<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File Number 0-26923
U.S. INTERACTIVE, INC.
(Exact name of registrant as specified in its charter)
Delaware 23-3316696
(State or Other Jurisdiction of (I.R.S. Employer)
Incorporation or Organization) (Identification Number)
2012 Renaissance Boulevard, 19406
King of Prussia, Pennsylvania (Zip Code)
(Address of principal executive offices)
(610) 313-9700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 26,520,925 shares of common
stock, $.001 par value per share, as of April 30, 2000.
<PAGE>
U.S. Interactive, Inc. and Subsidiaries
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Page No.
--------
<S> <C> <C>
Consolidated Balance Sheets as of March 31, 2000 (Unaudited) and December 31, 1999..... 1
Consolidated Statements of Operations for the three months ended March 31, 2000
and 1999 (Unaudited)................................................................. 2
Consolidated Statements of Cash Flows for the three months ended March 31, 2000 and 1999
(Unaudited).......................................................................... 3
Notes to Condensed Consolidated Financial Statements................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................. 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ..................................................................... 14
Item 2. Changes in Securities and Use of Proceeds.............................................. 15
Item 6. Exhibits and Reports on Form 8-K....................................................... 16
SIGNATURES............................................................................. 18
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................... $ 9,227 $ 34,130
Accounts receivable (net of allowance of $336 in
2000 and $75 in 1999)........................... 26,877 12,274
Fees and expenditures in excess of billings......... 1,455 353
Prepaid expenses and other current assets........... 2,886 2,383
--------- ---------
Total current assets .......................... 40,445 49,140
Furniture and equipment, net............................. 8,907 5,451
Goodwill and other intangibles, net...................... 364,390 5,988
Deferred offering costs.................................. 249 -
Other assets............................................. 2,056 1,699
--------- ---------
Total Assets ............................................ $ 416,047 $ 62,278
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ..................................... $ 4,981 $ 2,641
Accrued expenses and other liabilities................ 14,462 5,164
Notes payable-shareholders............................ 80,000 -
Notes payable-bank.................................... 6,150 -
Current portion of long-term debt..................... 1,177 977
Billings in excess of fees and expenditures .......... 3,169 1,854
Deferred revenue...................................... 557 -
--------- ---------
Total current liabilities....................... 110,496 10,636
Long-term debt, net of current portion................... 2,415 1,666
--------- ---------
Total Liabilities........................................ 112,911 12,302
Stockholders' Equity
Preferred stock, $.001 par value, 15,000,000 shares
authorized, none issued or outstanding in 1999........ - -
Common Stock $.001 par value, 90,000,000 shares
authorized, $.001 par value 24,191,825 shares issued
in 2000 (unaudited), 20,551,192 shares issued in
1999.................................................. 24 21
Additional paid in capital............................... 343,065 80,581
Deferred stock compensation.............................. (659) (831)
Treasury stock, 1,062,709 shares, at cost................ (5,055) (5,055)
Accumulated deficit...................................... (34,239) (24,740)
--------- ---------
Total Stockholders' Equity............................... 303,136 49,976
--------- ---------
Total Liabilities and Stockholders' Equity............... $ 416,047 $ 62,278
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
1
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U.S. INTERACTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
---- ----
(unaudited) (unaudited)
<S> <C> <C>
Revenue ......................................................... $ 18,550 $ 6,123
Operating Costs and Expenses:
Project personnel and related expenses ..................... 8,185 3,071
Management and administrative .............................. 7,422 2,683
Research and development ................................... 190 --
Selling and marketing ...................................... 2,345 723
Depreciation and amortization .............................. 7,569 2,496
--------- --------
Total operating expenses ................................. 25,711 8,973
--------- --------
Operating loss .................................................. (7,161) (2,850)
Other Income (Expense):
Interest expense ........................................... (447) (118)
Interest income ............................................ 393 26
--------- --------
Loss before extraordinary item .................................. (7,215) (2,942)
Extraordinary item - loss from early extinguishment
of debt ................................................. (2,284) --
--------- --------
Net loss ........................................................ (9,499) (2,942)
Accretion of mandatorily redeemable preferred stock to
redemption value........................................... -- (374)
--------- --------
Net loss attributable to common stockholders .................... $ (9,499) $ (3,316)
========= ========
Basic and diluted loss per share before extraordinary item and
before accretion of mandatorily redeemable preferred stock
to redemption value ....................................... $ (.35) $ (.36)
Basic and diluted loss per share for extraordinary item.......... $ (.11) --
--------- --------
Basic and diluted loss per share before accretion of mandatorily
redeemable preferred stock to redemption value ............ $ (.46) $ (.36)
========= ========
Basic and diluted loss per share attributable to common
stockholders .............................................. $ (.46) $ (.40)
========= ========
Weighted average shares outstanding used in the loss per common
share calculation:
Basic and diluted ............................................... 20,507 8,249
</TABLE>
See accompanying notes to consolidated financial statements.
2
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U.S. INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
---- ----
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................. $ (9,499) $ (2,942)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of deferred stock compensation and other
non-cash charges...................................... 1,739 77
Depreciation and amortization .......................... 7,569 2,496
Changes in operating assets and liabilities, net of
effects of acquisitions:
Increase in accounts receivable...................... (7,140) (3,571)
Decrease in fees and expenditures in excess of
billings .......................................... 519 33
Increase in prepaid expenses and other current
assets ............................................ (606) (27)
Increase in accounts payable and accrued expenses .. 6,099 984
Increase in billings in excess of fees and
expenditures ...................................... 1,314 1,787
-------- ---------
Net cash used in operating activities .................. (5) (1,163)
-------- ---------
Cash flows from investing activities:
Purchase of furniture and equipment...................... (2,401) (329)
Acquisition, net of cash acquired ....................... (25,426) 36
Other.................................................... (242) 23
-------- ---------
Net cash used in investing activities.................... (28,069) (270)
-------- ---------
Cash flows from financing activities:
Net proceeds from equipment financing.................... 401 545
Net (repayments) borrowings under bank line of credit.... 2,545 (631)
Repayment of stockholder loans........................... - (7)
Net proceeds from the exercise of stock options.......... 474 155
Deferred offering costs.................................. (249) --
-------- ---------
Net cash provided by financing activities................ 3,171 62
-------- ---------
Net decrease in cash and cash equivalents ............... (24,903) (1,371)
Cash and cash equivalents, beginning of period........... 34,130 3,698
-------- ---------
Cash and cash equivalents, end of period................. $ 9,227 $ 2,327
======== =========
Supplemental disclosure of cash flow information:
Cash paid for interest ............................. $ 74 $ 110
======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Interim Financial Information
The interim condensed consolidated financial statements of U.S.
Interactive, Inc. (the Company) for the three months ended March 31, 2000 and
1999, included herein have been prepared by the Company, without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission (SEC).
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations relating
to interim financial statements. These unaudited consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto as of December 31, 1999 included in the Company's
Form 10-K. In the opinion of management, the accompanying unaudited interim
consolidated financial statements reflect all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial position
of the Company at March 31, 2000, and the results of its operations for the
three months ended March 31, 2000 and 1999, and the results of its cash flows
for the three months ended March 31, 2000 and 1999.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
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.
Principles of Consolidation
The accompanying consolidated financial statements include the
financial statements of the Company and its three wholly owned subsidiaries, Web
Access, Inc., U.S. Interactive Corp. (Delaware) and U.S. Interactive (Canada),
Inc. All significant intercompany balances and transactions have been eliminated
in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of any potential contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Deferred Offering Costs
As of March 31, 2000 specific incremental costs directly attributable
to the Company's public offering process have been deferred. These costs will be
charged against additional paid-in-capital during the quarter ending June 30,
2000 in connection with the consummation of the offering.
4
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Historical Net Loss Per Share
The Company computes earnings per share in accordance with SFAS No.
128, "Earnings per Share" ("SFAS No. 128"). Basic earnings per share is computed
using the weighted average number of common shares outstanding during the
period. Diluted earnings per share is computed using the weighted-average number
of common and common equivalent shares outstanding during the period. For all
loss periods, the effect of common equivalent shares were excluded from the
computation as their effect is anti-dilutive. 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.
2. ACQUISITIONS
In March 1999, the Company acquired certain assets and assumed certain
liabilities of InVenGen LLC, a regional Internet professional service firm, in
exchange for 584,800 shares of the Company's common stock having an estimated
fair market value of $2,924,000 at the time of the transaction. The acquisition
was accounted for using the purchase method of accounting. Accordingly, a
portion of the purchase price was allocated to the net assets acquired and
liabilities assumed. The balance of the purchase price was recorded as goodwill
and is being amortized over two years.
The Company also issued 275,200 shares of restricted common stock in
connection with the transaction. The former employees of InVenGen LLC who became
employees of the Company are required to be employed by the Company during the
next two year period in order for the restricted shares to be released. If an
employee leaves the Company during the two-year period all unvested shares for
such employee are forfeited. As of March 31, 2000, 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.
On March 8, 2000, the Company acquired by merger (the Merger) Soft
Plus, Inc. (Soft Plus), a privately-held e-solutions company. The Company paid
to the Soft Plus shareholders 3.4 million shares of the Company's common stock
and 1.4 million options to acquire shares of the Company's common stock with an
estimated combined fair value of $262 million, $20 million in cash paid at
closing and an unsecured $80 million note bearing interest at 6.2% due to the
selling shareholders to be paid upon the earlier of one year or the receipt by
the Company of not less than $80 million from the net proceeds of public
offerings of the Company's common stock. The Merger has been accounted for using
the purchase method of accounting. Accordingly, the purchase price has been
allocated to the fair value of the net assets acquired and liabilities assumed.
The balance of the purchase price has been allocated to goodwill and other
intangible assets and amortized over their estimated useful lives of
approximately five years.
5
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U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. ACQUISITIONS - (Continued)
The following table reflects unaudited pro forma combined results of
operations of the Company and Soft Plus on the basis that the acquisition had
taken place at the beginning of 1999 (in thousands, except per share data).
<TABLE>
<CAPTION>
Three Months Ending Three Months Ending
March 31, March 31,
2000 1999
---- ----
<S> <C> <C>
Revenue ................................................. $24,891 $ 11,554
Net loss attributable to common stockholders.............. (29,234) (22,572)
Basic and diluted loss per common share................... $ (1.27) $ (1.94)
</TABLE>
In management's opinion, the unaudited pro forma combined results of
operations are not indicative of the actual results that would have occurred had
the acquisition been consummated at the beginning of 1999 or of future
operations of the combined companies under the ownership and management of the
Company.
3. REVOLVING CREDIT FACILITY
In March 2000, the Company entered into a revolving credit facility
with a commercial bank which provides for maximum borrowings of $15 million.
Interest is charged at the bank's prime lending rate plus 0.50%. On March 31,
2000 there were outstanding borrowings of $6.0 million at an interest rate of
8.75%. The line is collateralized by substantially all of the Company's assets
and expires 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.
4. LITIGATION
The Company is a party to legal proceedings and claims. 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.
5. EXTRAORDINARY ITEM
On March 21, 2000, the Company repaid all of the outstanding debt
acquired in the Soft Plus merger (note 2). The early extinguishment of this debt
resulted in an extraordinary charge of $2.3 million that consisted of $1.8
million of deferred financing costs and a $500,000 early termination fee.
6. PUBLIC OFFERING
In April 2000, the Company completed a public offering of securities
and issued a total of 2,274,567 shares of common stock at $19.63 per share. An
additional 225,433 shares were sold by existing stockholders at $19.63 per
share. Proceeds to the Company from its public offering net of underwriting
discounts and costs of the offering were approximately $41.8 million. The
Company used a total of $6.0 million of the net proceeds to repay all debt then
outstanding under its line of credit (note 3).
The following unaudited pro forma consolidated balance sheet sets forth
the financial position of the Company as of March 31, 2000 as if the public
offering had closed and all proceeds were received on March 31, 2000 and all
offering related expenses had been accrued or paid.
6
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
UNAUDITED
(In thousands, except per share data)
<TABLE>
<CAPTION>
March 31, 2000
March 31, Pro forma Pro Forma
2000 (unaudited) Adjustments (unaudited)
---------------- ----------- -----------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents................................ $ 9,227 $35,967 $ 45,194
Accounts receivable (net of allowance of $336 in 2000)... 26,877 26,877
Fees and expenditures in excess of billings ............. 1,455 1,455
Prepaid expenses and other current assets................ 2,886 - 2,886
---------- ------- --------
Total current assets.................................. 40,445 35,967 76,412
Furniture and equipment, net.................................. 8,907 8,907
Goodwill, net ................................................ 364,390 364,390
Deferred offering costs....................................... 249 (249) -
Other assets.................................................. 2,056 - 2,056
---------- ------- --------
Total Assets.................................................. $ 416,047 $35,718 $451,765
========== ======= ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable......................................... $ 4,981 $ 4,981
Accrued expenses and other liabilities................... 14,462 14,462
Notes payable-shareholders............................... 80,000 80,000
Notes payable-bank....................................... 6,150 $(6,000) 150
Current portion of long-term debt........................ 1,177 1,177
Billings in excess of fees and expenditures.............. 3,169 - 3,169
Deferred revenue......................................... 557 - 557
---------- ------- --------
Total current liabilities................................ 110,496 (6,000) 104,496
Long-term debt, net of current portion........................ 2,415 - 2,415
---------- ------- --------
Total Liabilities............................................. 112,911 (6,000) 106,911
Stockholders' equity:
Commonstock, $.001 par value, 90,000,000 shares authorized,
24,191,825 shares issued in 2000 (unaudited) and
26,466,392 issued pro forma: ........................... 24 2 26
Additional paid in capital ................................... 343,065 41,716 384,781
Deferred stock compensation................................... (659) - (659)
Treasury stock, 1,062,709 shares, at cost..................... (5,055) (5,055)
Accumulated deficit ......................................... (34,239) - (34,239)
---------- ------- --------
Total Stockholders' Equity.................................... 303,136 41,718 344,854
---------- ------- --------
Total Liabilities and Stockholders' Equity.................... $ 416,047 $35,718 $451,765
========== ======= ========
</TABLE>
7
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U.S. INTERACTIVE, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of U.S. Interactive, Inc. should be read in conjunction with the
unaudited condensed consolidated financial statements and notes thereto included
elsewhere in this report. This Quarterly Report on Form 10-Q contains
forward-looking statements within the meaning of Section 27A of the Securities
act of 1933, as amended, and Section 1E of the Securities Exchange Act of 1934,
as amended. These forward-looking statements involve risks and uncertainties,
and actual results could be significantly different than those discussed in this
Quarterly Report on Form 10-Q. These forward-looking statements include
statements about the following:
o implementing our 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 Report, the words "anticipate, "believe," "estimate,"
"expect," "seek," "intend," "may" and similar expressions are generally intended
to identify forward-looking statements. There are important factors that could
cause actual results to differ materially from those expressed or implied by
such forward-looking statements including: changes in general economic and
business conditions and those in the Internet professional services market in
particular; changes in Internet-related technologies; actions of competitors;
the extent to which we are able to expand our business into new markets; our
inability to effectively manage our growth (including growth through
acquisitions), including problems which may arise in integrating acquired
businesses into the Company's operations and in achieving satisfactory operating
results from the acquired businesses; the level of demand for our services;
changes in our business strategies; Year 2000 issues including those affecting
the Company or its clients; our inability to obtain financing when required and
other factors discussed under the caption "Risk Factors" in our prospectus dated
April 12, 2000.
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 39% of our revenue for the three months ended March 31,
2000 was derived from fixed-fee arrangements. The percentage of our revenue that
is derived from fixed-fee arrangements may increase in the future. Substantially
all of our client projects may be terminated early by the client without
penalty.
Cost Structure. 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 cost
associated with our development and maintenance of our marketing materials and
programs. Management and administrative expense consists primarily of the costs
associated with:
o operations
o finance
o human resources
o information systems
o facilities
o other administrative support for project personnel
8
<PAGE>
We regularly review our fees for services, compensation and overhead
costs in an effort to remain competitive within our industry. In addition, we
monitor the progress of client projects with client senior management from time
to time. Monitoring the costs and progress associated with each project is aided
by our intranet-based project management systems. We manage the activities of
our service delivery personnel by monitoring 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 with our sales efforts to secure new client projects.
Variability of Operating Results. Our operating results have fluctuated
from quarter to quarter and may continue to fluctuate in the future. These
fluctuations may be significant. It is difficult for us to forecast accurately
the frequency and duration of our projects. We incur expenses, which are mainly
fixed expenses, based on our expectations concerning the costs of our future
projects. We may not be able to adjust our spending in a timely manner to
compensate for any shortfall in our projected revenues. In the event of such a
shortfall, our expenses as a percentage of our revenue would increase. We also
have experienced seasonality with respect to our revenues that has resulted in
lower revenue during summer, year-end vacation and holiday periods.
In March 1999, the Company acquired certain assets and assumed certain
liabilities of InVenGen LLC, a regional Internet professional service firm, in
exchange for 584,800 shares of the Company's common stock having an estimated
fair market value of $2,924,000 at the time of the transaction. The acquisition
was accounted for using the purchase method of accounting. Accordingly, a
portion of the purchase price was allocated to the net assets acquired and
liabilities assumed. The balance of the purchase price was recorded as goodwill
and is being amortized over two years. The results of operations of InVenGen LLC
have been consolidated with the Company's results of operations since April 1,
1999.
In March 2000, we acquired by merger (the Merger) Soft Plus, a provider
of e-CRM solutions. We paid to the Soft Plus shareholders in the Merger: (i)
3,391,106 unregistered shares of our common stock, (ii) $20 million in cash, and
(iii) an unsecured $80 million note due to the former shareholders of Soft Plus
to be paid upon the earlier of one year or the completion of a public offering
of the Company's common 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 has been
accounted for using the purchase method of accounting. Accordingly, the purchase
price has been allocated to the net assets acquired and liabilities assumed. The
balance of the purchase price has been allocated to goodwill and other
intangible assets and amortized over their estimated useful lives of
approximately five years.
9
<PAGE>
Results of Operations
The following table presents, for the periods indicated, the relative
composition of revenue and selected statements of operations data as a
percentage of revenue:
Three Months Ended
March 31, March 31,
2000 1999
---- ----
Net revenues.................................... 100% 100%
Operating expenses:
Project personnel and related expenses. 44 50
Management and administration.......... 40 44
Research and development ............. 1 -
Marketing and sales.................... 13 12
Depreciation and amortization ......... 41 41
----- -----
Total operating expenses............... 139 147
----- -----
Loss from operations............................ (39) (47)
Other income (expense), net..................... - (1)
----- -----
Loss before extraordinary item.................. (39) (48)
Extraordinary item-loss from early
extinguishment of debt................. (12) -
----- -----
Net loss ....................................... (51%) (48%)
===== =====
Revenue. Revenue increased $12.4 million, or 203%, to $18.5 million for
the three months ended March 31, 2000, from $6.1 million for the three months
ended March 31, 1999. The increase in revenue was primarily due to growth in
services delivered to new clients, additional projects for existing clients and
larger average project size as well as the acquisition of Soft Plus, Inc. (Soft
Plus) which was effective March 8, 2000 which accounted for approximately $2.4
million of the revenue increase.
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 $5.1 million, or 167%, to $8.2 million for the three months ended
March 31, 2000, from $3.1 million for the three months ended March 31, 1999. The
increase was primarily due to the increase in the hiring of project personnel as
well as contracted services associated with the increased demand for the
Company's services and $1.1 million additional personnel related expenses
associated with the Soft Plus acquisition.
Management and Administrative. Management and administrative expenses
increased $4.7 million, or 177%, to $7.4 million for the three months ended
March 31, 2000, from $2.7 million for the three months ended March 31, 1999. 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 and
general operations.
Marketing and Sales. Marketing and sales expenses increased $1.6
million, or 224%, to $2.3 million for the three months ended March 31, 2000,
from $723,000 for the three months ended March 31, 1999. The increase was
attributable to the continuing investment in the Company's marketing and sales
programs including the hiring of new business development and marketing
personnel.
Depreciation and Amortization. Depreciation and amortization increased
$5.1 million to $7.6 million for the three months ended March 31, 2000 as
compared to $2.5 million for the three months ended March 31, 1999. The increase
was primarily due to amortization of approximately $4.5 million from the Soft
Plus acquisition. The amount is being amortized over a five-year period. There
was also increased capital expenditures for new equipment and leasehold
improvements.
10
<PAGE>
Other Income (Expense). Other expense decreased $38,000 to $54,000 for
the three months ended March 31, 2000, compared to $92,000 for the three months
ended March 31, 1999. The decrease was primarily attributable to increased
interest income from cash equivalents primarily the result of the Company's
initial public offering. The increase was partially offset by interest expense
on the $80 million note due to former Soft Plus shareholders as a result of the
merger on March 8, 2000.
Extraordinary item. As a result of the merger with Soft Plus, the
Company repaid all of the outstanding debt under Soft Plus' credit facility,
which resulted in a one-time charge of $2.3 million.
Income Tax Expense. As a result of the Company's losses there was no
income tax expense for the three months ended March 31, 2000, or the three
months ended March 31, 1999.
Liquidity and Capital Resources
Prior to the completion of our initial public offering in August 1999,
the Company had financed operations primarily from sales of preferred stock and
borrowings under a line of credit and term loan from a commercial bank. Through
December 31, 1998, we had raised approximately $12.7 million, net of offering
expenses, through the sale of our preferred stock. At March 31, 2000 the Company
had approximately $9.2 million in cash and cash equivalents.
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 was $5,000 for the three month
period ended March 31, 2000, and as compared to $1.2 million for the comparable
period in 1999. Cash used in operating activities in each of these periods was
primarily the result of net losses, which were partially offset by non-cash
charges for depreciation and amortization, as well as increases in accounts
receivable and other assets which were offset by increases in accounts payable
and other liabilities.
Net cash used in investing activities was $28.1 million for the three
months ended March 31, 2000, as compared to $270,000 for the three months ended
March 31, 1999. The increase in net cash used was primarily due to the cash paid
and expenses accrued for in the Soft Plus acquisition and increased purchases of
furniture and equipment.
Net cash provided by financing activities was $3.2 million for the
three months ended March 31, 2000, as compared to $62,000 for the three months
ended March 31, 1999. The principal reason for the increase was borrowings under
the Company's revolving credit facility, which was partially offset by the
repayment of the Soft Plus credit facility.
In April 2000, the Company completed a public offering of securities
and issued a total of 2,274,567 shares of common stock at $19.63 per share. An
additional 225,433 shares were sold by existing stockholders at $19.63 per
share. Proceeds to the Company from its public offering net of underwriting
discounts and costs of the offering were approximately $41.8 million. The
Company used a total of $6.0 million of the net proceeds to repay all
outstanding debt under its line of credit.
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)."
11
<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 anticipate that we will repay the $80 million note with proceeds to
be obtained from one or more of the following: borrowings under our credit
facilities, a refinancing, or a sale of capital stock or debt securities in the
public or private markets, together with revenues generated from operations.
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 may be materially adversely affected.
The Company believes that the net proceeds from the recently completed
public offering, combined with 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 eighteen months provided,
however that the Company is able to obtain funds sufficient to repay the $80
million note on terms satisfactory to the Company as described above. 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 the Company's stockholders. The Company may need to raise
additional funds sooner in order to support more rapid expansion, develop new or
enhanced services and products, respond to competitive pressures, acquire
complementary businesses or technologies or take advantage of unanticipated
opportunities. Future liquidity and capital requirements will depend on numerous
factors, including the success of existing and new service offerings and
competing technological and market developments. Additional financing, if any,
may not be available on satisfactory terms.
12
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk for changes in interest rates
relates primarily to the increase or decrease in the amount of interest income
we can earn on our available funds for investment and on the increase or
decrease in the amount of interest expense we must pay with respect to our
various outstanding debt instruments. The risk associated with fluctuating
interest expense is limited, however, to the exposure related to those debt
instruments and credit facilities which are tied to variable market rates. We do
not plan to use derivative financial instruments in our investment portfolio. We
plan to ensure the safety and preservation of our invested principal funds by
limiting default risks, market risk and reinvestment risk. We plan to mitigate
default risk by investing in high-credit, quality securities. If market interest
rates were to increase by 10% from rates as of May 12, 2000 we do not believe
that the effect would be material to the Company.
Currently, substantially all of our revenues are realized in U.S.
dollars and are from clients primarily in the United States. We do not believe
that we currently have any significant direct foreign currency exchange rate
risk. As a result of the Merger, our future financial results could be affected
by factors such as changes in foreign currency, exchange rates or weak economic
conditions in foreign markets.
13
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
We are not a party to any material legal proceedings. As previously
disclosed, we are party to the following proceedings.
On April 7, 2000, First Albany Corporation (FAC) filed a complaint
against U.S. Interactive, Inc., Soft Plus and U.S. Interactive Corp. (Delaware),
our wholly-owned subsidiary into which Soft Plus merged (USIC), in the U.S.
District Court, Northern District of California, San Jose Division (Case No.
C-0020383), alleging that Soft Plus had breached an agreement dated November 29,
1999 (the Engagement Agreement) between Soft Plus and FAC under which Soft Plus
had engaged FAC to render financial advisory and investment banking services in
connection with the possible sale of Soft Plus. FAC had submitted to Soft Plus a
claim for fees and expenses which FAC asserted it was entitled to receive in
connection with the Soft Plus Merger. After we rejected FAC's claims, FAC
commenced its lawsuit. FAC alleges that the defendants breached their
obligations under the Engagement Agreement by failing to pay First Albany the
fees in excess of $6.1 million it claims it is entitled to receive, including
amounts which FAC alleges it is entitled to receive at various times commencing
upon closing of the Merger. FAC requests that the court require the defendants
to pay these fees, with interest, together with FAC's costs and expenses. 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 proceeding would not be
likely to have material adverse effect on our business or financial condition.
On April 11, 2000, five former shareholders of Soft Plus (the Former
Shareholders) filed a complaint against U.S. Interactive, Inc., Soft Plus, USIC,
Mohan Uttarwar, Vijay Uttarwar, Vinay Deshpande, O.P. Srinivasan and Does 1-25,
in the Superior Court if California, County of Santa Clara (case number
CV789065). Upon the closing of the Merger, Mohan Uttarwar became a member of our
board of directors, and president of USIC; he is the brother of Vijay Uttarwar.
Messrs. Uttarwar, Vinay Dehspande and O.P. Srinivasan (the Principal
Shareholders) are former shareholders, officers and (except for Mr. Srinivasan)
directors of Soft Plus. The complaint alleges, among other things, that the
Former Shareholders requested but were improperly denied inspection of some of
the corporate records of Soft Plus in connection with evaluating the Merger and
whether to exercise their dissenters' rights. The complaint also alleges that
some transactions involving or for the benefit of the Principal Shareholders or
their relatives were improper, including the issuance of common stock and
preferred stock of Soft Plus and options to purchase common stock of Soft Plus,
which issuance and grants the Former Shareholders allege the Principal
Shareholders breached their fiduciary duty to the Former Shareholders and seek
damages in excess of $5.0 million. The Former Shareholders also request that the
court compel the defendants to produce for the Former Shareholders various
corporate records and materials for inspection and request attorneys' fees,
compensatory and punitive damages, interest and costs in its possession, as it
deemed appropriate. One of the Former Shareholders has also alleged that Mr.
Deshpande made material misrepresentations to him in connection with and offer
of employment and employee stock options. One this claim the Former Shareholder
is seeking damages in excess of $1.0 million.
As previously reported, we notified representatives of the Principal
Shareholders that, in accordance with the terms of the Merger, we intended to
seek indemnification from them for any costs or liabilities arising from the
pending litigation, including asserting our right to retain shares of our common
stock escrowed in the Merger or to reduce payments we are to make under the $80
million note. Based on subsequent discussions among the Principal Shareholders,
the Company and USIC, the Company currently anticipated that the Principal
Shareholders, the Company and USIC will enter into an agreement under which the
parties will reserve all indemnification rights which the Principal Shareholders
may have against the Company and USIC under the Soft Plus merger agreement.
Under the merger agreement, the Company agreed to assume USIC's obligations, as
successor to Soft Plus, Inc., contractual and otherwise, to indemnify the former
officers and directors of Soft Plus to the fullest extent permitted by
California law. While the outcome of this litigation, as with litigation
generally, is inherently uncertain, our management believes that the ultimate
resolution of this proceeding would not be likely to have a material adverse
effect on our business or financial condition.
14
<PAGE>
Item 2. Changes in Securities and Use of Proceeds.
(c) Sales of Unregistered Securities.
On March 8, 2000, the Company issued 3,391,106 shares of common stock which
were not registered for sale under the Securities Act in reliance on the
exemption from registration provided in Section 4(2) under the Act to
shareholders of Soft Plus, Inc. in connection with the acquisition of Soft Plus
by merger. In addition, the Company 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 common stock. In addition, shareholders
of Soft Plus were paid (i) $20 million in cash and (ii) an unsecured $80 million
note.
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 either of the foregoing.
(d) Use of Proceeds of Public Offering
On August 5, 1999, the Company's registration statement on Form S-1
(SEC File No. 333-78571) was declared effective, for the initial public offering
by the Company (the "IPO"). The Company received $44.5 million in net proceeds
from the offering.
The Company has used a total of $25.4 million of the net proceeds for the
Soft Plus acquisition, $6.4 million to repay all outstanding debt under its line
of credit and term loan, $5.6 million for the purchase of fixed assets including
leasehold improvements, equipment and furniture and $8.9 million for working
capital. The balance of the net proceeds of $2.1 million has been invested in
short-term investment grade securities and will be used for general corporate
purposes and for future acquisitions.
15
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
The exhibits required by Item 601 of Regulation S-K are listed below
and are incorporated as indicated.
Exhibit Number Description
- -------------- -----------
10.1 2000 Performance Incentive Plan and form of stock option
agreement (Incorporated by reference to Exhibit 10.1 to
Registration Statement on Form S-1 filed on March 10, 2000,
and all amendments thereto (File No. 333-32224) (the "2000
Registration Statement")
10.2 1999 Stock Plan of Soft Plus (Incorporated by reference to
Exhibit 10.6 to the 2000 Registration Statement.)
10.3 1999 Stock Option Plan of Soft Plus (Incorporated by reference
to Exhibit 10.7 to the 2000 Registration Statement.)
10.4 1997 Stock Option Plan of soft Plus (Incorporated by reference
to Exhibit 10.8 to the 2000 Registration Statement.)
10.5 Letter Agreement between U.S. Interactive and Chromazone,
dated April 6, 1999 (Incorporated by reference to Exhibit
10.16a to the 2000 Registration Statement.)
10.6 Professional Services and Consulting Agreement dated September
1, 1999, by and between U.S. Interactive and Chromazone
(Incorporated by reference to Exhibit 10.16b to the 2000
Registration Statement.)
10.7 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. Srinivasan (Incorporated by reference to Exhibit
10.17a to the 2000 Registration Statement.)
10.8 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 (Incorporated by reference to Exhibit 10.17b to
the 2000 Registration Statement.)
10.9 Registration Rights Agreement dated March 8, 2000, by and
between U.S. Interactive, Inc, and certain 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 Agreements to U.S.
Interactive, Inc., in connection with the merger (Incorporated
by reference to Exhibit 10.17c to the 2000 Registration
Statement.)
10.10 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 Manhattan Trust Company, National Association
(Incorporated by reference to Exhibit 10.17d to the 2000
Registration Statement.)
10.11 Form of Lock-up and Market-out Letter Agreement delivered by
each former Soft Plus, Inc, shareholder who received 50,000 or
more shares of common stock in the triangular merger among
Soft Plus, First Acquisition Co. (now known as U.S.
Interactive Corp. (Delaware), and U.S. Interactive, Inc. and
desired to enter into a Registration Rights Agreement with
U.S. Interactive, Inc., in connection with the merger
(Incorporated by reference to Exhibit 10.17e to the 2000
Registration Agreement.)
16
<PAGE>
10.12 Employment Agreement, dated March 8, 2000, by and between U.S.
Interactive, Inc. and Mohan Uttarwar (Incorporated by
reference to Exhibit 10.17f to the 2000 Registration
Statement.)
10.13 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 (Incorporated by reference to Exhibit 10.18a to
the 2000 Registration Statement.)
10.14 Stock Pledge Agreement dated March 21, 2000, between U.S.
Interactive, Inc. and PNC Bank, National Association
(Incorporated by reference to Exhibit 10.18b to the 2000
Registration Statement.)
10.15 Security Agreement dated March 21, 2000, between U.S.
Interactive, Inc. and PNC Bank, National Association
(Incorporated by reference to Exhibit 10.18c to the 2000
Registration Statement.)
10.16 Security Agreement dated March 21, 2000, between U.S.
Interactive Corp. (Delaware) and PNC Bank, National
Association (Incorporated by reference to Exhibit 10.18d to
the 2000 Registration Statement.)
10.17 Patent, Trademark and Copyright Security Agreement dated March
21, 2000 between U.S. Interactive, Inc. and PNC Bank, National
Association (Incorporated by reference to Exhibit 10.18e to
the 2000 Registration Statement.)
10.18 Patent, Trademark and Copyright Security Agreement dated March
21, 2000 between U.S. Interactive Corp. (Delaware) and PNC
Bank, National Association (Incorporated by reference to
Exhibit 10.18f to the 2000 Registration Statement.)
27.1 Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K Current Report dated March 8, 2000 was filed by
the Registrant with the Securities and Exchange Commission to report under Item
7 thereof the press release issued to the public on March 9, 2000 and the
acquisition of Soft Plus, Inc. described therein.
A report on Form 8-K Current Report dated March 8, 2000 was filed by
the Registrant with the Securities and Exchange Commission to report under Item
2 thereof the material terms of the acquisition of Soft Plus, Inc. and under
Item 7 thereof (by incorporation by reference to the Financial Statements to the
Registrant's Registration Statement on Form S-1 (No. 333-32224)) the following
financial statements:
o Audited Consolidated Balance Sheets of Soft Plus, Inc., as of December 31,
1998 and 1999, and audited Consolidated Statements of Operations,
Consolidated Statements of Stockholders' Equity and Consolidated Statements
of Cash Flows of Soft Plus, Inc, for the fiscal years ended December 31,
1997, 1998, and 1999; and
o Unaudited Pro Forma Combined Balance Sheet of the Registrant and Soft Plus,
Inc, as of December 31, 1999 and Unaudited Pro Forma Combined Statement of
Operations of the Registrant and Soft Plus, Inc., for the fiscal year ended
December 31, 1999.
17
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
U.S. INTERACTIVE, INC.
(Registrant)
Date: May 15, 2000 By: /s/ Stephen T. Zarrilli
-----------------------
Stephen T. Zarrilli
Chief Executive Officer
Date: May 15, 2000 By: /s/ Philip L. Calamia
---------------------
Philip L. Calamia
Vice President, Chief Financial Officer
(Principal Financial Officer and
Chief Accounting Officer)
18
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