditworthiness of each of the Borrowers in connection with this Agreement
and the making and continuance of the Loans hereunder; and (iii) except as
expressly provided herein, that the Agent shall have no duty or responsibility,
either initially or on a continuing basis, to provide any Bank with any credit
or other information with respect thereto, whether coming into its possession
before the making of any Loan or at any time or times thereafter.
<PAGE>
4. Actions in Discretion of Agent; Instructions From the Banks.
The Agent agrees, upon the written request of the Required Banks, to take
or refrain from taking any action of the type specified as being within the
Agent's rights, powers or discretion herein, provided that the Agent shall not
be required to take any action which exposes the Agent to personal liability or
which is contrary to this Agreement or any other Loan Document or applicable
Law. In the absence of a request by the Required Banks, the Agent shall have
authority, in its sole discretion, to take or not to take any such action,
unless this Agreement specifically requires the consent of the Required Banks or
all of the Banks. Any action taken or failure to act pursuant to such
instructions or discretion shall be binding on the Banks, subject to Paragraph 6
of this Exhibit 10. Subject to the provisions of Paragraph 6, no Bank shall have
any right of action whatsoever against the Agent as a result of the Agent acting
or refraining from acting hereunder in accordance with the instructions of the
Required Banks, or in the absence of such instructions, in the absolute
discretion of the Agent.
5. Reimbursement and Indemnification of Agent by the Borrower.
The Borrower unconditionally agrees to pay or reimburse the Agent and hold
the Agent harmless against (a) liability for the payment of all reasonable
out-of-pocket costs, expenses and disbursements, including reasonable fees and
expenses of outside counsel, appraisers and environmental consultants, incurred
by the Agent (i) in connection with the development, negotiation, preparation,
printing, execution, administration, syndication, interpretation and performance
of this Agreement and the other Loan Documents, (ii) relating to any requested
amendments, waivers or consents pursuant to the provisions hereof, (iii) in
connection with the enforcement of this Agreement or any other Loan Document or
collection of amounts due hereunder or thereunder or the proof and allowability
of any claim arising under this Agreement or any other Loan Document, whether in
bankruptcy or receivership proceedings or otherwise, and (iv) in any workout or
restructuring or in connection with the protection, preservation, exercise or
enforcement of any of the terms hereof or of any rights hereunder or under any
other Loan Document or in connection with any foreclosure, collection or
bankruptcy proceedings, and (b) all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements of any
kind or nature whatsoever which may be imposed on, incurred by or asserted
against the Agent, in its capacity as such, in any way relating to or arising
out of this Agreement or any other Loan Documents or any action taken or omitted
by the Agent hereunder or thereunder, provided that the Borrowers shall not be
liable for any portion of such liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements if the
same results from the Agent's gross negligence or willful misconduct, or if the
Borrowers were not given notice of the subject claim and the opportunity to
participate in the defense thereof, at their expense (except that the Borrower
shall remain liable to the extent such failure to give notice does not result in
a loss to any Borrower), or if the same results from a compromise or settlement
agreement entered into without the consent of the Borrower, which shall not be
unreasonably withheld. In addition, the Borrowers agree to reimburse and pay all
reasonable out-of-pocket expenses of the Agent's regular employees and agents
engaged periodically to perform audits of the Borrowers' books, records and
business properties.
<PAGE>
6. Exculpatory Provisions; Limitation of Liability.
Neither the Agent nor any of its directors, officers, employees, agents,
attorneys or Affiliates shall (a) be liable to any Bank for any action taken or
omitted to be taken by it or them hereunder, or in connection herewith including
pursuant to any Loan Document, unless caused by its or their own gross
negligence or willful misconduct, (b) be responsible in any manner to any of the
Banks for the effectiveness, enforceability, genuineness, validity or the due
execution of this Agreement or any other Loan Documents or for any recital,
representation, warranty, document, certificate, report or statement herein or
made or furnished under or in connection with this Agreement or any other Loan
Documents, or (c) be under any obligation to any of the Banks to ascertain or to
inquire as to the performance or observance of any of the terms, covenants or
conditions hereof or thereof on the part of the Borrowers, or the financial
condition of the Borrowers, or the existence or possible existence of any Event
of Default or Potential Default. No claim may be made by any of the Borrowers,
any Bank, the Agent or any of their respective Subsidiaries against the Agent,
any Bank or any of their respective directors, officers, employees, agents,
attorneys or Affiliates, or any of them, for any special, indirect or
consequential damages or, to the fullest extent permitted by Law, for any
punitive damages in respect of any claim or cause of action (whether based on
contract, tort, statutory liability, or any other ground) based on, arising out
of or related to any Loan Document or the transactions contemplated hereby or
any act, omission or event occurring in connection therewith, including the
negotiation, documentation, administration or collection of the Loans, and each
of the Borrowers, (for itself and on behalf of each of its Subsidiaries), the
Agent and each Bank hereby waive, releases and agree never to sue upon any claim
for any such damages, whether such claim now exists or hereafter arises and
whether or not it is now known or suspected to exist in its favor. Each Bank
agrees that, except for notices, reports and other documents expressly required
to be furnished to the Banks by the Agent hereunder or given to the Agent for
the account of or with copies for the Banks, the Agent and each of its
directors, officers, employees, agents, attorneys or Affiliates shall not have
any duty or responsibility to provide any Bank with an credit or other
information concerning the business, operations, property, condition (financial
or otherwise), prospects or creditworthiness of the Borrowers which may come
into the possession of the Agent or any of its directors, officers, employees,
agents, attorneys or Affiliates.
7. Reimbursement and Indemnification of Agent by Banks.
Each Bank agrees to reimburse and indemnify the Agent (to the extent not
reimbursed by the Borrower and without limiting the Obligation of the Borrowers
to do so) in proportion to its Ratable Share from and against all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements, including attorneys' fees and disbursements
(including the allocated costs of staff counsel), and costs of appraisers and
environmental consultants, of any kind or nature whatsoever which may be imposed
on, incurred by or asserted against the Agent, in its capacity as such, in any
way relating to or arising out of this Agreement or any other Loan Documents or
any action taken or omitted by the Agent hereunder or thereunder, provided that
no Bank shall be liable for any portion of such liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements (a) if the same results from the Agent's gross negligence or
willful misconduct, or (b) if such Bank was not given notice of the subject
claim and the opportunity to participate in the defense thereof, at its expense
(except that such Bank shall remain liable to the extent such failure to give
notice does not result in a loss to the Bank), or (c) if the same results from a
compromise and settlement agreement entered into without the consent of such
<PAGE>
Bank, which shall not be unreasonably withheld. In addition, each Bank agrees
promptly upon demand to reimburse the Agent (to the extent not reimbursed by the
Borrower and without limiting the Obligation of the Borrower to do so) in
proportion to its Ratable Share for all amounts due and payable by the Borrower
to the Agent in connection with the Agent's periodic audit of the Borrowers'
books, records and business properties.
8. Reliance by Agent.
The Agent shall be entitled to rely upon any writing, telegram, message,
resolution, notice, consent, certificate, letter, cablegram, statement, order or
other document or conversation by telephone or otherwise believed by it to be
genuine and correct and to have been signed, sent or made by the proper Person
or Persons, and upon the advice and opinions of counsel and other professional
advisers selected by the Agent. The Agent shall be fully justified in failing or
refusing to take any action hereunder unless it shall first be indemnified to
its satisfaction by the Banks against any and all liability and expense which
may be incurred by it by reason of taking or continuing to take any such action.
9. Notice of Default.
The Agent shall not be deemed to have knowledge or notice of the occurrence
of any Potential Default or Event of Default unless the Agent has received
written notice from a Bank or the Borrower referring to this Agreement,
describing such Potential Default or Event of Default and stating that such
notice is a "notice of default."
<PAGE>
10. Notices.
The Agent shall promptly send to each Bank a copy of all notices received
from the Borrower pursuant to the provisions of this Agreement or the other Loan
Documents promptly upon receipt thereof. The Agent shall promptly notify the
Borrower and the other Banks of each change in the Base Rate and the effective
date thereof.
11. Banks in Their Individual Capacities.
With respect to its Revolving Credit Commitment, the Revolving Credit
Loans, made by it and any other rights and powers given to it as a Bank
hereunder or under any of the other Loan Documents, the Agent shall have the
same rights and powers hereunder as any other Bank and may exercise the same as
though it were not the Agent, and the term "Banks" shall, unless the context
otherwise indicates, include the Agent in its individual capacity. PNC Bank and
its Affiliates and each of the Banks and their respective Affiliates may,
without liability to account, except as prohibited herein, make loans to, accept
deposits from, discount drafts for, act as trustee under indentures of, and
generally engage in any kind of banking or trust business with, the Borrowers
and their Affiliates, in the case of the Agent, as though it were not acting as
Agent hereunder and in the case of each Bank, as though such Bank were not a
Bank hereunder. The Banks acknowledge that, pursuant to such activities, the
Agent or its Affiliates may (i) receive information regarding the Borrowers
(including information that may be subject to confidentiality obligations in
favor of the Borrowers) and acknowledge that the Agent shall be under no
obligation to provide such information to them, and (ii) accept fees and other
consideration from the Borrowers for services in connection with this Agreement
and otherwise without having to account for the same to the Banks.
12. Holders of Notes.
The Agent may deem and treat any payee of any Note as the owner thereof for
all purposes hereof unless and until written notice of the assignment or
transfer thereof shall have been filed with the Agent. Any request, authority or
consent of any Person who at the time of making such request or giving such
authority or consent is the holder of any Note shall be conclusive and binding
on any subsequent holder, transferee or assignee of such Note or of any Note or
Notes issued in exchange therefor.
13. Equalization of Banks.
The Banks and the holders of any participations in any Notes agree among
themselves that, with respect to all amounts received by any Bank or any such
holder for application on any Obligation hereunder or under any Note or under
any such participation, whether received by voluntary payment, by realization
upon security, by the exercise of the right of set-off or banker's lien, by
counterclaim or by any other non-pro rata source, equitable adjustment will be
made in the manner stated in the following sentence so that, in effect, all such
excess amounts will be shared ratably among the Banks and such holders in
proportion to their interests in payments under the Notes, except as otherwise
provided in Section 4.4.2, 5.4.2 or 5.6. The Banks or any such holder receiving
any such amount shall purchase for cash from each of the other Banks an interest
in such Bank's Loans in such amount as shall result in a ratable participation
by the Banks and each such holder in the aggregate unpaid amount under the
Notes, provided that if all or any portion of such excess amount is thereafter
<PAGE>
recovered from the Bank or the holder making such purchase, such purchase shall
be rescinded and the purchase price restored to the extent of such recovery,
together with interest or other amounts, if any, required by law (including
court order) to be paid by the Bank or the holder making such purchase.
14. Successor Agent.
The Agent (i) may resign as Agent or (ii) shall resign if such resignation
is requested by the Required Banks (if the Agent is a Bank, the Agent's Loans
and its Commitment shall be considered in determining whether the Required Banks
have requested such resignation), in either case of (i) or (ii) by giving not
less than thirty (30) days' prior written notice to the Borrowers. If the Agent
shall resign under this Agreement, then either (a) the Required Banks shall
appoint from among the Banks a successor agent for the Banks, subject to the
consent of the Borrowers, such consent not to be unreasonably withheld, or (b)
if a successor agent shall not be so appointed and approved within the thirty
(30) day period following the Agent's notice to the Banks of its resignation,
then the Agent shall appoint, with the consent of the Borrower, such consent not
to be unreasonably withheld, a successor agent who shall serve as Agent until
such time as the Required Banks appoint and the Borrowers consent to the
appointment of a successor agent. Upon its appointment pursuant to either clause
(a) or (b) above, such successor agent shall succeed to the rights, powers and
duties of the Agent, and the term "Agent" shall mean such successor agent,
effective upon its appointment, and the former Agent's rights, powers and duties
as Agent shall be terminated without any other or further act or deed on the
part of such former Agent or any of the parties to this Agreement. After the
resignation of any Agent hereunder, the provisions of this Exhibit 10 shall
inure to the benefit of such former Agent and such former Agent shall not by
reason of such resignation be deemed to be released from liability for any
actions taken or not taken by it while it was an Agent under this Agreement.
15. Agent's Fee.
The Borrowers shall pay to the Agent a nonrefundable fee (the "Agent's
Fee") under the terms of the Agent's Letter between Parent and Agent, as amended
from time to time (the "Agent's Letter").
<PAGE>
16. Availability of Funds.
The Agent may assume that each Bank has made or will make the proceeds of a
Loan available to the Agent unless the Agent shall have been notified by such
Bank on or before the later of (1) the close of Business on the Business Day
preceding the Borrowing Date with respect to such Loan or two (2) hours before
the time on which the Agent actually funds the proceeds of such Loan to the
Borrower (whether using its own funds pursuant to this Paragraph 16 or using
proceeds deposited with the Agent by the Banks and whether such funding occurs
before or after the time on which Banks are required to deposit the proceeds of
such Loan with the Agent). The Agent may, in reliance upon such assumption (but
shall not be required to), make available to the Borrower a corresponding
amount. If such corresponding amount is not in fact made available to the Agent
by such Bank, the Agent shall be entitled to recover such amount on demand from
such Bank (or, if such Bank fails to pay such amount forthwith upon such demand
from the Borrowers) together with interest thereon, in respect of each day
during the period commencing on the date such amount was made available to the
Borrower and ending on the date the Agent recovers such amount, at a rate per
annum equal to (i) the Federal Funds Effective Rate during the first three (3)
days after such interest shall begin to accrue and (ii) the applicable interest
rate in respect of such Loan after the end of such three-day period.
17. Calculations.
In the absence of gross negligence or willful misconduct, the Agent shall
not be liable for any error in computing the amount payable to any Bank whether
in respect of the Loans, fees or any other amounts due to the Banks under this
Agreement. In the event an error in computing any amount payable to any Bank is
made, the Agent, the Borrower and each affected Bank shall, forthwith upon
discovery of such error, make such adjustments as shall be required to correct
such error, and any compensation therefor will be calculated at the Federal
Funds Effective Rate.
18. Beneficiaries.
Except as expressly provided herein, the provisions of this Exhibit 10 are
solely for the benefit of the Agent and the Banks, and the Borrowers shall not
have any rights to rely on or enforce any of the provisions hereof. In
performing its functions and duties under this Agreement, the Agent shall act
solely as agent of the Banks and does not assume and shall not be deemed to have
assumed any obligation toward or relationship of agency or trust with or for any
of the Borrowers.
<PAGE>
STOCK PLEDGE AGREEMENT
THIS STOCK PLEDGE AGREEMENT (the "Agreement"), dated March 21, 2000, is
made and entered into by and between U.S. INTERACTIVE, INC., a Delaware
corporation ("Pledgor"), with reference to the capital stock or other interests
of the Companies set forth on Schedule A hereto (each a "Company" and
collectively the "Companies"), and PNC BANK, NATIONAL ASSOCIATION, as Agent for
itself and the other Banks under the Credit Agreement described below (the
"Secured Party").
WHEREAS, pursuant to that certain Credit Agreement (as from time to
time restated, amended, modified or supplemented, the "Credit Agreement") dated
this date by and among the Pledgor (as a Borrower), the Banks party thereto, and
the Secured Party, the Secured Party and the Banks have agreed to provide
certain loans and other financial accommodations to Pledgor; and
WHEREAS, pursuant to and in consideration of the Credit Agreement,
certain of the issued and outstanding capital stock of each of the Companies is
to be pledged to the Secured Party in accordance herewith; and
WHEREAS, Pledgor owns the outstanding capital stock of the Companies as
set forth on Schedule A hereto.
NOW, THEREFORE, intending to be legally bound hereby, the parties
hereto hereby agree as follows:
1. Defined Terms.
(a) Except as otherwise expressly provided herein, capitalized terms
used in this Agreement shall have the respective meanings assigned to them in
the Credit Agreement. Where applicable and except as otherwise expressly
provided herein, terms used herein (whether or not capitalized) shall have the
respective meanings assigned to them in the Uniform Commercial Code as enacted
in Pennsylvania as amended from time to time (the "Code").
(b) "Pledged Collateral" shall mean and include the following: (i) the
capital stock, shares, securities and all other ownership interests listed on
Schedule A attached hereto and made a part hereof, and all rights and privileges
pertaining thereto, including, without limitation, all present and future
securities, shares, capital stock and other ownership interests receivable in
respect of or in exchange for any such securities, shares, capital stock or
ownership interests, all rights under shareholder agreements and other similar
agreements relating to all securities, shares, capital stock and other ownership
interests, all rights to subscribe for securities, shares, capital stock or
other ownership interests incident to or arising from ownership of such
securities, shares, capital stock or other ownership interests, all cash,
interest, stock and other dividends or distributions paid or payable on such
securities, shares, capital stock or other ownership interests, and all books
and records (whether paper, electronic or any other medium) pertaining to the
foregoing, including, without limitation, all stock record and transfer books,
(ii) any and all other securities, shares, capital stock and other ownership
interests hereafter pledged by Pledgor to the Secured Party to secure the
Secured Obligations (as hereinafter defined), and all rights and privileges
pertaining thereto, including, without limitation, all securities, shares,
capital stock and other ownership interests receivable in respect of or in
exchange for such securities, shares, capital stock or other ownership
interests, all rights to subscribe for securities, shares, capital stock or
other ownership interests incident to or arising from ownership of such
securities, shares, capital stock or other ownership interests, all cash,
interest, stock and other dividends or distributions paid or payable on such
securities, shares, capital stock or other ownership interests, and all books
and records pertaining to the foregoing, and (iii) whatever is received when any
of the foregoing is sold, exchanged, replaced or otherwise disposed of,
including all proceeds, as such term is defined in the Code, thereof.
2. Grant of Security Interests.
(a) To secure the payment and performance of all Obligations and of all
Indebtedness of Borrower under any Loan Document or any other agreement with any
Bank or any Affiliate of any Bank (collectively, the "Secured Obligations"),
Pledgor hereby grants to the Secured Party a first priority security interest in
and hereby pledges to Agent, in each case for the benefit of each of the Banks
and Agent and any Affiliate of any of the Banks, all of Pledgor's now existing
and hereafter acquired or arising right, title and interest in, to and under the
Pledged Collateral whether now or hereafter existing and wherever located.
<PAGE>
(b) Upon the execution and delivery of this Agreement, Pledgor shall
deliver to and deposit with the Secured Party in pledge, all stock certificates
and other instruments evidencing the Pledged Collateral owned by Pledgor,
together with undated stock powers signed in blank by Pledgor. The stock powers
delivered by Pledgor hereunder shall be utilized by Secured Party only after an
Event of Default has occurred.
3. Further Assurances.
Prior to or concurrently with the execution of this Agreement, and
thereafter at any time and from time to time upon reasonable request of the
Secured Party, Pledgor shall execute and deliver to the Secured Party all
financing statements, continuation financing statements, assignments,
certificates and documents of title, affidavits, reports, notices, schedules of
account, letters of authority, further pledges, powers of attorney and all other
documents (collectively, the "Security Documents") which the Secured Party may
reasonably request, in form reasonably satisfactory to the Secured Party, and
take such other action which the Secured Party may reasonably request, to
perfect and continue perfected and to create and maintain the first priority
status of the Secured Party's security interest in the Pledged Collateral and to
fully consummate the transactions contemplated under this Agreement. If an Event
of Default has occurred and is continuing, Pledgor hereby irrevocably makes,
constitutes and appoints the Secured Party (and any of the Secured Party's
officers or employees or agents designated by the Secured Party) as Pledgor's
true and lawful attorney with power to sign the name of Pledgor on all or any of
the Security Documents which the Secured Party determines must be executed,
filed, recorded or sent in order to perfect or continue perfected the Secured
Party's security interest in the Pledged Collateral in any jurisdiction. Such
power, being coupled with an interest, is irrevocable until all of the Secured
Obligations have been indefeasibly in full paid and the Commitments have
terminated.
4. Representations and Warranties.
Pledgor hereby represents and warrants to the Secured Party as follows:
(a) Pledgor, has and will continue to have (or, in the case of
after-acquired Pledged Collateral, at the time Pledgor acquires rights in such
Pledged Collateral, will have and will continue to have), title to its Pledged
Collateral, free and clear of all Liens.
(b) The capital stock shares, securities, and other ownership interests
constituting the Pledged Collateral have been duly authorized and validly issued
to Pledgor (as set forth on Schedule A hereto), are fully paid and nonassessable
and constitute one hundred percent (100%) of the issued and outstanding capital
stock of each of the Companies.
(c) The security interests in the Pledged Collateral granted hereunder
are valid, perfected and of first priority, subject to the Lien of no other
Person.
(d) There are no restrictions upon the transfer of the Pledged
Collateral other than applicable state and federal securities laws and Pledgor
has the power and authority and right to transfer the Pledged Collateral owned
by Pledgor free of any encumbrances and without obtaining the consent of any
other Person.
(e) Pledgor has all necessary power to execute, deliver and perform
this Agreement.
(f) There are no actions, suits, or proceedings pending or, to
Pledgor's best knowledge after due inquiry, threatened against or affecting
Pledgor with respect to the Pledged Collateral, at law or in equity or before or
by any Official Body, and Pledgor is not in default with respect to any
judgment, writ, injunction, decree, rule or regulation which would materially
adversely affect Pledgor's performance hereunder.
(g) This Agreement has been duly executed and delivered and constitutes
the valid and legally binding obligation of Pledgor, enforceable in accordance
with its terms, except to the extent that enforceability of this Agreement may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar Laws affecting the enforceability of creditors' rights generally
or limiting the right of specific performance.
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<PAGE>
(h) Neither the execution and delivery by Pledgor of this Agreement,
nor the compliance with the terms and provisions hereof, will violate any
provision of any Law or conflict with or result in a breach of any of the terms,
conditions or provisions of any judgment, order, injunction, decree or ruling of
any Official Body to which Pledgor is subject or any provision of any agreement,
understanding or arrangement to which Pledgor is a party or by which Pledgor is
bound.
(i) Pledgor's chief executive office address is as set forth on the
signature page hereto.
(j) All rights of Pledgor in connection with its ownership of each of
the Companies are evidenced and governed solely by the stock certificates, and
Pledgor has provided true and correct copies of its organizational documents
applicable to any of the Pledged Collateral.
5. General Covenants.
Pledgor hereby covenants and agrees as follows:
(a) Subject to Section 7.2.6 of the Credit Agreement, Pledgor shall do
all reasonable acts that may be necessary and appropriate to maintain, preserve
and protect the Pledged Collateral; Pledgor shall be responsible for the risk of
loss of, damage to, or destruction of the Pledged Collateral owned by Pledgor,
unless such loss is the result of the gross negligence or willful misconduct of
the Secured Party. Pledgor shall notify the Secured Party in writing ten (10)
days prior to any change in Pledgor's chief executive office address.
(b) Pledgor shall appear in and defend any action or proceeding of
which Pledgor is aware which would reasonably be expected to affect Pledgor's
title to, or the Secured Party's interest in, the Pledged Collateral or the
proceeds thereof; provided, however, that with the consent of the Secured Party
such Pledgor may settle such actions or proceedings with respect to the Pledged
Collateral, which consent shall not be unreasonably withheld or delayed.
(c) Pledgor shall, and shall cause each of the Companies to, keep
separate, accurate and complete records of the Pledged Collateral, disclosing
the Secured Party's security interest hereunder.
(d) Pledgor shall comply with all Laws applicable to the Pledged
Collateral unless any noncompliance would not individually or in the aggregate
materially impair the use or value of the Pledged Collateral or the Secured
Party's rights hereunder.
(e) Pledgor shall pay any and all taxes, duties, fees or imposts of any
nature imposed by any Official Body on any of the Pledged Collateral, except to
the extent contested in good faith by appropriate proceedings or subject to
extensions timely requested and granted.
(f) Pledgor shall permit the Secured Party, its officers, employees and
agents at reasonable times during normal business hours upon reasonable advance
notice to inspect all books and records related to the Pledged Collateral.
(g) To the extent, following the date hereof, Pledgor acquires capital
stock, shares securities, and other ownership interests of any of the Companies
or any of the rights, property or securities, shares, capital stock or other
ownership interests described in the definition of Pledged Collateral with
respect to any of the Companies, such stock, rights, property or securities,
shares, capital stock or ownership interests shall be subject to the terms
hereof and, upon such acquisition, shall be deemed to be hereby pledged to the
Secured Party; and, Pledgor thereupon shall deliver all such securities, shares,
capital stock, and other ownership interests together with an updated Schedule A
hereto, to the Secured Party.
(h) During the term of this Agreement, Pledgor shall not sell, assign,
replace, retire, transfer or otherwise dispose of its Pledged Collateral other
than in accordance with the Credit Agreement.
6. Other Rights With Respect to Pledged Collateral.
In addition to the other rights with respect to the Pledged Collateral
granted to the Secured Party hereunder, at any time and from time to time, after
and during the continuation of an Event of Default, the Secured Party, at its
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<PAGE>
option and at the expense of the Pledgor, may (a) transfer into its own name, or
into the name of its nominee, all or any part of the Pledged Collateral,
thereafter receiving all dividends, income or other distributions upon the
Pledged Collateral; (b) take control of and manage all or any of the Pledged
Collateral; (c) apply to the payment of any of the Secured Obligations, whether
any be due and payable or not, any moneys, including cash dividends and income
from any Pledged Collateral, now or hereafter in the hands of the Secured Party
or any Affiliate of the Secured Party, on deposit or otherwise, belonging to
Pledgor, as the Secured Party in its sole discretion shall determine; and (d) do
anything which Pledgor is required but fails to do hereunder.
7. Additional Remedies Upon Event of Default.
Upon the occurrence of any Event of Default and while such Event of
Default shall be continuing, the Secured Party shall have, in addition to all
rights and remedies of a secured party under the Code or other applicable Law,
and in addition to its rights under Section 6 above and under the other Loan
Documents, the following rights and remedies:
(a) The Secured Party may, after fifteen (15) days' advance notice to
the Pledgor, sell, assign, give an option or options to purchase or otherwise
dispose of Pledgor's Pledged Collateral or any part thereof at public or private
sale, at any of the Secured Party's offices or elsewhere, for cash, on credit or
for future delivery, and upon such other terms as the Secured Party may deem
commercially reasonable. Pledgor agrees that fifteen (15) days' advance notice
of the time and place of any public sale or the time after which any private
sale is to be made shall constitute reasonable notification. The Secured Party
shall not be obligated to make any sale of Pledged Collateral regardless of
notice of sale having been given. The Secured Party may adjourn any public or
private sale from time to time by announcement at the time and place fixed
therefor, and such sale may, without further notice, be made at the time and
place to which it was so adjourned. Pledgor recognizes that the Secured Party
may be compelled to resort to one or more private sales of the Pledged
Collateral to a restricted group of purchasers who will be obliged to agree,
among other things, to acquire such securities, shares, capital stock or
ownership interests for their own account for investment and not with a view to
the distribution or resale thereof.
(b) The proceeds of any collection, sale or other disposition of the
Pledged Collateral, or any part thereof, shall, after the Secured Party has made
all deductions of expenses, including but not limited to attorneys' fees and
other expenses incurred in connection with repossession, collection, sale or
disposition of such Pledged Collateral or in connection with the enforcement of
the Secured Party's rights with respect to the Pledged Collateral, including in
any insolvency, bankruptcy or reorganization proceedings, be applied against the
Secured Obligations, whether or not all the same be then due and payable, as
follows:
(i) first, to the Secured Obligations and to reimburse the
Secured Party for out-of-pocket costs, expenses and disbursements, including
without limitation reasonable attorneys' fees and legal expenses, incurred by
the Secured Party in connection with realizing on the Pledged Collateral or
collection of any obligation of Pledgor under any of the Loan Documents,
including advances made subsequent to an Event of Default by the Secured Party
for the reasonable maintenance, preservation, protection or enforcement of, or
realization upon, the Pledged Collateral, including without limitation advances
for taxes, insurance, and the like, and reasonable expenses incurred to sell or
otherwise realize on, or prepare for sale of or other realization on, any of the
Pledged Collateral, in such order as the Secured Party may determine in its
discretion; and
(ii) the balance, if any, as required by Law.
8. Secured Party's Duties.
The powers conferred on the Secured Party hereunder are solely to
protect its interest in the Pledged Collateral and shall not impose any duty
upon it to exercise any such powers. Except for the safe custody of any Pledged
Collateral in its possession and the accounting for moneys actually received by
it hereunder or on its behalf, the Secured Party shall have no duty as to any
Pledged Collateral or as to the taking of any necessary steps to preserve rights
against prior parties or any other rights pertaining to any Pledged Collateral.
9. No Waiver; Cumulative Remedies.
No failure to exercise, and no delay in exercising, on the part of the
Secured Party, any right, power or privilege hereunder shall operate as a waiver
thereof; nor shall any single or partial exercise of any right, power or
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<PAGE>
privilege hereunder preclude any further exercise thereof or the exercise of any
other right, power or privilege. The remedies herein provided are cumulative and
not exclusive of any remedies provided under the other Loan Documents or by Law.
Pledgor waives any right to require the Secured Party to proceed against any
other Person or to exhaust any of the Pledged Collateral or other security for
the Secured Obligations or to pursue any remedy in the Secured Party's power.
10. Assignment.
All rights of the Secured Party under this Agreement shall inure to the
benefit of its successors and assigns. All obligations of Pledgor shall bind its
successors and assigns; provided, however, Pledgor may not assign or transfer
any of its rights and obligations hereunder or any interest herein.
11. Severability.
Any provision of this Agreement which shall be held invalid or
unenforceable shall be ineffective without invalidating the remaining provisions
hereof.
12. Governing Law.
This Agreement shall be construed in accordance with and governed by
the internal laws of the Commonwealth of Pennsylvania without regard to its
conflicts of law principles, except to the extent the validity or perfection of
the security interests or the remedies hereunder in respect of any Pledged
Collateral are governed by the law of a jurisdiction other than the Commonwealth
of Pennsylvania.
13. Notices.
All notices, statements, requests and demands given to or made upon
either party hereto in accordance with the provisions of this Agreement shall be
given or made as provided in Section 10.6 of the Credit Agreement.
14. Specific Performance.
Pledgor acknowledges and agrees that, in addition to the other rights
of the Secured Party hereunder and under the other Loan Documents, because the
Secured Party's remedies at law for failure of Pledgor to comply with the
provisions hereof relating to the Secured Party's rights (i) to inspect the
books and records related to the Pledged Collateral, (ii) to receive the various
notifications Pledgor is required to deliver hereunder, (iii) to obtain copies
of agreements and documents as provided herein with respect to the Pledged
Collateral, (iv) to enforce the provisions hereof pursuant to which the Pledgor
has appointed the Secured Party its attorney-in-fact, and (v) to enforce the
Secured Party's remedies hereunder, would be inadequate and that any such
failure would not be adequately compensable in damages, Pledgor agrees that each
such provision hereof may be specifically enforced.
15. Voting Rights in Respect of the Pledged Collateral.
So long as no Event of Default shall occur and be continuing under the
Credit Agreement, Pledgor may exercise any and all voting and other consensual
rights pertaining to the Pledged Collateral or any part thereof for any purpose
not inconsistent with the terms of this Agreement or the other Loan Documents;
provided, however, that Pledgor will not exercise or will refrain from
exercising any such voting and other consensual right pertaining to the Pledged
Collateral, as the case may be, if such action would have a material adverse
effect on the value of any Pledged Collateral. Without limiting the generality
of the foregoing and in addition thereto except as otherwise permitted in the
Credit Agreement, the Pledgor shall not vote to enable, or take any other action
to permit, any of the Companies to issue any stock or other equity securities or
other ownership interests of any nature or to issue any other securities,
shares, capital stock or other ownership interests convertible into or granting
the right to purchase or exchange for any stock or other equity securities or
other ownership interests of any nature of any such Company or to enter into any
agreement or undertaking restricting the right or ability of the Pledgor or the
Secured Party to sell, assign or transfer any of the Pledged Collateral.
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<PAGE>
16. Consent to Jurisdiction.
Pledgor and each of the Companies hereby irrevocably submits to the
nonexclusive jurisdiction of any Pennsylvania State or Federal Court sitting in
Philadelphia, Pennsylvania, in any action or proceeding arising out of or
relating to this Agreement, and Pledgor and each of the Companies hereby
irrevocably agree that all claims in respect of such action or proceeding may be
heard and determined in such Pennsylvania State or Federal court. Pledgor and
each of the Companies hereby waives to the fullest extent it may effectively do
so, the defense of an inconvenient forum to the maintenance of any such action
or proceeding. Pledgor and each of the Companies hereby appoints the process
agent identified below (the "Process Agent") as its agent to receive on behalf
of such party and its respective property service of copies of the summons and
complaint and any other process which may be served in any action or proceeding.
Such service may be made by mailing or delivering a copy of such process to the
Pledgor or the Companies in care of the Process Agent at the Process Agent's
address, and the Pledgor and the Companies hereby authorize and direct the
Process Agent to receive such service on its behalf. Pledgor and each of the
Companies agree that a final judgment in any such action or proceeding shall be
conclusive and may be enforced in other jurisdictions (or any political
subdivision thereof) by suit on the judgment or in any other manner provided by
law. Pledgor and each of the Companies further agree that it shall, for so long
as any Commitment or any obligation of any Borrower to the Bank remains
outstanding, continue to retain Process Agent for the purposes set forth in this
Section 16. The Process Agent is U.S. Interactive, Inc., c/o General Counsel,
with an office on the date hereof at 2012 Renaissance Boulevard, King of
Prussia, Pennsylvania, United States. Pledgor and each of the Companies shall
produce to Secured Party evidence of the acceptance by Process Agent of such
appointment.
17. Waiver of Jury Trial.
EXCEPT AS PROHIBITED BY LAW, PLEDGOR AND EACH OF THE COMPANIES HEREBY
WAIVE ANY RIGHT IT MAY HAVE TO A TRIAL BY A JURY IN RESPECT OF ANY LITIGATION
DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS
AGREEMENT OR ANY OTHER DOCUMENTS OR TRANSACTIONS RELATING THERETO.
18. Entire Agreement; Amendments.
This Agreement constitutes the entire agreement between the parties
with respect to the subject matter hereof and supersedes all prior agreements
relating to a grant of a security interest in the Pledged Collateral by Pledgor.
This Agreement may not be amended or supplemented except by a writing signed by
the Secured Party and the Pledgor.
19. Counterparts.
This Agreement may be executed in any number of counterparts, and by
different parties hereto in separate counterparts, each of which when so
executed shall be deemed an original and all of which taken together shall
constitute but one and the same agreement.
20. Descriptive Headings
The descriptive headings which are used in this Agreement are for the
convenience of the parties only and shall not affect the meaning of any
provision of this Agreement.
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<PAGE>
SIGNATURE PAGE 1 OF 1 TO
STOCK PLEDGE AGREEMENT
IN WITNESS WHEREOF, and intending to be legally bound, the parties
hereto have caused this Agreement to be duly executed as of the date first above
written.
PNC BANK, NATIONAL ASSOCIATION, as Agent
By:
-------------------------------------------
Name:
Title:
U.S. INTERACTIVE, INC.
By: (Seal)
-------------------------------------------
Name:
Title:
Chief Executive Office:
----------------------
----------------------
----------------------
<PAGE>
ACKNOWLEDGEMENT AND CONSENT
Each of the undersigned hereby acknowledges receipt of a copy of the
Pledge Agreement, dated March 21, 2000, made by U.S. Interactive, Inc. for the
benefit of PNC Bank, National Association, as Agent, as Secured Party (the
"Pledge Agreement"). Each of the undersigned, intending to be legally bound
hereby, agrees for the benefit of the Secured Party and the Banks as follows:
1. Each of the undersigned will be bound by the terms of the Pledge
Agreement and will comply with such terms insofar as such terms are applicable
to the undersigned, including without limiting the generality of the foregoing,
those terms in Sections 16 and 17 of the Pledge Agreement.
2. Each of the undersigned will notify the Secured Party promptly in
writing of the occurrence of any of the events described in Section 5(g) of the
Pledge Agreement.
3. The terms of Section 3 of the Pledge Agreement shall apply to it,
mutatis mutandis, with respect to all actions that may facilitate, in the
reasonable judgment of the Secured Party, the carrying out of Section 3 of the
Pledge Agreement.
4. To the extent that any of undersigned has or hereafter may acquire
any immunity from the jurisdiction of any court or from any legal process
(whether through service or notice, attachment prior to judgment, attachment in
aid of execution, execution, or otherwise) with respect to itself or its
property, each of undersigned hereby irrevocably waives such immunity in respect
of its obligations under the Pledge Agreement and any other document or
agreement executed in connection therewith, and each of undersigned agrees that
it will not raise or claim any such immunity at or in respect of any such action
or proceeding.
5. Each of the undersigned acknowledges and agrees that any notices
sent to the Pledgor regarding any of the Pledged Collateral shall also be sent
to the Secured Party in the manner and at the address of Secured Party as
indicated in Section 13 of the Pledge Agreement.
U.S. INTERACTIVE CORP. (DELAWARE)
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
Address for Notices:
---------------------------
---------------------------
Fax:_______________________
<PAGE>
SCHEDULE A
TO
STOCK PLEDGE AGREEMENT
Description of Pledged Collateral
<TABLE>
<CAPTION>
Pledgor Pledged Shares Type and Amount of Ownership
------- -------------- ----------------------------
<S> <C> <C>
U.S. Interactive, Inc. 100% of the issued and outstanding 100 shares of common stock, $.01
capital shares of U.S. par value
INTERACTIVE CORP.
(DELAWARE), a Delaware
corporation
</TABLE>
<PAGE>
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (the "Agreement"), dated March 21, 2000 is
entered into by and between U.S. INTERACTIVE, INC., a Delaware corporation (the
"Borrower"), and PNC BANK, NATIONAL ASSOCIATION, as Agent (the "Agent") for the
Banks (as defined below);
WITNESSETH THAT:
WHEREAS, the Borrower is (or will be with respect to after-acquired
property) the legal and beneficial owner and the holder of the Collateral (as
defined in Section 1 hereof); and
WHEREAS, pursuant to that certain Credit Agreement (as it may hereafter
from time to time be restated, amended, modified or supplemented, the "Credit
Agreement") of even date herewith by and among the Agent, the Banks party
thereto (the "Banks") and the Borrower, the Agent and the Banks have agreed to
make certain loans to the Borrower; and
WHEREAS, the obligation of the Banks to make loans under the Credit
Agreement is subject to the condition, among others, that the Borrower secure
its obligations to the Banks under the Credit Agreement in the manner set forth
herein.
NOW, THEREFORE, intending to be legally bound hereby, the parties
hereto covenant and agree as follows:
1. Terms which are defined in the Credit Agreement and not otherwise
defined herein are used herein as defined therein. The following words and terms
shall have the following meanings, respectively, unless the context hereof
otherwise clearly requires:
(a) "Code" means the Uniform Commercial Code of each state as in
effect on the date hereof and as the same may subsequently be amended from time
to time, the substantive provisions of which are applicable to any of the
property of the Borrower in which the Agent for the benefit of the Banks is
granted a security interest pursuant to this Agreement.
(b) "Collateral" means all of the Borrower's right, title and
interest in, to and under the following described property of the Borrower (each
capitalized term used in this Section 1(b) shall have in this Agreement the
meaning given to it by Article 9 of the Code as in effect in Pennsylvania):
(i) all now existing and hereafter acquired and arising
Accounts, General Intangibles, Chattel Paper, Documents, Instruments, Investment
Property, Letters of Credit, Advices of Credit, Equipment, and Inventory, all
Products of and Accessions to the foregoing and all Proceeds of all of the
foregoing (including without limitation all insurance policies and proceeds
thereof);
(ii) to the extent, if any, not included in clause (i) above,
each and every other item of personal property and fixtures, both those that are
now owned and those that hereafter arise or are acquired, regardless of whether
Article 9 of the Code is applicable to any extent to the creation, perfection or
enforcement of Liens thereon or therein.
Without limiting the foregoing, Collateral includes all business records and
information, including computer tapes and other storage media containing the
<PAGE>
same and computer programs and software (including without limitation, source
code, object code and related manuals and documentation and all licenses to use
such software) for accessing and manipulating such information.
(c) "Debt" means, collectively, all now existing and hereafter
arising Indebtedness and Obligations of the Borrower to the Banks or any
Affiliate of any Bank under the Credit Agreement and other Loan Documents,
including without limitation, all Indebtedness and Obligations, whether of
principal, interest, fees, expenses or otherwise, of the Borrower to the Banks
or any Affiliate of any Bank now existing or hereafter incurred under the Credit
Agreement or the Notes), or any of the other Loan Documents referred to therein
as any of the same or any one or more of them may from time to time be amended,
restated, modified or supplemented, together with any and all extensions,
renewals, refinancings or refundings thereof in whole or in part.
(d) "Receivables" means all of the Collateral except Equipment and
Inventory.
2. As security for the due and punctual payment and performance of the
Debt in full, the Borrower hereby agrees that the Agent and the Banks and any
Affiliate of any Bank shall have, and the Borrower hereby grants to and creates
in favor of the Agent for the benefit of the Banks and any Affiliate of any
Bank, a first priority security interest under the Code in and to the Collateral
subject only to Permitted Liens. Without limiting the generality of Section 4
below, the Borrower further agrees that with respect to each item of Collateral
as to which (i) the creation of a valid and enforceable security interest is not
governed exclusively by the Code or (ii) the perfection of a valid and
enforceable security interest therein under the Code cannot be accomplished
either by the Agent taking possession thereof or by the filing in appropriate
locations of appropriate Code financing statements executed by the Borrower, the
Borrower will at its expense execute and deliver to the Agent such documents,
agreements, notices, assignments and instruments and take such further actions
as may be reasonably requested by the Agent from time to time for the purpose of
creating a valid and perfected first priority Lien on such item, subject only to
Permitted Liens, enforceable against the Borrower and all third parties to
secure the Debt.
3. The Borrower represents and warrants to the Agent and the Banks that
(a) the Borrower has good and marketable title to the Collateral, and (b) except
for the security interest granted to and created in favor of the Agent for the
benefit of the Banks hereunder and Permitted Liens, all the Collateral is free
and clear of any Lien other than the Liens of record of Progress Bank against
Borrower that will be removed in connection with this transaction.
4. The Borrower will faithfully preserve and protect the Agent's
security interest in the Collateral as a prior perfected security interest under
the Code, superior and prior to the rights of all third Persons, except for
Permitted Liens, and will do all such other acts and things and will, upon
request therefor by the Agent, execute, deliver, file and record all such other
documents and instruments, including, without limitation, financing statements,
security agreements, assignments and documents and powers of attorney with
respect to the Collateral, and pay all filing fees and taxes related thereto, as
the Agent in its reasonable discretion may deem necessary or advisable from time
to time in order to attach, continue, preserve, perfect and protect said
security interest; and the Borrower hereby irrevocably appoints the Agent, its
officers, employees and agents, or any of them, as attorneys-in-fact for the
Borrower to execute, deliver, file and record such items for the Borrower and in
the Borrower's name, place and stead if an Event of Default has occurred and is
continuing. This power of attorney, being coupled with an interest, shall be
irrevocable for the life of this Agreement.
5. The Borrower covenants and agrees that:
(a) it will defend the Agent's and the Banks' right, title and
security interest in and to the Collateral and the proceeds thereof against the
claims and demands of all Persons whomsoever, other than any Person claiming a
right in the Collateral pursuant to an agreement between such Person and the
Agent or a Bank;
(b) it will not suffer or permit to exist on any Collateral any Lien
except for Permitted Liens;
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<PAGE>
(c) it will not take or omit to take any action, the taking or the
omission of which would result in a material alteration or impairment of the
Collateral or of the Agent's rights under this Agreement;
(d) it will not sell, assign or otherwise dispose of any portion of
the Collateral except as permitted in the Credit Agreement;
(e) except as permitted by the Credit Agreement, it will (i) obtain
and maintain sole and exclusive possession of the Collateral, (ii) keep the
Collateral and all records pertaining thereto at the locations specified on the
Security Interest Data Summary attached as Schedule A hereto, unless it shall
have given the Agent prior notice and taken any action reasonably requested by
the Agent to maintain its security interest therein, (iii) deliver to the Agent
upon the Agent's request therefor all Collateral consisting of Chattel Paper
immediately upon the Borrower's receipt of a request therefor, and (iv) keep
materially accurate and complete books and records concerning the Collateral and
such other books and records as the Agent may from time to time reasonably
require; and
(f) it will promptly furnish to the Agent such information and
documents relating to the Collateral as the Agent may reasonably request,
including, without limitation, all invoices, Documents, contracts, Chattel
Paper, Instruments and other writings pertaining to the Borrower's contracts or
the performance thereof, all of the foregoing to be certified upon request of
the Agent by an authorized officer of the Borrower.
6. The Borrower assumes full responsibility for taking any and all
necessary steps to preserve the Agent's and the Banks' rights with respect to
the Collateral against all Persons other than anyone asserting rights in respect
of a Permitted Lien. The Agent shall be deemed to have exercised reasonable care
in the custody and preservation of the Collateral in its possession if the Agent
takes such action for that purpose as the Borrower requests in writing, provided
that such requested action will not, in the judgment of the Agent, impair the
security interest in the Collateral created hereby or the Agent's and the Banks'
rights in, or the value of, the Collateral, and provided further that such
written request is received by the Agent in sufficient time to permit the Agent
to take the requested action.
7. (a) At any time and from time to time whether or not an Event of
Default then exists and without prior notice to or consent of the Borrower, the
Agent may at its option take such actions as the Agent deems appropriate (i) to
attach, perfect, continue, preserve and protect the Agent's and the Banks' prior
security interest in the Collateral, and/or (ii) to inspect, audit and verify
the Collateral, including reviewing all of the Borrower's books and records and
copying and making excerpts therefrom, provided that prior to an Event of
Default or a Potential Default, the same is done with advance notice during
normal business hours to the extent access to the Borrower's premises is
required, and if not paid in a timely fashion by Borrower, (iii) to add all
liabilities, obligations, costs and expenses reasonably incurred in connection
with the foregoing clauses (i) and (ii) to the Debt, to be paid by the Borrower
to the Agent for the benefit of the Banks upon demand;
(b) At any time and from time to time after an Event of Default
exists and is continuing and without prior notice to or consent of the Borrower,
the Agent may at its option take such action as the Agent, in its reasonable
discretion, deems appropriate (i) to maintain, repair, protect and insure the
-3-
<PAGE>
Collateral, and/or (ii) to perform, keep, observe and render true and correct
any and all covenants, agreements, representations and warranties of the
Borrower hereunder, and (iii) to add all liabilities, obligations, costs and
expenses reasonably incurred in connection with the foregoing clauses (i) and
(ii) to the Debt, to be paid by the Borrower to the Agent for the benefit of the
Banks upon demand.
8. After there exists any Event of Default under the Credit Agreement:
(a) The Agent shall have and may exercise all the rights and
remedies available to and subject to all of the obligations of a secured party
under the Code in effect at the time, and such other rights and remedies as may
be provided by Law and as set forth below, including without limitation to take
over and collect all the Borrower's Receivables and all other Collateral, and to
this end the Borrower hereby appoints effective at such time, the Agent, its
officers, employees and agents, as its irrevocable, true and lawful
attorneys-in-fact with all necessary power and authority to (i) take possession
immediately, with or without notice, demand, or legal process, of any of or all
of the Collateral wherever found, and for such purposes, enter upon any premises
upon which the Collateral may be found and remove the Collateral therefrom, (ii)
require the Borrower to assemble the Collateral and deliver it to the Agent or
to any place designated by the Agent at the Borrower's expense, (iii) receive,
open and dispose of all mail addressed to the Borrower and notify postal
authorities to change the address for delivery thereof to such address as the
Agent may designate, (iv) demand payment of the Receivables, (v) enforce payment
of the Receivables by legal proceedings or otherwise, (vi) exercise all of the
Borrower's rights and remedies with respect to the collection of the
Receivables, (vii) settle, adjust, compromise, extend or renew the Receivables,
(viii) settle, adjust or compromise any legal proceedings brought to collect the
Receivables, (ix) to the extent permitted by applicable Law, sell or assign the
Receivables upon such terms, for such amounts and at such time or times as the
Agent deems advisable, (x) discharge and release the Receivables, (xi) take
control, in any manner, of any item of payment or proceeds from any account
debtor, (xii) prepare, file and sign the Borrower's name on any Proof of Claim
in Bankruptcy or similar document against any account debtor, (xiii) prepare,
file and sign the Borrower's name on any notice of Lien, assignment or
satisfaction of Lien or similar document in connection with the Receivables,
(xiv) do all acts and things necessary, in the Agent's reasonable and sole
discretion, to fulfill the Borrower's obligations under the Loan Documents, (xv)
endorse the name of the Borrower upon any check, Chattel Paper, Document,
Instrument, invoice, freight bill, bill of lading or similar document or
agreement relating to the Receivables or Inventory; (xvi) use the Borrower's
stationery and sign the Borrower's name to verifications of the Receivables and
notices thereof to account debtors; (xvii) access and use the information
recorded on or contained in any data processing equipment or computer hardware
or software relating to the Receivables, Inventory, or other Collateral or
proceeds thereof to which the Borrower has access, (xviii) demand, sue for,
collect, compromise and give acquittances for any and all Collateral, (xix)
prosecute, defend or compromise any action, claim or proceeding with respect to
any of the Collateral, and (xx) take such other action as the Agent may deem
appropriate, including extending or modifying the terms of payment of the
Borrower's debtors. This power of attorney, being coupled with an interest,
shall be irrevocable for the life of this Agreement. To the extent permitted by
Law, the Borrower hereby waives all claims of damages due to or arising from or
connected with any of the rights or remedies exercised by the Agent pursuant to
this Agreement, except claims for physical damage to the Collateral arising from
gross negligence or willful misconduct by the Agent or its employees or agents.
(b) The Agent shall have the right to lease, sell or otherwise
dispose of all or any of the Collateral at public or private sale or sales for
cash, credit or any combination thereof, with such notice as may be required by
Law (it being agreed by the Borrower that, in the absence of any contrary
requirement of Law, fifteen (15) days' prior notice of a public or private sale
of Collateral shall be deemed reasonable notice), in lots or in bulk, for cash
or on credit, all as the Agent, in its reasonable and sole discretion, may deem
advisable. Such sales may be adjourned from time to time with or without notice.
The Agent shall have the right to conduct such sales on the Borrower's premises
or elsewhere and shall have the right to use the Borrower's premises without
charge for such sales for such time or times as the Agent may see fit. The Agent
-4-
<PAGE>
may purchase all or any part of the Collateral at public or, if permitted by
Law, private sale and, in lieu of actual payment of such purchase price, may set
off the amount of such price against the Debt.
9. The security interest in the Borrower's Collateral granted to and
created in favor of the Agent by this Agreement shall be for the benefit of the
Agent and the Banks. Each of the rights, privileges, and remedies provided to
the Agent hereunder or otherwise by Law with respect to the Borrower's
Collateral shall be exercised by the Agent only for its own benefit and the
benefit of the Banks, and any of the Borrower's Collateral or proceeds thereof
held or realized upon at any time by the Agent shall be applied as set forth in
Section 8.2.5 of the Credit Agreement. The Borrower shall remain liable to the
Banks for and shall pay to the Agent for the benefit of the Banks any deficiency
which may remain after such sale or collection.
10. If the Agent repossesses or seeks to repossess any of the
Collateral pursuant to the terms hereof because of the occurrence of an Event of
Default. Borrower will cooperate with the Agent and grant the Agent reasonable
access to the Borrower's premises. In the event Borrower does not cooperate with
the Agent and grant the Agent reasonable access to the Borrower's premises, then
to the extent it is commercially reasonable for the Agent to store any
Collateral on any of the Borrower's premises, the Borrower hereby agrees to
lease to the Agent on a month-to-month tenancy for a period not to exceed one
hundred twenty (120) days at the Agent's election, at a rental of One Dollar
($1.00) per month, the premises on which the Collateral is located, provided it
is located on premises owned or leased by the Borrower.
11. Upon indefeasible payment in full of the Debt and termination of
the Credit Agreement, this Agreement shall terminate and be of no further force
and effect, and the Agent shall thereupon promptly return to the Borrower such
of the Collateral and such other documents delivered by the Borrower hereunder
as may then be in the Agent's possession and Agent will terminate all financing
statements in connection with this transaction. Until such time, however, this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and permitted assigns.
12. No failure or delay on the part of the Agent in exercising any
right, remedy, power or privilege hereunder shall operate as a waiver thereof or
of any other right, remedy, power or privilege of the Agent hereunder; nor shall
any single or partial exercise of any such right, remedy, power or privilege
preclude any other or further exercise thereof or the exercise of any other
right, remedy, power or privilege. No waiver of a single Event of Default shall
be deemed a waiver of a subsequent Event of Default. All waivers under this
Agreement must be in writing. The rights and remedies of the Agent under this
Agreement are cumulative and in addition to any rights or remedies which it may
otherwise have, and the Agent may enforce any one or more remedies hereunder
successively or concurrently at its option.
13. All notices, statements, requests and demands given to or made upon
either party hereto in accordance with the provisions of this Agreement shall be
given or made as provided in Section 10.6 of the Credit Agreement.
14. The Borrower agrees that as of the date hereof, all information
contained on the Security Interest Data Schedule attached hereto as Schedule A
is accurate and complete and contains no omission or misrepresentation. The
Borrower shall promptly notify the Agent of any changes in the information set
forth thereon.
15. The Borrower acknowledges that the provisions hereof giving the
Agent rights of access to books, records and information concerning the
Collateral and the Borrower's operations and providing the Agent access to the
Borrower's premises are intended to afford the Agent with immediate access to
-5-
<PAGE>
current information concerning the Borrower and its activities, including
without limitation, the value, nature and location of the Collateral so that the
Agent can, among other things, make an appropriate determination after the
occurrence of an Event of Default, whether and when to exercise its other
remedies hereunder and at Law, including without limitation, instituting a
replevin action should the Borrower refuse to turn over any Collateral to the
Agent. The Borrower further acknowledges that should the Borrower at any time
fail to promptly provide such information and access to the Agent, the Borrower
acknowledges that the Agent would have no adequate remedy at Law to promptly
obtain the same. The Borrower agrees that the provisions hereof may be
specifically enforced by the Agent and waives any claim or defense in any such
action or proceeding that the Agent has an adequate remedy at Law.
16. This Agreement shall be binding upon and inure to the benefit of the Agent,
the Banks and their respective successors and assigns, and the Borrower and its
successors and assigns, except that the Borrower may not assign or transfer the
Borrower's obligations hereunder or any interest herein.
17. This Agreement shall be deemed to be a contract under the laws of the
Commonwealth of Pennsylvania and for all purposes shall be governed by and
construed in accordance with the laws of said Commonwealth excluding its rules
relating to conflicts of law.
18. Any provision of this Agreement which is prohibited or unenforceable in any
jurisdiction shall not invalidate the remaining provisions hereof, and any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
[SIGNATURE PAGE FOLLOWS]
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<PAGE>
[SIGNATURE PAGE 1 OF 1 TO SECURITY AGREEMENT]
IN WITNESS WHEREOF, the parties hereto, by their officers thereunto
duly authorized, have executed and delivered this Agreement as of the day and
year first above set forth.
U.S. INTERACTIVE, INC.
By:_____________________________
Name:
Title:
PNC BANK, NATIONAL ASSOCIATION,
as Agent
By:_____________________________
Name:
Title:
<PAGE>
SCHEDULE A
TO
SECURITY AGREEMENT
SECURITY INTEREST DATA SUMMARY
1. The chief executive office of U.S. Interactive, Inc. (the "Debtor")
is located at:
2012 Renaissance Boulevard
King of Prussia, PA 19406
Montgomery County
2. The Debtor's true and full name is: U.S. Interactive, Inc. The
Debtor uses no trade names or fictitious names.
3. All of the Debtor's personal property which has not been delivered
to the Agent pursuant to the terms of this Agreement or the Credit Agreement is
now, and will be at all future times, located at the Debtor's chief executive
office as described in Paragraph 1 above, except as specified below:
CALIFORNIA:
18900 Stevens Creek Boulevard
Cupertino, CA 95014
[REMAINING ADDRESSES TO BE PROVIDED]
<PAGE>
SECURITY AGREEMENT
(Sub)
THIS SECURITY AGREEMENT (the "Agreement"), dated March 21, 2000 is
entered into by and between U.S. INTERACTIVE CORP. (DELAWARE), a Delaware
corporation (the "Borrower"), and PNC BANK, NATIONAL ASSOCIATION, as Agent (the
"Agent") for the Banks (as defined below);
WITNESSETH THAT:
WHEREAS, the Borrower is (or will be with respect to after-acquired
property) the legal and beneficial owner and the holder of the Collateral (as
defined in Section 1 hereof); and
WHEREAS, pursuant to that certain Credit Agreement (as it may hereafter
from time to time be restated, amended, modified or supplemented, the "Credit
Agreement") of even date herewith by and among the Agent, the Banks party
thereto (the "Banks") and the Borrower, the Agent and the Banks have agreed to
make certain loans to the Borrower; and
WHEREAS, the obligation of the Banks to make loans under the Credit
Agreement is subject to the condition, among others, that the Borrower secure
its obligations to the Banks under the Credit Agreement in the manner set forth
herein.
NOW, THEREFORE, intending to be legally bound hereby, the parties
hereto covenant and agree as follows:
1. Terms which are defined in the Credit Agreement and not otherwise
defined herein are used herein as defined therein. The following words and terms
shall have the following meanings, respectively, unless the context hereof
otherwise clearly requires:
(a) "Code" means the Uniform Commercial Code of each state as in
effect on the date hereof and as the same may subsequently be amended from time
to time, the substantive provisions of which are applicable to any of the
property of the Borrower in which the Agent for the benefit of the Banks is
granted a security interest pursuant to this Agreement.
(b) "Collateral" means all of the Borrower's right, title and
interest in, to and under the following described property of the Borrower (each
capitalized term used in this Section 1(b) shall have in this Agreement the
meaning given to it by Article 9 of the Code as in effect in Pennsylvania):
(i) all now existing and hereafter acquired and arising Accounts,
General Intangibles, Chattel Paper, Documents, Instruments, Investment Property,
Letters of Credit, Advices of Credit, Equipment, and Inventory, all Products of
and Accessions to the foregoing and all Proceeds of all of the foregoing
(including without limitation all insurance policies and proceeds thereof);
(ii) to the extent, if any, not included in clause (i) above,
each and every other item of personal property and fixtures, both those that are
now owned and those that hereafter arise or are acquired, regardless of whether
Article 9 of the Code is applicable to any extent to the creation, perfection or
enforcement of Liens thereon or therein.
Without limiting the foregoing, Collateral includes all business records and
information, including computer tapes and other storage media containing the
same and computer programs and software (including without limitation, source
code, object code and related manuals and documentation and all licenses to use
such software) for accessing and manipulating such information.
<PAGE>
(c) "Debt" means, collectively, all now existing and hereafter
arising Indebtedness and Obligations of the Borrower to the Banks or any
Affiliate of any Bank under the Credit Agreement and other Loan Documents,
including without limitation, all Indebtedness and Obligations, whether of
principal, interest, fees, expenses or otherwise, of the Borrower to the Banks
or any Affiliate of any Bank now existing or hereafter incurred under the Credit
Agreement or the Notes), or any of the other Loan Documents referred to therein
as any of the same or any one or more of them may from time to time be amended,
restated, modified or supplemented, together with any and all extensions,
renewals, refinancings or refundings thereof in whole or in part.
(d) "Receivables" means all of the Collateral except Equipment and
Inventory.
2. As security for the due and punctual payment and performance of
the Debt in full, the Borrower hereby agrees that the Agent and the Banks and
any Affiliate of any Bank shall have, and the Borrower hereby grants to and
creates in favor of the Agent for the benefit of the Banks and any Affiliate of
any Bank, a first priority security interest under the Code in and to the
Collateral subject only to Permitted Liens. Without limiting the generality of
Section 4 below, the Borrower further agrees that with respect to each item of
Collateral as to which (i) the creation of a valid and enforceable security
interest is not governed exclusively by the Code or (ii) the perfection of a
valid and enforceable security interest therein under the Code cannot be
accomplished either by the Agent taking possession thereof or by the filing in
appropriate locations of appropriate Code financing statements executed by the
Borrower, the Borrower will at its expense execute and deliver to the Agent such
documents, agreements, notices, assignments and instruments and take such
further actions as may be reasonably requested by the Agent from time to time
for the purpose of creating a valid and perfected first priority Lien on such
item, subject only to Permitted Liens, enforceable against the Borrower and all
third parties to secure the Debt.
3. The Borrower represents and warrants to the Agent and the Banks
that (a) the Borrower has good and marketable title to the Collateral, and (b)
except for the security interest granted to and created in favor of the Agent
for the benefit of the Banks hereunder and Permitted Liens, all the Collateral
is free and clear of any Lien other than the Liens of record of Venture Leasing
against Borrower that will be removed in connection with this transaction.
4. The Borrower will faithfully preserve and protect the Agent's
security interest in the Collateral as a prior perfected security interest under
the Code, superior and prior to the rights of all third Persons, except for
Permitted Liens, and will do all such other acts and things and will, upon
request therefor by the Agent, execute, deliver, file and record all such other
documents and instruments, including, without limitation, financing statements,
security agreements, assignments and documents and powers of attorney with
respect to the Collateral, and pay all filing fees and taxes related thereto, as
the Agent in its reasonable discretion may deem necessary or advisable from time
to time in order to attach, continue, preserve, perfect and protect said
security interest; and the Borrower hereby irrevocably appoints the Agent, its
officers, employees and agents, or any of them, as attorneys-in-fact for the
Borrower to execute, deliver, file and record such items for the Borrower and in
the Borrower's name, place and stead if an Event of Default has occurred and is
continuing. This power of attorney, being coupled with an interest, shall be
irrevocable for the life of this Agreement.
5. The Borrower covenants and agrees that:
(a) it will defend the Agent's and the Banks' right, title and
security interest in and to the Collateral and the proceeds thereof against the
claims and demands of all Persons whomsoever, other than any Person claiming a
right in the Collateral pursuant to an agreement between such Person and the
Agent or a Bank;
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<PAGE>
(b) it will not suffer or permit to exist on any Collateral any Lien
except for Permitted Liens;
(c) it will not take or omit to take any action, the taking or the
omission of which would result in a material alteration or impairment of the
Collateral or of the Agent's rights under this Agreement;
(d) it will not sell, assign or otherwise dispose of any portion of
the Collateral except as permitted in the Credit Agreement;
(e) except as permitted by the Credit Agreement, it will (i) obtain
and maintain sole and exclusive possession of the Collateral, (ii) keep the
Collateral and all records pertaining thereto at the locations specified on the
Security Interest Data Summary attached as Schedule A hereto, unless it shall
have given the Agent prior notice and taken any action reasonably requested by
the Agent to maintain its security interest therein, (iii) deliver to the Agent
upon the Agent's request therefor all Collateral consisting of Chattel Paper
immediately upon the Borrower's receipt of a request therefor, and (iv) keep
materially accurate and complete books and records concerning the Collateral and
such other books and records as the Agent may from time to time reasonably
require; and
(f) it will promptly furnish to the Agent such information and
documents relating to the Collateral as the Agent may reasonably request,
including, without limitation, all invoices, Documents, contracts, Chattel
Paper, Instruments and other writings pertaining to the Borrower's contracts or
the performance thereof, all of the foregoing to be certified upon request of
the Agent by an authorized officer of the Borrower.
6. The Borrower assumes full responsibility for taking any and all
necessary steps to preserve the Agent's and the Banks' rights with respect to
the Collateral against all Persons other than anyone asserting rights in respect
of a Permitted Lien. The Agent shall be deemed to have exercised reasonable care
in the custody and preservation of the Collateral in its possession if the Agent
takes such action for that purpose as the Borrower requests in writing, provided
that such requested action will not, in the judgment of the Agent, impair the
security interest in the Collateral created hereby or the Agent's and the Banks'
rights in, or the value of, the Collateral, and provided further that such
written request is received by the Agent in sufficient time to permit the Agent
to take the requested action.
7. (a) At any time and from time to time whether or not an Event of
Default then exists and without prior notice to or consent of the Borrower, the
Agent may at its option take such actions as the Agent deems appropriate (i) to
attach, perfect, continue, preserve and protect the Agent's and the Banks' prior
security interest in the Collateral, and/or (ii) to inspect, audit and verify
the Collateral, including reviewing all of the Borrower's books and records and
copying and making excerpts therefrom, provided that prior to an Event of
Default or a Potential Default, the same is done with advance notice during
normal business hours to the extent access to the Borrower's premises is
required, and if not paid in a timely fashion by Borrower, (iii) to add all
liabilities, obligations, costs and expenses reasonably incurred in connection
with the foregoing clauses (i) and (ii) to the Debt, to be paid by the Borrower
to the Agent for the benefit of the Banks upon demand;
(b) At any time and from time to time after an Event of Default
exists and is continuing and without prior notice to or consent of the Borrower,
the Agent may at its option take such action as the Agent in its reasonable
discretion deems appropriate (i) to maintain, repair, protect and insure the
Collateral, and/or (ii) to perform, keep, observe and render true and correct
any and all covenants, agreements, representations and warranties of the
Borrower hereunder, and (iii) to add all liabilities, obligations, costs and
expenses reasonably incurred in connection with the foregoing
-3-
<PAGE>
clauses (i) and (ii) to the Debt, to be paid by the Borrower to the Agent for
the benefit of the Banks upon demand.
8. After there exists any Event of Default under the Credit
Agreement:
(a) The Agent shall have and may exercise all the rights and
remedies available to and subject to all of the obligations of a secured party
under the Code in effect at the time, and such other rights and remedies as may
be provided by Law and as set forth below, including without limitation to take
over and collect all the Borrower's Receivables and all other Collateral, and to
this end the Borrower hereby appoints effective at such time, the Agent, its
officers, employees and agents, as its irrevocable, true and lawful
attorneys-in-fact with all necessary power and authority to (i) take possession
immediately, with or without notice, demand, or legal process, of any of or all
of the Collateral wherever found, and for such purposes, enter upon any premises
upon which the Collateral may be found and remove the Collateral therefrom, (ii)
require the Borrower to assemble the Collateral and deliver it to the Agent or
to any place designated by the Agent at the Borrower's expense, (iii) receive,
open and dispose of all mail addressed to the Borrower and notify postal
authorities to change the address for delivery thereof to such address as the
Agent may designate, (iv) demand payment of the Receivables, (v) enforce payment
of the Receivables by legal proceedings or otherwise, (vi) exercise all of the
Borrower's rights and remedies with respect to the collection of the
Receivables, (vii) settle, adjust, compromise, extend or renew the Receivables,
(viii) settle, adjust or compromise any legal proceedings brought to collect the
Receivables, (ix) to the extent permitted by applicable Law, sell or assign the
Receivables upon such terms, for such amounts and at such time or times as the
Agent deems advisable, (x) discharge and release the Receivables, (xi) take
control, in any manner, of any item of payment or proceeds from any account
debtor, (xii) prepare, file and sign the Borrower's name on any Proof of Claim
in Bankruptcy or similar document against any account debtor, (xiii) prepare,
file and sign the Borrower's name on any notice of Lien, assignment or
satisfaction of Lien or similar document in connection with the Receivables,
(xiv) do all acts and things necessary, in the Agent's reasonable and sole
discretion, to fulfill the Borrower's obligations under the Loan Documents, (xv)
endorse the name of the Borrower upon any check, Chattel Paper, Document,
Instrument, invoice, freight bill, bill of lading or similar document or
agreement relating to the Receivables or Inventory; (xvi) use the Borrower's
stationery and sign the Borrower's name to verifications of the Receivables and
notices thereof to account debtors; (xvii) access and use the information
recorded on or contained in any data processing equipment or computer hardware
or software relating to the Receivables, Inventory, or other Collateral or
proceeds thereof to which the Borrower has access, (xviii) demand, sue for,
collect, compromise and give acquittances for any and all Collateral, (xix)
prosecute, defend or compromise any action, claim or proceeding with respect to
any of the Collateral, and (xx) take such other action as the Agent may deem
appropriate, including extending or modifying the terms of payment of the
Borrower's debtors. This power of attorney, being coupled with an interest,
shall be irrevocable for the life of this Agreement. To the extent permitted by
Law, the Borrower hereby waives all claims of damages due to or arising from or
connected with any of the rights or remedies exercised by the Agent pursuant to
this Agreement, except claims for physical damage to the Collateral arising from
gross negligence or willful misconduct by the Agent or its employees or agents.
(b) The Agent shall have the right to lease, sell or otherwise
dispose of all or any of the Collateral at public or private sale or sales for
cash, credit or any combination thereof, with such notice as may be required by
Law (it being agreed by the Borrower that, in the absence of any contrary
requirement of Law, fifteen (15) days' prior notice of a public or private sale
of Collateral shall be deemed reasonable notice), in lots or in bulk, for cash
or on credit, all as the Agent, in its reasonable and sole discretion, may deem
advisable. Such sales may be adjourned from time to time with or without notice.
The Agent shall have the right to conduct such sales on the Borrower's premises
or elsewhere and shall have the right to use the Borrower's premises without
charge for such sales for such time or times as the Agent may see fit. The Agent
may purchase all or any part of
-4-
<PAGE>
the Collateral at public or, if permitted by Law, private sale and, in lieu of
actual payment of such purchase price, may set off the amount of such price
against the Debt.
9. The security interest in the Borrower's Collateral granted to and
created in favor of the Agent by this Agreement shall be for the benefit of the
Agent and the Banks. Each of the rights, privileges, and remedies provided to
the Agent hereunder or otherwise by Law with respect to the Borrower's
Collateral shall be exercised by the Agent only for its own benefit and the
benefit of the Banks, and any of the Borrower's Collateral or proceeds thereof
held or realized upon at any time by the Agent shall be applied as set forth in
Section 8.2.5 of the Credit Agreement. The Borrower shall remain liable to the
Banks for and shall pay to the Agent for the benefit of the Banks any deficiency
which may remain after such sale or collection.
10. If the Agent repossesses or seeks to repossess any of the
Collateral pursuant to the terms hereof because of the occurrence of an Event of
Default, Borrower will cooperate with the Agent and grant the Agent reasonable
access to the Borrower's premises. In the event Borrower does not cooperate with
the Agent and does not grant the Agent reasonable access to the Borrower's
premises, then to the extent it is commercially reasonable for the Agent to
store any Collateral on any of the Borrower's premises, the Borrower hereby
agrees to lease to the Agent on a month-to-month tenancy for a period not to
exceed one hundred twenty (120) days at the Agent's election, at a rental of One
Dollar ($1.00) per month, the premises on which the Collateral is located,
provided it is located on premises owned or leased by the Borrower.
11. Upon indefeasible payment in full of the Debt and termination of
the Credit Agreement, this Agreement shall terminate and be of no further force
and effect, and the Agent shall thereupon promptly return to the Borrower such
of the Collateral and such other documents delivered by the Borrower hereunder
as may then be in the Agent's possession and Agent will terminate all financing
statements. Until such time, however, this Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns.
12. No failure or delay on the part of the Agent in exercising any
right, remedy, power or privilege hereunder shall operate as a waiver thereof or
of any other right, remedy, power or privilege of the Agent hereunder; nor shall
any single or partial exercise of any such right, remedy, power or privilege
preclude any other or further exercise thereof or the exercise of any other
right, remedy, power or privilege. No waiver of a single Event of Default shall
be deemed a waiver of a subsequent Event of Default. All waivers under this
Agreement must be in writing. The rights and remedies of the Agent under this
Agreement are cumulative and in addition to any rights or remedies which it may
otherwise have, and the Agent may enforce any one or more remedies hereunder
successively or concurrently at its option.
13. All notices, statements, requests and demands given to or made
upon either party hereto in accordance with the provisions of this Agreement
shall be given or made as provided in Section 10.6 of the Credit Agreement.
14. The Borrower agrees that as of the date hereof, all information
contained on the Security Interest Data Schedule attached hereto as Schedule A
is accurate and complete and contains no omission or misrepresentation. The
Borrower shall promptly notify the Agent of any changes in the information set
forth thereon.
15. The Borrower acknowledges that the provisions hereof giving the
Agent rights of access to books, records and information concerning the
Collateral and the Borrower's operations and providing the Agent access to the
Borrower's premises are intended to afford the Agent with immediate access to
current information concerning the Borrower and its activities, including
without limitation, the value, nature and location of the Collateral so that the
Agent can, among other things, make an appropriate determination after the
occurrence of an Event of Default, whether and when to
-5-
<PAGE>
exercise its other remedies hereunder and at Law, including without limitation,
instituting a replevin action should the Borrower refuse to turn over any
Collateral to the Agent. The Borrower further acknowledges that should the
Borrower at any time fail to promptly provide such information and access to the
Agent, the Borrower acknowledges that the Agent would have no adequate remedy at
Law to promptly obtain the same. The Borrower agrees that the provisions hereof
may be specifically enforced by the Agent and waives any claim or defense in any
such action or proceeding that the Agent has an adequate remedy at Law.
16. This Agreement shall be binding upon and inure to the benefit of
the Agent, the Banks and their respective successors and assigns, and the
Borrower and its successors and assigns, except that the Borrower may not assign
or transfer the Borrower's obligations hereunder or any interest herein.
17. This Agreement shall be deemed to be a contract under the laws
of the Commonwealth of Pennsylvania and for all purposes shall be governed by
and construed in accordance with the laws of said Commonwealth excluding its
rules relating to conflicts of law.
18. Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall not invalidate the remaining provisions
hereof, and any such prohibition or unenforceability in any jurisdiction shall
not invalidate or render unenforceable such provision in any other jurisdiction.
[SIGNATURE PAGE FOLLOWS]
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[SIGNATURE PAGE 1 OF 1 TO SECURITY AGREEMENT]
IN WITNESS WHEREOF, the parties hereto, by their officers thereunto
duly authorized, have executed and delivered this Agreement as of the day and
year first above set forth.
U.S. INTERACTIVE CORP. (DELAWARE)
By:_______________________________
Name:
Title:
PNC BANK, NATIONAL ASSOCIATION, as
Agent
By:_______________________________
Name:
Title:
<PAGE>
SCHEDULE A
TO
SECURITY AGREEMENT
SECURITY INTEREST DATA SUMMARY
1. The chief executive office of U.S. Interactive Corp. (Delaware)
(the "Debtor") is located at:
_________________
_________________
_________________
__________ County
2. The Debtor's true and full name is: U.S. Interactive Corp.
(Delaware). The Debtor uses no trade names or fictitious names.
3. All of the Debtor's personal property which has not been
delivered to the Agent pursuant to the terms of this Agreement or the Credit
Agreement is now, and will be at all future times, located at the Debtor's chief
executive office as described in Paragraph 1 above, except as specified below:
<PAGE>
PATENT, TRADEMARK AND COPYRIGHT SECURITY AGREEMENT
This Patent, Trademark and Copyright Security Agreement (the
"Agreement"), dated March 21, 2000 is entered into by and between U.S.
INTERACTIVE, INC., a Delaware corporation (the "Pledgor"), and PNC BANK,
NATIONAL ASSOCIATION, as Agent for the Banks referred to below (the "Secured
Party").
WHEREAS, pursuant to that certain Credit Agreement (as amended,
restated, modified or supplemented from time to time, the "Credit Agreement") of
even date herewith by and among the Pledgor as borrower, the Banks and the
Secured Party as lenders (all as defined in the Credit Agreement), Secured Party
and the Banks have agreed to provide certain loans to the Pledgor, and the
Pledgor has agreed, among other things, to grant a security interest to the
Secured Party in certain patents, trademarks, copyrights and other property as
security for such loans and other obligations as more fully described herein.
NOW, THEREFORE, intending to be legally bound hereby, the parties
hereto agree as follows:
1. Except as otherwise expressly provided herein, capitalized terms
used in this Agreement shall have the respective meanings given to them in the
Credit Agreement.
2. To secure the full payment and performance of all Obligations and
other liabilities of the Pledgor now or hereafter existing under the Credit
Agreement and the other Loan Documents, including, without limitation,
principal, interest, fees, expenses, costs and expenses of enforcement,
reasonable attorneys' fees and expenses, and obligations under indemnification
provisions in the Loan Documents (collectively, the "Secured Obligations"),
Pledgor hereby grants, and conveys a security interest to Secured Party in the
entire right, title and interest of Pledgor in and to all trade names, patent
applications, patents, trademark applications, trademarks and copyrights,
whether now owned or hereafter acquired by Pledgor, including, without
limitation, those listed on Schedule A hereto, including all proceeds thereof
(such as, by way of example, license royalties and proceeds of infringement
suits), the right to sue for past, present and future infringements, all rights
corresponding thereto throughout the world and all reissues, divisions,
continuations, renewals, extensions and continuations-in-part thereof, and the
goodwill of the business to which any of the patents, trademarks and copyrights
relate (collectively, the "Patents, Trademarks and Copyrights").
3. Pledgor covenants and warrants that:
(a) the Patents, Trademarks and Copyrights are subsisting and have
not been adjudged invalid or unenforceable, in whole or in part;
(b) to the best of Pledgor's knowledge, each of the Patents,
Trademarks and Copyrights is valid and enforceable;
(c) Pledgor is the sole and exclusive owner of the entire and
unencumbered right, title and interest in and to each of the Patents, Trademarks
and Copyrights, free and clear of any liens, other than those under the Existing
Facility which are to be satisfied on or about the Closing Date, charges and
encumbrances, including without limitation pledges, assignments, licenses, shop
rights and covenants by Pledgor not to sue third persons;
(d) Pledgor has the corporate power and authority to enter into this
Agreement and perform its terms;
<PAGE>
(e) no claim has been made to Pledgor or, to the knowledge of
Pledgor, any other person that the use of any of the Patents, Trademarks and
Copyrights does or may violate the rights of any third party;
(f) Pledgor has used, and will continue to use for the duration of
this Agreement, consistent standards of quality in its manufacture of products
sold under the Patents, Trademarks and Copyrights; and
(g) Pledgor has used, and will continue to use for the duration of
this Agreement, proper statutory notice in connection with its use of the
Patents, Trademarks and Copyrights, except for those Patents, Trademarks and
Copyrights that are hereafter allowed to lapse in accordance with Paragraph 10
hereof.
4. Pledgor agrees that, until all of the Secured Obligations shall have
been satisfied in full, it will not enter into any agreement (for example, a
license agreement) which is inconsistent with Pledgor's obligations under this
Agreement, without Secured Party's prior written consent which shall not be
unreasonably withheld except Pledgor may license technology in the ordinary
course of business without the Secured Party's consent to suppliers and
customers to facilitate the manufacture and use of Pledgor's products.
5. If, before the Secured Obligations shall have been indefeasibly
satisfied in full and the Commitments have terminated, Pledgor shall own any new
trademarks or any new copyrightable or patentable inventions, or any patent
application or patent for any reissue, division, continuation, renewal,
extension, or continuation in part of any Patent, Trademark or Copyright or any
improvement on any Patent, Trademark or Copyright, the provisions of this
Agreement shall automatically apply thereto and Pledgor shall give to Secured
Party prompt notice thereof in writing. Pledgor and Secured Party agree to
modify this Agreement by amending Schedule A to include any future patents,
patent applications, trademark applications, trademarks, copyrights or copyright
applications and the provisions of this Agreement shall apply thereto.
6. Secured Party shall have, in addition to all other rights and
remedies given it by this Agreement and those rights and remedies set forth in
the Credit Agreement, those allowed by Law and the rights and remedies of a
secured party under the Uniform Commercial Code as enacted in any jurisdiction
in which the Patents, Trademarks and Copyrights may be located and, without
limiting the generality of the foregoing, if an Event of Default has occurred
and is continuing, Secured Party may immediately, without demand of performance
and without other notice (except as set forth below) or demand whatsoever to
Pledgor, all of which are hereby expressly waived, and without advertisement,
sell at public or private sale or otherwise realize upon, in a city that the
Agent shall designate by notice to the Pledgor, in Philadelphia, Pennsylvania or
elsewhere, the whole or from time to time any part of the Patents, Trademarks
and Copyrights, or any interest which Pledgor may have therein and, after
deducting from the proceeds of sale or other disposition of the Patents,
Trademarks and Copyrights all expenses (including fees and expenses for brokers
and attorneys), shall apply the remainder of such proceeds toward the payment of
the Secured Obligations as the Secured Party, in its sole and reasonable
discretion, shall determine. Any remainder of the proceeds after payment in full
of the Secured Obligations shall be paid over to Pledgor. Notice of any sale or
other disposition of the Patents, Trademarks and Copyrights shall be given to
Pledgor at least fifteen (15) days before the time of any intended public or
private sale or other disposition of the Patents, Trademarks and Copyrights is
to be made, which Pledgor hereby agrees shall be reasonable notice of such sale
or other disposition. At any such sale or other disposition, Secured Party may,
to the extent permissible under applicable Law, purchase the whole or any part
of the Patents, Trademarks and Copyrights sold, free from any right of
redemption on the part of Pledgor, which right is hereby waived and released.
-2-
<PAGE>
7. If any Event of Default shall have occurred and be continuing,
Pledgor hereby authorizes and empowers Secured Party to make, constitute and
appoint any officer or agent of Secured Party, as Secured Party may select in
its exclusive discretion, as Pledgor's true and lawful attorney-in-fact, with
the power to endorse Pledgor's name on all applications, documents, papers and
instruments necessary for Secured Party to use the Patents, Trademarks and
Copyrights, or to grant or issue, on commercially reasonable terms, any
exclusive or nonexclusive license under the Patents, Trademarks and Copyrights
to any third person, or necessary for Secured Party to assign, pledge, convey or
otherwise transfer title in or dispose, on commercially reasonable terms, of the
Patents, Trademarks and Copyrights to any third Person. Pledgor hereby ratifies
all that such attorney shall lawfully do or cause to be done by virtue hereof.
This power of attorney, being coupled with an interest, shall be irrevocable for
the life of this Agreement.
8. At such time as Pledgor shall have indefeasibly paid in full all of
the Secured Obligations and the Commitments shall have terminated, this
Agreement shall terminate and Secured Party shall execute and deliver to Pledgor
all deeds, assignments and other instruments as may be necessary or proper to
re-vest in Pledgor full title to the Patents, Trademarks and Copyrights, subject
to any disposition thereof which may have been made by Secured Party pursuant
hereto.
9. Any and all reasonable fees, costs and expenses, of whatever kind or
nature, including reasonable attorneys' fees and expenses incurred by Secured
Party in connection with the preparation of this Agreement and all other
documents relating hereto and the consummation of this transaction, the filing
or recording of any documents (including all taxes in connection therewith) in
public offices, the payment or discharge of any taxes, counsel fees, maintenance
fees, encumbrances, the protection, maintenance or preservation of the Patents,
Trademarks and Copyrights, or the defense or prosecution of any actions or
proceedings arising out of or related to the Patents, Trademarks and Copyrights,
shall be borne and paid by Pledgor within fifteen (15) days of demand by Secured
Party, and if not paid within such time, shall be added to the principal amount
of the Secured Obligations and shall bear interest at the highest rate
prescribed in the Credit Agreement.
10. Pledgor shall have the duty, through counsel reasonably acceptable
to Secured Party, to prosecute diligently any patent applications of the
Patents, Trademarks and Copyrights pending as of the date of this Agreement if
commercially reasonable or thereafter until the Secured Obligations shall have
been indefeasibly paid in full and the Commitments shall have terminated, to
make application on unpatented but patentable inventions (whenever it is
commercially reasonable in the reasonable judgment of Pledgor to do so) and to
preserve and maintain all rights in patent applications and patents of the
Patents, including without limitation the payment of all maintenance fees
(whenever it is commercially reasonable in the reasonable judgment of Pledgor to
do so). Any expenses incurred in connection with such an application shall be
borne by Pledgor. Pledgor shall not abandon any Patent, Trademark or Copyright
material to the business of Pledgor without the consent of Secured Party, which
shall not be unreasonably withheld.
11. Pledgor shall have the right, with the consent of Secured Party,
which shall not be unreasonably withheld, to bring suit, action or other
proceeding in its own name, and to join Secured Party, if necessary, as a party
to such suit so long as Secured Party is satisfied that such joinder will not
subject it to any risk of liability, to enforce the Patents, Trademarks and
Copyrights and any licenses thereunder. Pledgor shall promptly, upon demand,
reimburse and indemnify Secured Party for all damages, costs and expenses,
including reasonable legal fees, incurred by Secured Party as a result of such
suit or joinder by Pledgor.
12. No course of dealing between Pledgor and Secured Party, nor any
failure to exercise nor any delay in exercising, on the part of Secured Party,
any right, power or privilege hereunder or under the Credit Agreement or other
Loan Documents shall operate as a waiver of such right, power or privilege, nor
shall any single or partial exercise of any right, power or privilege hereunder
or thereunder preclude any other or further exercise thereof or the exercise of
any other right, power or privilege.
-3-
<PAGE>
13. All of Secured Party's rights and remedies with respect to the
Patents, Trademarks and Copyrights, whether established hereby or by the Credit
Agreement or by any other agreements or by Law, shall be cumulative and may be
exercised singularly or concurrently.
14. The provisions of this Agreement are severable, and if any clause
or provision shall be held invalid and unenforceable in whole or in part in any
jurisdiction, then such invalidity or unenforceability shall affect only such
clause or provision, or part thereof, in such jurisdiction, and shall not in any
manner affect such clause or provision in any other jurisdiction, or any clause
or provision of this Agreement in any jurisdiction.
15. This Agreement is subject to modification only by a writing signed
by the parties, except as provided in Paragraph 5.
16. The benefits and burdens of this Agreement shall inure to the
benefit of and be binding upon the respective successors and permitted assigns
of the parties, provided, however, that Pledgor may not assign or transfer any
of its rights or obligations hereunder or any interest herein and any such
purported assignment or transfer shall be null and void.
17. This Agreement shall be governed by and construed in accordance
with the internal Laws of the Commonwealth of Pennsylvania without regard to its
conflicts of law principles.
[SIGNATURES APPEAR ON FOLLOWING PAGE]
-4-
<PAGE>
[SIGNATURE PAGE 1 OF 1 TO PATENT, TRADEMARK
AND COPYRIGHT SECURITY AGREEMENT]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers or agents thereunto duly authorized, as of
the date first above written.
ATTEST: U.S. INTERACTIVE, INC.
____________________________ By:______________________________________
Name: Name:
Title: Title:
PNC BANK, NATIONAL ASSOCIATION, as Agent
By:______________________________________
Name:
Title:
<PAGE>
SCHEDULE A
TO
PATENT, TRADEMARK AND COPYRIGHT SECURITY AGREEMENT
LIST OF REGISTERED PATENTS, TRADEMARKS,
TRADE NAMES AND COPYRIGHTS
1. Registered Patents:
2. Trademarks:
3. Trade Names:
4. Copyrights:
<PAGE>
PATENT, TRADEMARK AND COPYRIGHT SECURITY AGREEMENT
(Sub)
This Patent, Trademark and Copyright Security Agreement (the
"Agreement"), dated March 21, 2000 is entered into by and between U.S.
INTERACTIVE CORP. (DELAWARE), a Delaware corporation (the "Pledgor"), and PNC
BANK, NATIONAL ASSOCIATION, as Agent for the Banks referred to below (the
"Secured Party").
WHEREAS, pursuant to that certain Credit Agreement (as amended,
restated, modified or supplemented from time to time, the "Credit Agreement") of
even date herewith by and among the Pledgor as borrower, the Banks and the
Secured Party as lenders (all as defined in the Credit Agreement), Secured Party
and the Banks have agreed to provide certain loans to the Pledgor, and the
Pledgor has agreed, among other things, to grant a security interest to the
Secured Party in certain patents, trademarks, copyrights and other property as
security for such loans and other obligations as more fully described herein.
NOW, THEREFORE, intending to be legally bound hereby, the parties
hereto agree as follows:
1. Except as otherwise expressly provided herein, capitalized terms
used in this Agreement shall have the respective meanings given to them in the
Credit Agreement.
2. To secure the full payment and performance of all Obligations and
other liabilities of the Pledgor now or hereafter existing under the Credit
Agreement and the other Loan Documents, including, without limitation,
principal, interest, fees, expenses, costs and expenses of enforcement,
reasonable attorneys' fees and expenses, and obligations under indemnification
provisions in the Loan Documents (collectively, the "Secured Obligations"),
Pledgor hereby grants, and conveys a security interest to Secured Party in the
entire right, title and interest of Pledgor in and to all trade names, patent
applications, patents, trademark applications, trademarks and copyrights,
whether now owned or hereafter acquired by Pledgor, including, without
limitation, those listed on Schedule A hereto, including all proceeds thereof
(such as, by way of example, license royalties and proceeds of infringement
suits), the right to sue for past, present and future infringements, all rights
corresponding thereto throughout the world and all reissues, divisions,
continuations, renewals, extensions and continuations-in-part thereof, and the
goodwill of the business to which any of the patents, trademarks and copyrights
relate (collectively, the "Patents, Trademarks and Copyrights").
3. Pledgor covenants and warrants that:
(a) the Patents, Trademarks and Copyrights are subsisting and have
not been adjudged invalid or unenforceable, in whole or in part;
(b) to the best of Pledgor's knowledge, each of the Patents,
Trademarks and Copyrights is valid and enforceable;
(c) Pledgor is the sole and exclusive owner of the entire and
unencumbered right, title and interest in and to each of the Patents, Trademarks
and Copyrights, free and clear of any liens, charges and encumbrances, including
without limitation pledges, assignments, licenses, shop rights and covenants by
Pledgor not to sue third persons;
(d) Pledgor has the corporate power and authority to enter into this
Agreement and perform its terms;
<PAGE>
(e) no claim has been made to Pledgor or, to the knowledge of
Pledgor, any other person that the use of any of the Patents, Trademarks and
Copyrights does or may violate the rights of any third party;
(f) Pledgor has used, and will continue to use for the duration of
this Agreement, consistent standards of quality in its manufacture of products
sold under the Patents, Trademarks and Copyrights; and
(g) Pledgor has used, and will continue to use for the duration of
this Agreement, proper statutory notice in connection with its use of the
Patents, Trademarks and Copyrights, except for those Patents, Trademarks and
Copyrights that are hereafter allowed to lapse in accordance with Paragraph 10
hereof.
4. Pledgor agrees that, until all of the Secured Obligations shall have
been satisfied in full, it will not enter into any agreement (for example, a
license agreement) which is inconsistent with Pledgor's obligations under this
Agreement, without Secured Party's prior written consent which shall not be
unreasonably withheld except Pledgor may license technology in the ordinary
course of business without the Secured Party's consent to suppliers and
customers to facilitate the manufacture and use of Pledgor's products.
5. If, before the Secured Obligations shall have been indefeasibly
satisfied in full and the Commitments have terminated, Pledgor shall own any new
trademarks or any new copyrightable or patentable inventions, or any patent
application or patent for any reissue, division, continuation, renewal,
extension, or continuation in part of any Patent, Trademark or Copyright or any
improvement on any Patent, Trademark or Copyright, the provisions of this
Agreement shall automatically apply thereto and Pledgor shall give to Secured
Party prompt notice thereof in writing. Pledgor and Secured Party agree to
modify this Agreement by amending Schedule A to include any future patents,
patent applications, trademark applications, trademarks, copyrights or copyright
applications and the provisions of this Agreement shall apply thereto.
6. Secured Party shall have, in addition to all other rights and
remedies given it by this Agreement and those rights and remedies set forth in
the Credit Agreement, those allowed by Law and the rights and remedies of a
secured party under the Uniform Commercial Code as enacted in any jurisdiction
in which the Patents, Trademarks and Copyrights may be located and, without
limiting the generality of the foregoing, if an Event of Default has occurred
and is continuing, Secured Party may immediately, without demand of performance
and without other notice (except as set forth below) or demand whatsoever to
Pledgor, all of which are hereby expressly waived, and without advertisement,
sell at public or private sale or otherwise realize upon, in a city that the
Agent shall designate by notice to the Pledgor, in Philadelphia, Pennsylvania or
elsewhere, the whole or from time to time any part of the Patents, Trademarks
and Copyrights, or any interest which Pledgor may have therein and, after
deducting from the proceeds of sale or other disposition of the Patents,
Trademarks and Copyrights all expenses (including fees and expenses for brokers
and attorneys), shall apply the remainder of such proceeds toward the payment of
the Secured Obligations as the Secured Party, in its sole and reasonable
discretion, shall determine. Any remainder of the proceeds after payment in full
of the Secured Obligations shall be paid over to Pledgor. Notice of any sale or
other disposition of the Patents, Trademarks and Copyrights shall be given to
Pledgor at least fifteen (15) days before the time of any intended public or
private sale or other disposition of the Patents, Trademarks and Copyrights is
to be made, which Pledgor hereby agrees shall be reasonable notice of such sale
or other disposition. At any such sale or other disposition, Secured Party may,
to the extent permissible under applicable Law, purchase the whole or any part
of the Patents, Trademarks and Copyrights sold, free from any right of
redemption on the part of Pledgor, which right is hereby waived and released.
-2-
<PAGE>
7. If any Event of Default shall have occurred and be continuing,
Pledgor hereby authorizes and empowers Secured Party to make, constitute and
appoint any officer or agent of Secured Party, as Secured Party may select in
its exclusive discretion, as Pledgor's true and lawful attorney-in-fact, with
the power to endorse Pledgor's name on all applications, documents, papers and
instruments necessary for Secured Party to use the Patents, Trademarks and
Copyrights, or to grant or issue, on commercially reasonable terms, any
exclusive or nonexclusive license under the Patents, Trademarks and Copyrights
to any third person, or necessary for Secured Party to assign, pledge, convey or
otherwise transfer title in or dispose, on commercially reasonable terms, of the
Patents, Trademarks and Copyrights to any third Person. Pledgor hereby ratifies
all that such attorney shall lawfully do or cause to be done by virtue hereof.
This power of attorney, being coupled with an interest, shall be irrevocable for
the life of this Agreement.
8. At such time as Pledgor shall have indefeasibly paid in full all of
the Secured Obligations and the Commitments shall have terminated, this
Agreement shall terminate and Secured Party shall execute and deliver to Pledgor
all deeds, assignments and other instruments as may be necessary or proper to
re-vest in Pledgor full title to the Patents, Trademarks and Copyrights, subject
to any disposition thereof which may have been made by Secured Party pursuant
hereto.
9. Any and all reasonable fees, costs and expenses, of whatever kind or
nature, including reasonable attorneys' fees and expenses incurred by Secured
Party in connection with the preparation of this Agreement and all other
documents relating hereto and the consummation of this transaction, the filing
or recording of any documents (including all taxes in connection therewith) in
public offices, the payment or discharge of any taxes, counsel fees, maintenance
fees, encumbrances, the protection, maintenance or preservation of the Patents,
Trademarks and Copyrights, or the defense or prosecution of any actions or
proceedings arising out of or related to the Patents, Trademarks and Copyrights,
shall be borne and paid by Pledgor within fifteen (15) days of demand by Secured
Party, and if not paid within such time, shall be added to the principal amount
of the Secured Obligations and shall bear interest at the highest rate
prescribed in the Credit Agreement.
10. Pledgor shall have the duty, through counsel reasonably acceptable
to Secured Party, to prosecute diligently any patent applications of the
Patents, Trademarks and Copyrights pending as of the date of this Agreement if
commercially reasonable or thereafter until the Secured Obligations shall have
been indefeasibly paid in full and the Commitments shall have terminated, to
make application on unpatented but patentable inventions (whenever it is
commercially reasonable in the reasonable judgment of Pledgor to do so) and to
preserve and maintain all rights in patent applications and patents of the
Patents, including without limitation the payment of all maintenance fees
(whenever it is commercially reasonable in the reasonable judgment of Pledgor to
do so). Any expenses incurred in connection with such an application shall be
borne by Pledgor. Pledgor shall not abandon any Patent, Trademark or Copyright
material to the business of Pledgor without the consent of Secured Party, which
shall not be unreasonably withheld.
11. Pledgor shall have the right, with the consent of Secured Party,
which shall not be unreasonably withheld, to bring suit, action or other
proceeding in its own name, and to join Secured Party, if necessary, as a party
to such suit so long as Secured Party is satisfied that such joinder will not
subject it to any risk of liability, to enforce the Patents, Trademarks and
Copyrights and any licenses thereunder. Pledgor shall promptly, upon demand,
reimburse and indemnify Secured Party for all damages, costs and expenses,
including reasonable legal fees, incurred by Secured Party as a result of such
suit or joinder by Pledgor.
12. No course of dealing between Pledgor and Secured Party, nor any
failure to exercise nor any delay in exercising, on the part of Secured Party,
any right, power or privilege hereunder or under the Credit Agreement or other
Loan Documents shall operate as a waiver of such right, power or privilege, nor
shall any single or partial exercise of any right, power or privilege hereunder
or thereunder preclude any other or further exercise thereof or the exercise of
any other right, power or privilege.
-3-
<PAGE>
13. All of Secured Party's rights and remedies with respect to the
Patents, Trademarks and Copyrights, whether established hereby or by the Credit
Agreement or by any other agreements or by Law, shall be cumulative and may be
exercised singularly or concurrently.
14. The provisions of this Agreement are severable, and if any clause
or provision shall be held invalid and unenforceable in whole or in part in any
jurisdiction, then such invalidity or unenforceability shall affect only such
clause or provision, or part thereof, in such jurisdiction, and shall not in any
manner affect such clause or provision in any other jurisdiction, or any clause
or provision of this Agreement in any jurisdiction.
15. This Agreement is subject to modification only by a writing signed
by the parties, except as provided in Paragraph 5.
16. The benefits and burdens of this Agreement shall inure to the
benefit of and be binding upon the respective successors and permitted assigns
of the parties, provided, however, that Pledgor may not assign or transfer any
of its rights or obligations hereunder or any interest herein and any such
purported assignment or transfer shall be null and void.
17. This Agreement shall be governed by and construed in accordance
with the internal Laws of the Commonwealth of Pennsylvania without regard to its
conflicts of law principles.
[SIGNATURES APPEAR ON FOLLOWING PAGE]
-4-
<PAGE>
[SIGNATURE PAGE 1 OF 1 TO PATENT, TRADEMARK
AND COPYRIGHT SECURITY AGREEMENT]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers or agents thereunto duly authorized, as of
the date first above written.
ATTEST: U.S. INTERACTIVE CORP. (DELAWARE)
______________________________ By:______________________________________
Name: Name:
Title: Title:
PNC BANK, NATIONAL ASSOCIATION, as Agent
By:______________________________________
Name:
Title:
<PAGE>
SCHEDULE A
TO
PATENT, TRADEMARK AND COPYRIGHT SECURITY AGREEMENT
LIST OF REGISTERED PATENTS, TRADEMARKS,
TRADE NAMES AND COPYRIGHTS
1. Registered Patents:
2. Trademarks:
3. Trade Names:
4, Copyrights:
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors U.S. Interactive, Inc.:
The audits referred to in our report dated February 9, 2000, included the
related consolidated financial statement schedule for each of the years in the
three-year period ended December 31, 1999, 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.
/s/ KPMG LLP
- ---------------------------
Philadelphia, Pennsylvania
April 10, 2000
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors Soft Plus, Inc.:
We consent to the use of our report included herein and to the reference
to our firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP
- ---------------------------
Mountain View, California
April 10, 2000
<PAGE>
EXHIBIT 23.4
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, Inc. 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
- -------------------------------
Los Angeles, California
April 11, 2000
