<PAGE>
As filed with the Securities and Exchange Commission on March 22, 2000
Registration No. 333-32224
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------
Amendment No. 1
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>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==============================================================================================================
Proposed Maximum Proposed Maximum
Title Of Securities Amount To Offering Price Aggregate Offering Amount Of
To Be Registered Be Registered Per Share Price Registration Fee(4)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001
Par Value ........... 3,650,000 Shares(1) $ 39.375(2) $ 143,718,750(2) $ 39,954
Common Stock, $.001
Par Value ........... 175,376 Shares $ 34.625(3) $ 6,072,394(3) $ 1,603.11
===============================================================================================================
</TABLE>
(1) Includes 450,000 shares which the underwriters will have the option to
purchase to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee,
pursuant to Rule 457(c) under the Securities Act of 1933, as amended, on
the basis of the average of the high and low prices for the Common Stock
on March 9, 2000, as reported by the Nasdaq National Market System.
(3) Estimated solely for the purpose of calculating the registration fee,
pursuant to Rule 457(c) under the Securities Act of 1933, as amended, on
the basis of the average of the high and low prices for the Common Stock
on March 21, 2000, as reported by the Nasdaq National Market System.
(4) $39,954 has already been paid.
<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 March 22, 2000
PROSPECTUS
3,375,376 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 375,376 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 March 21, 2000, the last reported sale price of the common stock on
the Nasdaq National Market was $34.98 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 completion of this
offering. 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 ......... 375,376 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 the $80 million note issued in
the Merger, 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. 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 $34.98 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 $ 29,120
Working capital (deficit) ...................... 38,504 (64,520) 34,647
Total assets ................................... 62,278 411,754 430,922
Acquisition note payable ....................... -- 80,000 --
Long-term debt, net of current portion ......... 1,666 3,366 3,366
Total stockholders' equity ..................... 49,976 311,996 411,164
</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. Mr. Shulman owns 4% and is 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 will continue 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.
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, 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 4,139,850 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 4,000,982 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
660,928 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 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 closing of this offering. We intend to pay the $80 million note in full
with a portion 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.
We are holding 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. Our right to repurchase a portion of these
shares lapses on a monthly basis over periods ranging from 30 to 36 months
commencing on March 8, 2000.
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 $34.98 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 $99.2 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 approximately $80 million of the proceeds from the
offering to repay the Soft Plus note. We intend to use the balance of the net
proceeds 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. 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 21, 2000. Borrowings under the revolving credit agreement
bear interest at variable rates; on March 21, 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, 2000).
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 (through March 21, 2000) ......... $ 76.50 $ 34.98
On March 21, 2000, the last reported sale price for our common stock on
the Nasdaq National Market was $34.98 per share. As of March 21, 2000, there
were approximately 459 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 $99.2 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 --
========= ========= =========
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 ............................................ 80,581 342,598 441,763
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 ............................................ 49,976 311,996 411,164
--------- --------- ---------
Total capitalization .................................................. $ 51,642 $ 315,362 $ 414,530
========= ========= =========
</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 $42.0 million, or $1.62 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 $34.98 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 $4.12 per share to existing stockholders and an immediate dilution in pro
forma net tangible book value of $33.36 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 ......................................... $ 34.98
Pro forma net tangible book value per share as of December 31, 1999 ...... $(2.50)
Increase per share attributable to new investors ......................... $ 4.12
------
Pro forma net tangible book value per share after this offering .......... $ 1.62
-------
Net tangible book value dilution per share to new investors .............. $ 33.36
=======
</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 $ 29,120
Working capital (deficit) ...................... 38,504 (64,520) 34,647
Total assets ................................... 62,278 411,754 430,922
Acquisition note payable ....................... -- 80,000 --
Long-term debt, net of current portion ......... 1,666 3,366 3,366
Mandatorily redeemable convertible preferred
stock ........................................ -- -- --
Total stockholders' equity (deficit) ........... 49,976 311,996 411,164
</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 completion of this offering. 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.
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
closing of this offering. We intend to pay the $80 million note in full with a
portion of the proceeds of this offering.
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 following 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 employ 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
o San Jose, California
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.
Legal Matters
We are not a party to any material legal proceedings.
In September 1999, Soft Plus engaged First Albany Corporation (FAC) to
serve as its financial advisor in connection with the possible sale of Soft
Plus. FAC has submitted to Soft Plus a claim for fees and expenses which FAC
asserts it is entitled to receive in connection with the Merger. We have
rejected FAC's claims. 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.
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.
<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 and as CEO and Chairman of Soft Plus from January
1999 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., Diablo Research Corporation, LLC, Masterpack
International, Inc., MultiGenParadigm, 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.
The number of directors is presently fixed at nine. 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 audit committee will review the qualifications of
our independent auditors, make recommendations to the board of directors
regarding the selection of independent auditors, review the scope, fees and
results of any audit and review any non-audit services and related fees.
Compensation of Directors
U.S. Interactive does not pay fees to directors for serving on our board
of directors. Directors who are not employees of U.S. Interactive are
reimbursed for their reasonable out-of-pocket expenses incurred in attending
the meetings of the board of directors and committees thereof. In addition,
directors who are not employees of U.S. Interactive are eligible to receive
stock options under 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.
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 increase the number of
shares authorized under the plan by 500,000 and to include officers,
non-employee directors and consultants for approval of our stockholders at our
next annual meeting. No options have been granted 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
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<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.
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
46
<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.
47
<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. Mr. Shulman, our
director, owns 4% and is a director of NetSmart, Inc. 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, which 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) ....................... 61,250 * 61,250 *
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) ................... 5,610,522 23.9 5,610,522 21.2
Named Former Executive Officer:
Larry W. Smith (10) ...................... 795,701 3.3 795,701 3.1
Other Five Percent Holder:
Safeguard Scientifics, Inc. (11) ......... 2,559,691 10.0 2,559,691 9.8
Additional Selling Stockholders:
Vulcan Ventures Inc. (12) ................ 692,355 2.9 200,000 492,355 1.9
IVG Postco LLC (12) ...................... 275,200 1.2 145,000 130,200 *
</TABLE>
49
<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>
Chandrasekhar Living Trust dated
August 26, 1998(14)(20) ............ 6,685 * 2,005 4,680 *
VLG Investments 1999(15)(20) ......... 16,290 * 4,887 11,403 *
MMC/GATX Partnership No. 1
(16)(20) ........................... 54,818 * 16,445 38,373 *
Tae Hea Nahm(17)(20) ................. 5,262 * 1,578 3,684 *
Miriam K. Frazer(18)(20) ............. 4,228 * 1,268 2,960 *
Phillip Dunkelberger(19)(20) ......... 13,978 * 4,193 9,785 *
</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, 2000, 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. See note 13, below.
(4) Includes 61,250 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 425,106 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
<PAGE>
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 275,200 shares which IVG Postco LLC (formerly, InVenGen LLC)
acquired in connection with our acquisition of all of the assets of
InVenGen LLC on March 12, 1999. Certain former employees of InVenGen have
a right to acquire all of these shares upon payment of certain employment
taxes, including certain shares referred to in note 3, above, which Mr.
Prabhu has a right to acquire, pursuant to certain confidential
compensation agreements between the employee and InVenGen LLC. This
includes 145,000 shares being sold by IVG Postco LLC in this offering on
behalf of its former employees for the payment of those employment taxes.
Does not include 137,600 shares held by Dilworth Paxson LLP as escrow
agent pursuant to the terms of an escrow agreement contingent upon certain
former employees of InVenGen LLC remaining in the employ of U.S.
Intereactive through March 12, 2001, which shares those same former
employees of InVenGen have a right to acquire pursuant to the terms of
those same confidential compensation agreements.
(14) Includes 1,415 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 3,449 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 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.
(17) Includes 1,114 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) Includes 895 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.
(19) Includes 2,960 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.
(20) 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.
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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
<PAGE>
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
53
<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.
54
<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 3,375,376 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
15,977,687 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.
55
<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 4,000,982 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 30,376 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 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 3,375,376 shares to be purchased by the underwriters, 3,000,000
shares will be purchased from us and 375,376 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 ....................... $ 39,954
NASD filing fee ............................ 30,500
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 .............................. 77,046
--------
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.
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 one year from the closing of the
Merger or the closing of an equity offering by the Company. 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>
================================================================================
3,375,376 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 ....................... $ 39,954
NASD filing fee ............................ 30,500
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 .............................. 77,046
--------
Total .................................... $800,000
========
Item 14. Indemnification of Directors and Officers.
Under Section 145 of the Delaware General Corporation Law, as amended (the
"DGCL"), a corporation has the power to indemnify directors and officers under
certain prescribed circumstances and subject to certain limitations against
certain costs and expenses, including attorney's fees actually and reasonably
incurred in connection with any action, suit or proceeding, whether civil,
criminal, administrative or investigative, to which any of them is a party by
reason of being a director or officer of the corporation if it is determined
that the director or officer acted in accordance with the applicable standard
of conduct set forth in such statutory provision. Article IX of U.S.
Interactive's 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 Form (undated) of 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 Mark-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 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. 1 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 22nd day of March, 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. 1 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 March 22, 2000
Eric Pulier
/s/ Stephen T. Zarrilli
- ------------------------- Director, Chief Executive Officer and President March 22, 2000
Stephen T. Zarrilli (principal executive officer)
/s/ Philip L. Calamia
- ------------------------- Senior Vice President and Chief Financial Officer March 22, 2000
Philip L. Calamia (principal financial and accounting officer)
*
- ------------------------- Director, President of subsidiary U.S. Interactive, March 22, 2000
Mohan Uttarwar Corp. (Delaware)
*
- ------------------------- Director March 22, 2000
Robert E. Keith, Jr.
*
- ------------------------- Director March 22, 2000
John D. Shulman
*
- ------------------------- Director March 22, 2000
E. Michael Forgash
*
- ------------------------- Director March 22, 2000
John H. Klein
*
- ------------------------- Director March 22, 2000
William C. Jennings
*
- ------------------------- Director March 22, 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 Form (undated) of 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 Mark-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 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>
________________ shares
U.S. INTERACTIVE, INC.
Common Stock
UNDERWRITING AGREEMENT
___________ ____, 2000
LEHMAN BROTHERS INC.
CHASE SECURITIES INC.
DEUTSCHE BANK SECURITIES INC.
FIRST UNION SECURITIES, INC.
ADAMS, HARKNESS & HILL, INC.
As Representatives of the several
Underwriters named in Schedule 1,
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Ladies and Gentlemen:
U.S. Interactive, Inc., a Delaware corporation (the "Company"), and
certain stockholders of the Company named in Schedule 2 hereto (the "Selling
Stockholders"), propose to sell an aggregate of _____________ shares (the "Firm
Stock") of the Company's common stock (the "Common Stock"). Of the _____________
shares of the Firm Stock, _______________ are being sold by the Company and
___________ by the Selling Stockholders. In addition, the Company proposes to
grant to the Underwriters named in Schedule 1 hereto (the "Underwriters") an
option to purchase up to an additional ___________ shares of the Common Stock on
the terms and for the purposes set forth in Section 3 (the "Option Stock"). The
Firm Stock and the Option Stock, if purchased, are hereinafter collectively
called the "Stock." This is to confirm the agreement concerning the purchase of
the Stock from the Company and the Selling Stockholders by the Underwriters
named in Schedule 1 hereto (the "Underwriters").
1. Representations, Warranties and Agreements of the Company. The
Company represents, warrants and agrees that:
(a) A registration statement on Form S-1, and amendments
thereto, with respect to the Stock have (i) been prepared by the Company in
conformity in all material respects with the requirements of the United States
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Securities Act of 1933, as amended (the "Securities Act"), and the rules and
regulations (the "Rule and Regulations") of the United States Securities and
Exchange Commission (the "Commission") thereunder, (ii) been filed with the
Commission under the Securities Act and (iii) become effective under the
Securities Act. Copies of such registration statement and the amendments thereto
have been delivered by the Company to you as the representatives (the
"Representatives") of the Underwriters. As used in this Agreement, "Effective
Time" means the date and the time as of which such registration statement, or
the most recent post-effective amendment thereto, if any, was declared effective
by the Commission; "Effective Date" means the date of the Effective Time;
"Preliminary Prospectus" means each prospectus included in such registration
statement, or amendments thereof, before it became effective under the
Securities Act and any prospectus filed with the Commission by the Company with
the consent of the Representatives pursuant to Rule 424(a) of the Rules and
Regulations; "Registration Statement" means such registration statement, as
amended at the Effective Time, including all information contained in the final
prospectus filed with the Commission pursuant to Rule 424(b) of the Rules and
Regulations in accordance with Section 6(a) hereof and deemed to be a part of
the registration statement as of the Effective Time pursuant to paragraph (b) of
Rule 430A of the Rules and Regulations; and "Prospectus" means such final
prospectus, as first filed with the Commission pursuant to paragraph (1) or (4)
of Rule 424(b) of the Rules and Regulations. The Commission has not issued any
order preventing or suspending the use of any Preliminary Prospectus.
(b) The Registration Statement conforms, and the Prospectus
and any further amendments or supplements to the Registration Statement or the
Prospectus will, when they become effective or are filed with the Commission, as
the case may be, conform in all material respects to the requirements of the
Securities Act and the Rules and Regulations and do not and will not, as of the
applicable effective date (as to the Registration Statement and any amendment
thereto) and as of the applicable filing date (as to the Prospectus and any
amendment or supplement thereto) contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading; provided that no representation or
warranty is made as to information contained in or omitted from the Registration
Statement or the Prospectus in reliance upon and in conformity with written
information furnished to the Company through the Representatives by or on behalf
of any Underwriter specifically for inclusion therein.
(c) The Company and each of its subsidiaries have been duly
incorporated and are validly existing as corporations in good standing under the
laws of their respective jurisdictions of incorporation, are duly qualified to
do business and are in good standing as foreign corporations in each
jurisdiction in which the ownership or lease of property or the conduct of their
businesses requires such qualification and in which the failure to so qualify
could reasonably be expected to have a Material Adverse Effect (as defined in
Section 1(j)), and have all power and authority necessary to own or hold their
properties and to conduct their businesses in which they are engaged.
(d) The Company has an authorized capitalization as set forth
in the Prospectus, and all of the issued shares of capital stock of the Company
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have been duly and validly authorized and issued, are fully paid and
non-assessable and conform to the description thereof contained in the
Prospectus.
(e) The unissued shares of the Stock to be issued and sold by
the Company to the Underwriters hereunder have been duly and validly authorized
and, when issued and delivered against payment therefor as provided herein will
be duly and validly issued, fully paid and non-assessable and the Stock will
conform to the description thereof contained in the Prospectus.
(f) This Agreement has been duly authorized, executed and
delivered by the Company.
(g) The execution, delivery and performance of this Agreement
by the Company and the consummation of the transactions contemplated hereby will
not conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which the Company or
any of its subsidiaries is a party or by which the Company or any of its
subsidiaries is bound or to which any of the property or assets of the Company
or any of its subsidiaries is subject, nor will such actions result in any
violation of the provisions of the charter or by-laws of the Company or any of
its subsidiaries or any statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Company or any of its
subsidiaries or any of their properties or assets; and except for the
registration of the Stock under the Securities Act and such consents, approvals,
authorizations, registrations or qualifications as may be required under the
Exchange Act, under the rules of the National Association of Securities Dealers,
Inc., in connection with the quotation of the Stock on The Nasdaq National
Market System or otherwise, and applicable state securities laws in connection
with the purchase and distribution of the Stock by the Underwriters, no consent,
approval, authorization or order of, or filing or registration with, any such
court or governmental agency or body is required to be made or obtained by the
Company for the execution, delivery and performance of this Agreement by the
Company and the consummation of the transactions contemplated hereby.
(h) Except as described or referred to in the Prospectus,
there are no contracts, agreements or understandings between the Company and any
person granting such person the right (other than rights which have been waived
or satisfied) to require the Company to file a registration statement under the
Securities Act with respect to the offer or sale of any securities of the
Company owned or to be owned by such person or to require the Company to include
such securities in the securities registered pursuant to the Registration
Statement or in any securities being registered pursuant to any other
registration statement which the Company shall file hereafter under the
Securities Act.
(i) Except as described in the Prospectus, the Company has not
sold or issued any shares of Common Stock during the six-month period preceding
the date of the Prospectus, including any sales pursuant to Rule 144A under, or
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Regulations D or S of, the Securities Act, other than shares issued pursuant to
employee benefit plans, stock options plans or other employee compensation plans
or pursuant to outstanding options, rights, warrants or convertible securities.
(j) Neither the Company nor any of its subsidiaries has
sustained, since the date of the latest audited financial statements included in
the Prospectus, any material loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by insurance, or from
any labor dispute or court or governmental action, order or decree, other than
as set forth or contemplated in the Prospectus; and, since such date, there has
not been any change in the classes or terms of capital stock or long-term debt
of the Company or any of its subsidiaries or any material adverse change, or any
development known to the Company involving a prospective material adverse
change, in or affecting the general affairs, management, consolidated financial
position, stockholders' equity, results of operations, business or prospects of
the Company and its subsidiaries as a whole (a "Material Adverse Effect"), other
than as set forth or contemplated in the Prospectus.
(k) The financial statements (including the related notes and
supporting schedules) filed as part of the Registration Statement or included in
the Prospectus present fairly the financial condition and results of operations
of the entities purported to be shown thereby, at the dates and for the periods
indicated, and have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved.
(l) KPMG LLP, who have certified certain financial statements
of the Company, whose report appears in the Prospectus and who have delivered
the initial letter referred to in Section 9(g) hereof, are independent public
accountants as required by the Securities Act and the Rules and Regulations.
(m) All real property and buildings held under lease by the
Company and its subsidiaries are held by them under valid, subsisting and
enforceable leases, with such exceptions as are not material and do not
interfere with the use made and proposed to be made of such property and
buildings by the Company and its subsidiaries.
(n) The Company carries or is covered by, insurance in such
amounts and covering such risks as is adequate for the conduct of its business.
(o) The Company and each of its subsidiaries own or possess
adequate rights to use all material patents, patent applications, trademarks,
service marks, trade names, trademark registrations, service mark registrations,
copyrights and licenses necessary for the conduct of their respective businesses
and have no reason to believe that the conduct of their respective businesses
will conflict with, and, except as required to be disclosed in the Prospectus,
have not received any notice of any claim of conflict with, any such rights of
others.
(p) There are no legal or governmental proceedings pending to
which the Company or any of its subsidiaries is a party or of which any property
or assets of the Company or any of its subsidiaries is the subject which, if
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determined adversely to the Company or any of its subsidiaries, might have a
Material Adverse Effect and, to the best of the Company's knowledge, no such
proceedings are threatened or contemplated by governmental authorities or
threatened by others.
(q) There are no contracts or other documents which are
required to be described in the Prospectus or filed as exhibits to the
Registration Statement by the Securities Act or by the Rules and Regulations
which have not been described in the Prospectus or filed as exhibits to the
Registration Statement or incorporated therein by reference as permitted by the
Rules and Regulations.
(r) No relationship, direct or indirect, exists between or
among the Company on the one hand, and the directors, officers, stockholders,
customers or suppliers of the Company on the other hand, which is required to be
described in the Prospectus which is not so described.
(s) No labor disturbance by the employees of the Company
exists or, to the knowledge of the Company, is imminent which might be expected
to have a Material Adverse Effect.
(t) The Company is in compliance in all material respects with
all presently applicable provisions of the Employee Retirement Income Security
Act of 1974, as amended, including the regulations and published interpretations
thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred
with respect to any "pension plan" (as defined in ERISA) for which the Company
would have any liability; the Company has not incurred and does not expect to
incur liability under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal
Revenue Code of 1986, as amended, including the regulations and published
interpretations thereunder (the "Code"); and each "pension plan" for which the
Company would have any liability that is intended to be qualified under Section
401(a) of the Code is so qualified in all material respects and nothing has
occurred, whether by action or by failure to act, which would cause the loss of
such qualification.
(u) The Company has filed all federal, state and local income
and franchise tax returns required to be filed through the date hereof and has
paid all taxes due thereon, and no tax deficiency has been determined adversely
to the Company or any of its subsidiaries which has had (nor does the Company
have any knowledge of any tax deficiency which, if determined adversely to the
Company or any of its subsidiaries, might have) a Material Adverse Effect.
(v) Since the date as of which information is given in the
Prospectus through the date hereof, and except as may otherwise be disclosed in
the Prospectus, the Company has not (i) issued or granted any securities (other
than securities issued pursuant to employee benefit plans, stock option plans or
other employee compensation plans or pursuant to outstanding options issued
under such plans), (ii) incurred any material (whether individually or in the
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aggregate) liability or obligation, direct or contingent, other than liabilities
and obligations which were incurred in the ordinary course of business, (iii)
entered into any material transaction (whether individually or in the aggregate)
not in the ordinary course of business or (iv) declared or paid any dividend on
its capital stock.
(w) The Company (i) makes and keeps accurate books and records
and (ii) maintains internal accounting controls which provide reasonable
assurance that (A) transactions are executed in accordance with management's
authorization, (B) transactions are recorded as necessary to permit preparation
of its financial statements and to maintain accountability for its assets, (C)
access to its assets is permitted only in accordance with management's
authorization and (D) the reported accountability for its assets is compared
with existing assets at reasonable intervals.
(x) Neither the Company nor any of its subsidiaries (i) is in
material violation of its charter or by-laws, (ii) is in default in any material
respect, and no event has occurred which, with notice or lapse of time or both,
would constitute such a default, in the due performance or observance of any
term, covenant or condition contained in any material indenture, mortgage, deed
of trust, loan agreement or other agreement or instrument to which it is a party
or by which it is bound or to which any of its properties or assets is subject
or (iii) is in violation in any material respect of any law, ordinance,
governmental rule, regulation or court decree to which it or its property or
assets may be subject or has failed to obtain any material license, permit,
certificate, franchise or other governmental authorization or permit necessary
to the ownership of its property or to the conduct of its business.
(y) Neither the Company nor any of its subsidiaries, nor any
director, officer, agent, employee or other person associated with or acting on
behalf of the Company or any of its subsidiaries, has used any corporate funds
for any unlawful contribution, gift, entertainment or other unlawful expense
relating to political activity; violated or is in violation of any provision of
the Foreign Corrupt Practices Act of 1977; or made any unlawful bribe, rebate,
payoff, influence payment, kickback or other unlawful payment.
(z) There has been no storage, disposal, generation,
manufacture, refinement, transportation, handling or treatment of toxic wastes,
medical wastes, hazardous wastes or hazardous substances by the Company or any
of its subsidiaries (or, to the knowledge of the Company, any of their
predecessors in interest) at, upon or from any of the property now or previously
owned or leased by the Company or its subsidiaries in violation of any
applicable law, ordinance, rule, regulation, order, judgment, decree or permit
or which would require remedial action under any applicable law, ordinance,
rule, regulation, order, judgment, decree or permit, except for any violation or
remedial action which would not have, or could not be reasonably likely to have,
singularly or in the aggregate with all such violations and remedial actions, a
Material Adverse Effect; there has been no material spill, discharge, leak,
emission, injection, escape, dumping or release of any kind onto such property
or into the environment surrounding such property of any toxic wastes, medical
wastes, solid wastes, hazardous wastes or hazardous substances due to or caused
by the Company or any of its subsidiaries or with respect to which the Company
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or any of its subsidiaries have knowledge, except for any such spill, discharge,
leak, emission, injection, escape, dumping or release which would not have or
would not be reasonably likely to have, singularly or in the aggregate with all
such spills, discharges, leaks, emissions, injections, escapes, dumpings and
releases, a Material Adverse Effect. The terms "hazardous wastes", "toxic
wastes", "hazardous substances" and "medical wastes" shall have the meanings
specified in any applicable local, state, federal and foreign laws or
regulations with respect to environmental protection.
(aa) Neither the Company nor any subsidiary is an "investment
company" within the meaning of such term under the Investment Company Act of
1940 and the rules and regulations of the Commission thereunder.
2. Representations, Warranties and Agreements of the Selling
Stockholders. Each Selling Stockholder severally and not jointly represents,
warrants and agrees (to and with you and the Company) that:
(a) The Selling Stockholder is, and immediately prior to the
First Delivery Date (as defined in Section 5 hereof) the Selling Stockholder
will be the sole owner of the shares of Stock to be sold by the Selling
Stockholder hereunder on such date, free and clear of all liens, encumbrances,
or claims (whether at law or equity) arising through such Selling Stockholder;
and upon delivery of such shares pursuant to the terms hereof, the Underwriters
will acquire all of such Selling Stockholder's rights in such shares free of any
adverse claims (within the meaning of Section 8-102(a)(1) of the Uniform
Commercial Code as in effect in the State of New York.
(b) The Selling Stockholder has placed in custody under a
custody agreement (the "Custody Agreement" and, together with all other similar
agreements executed by the other Selling Stockholders, the "Custody Agreements")
with ChaseMellon Shareholder Services, LLC, as custodian (the "Custodian"), for
delivery under this Agreement, certificates in negotiable form (with signature
guaranteed by a commercial bank or trust company having an office or
correspondent in the United States or a member firm of the New York or American
Stock Exchanges) representing the shares of Firm Stock to be sold by the Selling
Stockholder hereunder.
(c) The Selling Stockholder has duly and irrevocably executed
and delivered a power of attorney (the "Power of Attorney" and, together with
all other similar agreements executed by the other Selling Stockholders, the
"Powers of Attorney") appointing one or more persons, as attorneys-in-fact, with
full power of substitution, and with full authority (exercisable by any one or
more of them) to execute and deliver this Agreement and to take such other
action as may be necessary or desirable to carry out the provisions hereof on
behalf of the Selling Stockholder.
(d) The Selling Stockholder has full right, power and
authority to enter into this Agreement, the Power of Attorney and the Custody
Agreement; the execution, delivery and performance of this Agreement, the Power
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of Attorney and the Custody Agreement by the Selling Stockholder and the
consummation by the Selling Stockholder of the transactions contemplated hereby
and thereby will not conflict with or result in a breach or violation of any of
the terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement or other agreement or instrument to
which the Selling Stockholder is a party or by which the Selling Stockholder is
bound or to which any of the property or assets of the Selling Stockholder is
subject, other than such breaches, violations or defaults which have been waived
or which would not be materially adverse to such Selling Stockholder's ability
to perform its obligations hereunder, nor will such actions result in any
violation of the provisions of (i) if the Selling Stockholder is a corporation,
the charter or by-laws of the Selling Stockholder; (ii) if the Selling
Stockholder is a partnership, the partnership agreement of the Selling
Stockholder; and (iii) if the Selling Stockholder is a trust, the deed of trust
of the Selling Stockholder, or any statute or any order, rule or regulation of
any court or governmental agency or body having jurisdiction over the Selling
Stockholder or the property or assets of the Selling Stockholder; and, except
for the registration of the Stock under the Securities Act and such consents,
approvals, authorizations, registrations or qualifications as may be required
under the Exchange Act and applicable state securities laws in connection with
the purchase and distribution of the Stock by the Underwriters, no consent,
approval, authorization or order of, or filing or registration with, any such
court or governmental agency or body is required to be obtained by the Selling
Stockholder for the execution, delivery and performance of this Agreement, the
Power of Attorney or the Custody Agreement by the Selling Stockholder and the
consummation by the Selling Stockholder of the transactions contemplated hereby
and thereby.
(e) The Registration Statement and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will, when they become effective or are filed with the Commission, as
the case may be, do not and will not, as of the applicable effective date (as to
the Registration Statement and any amendment thereto) and as of the applicable
filing date (as to the Prospectus and any amendment or supplement thereto)
contain an untrue statement of a material fact relating to such Selling
Stockholder (based upon written information furnished to the Company by or on
behalf of such Selling Stockholder specifically for inclusion therein) or omit
to state a material fact relating to such Selling Stockholder (based upon
written information furnished to the Company by or on behalf of such Selling
Stockholder specifically for inclusion therein) required to be stated therein or
necessary to make the statements therein not misleading.
(f) The Selling Stockholder has not taken and will not take,
directly or indirectly, any action which is designed to or which has constituted
or which might reasonably be expected to cause or result in the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the shares of the Stock.
3. Purchase of the Stock by the Underwriters; Management Fee . On the
basis of the representations and warranties contained in, and subject to the
terms and conditions of, this Agreement, the Company agrees to sell
_______________ shares of the Firm Stock and each Selling Stockholder hereby
agrees to sell the number of shares of the Firm Stock set opposite such Selling
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Stockholder's name in Schedule 2 hereto, severally and not jointly, to the
several Underwriters and each of the Underwriters, severally and not jointly,
agrees to purchase the number of shares of the Firm Stock set opposite that
Underwriter's name in Schedule 1 hereto. Each Underwriter shall be obligated to
purchase from the Company, and from each Selling Stockholder, that number of
shares of the Firm Stock which represents the same proportion of the number of
shares of the Firm Stock to be sold by the Company, and by each Selling
Stockholder, as the number of shares of the Firm Stock set forth opposite the
name of such Underwriter in Schedule 1 represents of the total number of shares
of the Firm Stock to be purchased by all of the Underwriters pursuant to this
Agreement. The respective purchase obligations of the Underwriters with respect
to the Firm Stock shall be rounded among the Underwriters to avoid fractional
shares, as the Representatives may determine.
In addition, the Company grants to the Underwriters an option to
purchase up to ___________ shares of Option Stock. Such option is granted for
the purpose of covering over-allotments in the sale of Firm Stock and is
exercisable as provided in Section 5 hereof. Shares of Option Stock shall, if
purchased, be purchased severally for the account of the Underwriters in
proportion to the number of shares of Firm Stock set opposite the name of such
Underwriters in Schedule 1 hereto. The respective purchase obligations of each
Underwriter with respect to the Option Stock shall be adjusted by the
Representatives so that no Underwriter shall be obligated to purchase Option
Stock other than in 100 share amounts. The price of both the Firm Stock and any
Option Stock shall be $_________ per share.
The Company and the Selling Stockholders shall not be obligated to
deliver any of the Stock to be delivered on any Delivery Date (as hereinafter
defined), as the case may be, except upon payment for all the Stock to be
purchased on such Delivery Date as provided herein.
4. Offering of Stock by the Underwriters.
Upon authorization by the Representatives of the release of the Firm
Stock, the several Underwriters propose to offer the Firm Stock for sale upon
the terms and conditions set forth in the Prospectus.
5. Delivery of and Payment for the Stock. Delivery of and payment for
the Firm Stock shall be made at the offices of Brobeck, Phleger & Harrison LLP,
701 Pennsylvania Avenue, N.W., Suite 220, Washington, D.C. 20004, at 10:00 A.M.,
Washington, D.C. time, on the fourth full business day following the date of
this Agreement or at such other date or place as shall be determined by
agreement between the Representatives and the Company. This date and time are
sometimes referred to as the "First Delivery Date." On the First Delivery Date,
the Company and the Selling Stockholders shall deliver or cause to be delivered
certificates representing the Firm Stock to the Representatives for the account
of each Underwriter against payment to or upon the order of the Company and the
Selling Stockholders of the purchase price by wire transfer in immediately
available funds. Time shall be of the essence, and delivery at the time and
place specified pursuant to this Agreement is a further condition of the
obligation of each Underwriter hereunder. Upon delivery, the Firm Stock shall be
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registered in such names and in such denominations as the Representatives shall
request in writing not less than two full business days prior to the First
Delivery Date. For the purpose of expediting the checking and packaging of the
certificates for the Firm Stock, the Company and the Selling Stockholders shall
make the certificates representing the Firm Stock available for inspection by
the Representatives in New York, New York, not later than 2:00 P.M., New York
City time, on the business day prior to the First Delivery Date.
The option granted in Section 3 will expire 30 days after the date of
this Agreement and may be exercised in whole or in part from time to time by
written notice being given to the Company by the Representatives. Such notice
shall set forth the aggregate number of shares of Option Stock as to which the
option is being exercised, the names in which the shares of Option Stock are to
be registered, the denominations in which the shares of Option Stock are to be
issued and the date and time, as determined by the Representatives, when the
shares of Option Stock are to be delivered; provided, however, that this date
and time shall not be earlier than the First Delivery Date nor earlier than the
second business day after the date on which the option shall have been exercised
nor later than the fifth business day after the date on which the option shall
have been exercised. The date and time the shares of Option Stock are delivered
are sometimes referred to as a "Second Delivery Date" and the First Delivery
Date and any Second Delivery Date are sometimes each referred to as a "Delivery
Date".
Delivery of and payment for the Option Stock shall be made at the place
specified in the first sentence of the first paragraph of this Section 5 (or at
such other place as shall be determined by agreement between the Representatives
and the Company) at 10:00 A.M., Washington, D.C. time, on such Second Delivery
Date. On such Second Delivery Date, the Company shall deliver or cause to be
delivered the certificates representing the Option Stock to the Representatives
for the account of each Underwriter against payment to or upon the order of the
Company of the purchase price by wire transfer in immediately available funds.
Time shall be of the essence, and delivery at the time and place specified
pursuant to this Agreement is a further condition of the obligation of each
Underwriter hereunder. Upon delivery, the Option Stock shall be registered in
such names and in such denominations as the Representatives shall request in the
aforesaid written notice. For the purpose of expediting the checking and
packaging of the certificates for the Option Stock, the Company shall make the
certificates representing the Option Stock available for inspection by the
Representatives in New York, New York, not later than 2:00 P.M., New York City
time, on the business day prior to such Second Delivery Date.
6. Further Agreements of the Company. The Company agrees:
(a) To prepare the Prospectus in a form approved by the
Representatives and to file such Prospectus pursuant to Rule 424(b) under the
Securities Act not later than Commission's close of business on the second
business day following the execution and delivery of this Agreement or, if
applicable, such earlier time as may be required by Rule 430A(a)(3) under the
Securities Act; to make no further amendment or any supplement to the
Registration Statement or to the Prospectus except as permitted herein; to
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advise the Representatives, promptly after it receives notice thereof, of the
time when any amendment to the Registration Statement has been filed or becomes
effective or any supplement to the Prospectus or any amended Prospectus has been
filed and to furnish the Representatives with copies thereof; to advise the
Representatives, promptly after it receives notice thereof, of the issuance by
the Commission of any stop order or of any order preventing or suspending the
use of any Preliminary Prospectus or the Prospectus, of the suspension of the
qualification of the Stock for offering or sale in any jurisdiction, of the
initiation or threatening of any proceeding for any such purpose, or of any
request by the Commission for the amending or supplementing of the Registration
Statement or the Prospectus or for additional information; and, in the event of
the issuance of any stop order or of any order preventing or suspending the use
of any Preliminary Prospectus or the Prospectus or suspending any such
qualification, to use promptly its best efforts to obtain its withdrawal;
(b) To furnish promptly to each of the Representatives and to
counsel for the Underwriters a signed copy of the Registration Statement as
originally filed with the Commission, and each amendment thereto filed with the
Commission, including all consents and exhibits filed therewith;
(c) To deliver promptly to the Representatives such number of
the following documents as the Representatives shall reasonably request: (i)
conformed copies of the Registration Statement as originally filed with the
Commission and each amendment thereto (in each case excluding exhibits other
than this Agreement and the computation of per share earnings) and (ii) each
Preliminary Prospectus, the Prospectus and any amended or supplemented
Prospectus and, if the delivery of a prospectus is required at any time after
the Effective Time in connection with the offering or sale of the Stock or any
other securities relating thereto and if at such time any events shall have
occurred as a result of which the Prospectus as then amended or supplemented
would include an untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made when such Prospectus is delivered,
not misleading, or, if for any other reason it shall be necessary to amend or
supplement the Prospectus in order to comply with the Securities Act, to notify
the Representatives and, upon their request, to prepare and furnish without
charge to each Underwriter and to any dealer in securities as many copies as the
Representatives may from time to time reasonably request of an amended or
supplemented Prospectus which will correct such statement or omission or effect
such compliance.
(d) To file promptly with the Commission any amendment to the
Registration Statement or the Prospectus or any supplement to the Prospectus
that may, in the judgment of the Company or the Representatives, be required by
the Securities Act or requested by the Commission;
(e) Prior to filing with the Commission any amendment to the
Registration Statement or supplement to the Prospectus or any Prospectus
pursuant to Rule 424 of the Rules and Regulations, to furnish a copy thereof to
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the Representatives and counsel for the Underwriters and obtain the consent of
the Representatives to the filing;
(f) As soon as practicable after the Effective Date to make
generally available to the Company's security holders and to deliver to the
Representatives an earnings statement of the Company and its subsidiaries (which
need not be audited) complying with Section 11(a) of the Securities Act and the
Rules and Regulations (including, at the option of the Company, Rule 158);
(g) For a period of five years following the Effective Date,
to furnish to the Representatives copies of all materials furnished by the
Company to its shareholders generally and all public reports and all reports and
financial statements furnished by the Company to the principal national
securities exchange upon which the Common Stock may be listed pursuant to
requirements of or agreements with such exchange or to the Commission pursuant
to the Exchange Act or any rule or regulation of the Commission thereunder;
(h) Promptly from time to time to take such action as the
Representatives may reasonably request to qualify the Stock for offering and
sale under the securities laws of such jurisdictions as the Representatives may
request and to comply with such laws so as to permit the continuance of sales
and dealings therein in such jurisdictions for as long as may be necessary to
complete the distribution of the Stock; provided that in connection therewith
the Company shall not be required to qualify as a foreign corporation or to file
a general consent to service of process in any jurisdiction;
(i) For a period of 90 days from the date of the Prospectus,
not to, directly or indirectly, (1) offer for sale, sell, pledge or otherwise
dispose of (or enter into any transaction or device which is designed to, or
could be expected to, result in the disposition by any person at any time in the
future of) any shares of Common Stock or securities convertible into or
exchangeable for Common Stock (other than (A) the Stock, (B) shares issued
pursuant to employee benefit plans, stock option plans or other employee
compensation plans existing on the date hereof or pursuant to currently
outstanding options or warrants, and (C) in connection with acquisitions of
other companies, or their businesses or assets), or sell or grant options,
rights or warrants with respect to any shares of Common Stock or securities
convertible into or exchangeable for Common Stock (other than the grant of
options pursuant to option plans existing on the date hereof), or (2) enter into
any swap or other derivatives transaction that transfers to another, in whole or
in part, any of the economic benefits or risks of ownership of such shares of
Common Stock, whether any such transaction described in clause (1) or (2) above
is to be settled by delivery of Common Stock or other securities, in cash or
otherwise, in each case without the prior written consent of Lehman Brothers
Inc.;
(j) Cause each officer, director and certain stockholders of
the Company to furnish to the Representatives, prior to the First Delivery Date,
a letter or letters, in form and substance satisfactory to counsel for the
Underwriters, pursuant to which each such person shall agree not to, directly or
indirectly, (1) offer for sale, sell, pledge or otherwise dispose of (or enter
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into any transaction or device which is designed to, or could be expected to,
result in the disposition by any person at any time in the future of) any shares
of Common Stock or securities convertible into or exchangeable for Common Stock
or (2) enter into any swap or other derivatives transaction that transfers to
another, in whole or in part, any of the economic benefits or risks of ownership
of such shares of Common Stock, whether any such transaction described in clause
(1) or (2) above is to be settled by delivery of Common Stock or other
securities, in cash or otherwise, in each case for a period of 90 days from the
date of the Prospectus, without the prior written consent of Lehman Brothers
Inc. except for gifts of shares of Common Stock or other securities convertible
into, or exchangeable or exercisable for, Common Stock or other derivatives
during the above-referenced lock-up period after the date of the Prospectus if
the donee agrees in writing to be bound by the terms of such agreement for the
remainder of the lock-up period;
(k) Prior to the Effective Date, to apply for the inclusion of
the Stock on the Nasdaq National Market System and to use its best efforts to
complete that listing, subject only to official notice of issuance, prior to the
First Delivery Date;
(l) To apply the net proceeds from the sale of the Stock being
sold by the Company as set forth in the Prospectus; and
(m) To take such steps as shall be necessary to ensure that
neither the Company nor any subsidiary shall become an "investment company"
within the meaning of such term under the Investment Company Act of 1940 and the
rules and regulations of the Commission thereunder.
7. Further Agreements of the Selling Stockholders. Each Selling
Stockholder agrees:
(a) For a period of 90 days from the date of the Prospectus,
not to, directly or indirectly, (1) offer for sale, sell, pledge or otherwise
dispose of (or enter into any transaction or device which is designed to, or
could be expected to, result in the disposition by any person at any time in the
future of) any shares of Common Stock or securities convertible into or
exchangeable for Common Stock (other than the Stock) or (2) enter into any swap
or other derivatives transaction that transfers to another, in whole or in part,
any of the economic benefits or risks of ownership of such shares of Common
Stock, whether any such transaction described in clause (1) or (2) above is to
be settled by delivery of Common Stock or other securities, in cash or
otherwise, in each case without the prior written consent of Lehman Brothers
Inc., except for gifts of shares of Common Stock or other securities convertible
into, or exchangeable or exercisable for, Common Stock or other derivatives
during the above-referenced lock-up period after the date of the Prospectus if
the donee agrees in writing to be bound by the terms of such agreement for the
remainder of the lock-up period.
(b) That the Stock to be sold by the Selling Stockholder
hereunder, which is represented by the certificates held in custody for the
Selling Stockholder, is subject to the interest of the Underwriters and the
other Selling Stockholders thereunder, that the arrangements made by the Selling
Stockholder for such custody are to that extent irrevocable, and that the
obligations of the Selling Stockholder hereunder shall not be terminated by any
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act of the Selling Stockholder, by operation of law, by the death or incapacity
of any individual Selling Stockholder or, in the case of a trust, by the death
or incapacity of any executor or trustee or the termination of such trust, or
the occurrence of any other event.
(c) To deliver to the Representatives prior to the First
Delivery Date a properly completed and executed United States Treasury
Department Form W-8 (if the Selling Stockholder is a non-United States person or
Form W-9 (if the Selling Stockholder is a United States person.)
8. Expenses. The Company agrees to pay (a) the costs incident to the
authorization, issuance, sale and delivery of the Stock and any taxes payable in
that connection; (b) the costs incident to the preparation, printing and filing
under the Securities Act of the Registration Statement and any amendments and
exhibits thereto; (c) the costs of distributing the Registration Statement as
originally filed and each amendment thereto and any post-effective amendments
thereof (including, in each case, exhibits), any Preliminary Prospectus, the
Prospectus and any amendment or supplement to the Prospectus, all as provided in
this Agreement; (d) the costs of producing and distributing this Agreement and
any other related documents in connection with the offering, purchase, sale and
delivery of the Stock; (e) the costs of delivering and distributing the Custody
Agreements and the Powers of Attorney; (f) the filing fees incident to securing
any required review by the National Association of Securities Dealers, Inc. of
the terms of sale of the Stock; (g) any applicable listing or other fees; (h)
the fees and expenses of qualifying the Stock under the securities laws of those
provinces of Canada in which the Stock is being offered; (i) the costs and
expenses of the Company relating to investor presentations on any "road show"
undertaken in connection with the marketing of the offering of the Stock,
including, without limitation, expenses associated with the production of road
show slides and graphics, fees and expenses of any consultants engaged in
connection with the road show presentations with the prior approval of the
Company, travel and lodging expenses of the representatives and officers of the
Company and any such consultants, and the cost of any aircraft chartered in
connection with the road show; and (j) all other costs and expenses incident to
the performance of the obligations of the Company and the Selling Stockholders
under this Agreement; provided that, except as provided in this Section 8 and in
Section 13, the Underwriters shall pay their own costs and expenses, including
the costs and expenses of their counsel, any transfer taxes on the Stock which
they may sell and the expenses of advertising any offering of the Stock made by
the Underwriters, and the Selling Stockholders shall pay the fees and expenses
of their counsel, the Custodian (and any other attorney-in-fact), and any
transfer taxes payable in connection with their respective sales of Stock to the
Underwriters and reimburse the Company for their pro rata share of the fees and
expenses paid by the Company in connection with the offering of the Stock.
9. Conditions of Underwriters' Obligations. The respective obligations
of the Underwriters hereunder are subject to the accuracy, when made and on each
Delivery Date, of the representations and warranties of the Company and the
Selling Stockholders contained herein, to the performance by the Company and the
Selling Stockholders of their respective obligations hereunder, and to each of
the following additional terms and conditions:
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(a) The Prospectus shall have been timely filed with the
Commission in accordance with Section 6(a); no stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have been
issued and no proceeding for that purpose shall have been initiated or
threatened by the Commission; and any request of the Commission for inclusion of
additional information in the Registration Statement or the Prospectus or
otherwise shall have been complied with.
(b) No Underwriter shall have discovered and disclosed to the
Company on or prior to such Delivery Date that the Registration Statement or the
Prospectus or any amendment or supplement thereto contains an untrue statement
of material fact or omits to state a material fact which, in the opinion of
Brobeck, Phleger & Harrison LLP, counsel for the Underwriters, is required to be
stated therein or is necessary to make the statements therein not misleading;
provided, however, the Company shall have the opportunity to cure such defect by
filing a Post-Effective Amendment to the Registration Statement (and/or such
other action as may be required under the Securities Act) prior to such Delivery
Date.
(c) All corporate proceedings and other legal matters incident
to the authorization, form and validity of this Agreement, the Custody
Agreements, the Powers of Attorney, the Stock, the Registration Statement and
the Prospectus, and all other legal matters relating to this Agreement and the
transactions contemplated hereby shall be reasonably satisfactory in all
material respects to counsel for the Underwriters, and the Company and the
Selling Stockholders shall have furnished to such counsel all documents and
information that they may reasonably request to enable them to pass upon such
matters.
(d) Dilworth Paxson LLP shall have furnished to the
Representatives its written opinion, as counsel to the Company, addressed to the
Underwriters and dated such Delivery Date, in form and substance reasonably
satisfactory to the Representatives, to the effect that:
(i) The Company and each of its subsidiaries have
been duly incorporated and are validly existing as corporations in good standing
under the laws of their respective jurisdictions of incorporation, are duly
qualified to do business and are in good standing as foreign corporations in the
States of New York, New Jersey, California, Virginia, Illinois and
_________________ and the Commonwealths of Pennsylvania and Massachusetts and
have all power and authority necessary to own or hold their properties and
conduct their businesses in which they are engaged;
(ii) The Company has an authorized capitalization as
set forth in the Prospectus, and all of the issued shares of capital stock of
the Company (including the shares of Stock being delivered on such Delivery
Date) have been duly and validly authorized and issued, are fully paid and
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non-assessable and conform to the description thereof contained in the
Prospectus and all issued shares of capital stock of each subsidiary of the
Company have been duly and validly authorized and issued and are fully paid and
nonassessable and are owned directly or indirectly by the Company free and clear
of all liens, encumbrances, equities or claims;
(iii) There are no preemptive or other rights to
subscribe for or to purchase, nor any restriction upon the voting or transfer
of, any shares of the Stock pursuant to the Company's charter or by-laws or any
agreement or other instrument known to such counsel;
(iv) Such counsel knows of no material legal or
governmental proceedings pending or threatened against the Company or any of its
subsidiaries except as set forth in the Prospectus;
(v) To the best of such counsel's knowledge, there
are no contracts or other documents which are required to be described in the
Prospectus or filed as exhibits to the Registration Statement by the Securities
Act or by the Rules and Regulations which have not been described or filed as
exhibits to the Registration Statement or incorporated therein by reference as
permitted by the Rules and Regulations;
(vi) This Agreement has been duly authorized,
executed and delivered by the Company;
(vii) The issue and sale of the shares of Stock being
delivered on such Delivery Date by the Company and the compliance by the Company
with all of the provisions of this Agreement and the consummation of the
transactions contemplated hereby will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a default under,
any indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument known to such counsel to which the Company or any of its subsidiaries
is a party or by which the Company or any of its subsidiaries is bound or to
which any of the property or assets of the Company or any of its subsidiaries is
subject, other than such breaches, violations or defaults which have been waived
or which would not be materially adverse to the Company's ability to perform its
obligations hereunder, nor will such actions result in any violation of the
provisions of the charter or by-laws of the Company or any of its subsidiaries
or any statute or any order, rule or regulation known to such counsel of any
court or governmental agency or body having jurisdiction over the Company or any
of its subsidiaries or any of their properties or assets; and, except for the
registration of the Stock under the Securities Act and such consents, approvals,
authorizations, registrations or qualifications as may be required under the
Exchange Act, applicable state securities laws or under the rules of the
National Association of Securities Dealers, Inc. in connection with the purchase
and distribution of the Stock, no consent, approval, authorization or order of,
or filing or registration with, any such court or governmental agency or body is
required to be made or obtained by the Company for the execution, delivery and
performance of this Agreement by the Company and the consummation of the
transactions contemplated hereby; and
(viii) To the best of such counsel's knowledge, there
are no contracts, agreements or understandings between the Company and any
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person granting such person the right (other than rights which have been waived
or satisfied) to require the Company to file a registration statement under the
Securities Act with respect to any securities of the Company owned or to be
owned by such person or to require the Company to include such securities in the
securities registered pursuant to the Registration Statement or in any
securities being registered pursuant to any other registration statement filed
by the Company under the Securities Act.
(iv) The Registration Statement was declared
effective under the Securities Act as of the date and time specified in such
opinion, the Prospectus was filed with the Commission pursuant to the
subparagraph of Rule 424(b) of the Rules and Regulations specified in such
opinion on the date specified therein and no stop order suspending the
effectiveness of the Registration Statement has been issued and, to the
knowledge of such counsel, no proceeding for that purpose is pending or
threatened by the Commission; and
(x) The Registration Statement and the Prospectus and
any further amendments or supplements thereto made by the Company prior to such
Delivery Date (other than the financial statements and related schedules
therein, as to which such counsel need express no opinion) comply as to form in
all material respects with the requirements of the Securities Act and the Rules
and Regulations (other than the financial statements and related schedules
therein, as to which such counsel need express no opinion), when they were filed
with the Commission complied as to form in all material respects with the
requirements of the Securities Act and the rules and regulations of the
Commission thereunder.
In rendering such opinion, such counsel may state that its
opinion is limited to matters governed by the Federal laws of the United States
of America, the laws of the Commonwealth of Pennsylvania, the General
Corporation Law of the State of Delaware and that such counsel is not admitted
in the State of Delaware. Such counsel shall also have furnished to the
Representatives a written statement, addressed to the Underwriters and dated
such Delivery Date, in form and substance satisfactory to the Representatives,
to the effect that (x) such counsel has acted as counsel to the Company in
connection with previous financing transactions and has acted as counsel to the
Company in connection with the preparation of the Registration Statement, and
(y) based on the foregoing, no facts have come to the attention of such counsel
which lead it to believe that the Registration Statement, as of the Effective
Date, contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein not misleading, or that the Prospectus, as of the Effective
Date, contains any untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The foregoing opinion and statement may be qualified by a
statement to the effect that the subject matter thereof is limited solely to the
statements contained in the Prospectus under the captions "Business - Strategic
Relationships," Management - Employment Agreements," "- Severance Agreements,"
"- Stock Option Plans," and "- Description of Capital Stock" insofar as such
statements relate to the Stock and concern legal matters.
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(e) The respective counsel for each of the Selling
Stockholders shall each have furnished to the Representatives its written
opinion, as counsel to each of the Selling Stockholders for whom it is acting as
counsel, addressed to the Underwriters and dated the First Delivery Date, in
form and substance reasonably satisfactory to the Representatives, to the effect
that:
(i) Such Selling Stockholder has full right, power
and authority to enter into this Agreement, the Power of Attorney and the
Custody Agreement; the execution, delivery and performance of this Agreement,
the Power of Attorney and the Custody Agreement by such Selling Stockholder and
the consummation by such Selling Stockholder of the transactions contemplated
hereby will not conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, loan agreement or other agreement or instrument known to such
counsel to which such Selling Stockholder is a party or by which such Selling
Stockholder is bound or to which any of the property or assets of such Selling
Stockholder is subject except such breaches, violations or defaults which have
been waived or which would not have a material adverse effect upon such Selling
Stockholder's ability to perform its obligations hereunder, nor will such
actions result in any violation of the provisions of the charter or by-laws of
such Selling Stockholder or the partnership agreement of any Selling Stockholder
(as the case may be) or any statute or any order, rule or regulation known to
such counsel of any court or governmental agency or body having jurisdiction
over such Selling Stockholder or the property or assets of such Selling
Stockholder; and, except for the registration of the Stock under the Securities
Act and such consents, approvals, authorizations, registrations or
qualifications as may be required under the Exchange Act and applicable state
securities laws in connection with the purchase and distribution of the Stock by
the Underwriters, no consent, approval, authorization or order of, or filing or
registration with, any such court or governmental agency or body is required to
be made or obtained by the Selling Stockholder for the execution, delivery and
performance of this Agreement, the Power of Attorney or the Custody Agreement by
such Selling Stockholder and the consummation by such Selling Stockholder of the
transactions contemplated hereby and thereby;
(ii) This Agreement has been duly authorized,
executed and delivered by or on behalf of such Selling Stockholder;
(iii) A Power-of-Attorney and a Custody Agreement
have been duly authorized and executed by such Selling Stockholder and
constitute valid and binding agreements of such Selling Stockholder, enforceable
in accordance with their respective terms;
(iv) As of the date hereof, to such counsel's
knowledge, such Selling Stockholder is the sole owner of the shares of Stock to
be sold by such Selling Stockholder under this Agreement, free and clear of all
liens, encumbrances or claims (whether at law or equity), and has full right,
power and authority to sell, assign, transfer and deliver such shares to be sold
by such Selling Stockholder hereunder; and
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(v) Upon delivery of the shares of Firm Stock to be
sold by such Selling Stockholder to each of the Underwriters pursuant to the
terms of this Agreement, the Underwriters will acquire all of such Selling
Stockholder's rights in the shares of Stock to be sold by such Selling
Stockholder under this Agreement, free of any adverse claims (within the meaning
of Section 8-102(a)(1) of the Uniform Commercial Code as in effect in the State
of New York).
In rendering such opinion, such counsel may (i) state that its
opinion is limited to matters governed by the Federal laws of the United States
of America, the laws of the jurisdiction in which such counsel practices law or
the jurisdiction in which the Selling Stockholder is organized and that such
counsel is not admitted in the jurisdiction in which the Selling Stockholder is
organized (e.g., "the State of Delaware"), (ii) in rendering the opinion in
Section 9(e)(iv) and 9(e)(v) above, rely upon a certificate of such Selling
Stockholder in respect of matters of fact as to ownership of and liens,
encumbrances or claims (whether at law or equity) on the shares of Stock sold by
such Selling Stockholder, provided that such counsel shall furnish copies
thereof to the Representatives and state that it believes that both the
Underwriters and it are justified in relying upon such certificate and (iii) in
rendering the opinion in Section 9(e)(v) above, assume that the Underwriters
will purchase the shares sold by such Selling Stockholder without notice of any
adverse claim (as defined in Section 8-102(a)(1) of the Uniform Commercial Code
as in effect in the State of New York). Such counsel shall also have furnished
to the Representatives a written statement, addressed to the Underwriters and
dated the First Delivery Date, in form and substance satisfactory to the
Representatives, to the effect that (x) such counsel has acted as counsel to
such Selling Stockholder in its capacity as a participant in the proposed
offering of shares being made pursuant to the Prospectus, and (y) based on the
foregoing, no facts have come to the attention of such counsel which lead it to
believe that the Registration Statement, as of the Effective Date, contained any
untrue statement of a material fact relating to such Selling Stockholder or
omitted to state such a material fact relating to such Selling Stockholder
required to be stated therein or necessary in order to make the statements
therein not misleading, or that the Prospectus contains any untrue statement of
a material fact relating to such Selling Stockholder or omits to state such a
material fact relating to such Selling Stockholder required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The foregoing opinion
and statement may be qualified by a statement to the effect that such counsel
does not assume any responsibility for the accuracy, completeness or fairness of
the statements contained in the Registration Statement or the Prospectus.
(f) The Representatives shall have received from Brobeck,
Phleger & Harrison LLP, counsel for the Underwriters, such opinion or opinions,
dated such Delivery Date, with respect to the issuance and sale of the Stock,
the Registration Statement, the Prospectus and other related matters as the
Representatives may reasonably require, and the Company shall have furnished to
such counsel such documents as they reasonably request for the purpose of
enabling them to pass upon such matters.
(g) At the time of execution of this Agreement, the
Representatives shall have received from KPMG LLP a letter, in form and
substance satisfactory to the Representatives, addressed to the Underwriters and
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dated the date hereof (i) confirming that they are independent public
accountants within the meaning of the Securities Act and are in compliance with
the applicable requirements relating to the qualification of accountants under
Rule 2-01 of Regulation S-X of the Commission, (ii) stating, as of the date
hereof (or, with respect to matters involving changes or developments since the
respective dates as of which specified financial information is given in the
Prospectus, as of a date not more than five days prior to the date hereof), the
conclusions and findings of such firm with respect to the financial information
and other matters ordinarily covered by accountants' "comfort letters" to
underwriters in connection with registered public offerings.
(h) With respect to the letter of KPMG LLP referred to in the
preceding paragraph and delivered to the Representatives concurrently with the
execution of this Agreement (the "initial letter"), the Company shall have
furnished to the Representatives a letter (the "bring-down letter") of such
accountants, addressed to the Underwriters and dated such Delivery Date (i)
confirming that they are independent public accountants within the meaning of
the Securities Act and are in compliance with the applicable requirements
relating to the qualification of accountants under Rule 2-01 of Regulation S-X
of the Commission, (ii) stating, as of the date of the bring-down letter (or,
with respect to matters involving changes or developments since the respective
dates as of which specified financial information is given in the Prospectus, as
of a date not more than five days prior to the date of the bring-down letter),
the conclusions and findings of such firm with respect to the financial
information and other matters covered by the initial letter and (iii) confirming
in all material respects the conclusions and findings set forth in the initial
letter.
(i) The Company shall have furnished to the Representatives a
certificate, dated such Delivery Date, of its President or a Vice President and
its Chief Financial Officer stating that:
(i) The representations, warranties and agreements of
the Company in Section 1 are true and correct as of such Delivery Date; the
Company has complied with all its agreements contained herein; and the
conditions set forth in Sections 9(a) and 9(k) have been fulfilled; and
(ii) They have carefully examined the Registration
Statement and the Prospectus and, in their view (A) as of the Effective Date,
the Registration Statement and Prospectus (except for statements relating to the
Underwriters, the Representatives, Safeguard or the directed share subscription
program conducted by Safeguard) did not include any untrue statement of a
material fact and did not omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, and (B)
since the Effective Date no event has occurred which should have been set forth
in a supplement or amendment to the Registration Statement or the Prospectus.
(j) Each Selling Stockholder (or the Custodian or one or more
attorneys-in-fact on behalf of the Selling Stockholders) shall have furnished to
the Representatives on the First Delivery Date a certificate, dated the First
Delivery Date, signed by, or on behalf of, the Selling Stockholder (or the
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Custodian or one or more attorneys-in-fact) stating that the representations,
warranties and agreements of the Selling Stockholder contained herein are true
and correct as of the First Delivery Date and that the Selling Stockholder has
complied with all agreements contained herein to be performed by the Selling
Stockholder at or prior to the First Delivery Date.
(k) (i) Neither the Company nor any of its subsidiaries shall
have sustained since the date of the latest audited financial statements
included in the Prospectus any loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by insurance, or from
any labor dispute or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Prospectus or (ii) since such date
there shall not have been any change in the capital stock or long-term debt of
the Company or any of its subsidiaries or any change, or any development
involving a prospective change, in or affecting the general affairs, management,
consolidated financial position, stockholders' equity or results of operations
of the Company and its subsidiaries, otherwise than as set forth or contemplated
in the Prospectus, the effect of which, in any such case described in clause (i)
or (ii), is, in the judgment of the Representatives, so material and adverse as
to make it impracticable or inadvisable to proceed with the public offering or
the delivery of the Stock being delivered on such Delivery Date on the terms and
in the manner contemplated in the Prospectus.
(l) Subsequent to the execution and delivery of this Agreement
there shall not have occurred any of the following: (i) trading in securities
generally on the New York Stock Exchange or the American Stock Exchange or in
the over-the-counter market, or trading in any securities of the Company on any
exchange or in the over-the-counter market, shall have been suspended or minimum
prices shall have been established on any such exchange or such market by the
Commission, by such exchange or by any other regulatory body or governmental
authority having jurisdiction, (ii) a banking moratorium shall have been
declared by Federal or state authorities, (iii) the United States shall have
become engaged in hostilities, there shall have been an escalation in
hostilities involving the United States or there shall have been a declaration
of a national emergency or war by the United States or (iv) there shall have
occurred such a material adverse change in general economic, political or
financial conditions (or the effect of international conditions on the financial
markets in the United States shall be such) as to make it, in the judgment of a
majority in interest of the several Underwriters, impracticable or inadvisable
to proceed with the public offering or delivery of the Stock being delivered on
such Delivery Date on the terms and in the manner contemplated in the
Prospectus.
(m) The Nasdaq National Market System shall have approved the
Stock for inclusion, subject only to official notice of issuance and evidence of
satisfactory distribution.
All opinions, letters, evidence and certificates mentioned
above or elsewhere in this Agreement shall be deemed to be in compliance with
the provisions hereof only if they are in form and substance reasonably
satisfactory to counsel for the Underwriters.
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<PAGE>
10. Indemnification and Contribution.
(a) The Company shall indemnify and hold harmless each
Underwriter and each Selling Stockholder, their respective officers and
employees and each person, if any, who controls any Underwriter or Selling
Stockholder within the meaning of the Securities Act, from and against any loss,
claim, damage or liability, joint or several, or any action in respect thereof
(including, but not limited to, any loss, claim, damage, liability or action
relating to purchases and sales of Stock), to which that Underwriter or Selling
Stockholder, officer, employee or controlling person may become subject, under
the Securities Act or otherwise, insofar as such loss, claim, damage, liability
or action arises out of, or is based upon, (i) any untrue statement or alleged
untrue statement of a material fact contained (A) in any Preliminary Prospectus,
the Registration Statement or the Prospectus or in any amendment or supplement
thereto or (B) in any blue sky application or other document prepared or
executed by the Company (or based upon any written information furnished by the
Company) specifically for the purpose of qualifying any or all of the Stock
under the securities laws of any state or other jurisdiction (any such
application, document or information being hereinafter called a "Blue Sky
Application"), (ii) the omission or alleged omission to state in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or in any amendment or
supplement thereto, or in any Blue Sky Application any material fact required to
be stated therein or necessary to make the statements therein not misleading or
(iii) any act or failure to act or any alleged act or failure to act by any
Underwriter in connection with, or relating in any manner to, the Stock or the
offering contemplated hereby, and which is included as part of or referred to in
any loss, claim, damage, liability or action arising out of or based upon
matters covered by clause (i) or (ii) above (provided that the Company shall not
be liable under this clause (iii) to the extent that it is determined by a court
of competent jurisdiction that such loss, claim, damage, liability or action
resulted directly from any such acts or failures to act undertaken or omitted to
be taken by such Underwriter through its gross negligence or willful
misconduct), and shall reimburse each Underwriter and each such officer,
employee or controlling person promptly upon demand for any legal or other
expenses reasonably incurred by that Underwriter, officer, employee or
controlling person in connection with investigating or defending or preparing to
defend against any such loss, claim, damage, liability or action as such
expenses are incurred; provided, however, that the Company shall not be liable
in any such case to the extent that any such loss, claim, damage, liability or
action arises out of, or is based upon, any untrue statement or alleged untrue
statement or omission or alleged omission made in any Preliminary Prospectus,
the Registration Statement or the Prospectus, or in any such amendment or
supplement or in any Blue Sky Application, in reliance upon and in conformity
with written information concerning such Underwriter furnished to the Company
through the Representatives by or on behalf of any Underwriter specifically for
inclusion therein which information consists solely of the information specified
in Section 10(f) or in reliance upon and in conformity with written information
concerning such Selling Stockholder furnished to the Company by or on behalf of
such Selling Stockholder specifically for inclusion therein; and provided
further, however, that the Company shall not be liable to any Underwriter from
whom the person asserting any such losses, claims, damages or liabilities
purchased Stock if a copy of the Prospectus (as then amended or supplemented)
was not sent or given by or on behalf of such Underwriter to such person with
the written confirmation of the sale of the Stock to such person, and if the
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Prospectus (as so amended or supplemented) would have cured the defect giving
rise to such losses, claims, damages or liabilities. The foregoing indemnity
agreement is in addition to any liability which the Company may otherwise have
to any Underwriter or to any officer, employee or controlling person of that
Underwriter.
(b) The Selling Stockholders, severally and not jointly, in
proportion to the number of shares of Stock to be sold by each of them
hereunder, shall indemnify and hold harmless the Company and each Underwriter,
and their respective officers and employees, and each person, if any, who
controls the Company or any Underwriter within the meaning of the Securities
Act, from and against any loss, claim, damage or liability, joint or several, or
any action in respect thereof (including, but not limited to, any loss, claim,
damage, liability or action relating to purchases and sales of Stock), to which
the Company or that Underwriter, or any officer, employee or controlling person
may become subject, under the Securities Act or otherwise, insofar as such loss,
claim, damage, liability or action arises out of, or is based upon, (i) any
untrue statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the Registration Statement or the Prospectus or in any
amendment or supplement thereto or (ii) the omission or alleged omission to
state in any Preliminary Prospectus, Registration Statement or the Prospectus,
or in any amendment or supplement thereto, any material fact required to be
stated therein or necessary to make the statements therein not misleading, and
shall reimburse the Company and each Underwriter, their respective officers and
employees and each such controlling person for any legal or other expenses
reasonably incurred by the Company or that Underwriter, or their respective
officers and employees or controlling person in connection with investigating or
defending or preparing to defend against any such loss, claim, damage, liability
or action as such expenses are incurred but only with respect to untrue
statements or omissions, or alleged untrue statements or omissions or alleged
omissions made in any Preliminary Prospectus, the Registration Statement or the
Prospectus or in any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
such Selling Stockholder specifically for inclusion therein; provided, that the
Selling Stockholders shall not be liable in any such case to the extent that any
such loss, claim, damage, liability or action arises out of, or is based upon,
any untrue statement or alleged untrue statement or omission or alleged omission
made in any Preliminary Prospectus, the Registration Statement or the Prospectus
or in any such amendment or supplement in reliance upon and in conformity with
written information concerning such Underwriter furnished to the Company through
the Representatives by or on behalf of any Underwriter specifically for
inclusion therein which information consists solely of the information specified
in Section 10(f). In no event, however, shall the liability of any Selling
Stockholder for indemnification under this Section 10(b) exceed the net proceeds
received by such Selling Stockholder from the Underwriters in this offering. The
foregoing indemnity agreement is in addition to any liability which the Selling
Stockholders may otherwise have to any Underwriter or any officer, employee or
controlling person of that Underwriter.
(c) Each Underwriter, severally and not jointly, shall
indemnify and hold harmless the Company and each Selling Stockholder, each of
their respective officers and employees, each of their respective directors, and
each person, if any, who controls the Company or any Selling Stockholder within
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<PAGE>
the meaning of the Securities Act, from and against any loss, claim, damage or
liability, joint or several, or any action in respect thereof, to which the
Company or any such director, officer, Selling Stockholder or controlling person
may become subject, under the Securities Act or otherwise, insofar as such loss,
claim, damage, liability or action arises out of, or is based upon, (i) any
untrue statement or alleged untrue statement of a material fact contained (A) in
any Preliminary Prospectus, the Registration Statement or the Prospectus or in
any amendment or supplement thereto, or (B) in any Blue Sky Application or (ii)
the omission or alleged omission to state in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or in any amendment or supplement
thereto, or in any Blue Sky Application any material fact required to be stated
therein or necessary to make the statements therein not misleading, but in each
case only to the extent that the untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity with
written information concerning such Underwriter furnished to the Company through
the Representatives by or on behalf of that Underwriter specifically for
inclusion therein, and shall reimburse the Company and any such director,
officer, Selling Stockholder or controlling person for any legal or other
expenses reasonably incurred by the Company or any such director, officer,
Selling Stockholder or controlling person in connection with investigating or
defending or preparing to defend against any such loss, claim, damage, liability
or action as such expenses are incurred. The foregoing indemnity agreement is in
addition to any liability which any Underwriter may otherwise have to the
Company or any such director, officer, employee, Selling Stockholder or
controlling person.
(d) Promptly after receipt by an indemnified party under this
Section 10 of notice of any claim or the commencement of any action, the
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under this Section 10, notify the indemnifying party in
writing of the claim or the commencement of that action; provided, however, that
the failure to notify the indemnifying party shall not relieve it from any
liability which it may have under this Section 10 except to the extent it has
been materially prejudiced by such failure and, provided further, that the
failure to notify the indemnifying party shall not relieve it from any liability
which it may have to an indemnified party otherwise than under this Section 10.
If any such claim or action shall be brought against an indemnified party, and
it shall notify the indemnifying party thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it wishes, jointly with
any other similarly notified indemnifying party, to assume the defense thereof
with counsel reasonably satisfactory to the indemnified party. After notice from
the indemnifying party to the indemnified party of its election to assume the
defense of such claim or action, the indemnifying party shall not be liable to
the indemnified party under this Section 10 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than reasonable costs of investigation; provided, however, that
the Representatives shall have the right to employ counsel to represent jointly
the Representatives and those other Underwriters and their respective officers,
employees and controlling persons who may be subject to liability arising out of
any claim in respect of which indemnity may be sought by the Underwriters
against the Company or any Selling Stockholder under this Section 10 if, in the
reasonable judgment of the Representatives, it is advisable for the
Representatives and those Underwriters, officers, employees and controlling
persons to be jointly represented by separate counsel, and in that event the
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<PAGE>
fees and expenses of such separate counsel shall be paid by the Company or
Selling Stockholders. No indemnifying party shall (i) without the prior written
consent of the indemnified parties (which consent shall not be unreasonably
withheld), settle or compromise or consent to the entry of any judgment with
respect to any pending or threatened claim, action, suit or proceeding in
respect of which indemnification or contribution may be sought hereunder
(whether or not the indemnified parties are actual or potential parties to such
claim or action) unless such settlement, compromise or consent includes an
unconditional release of each indemnified party from all liability arising out
of such claim, action, suit or proceeding, or (ii) be liable for any settlement
of any such action effected without its written consent (which consent shall not
be unreasonably withheld), but if settled with the consent of the indemnifying
party or if there be a final judgment of the plaintiff in any such action, the
indemnifying party agrees to indemnify and hold harmless any indemnified party
from and against any loss or liability by reason of such settlement or judgment.
(e) If the indemnification provided for in this Section 10
shall for any reason be unavailable to or insufficient to hold harmless an
indemnified party under Section 10(a), 10(b) or 10(c) in respect of any loss,
claim, damage or liability, or any action in respect thereof, referred to
therein, then each indemnifying party shall, in lieu of indemnifying such
indemnified party, contribute to the amount paid or payable by such indemnified
party as a result of such loss, claim, damage or liability, or action in respect
thereof, (i) in such proportion as shall be appropriate to reflect the relative
benefits received by the Company and the Selling Stockholders on the one hand
and the Underwriters on the other from the offering of the Stock or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company and
the Selling Stockholders on the one hand and the Underwriters on the other with
respect to the statements or omissions which resulted in such loss, claim,
damage or liability, or action in respect thereof, as well as any other relevant
equitable considerations. The relative benefits received by the Company and the
Selling Stockholders on the one hand and the Underwriters on the other with
respect to such offering shall be deemed to be in the same proportion as the
total net proceeds from the offering of the Stock purchased under this Agreement
(before deducting expenses) received by the Company and the Selling
Stockholders, on the one hand, and the total underwriting discounts and
commissions received by the Underwriters with respect to the shares of the Stock
purchased under this Agreement, on the other hand, bear to the total gross
proceeds from the offering of the shares of the Stock under this Agreement, in
each case as set forth in the table on the cover page of the Prospectus. The
relative fault shall be determined by reference to whether the untrue or alleged
untrue statement of a material fact or omission or alleged omission to state a
material fact relates to information supplied by the Company, the Selling
Stockholders or the Underwriters, the intent of the parties and their relative
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company, the Selling Stockholders and the
Underwriters agree that it would not be just and equitable if contributions
pursuant to this Section 10 were to be determined by pro rata allocation (even
if the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take into account the equitable
considerations referred to herein. The amount paid or payable by an indemnified
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<PAGE>
party as a result of the loss, claim, damage or liability, or action in respect
thereof, referred to above in this Section shall be deemed to include, for
purposes of this Section 10(e), any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 10(e), no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Stock underwritten by it and distributed
to the public was offered to the public exceeds the amount of any damages which
such Underwriter has otherwise paid or become liable to pay by reason of any
untrue or alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. The Underwriters' obligations
to contribute as provided in this Section 10(e) are several in proportion to
their respective underwriting obligations and not joint. No Selling Stockholder
shall be required to contribute any amount in excess of the amount of net
proceeds received by such Selling Stockholder from the sale of shares by such
Selling Stockholder hereunder.
(f) The Underwriters severally confirm and the Company
acknowledges that the statements with respect to the public offering of the
Stock by the Underwriters set forth on the cover page of, and the concession and
reallowance figures appearing under the caption "Plan of Distribution" in, the
Prospectus are correct and constitute the only information concerning such
Underwriters furnished in writing to the Company by or on behalf of the
Underwriters specifically for inclusion in the Registration Statement and the
Prospectus.
11. Defaulting Underwriters.
If, on either Delivery Date, any Underwriter defaults in the
performance of its obligations under this Agreement, the remaining
non-defaulting Underwriters shall be obligated to purchase the Stock which the
defaulting Underwriter agreed but failed to purchase on such Delivery Date in
the respective proportions which the number of shares of the Firm Stock set
opposite the name of each remaining non-defaulting Underwriter in Schedule 1
hereto bears to the total number of shares of the Firm Stock set opposite the
names of all the remaining non-defaulting Underwriters in Schedule 1 hereto;
provided, however, that the remaining non-defaulting Underwriters shall not be
obligated to purchase any of the Stock on such Delivery Date if the total number
of shares of the Stock which the defaulting Underwriter or Underwriters agreed
but failed to purchase on such date exceeds 9.09% of the total number of shares
of the Stock to be purchased on such Delivery Date, and any remaining
non-defaulting Underwriter shall not be obligated to purchase more than 110% of
the number of shares of the Stock which it agreed to purchase on such Delivery
Date pursuant to the terms of Section 3. If the foregoing maximums are exceeded,
the remaining non-defaulting Underwriters, or those other underwriters
satisfactory to the Representatives who so agree, shall have the right, but
shall not be obligated, to purchase, in such proportion as may be agreed upon
among them, all the Stock to be purchased on such Delivery Date. If the
remaining Underwriters or other underwriters satisfactory to the Representatives
do not elect to purchase the shares which the defaulting Underwriter or
Underwriters agreed but failed to purchase on such Delivery Date, this Agreement
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<PAGE>
(or, with respect to the Second Delivery Date, the obligation of the
Underwriters to purchase, and of the Company to sell, the Option Stock) shall
terminate without liability on the part of any non-defaulting Underwriter or the
Company or the Selling Stockholders, except that the Company will continue to be
liable for the payment of expenses to the extent set forth in Sections 8 and 13.
As used in this Agreement, the term "Underwriter" includes, for all purposes of
this Agreement unless the context requires otherwise, any party not listed in
Schedule 1 hereto who, pursuant to this Section 11, purchases Firm Stock which a
defaulting Underwriter agreed but failed to purchase.
Nothing contained herein shall relieve a defaulting
Underwriter of any liability it may have to the Company and the Selling
Stockholders for damages caused by its default. If other underwriters are
obligated or agree to purchase the Stock of a defaulting or withdrawing
Underwriter, either the Representatives or the Company may postpone the Delivery
Date for up to seven full business days in order to effect any changes that in
the opinion of counsel for the Company or counsel for the Underwriters may be
necessary in the Registration Statement, the Prospectus or in any other document
or arrangement.
12. Termination. The obligations of the Underwriters hereunder may be
terminated by the Representatives by notice given to and received by the Company
and the Selling Stockholders prior to delivery of and payment for the Firm Stock
if, prior to that time, any of the events described in Sections 9(k) or 9(l),
shall have occurred or if the Underwriters shall decline to purchase the Stock
for any reason permitted under this Agreement.
13. Reimbursement of Underwriters' Expenses. If the Company or any
Selling Stockholder shall fail to tender the Stock for delivery to the
Underwriters by reason of any failure, refusal or inability on the part of the
Company or the Selling Stockholder(s) to perform any agreement on its part to be
performed, or because any other condition of the Underwriters' obligations
hereunder required to be fulfilled by the Company or the Selling Stockholder(s)
is not fulfilled, the Company and the Selling Stockholder(s) will reimburse the
Underwriters for all reasonable out-of-pocket expenses (including fees and
disbursements of counsel) incurred by the Underwriters in connection with this
Agreement and the proposed purchase of the Stock, and upon demand the Company
and the Selling Stockholder(s) shall pay the full amount thereof to the
Representative(s). If this Agreement is terminated pursuant to Section 11 by
reason of the default of one or more Underwriters, neither the Company nor any
Selling Stockholder shall be obligated to reimburse any defaulting Underwriter
on account of those expenses.
14. Notices, etc. All statements, requests, notices and agreements
hereunder shall be in writing, and:
(a) if to the Underwriters, shall be delivered or sent by
mail, telex or facsimile transmission to Lehman Brothers Inc., Three World
Financial Center, New York, New York 10285, Attention: Syndicate Department
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<PAGE>
(Fax: 212-526-6588), with a copy, in the case of any notice pursuant to Section
10(d), to the Director of Litigation, Office of the General Counsel, Lehman
Brothers Inc., 3 World Financial Center, 10th Floor, New York, NY 10285;
(b) if to the Company, shall be delivered or sent by mail,
telex or facsimile transmission to the address of the Company set forth in the
Registration Statement, Attention: Stephen T. Zarrilli, Fax: (610) 382-8908;
(c) if to any Selling Stockholders, shall be delivered or sent
by mail, telex or facsimile transmission to such Selling Stockholder at the
address set forth on Schedule 2 hereto;
provided, however, that any notice to an Underwriter pursuant to Section 10(d)
shall be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its acceptance telex to the
Representatives, which address will be supplied to any other party hereto by the
Representatives upon request. Any such statements, requests, notices or
agreements shall take effect at the time of receipt thereof. The Company and the
Selling Stockholders shall be entitled to act and rely upon any request,
consent, notice or agreement given or made on behalf of the Underwriters by
Lehman Brothers Inc. on behalf of the Representatives and the Company and the
Underwriters shall be entitled to act and rely upon any request, consent, notice
or agreement given or made on behalf of the Selling Stockholders by the
Custodian.
15. Persons Entitled to Benefit of Agreement. This Agreement shall
inure to the benefit of and be binding upon the Underwriters, the Company, the
Selling Stockholders and their respective personal representatives and
successors. This Agreement and the terms and provisions hereof are for the sole
benefit of only those persons, except that (A) the representations, warranties,
indemnities and agreements of the Company and the Selling Stockholders contained
in this Agreement shall also be deemed to be for the benefit of the person or
persons, if any, who control any Underwriter within the meaning of Section 15 of
the Securities Act, and (B) the indemnity agreement of the Underwriters
contained in Section 10(c) of this Agreement shall be deemed to be for the
benefit of directors of the Company, officers of the Company who have signed the
Registration Statement and any person controlling the Company or any Selling
Stockholder within the meaning of Section 15 of the Securities Act. Nothing in
this Agreement is intended or shall be construed to give any person, other than
the persons referred to in this Section 15, any legal or equitable right, remedy
or claim under or in respect of this Agreement or any provision contained
herein.
16. Survival. The respective indemnities, representations, warranties
and agreements of the Company, the Selling Stockholders and the Underwriters
contained in this Agreement or made by or on behalf on them, respectively,
pursuant to this Agreement, shall survive the delivery of and payment for the
Stock and shall remain in full force and effect, regardless of any investigation
made by or on behalf of any of them or any person controlling any of them.
17. Definition of the Terms "Business Day" and "Subsidiary". For
purposes of this Agreement, (a) "business day" means each Monday, Tuesday,
Wednesday, Thursday or Friday which is not a day on which banking institutions
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<PAGE>
in New York are generally authorized or obligated by law or executive order to
close and (b) "subsidiary" has the meaning set forth in Rule 405 of the Rules
and Regulations.
18. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of New York.
19. Counterparts. This Agreement may be executed in one or more
counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
20. Headings. The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
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<PAGE>
If the foregoing correctly sets forth the agreement among the Company,
the Selling Stockholders and the Underwriters, please indicate your acceptance
in the space provided for that purpose below.
Very truly yours,
U.S. INTERACTIVE, INC.
By: ______________________________________
Title: ___________________________________
The Selling Stockholders named in Schedule 2
to this Agreement
By: _____________________________________
Attorney-in-Fact
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<PAGE>
Accepted:
LEHMAN BROTHERS INC.
CHASE SECURITIES INC.
DEUTSCHE BANK SECURITIES INC.
FIRST UNION SECURITIES, INC.
ADAMS, HARKNESS & HILL, INC.
For themselves and as Representatives
of the several Underwriters named
in Schedule 1 hereto
By: LEHMAN BROTHERS INC.
By: ____________________________________
Authorized Representative
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<PAGE>
SCHEDULE 1
Number
Underwriters of Shares
Lehman Brothers Inc.............................................................
Chase Securities Inc............................................................
Deutsche Bank Securities Inc....................................................
First Union Securities, Inc.....................................................
Adams, Harkness & Hill, Inc.....................................................
................................................................................
Total...........................................................
=
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<PAGE>
- 34 -
<PAGE>
SCHEDULE 2
Number of Shares
Name and address of Selling Stockholder of Firm Stock
- --------------------------------------- -------------
- --------------------------......................................
Total ==========
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<PAGE>
[FORM OF OPINION]
[LETTERHEAD OF DILWORTH PAXSON LP]
Exhibit 5.1
______, 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
---------------------------------------------
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 (Registration No. 333- ) 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 3,650,000 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. _ dated _______, 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 200,000 presently outstanding Shares to be sold by a
the Selling Stockholder 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,
cc. Lawrence F. Shay,
Senior Vice President,
General Counsel
and Secretary
<PAGE>
EXHIBIT 10.16B
BASIC OPERATING AGREEMENT
WITH
U.S. INTERACTIVE
THIS AGREEMENT is made and entered into as of September 1, 1999 by and
between CHROMAZONE.COM, INC., a Delaware limited liability company, with offices
at 2901 West Alameda Avenue, 7th Floor, Burbank, California 91505 (hereinafter
referred to collectively as "CZ") and U.S. INTERACTIVE, INC., a Delaware
corporation, with offices at 11911 San Vincente Blvd., Los Angeles, CA 90049
(hereinafter referred to as "USI").
RECITALS
A. CZ is in the business of developing and operating all types of electronic
commerce, video, Internet and Interactive applications and services.
B. USI is in the business of enabling electronic enterprise, including digital
marketing, knowledge management consulting, graphical and interface design,
Internet systems design, and Internet systems management, and has agreed to
assist CZ in the development of software and processes as are more fully
set forth in those mutually approved Statement(s) of Work prepared from
time to time.
NOW, THEREFORE, based on the foregoing facts and in consideration of
the mutual covenants and conditions contained in this Agreement, CZ and USI
agree as follows:
1.0 Definitions
"Affiliate" means any person which either directly or indirectly
controls a party to this Agreement, is controlled by such party, or is under
common control with such party. As used herein, the term "control" means the
possession of the power to direct or cause the direction of management and
policies of such person, whether through the ownership of voting securities, by
contract or otherwise.
"Change Order" means a written document signed by both CZ and USI
pursuant to Section 6, below, which amends this Agreement and/or involves an
addition to, deduction from, or other revision to the Work which may result in
an alteration to the timing and/or compensation.
"Confidential Information" shall mean information, including systems,
programs, compilations, devices, methods, techniques, processes, concepts,
designs, trade secrets, financial data, customer information, general business
information, strategies and/or know-how that provides actual or potential
economic value to its owner by not being generally known to the public and is
the subject of reasonable efforts under the circumstances to maintain its
secrecy. "Confidential Information" as defined herein shall not include
information that: (a) is or becomes known to the public through no fault of the
<PAGE>
receiving party; (b) is known to the receiving party prior to its receipt or
becomes known to the receiving party by disclosure from a third party who has a
lawful right to disclose the information; (c) is authorized to be disclosed by
prior written consent of the disclosing party; (d) is independently developed as
demonstrated by written record, without reference to Confidential Information;
or (e) is required by law to be disclosed, provided recipient gives the
disclosing party prompt notice of the required disclosure.
"Indemnifiable Claims" means any and all claims, suits, judgments,
damages, losses and/or expenses (including, without limitation, costs,
design-professional fees, and reasonable attorney's fees and expenses incurred
in connection with any such claims, suits, judgments, damages, losses and/or
expenses, and in proving the right to indemnification), and/or demands,
including demands arising from injuries or death of persons (including, without
limitation, the parties' employees) and damage to property.
"Intellectual Property Rights" means worldwide patent, copyright, trade
secret, trademark, service mark, trade dress and trade name rights, rights in
industrial designs, rights of publicity or privacy, moral rights, rights of
attribution or integrity and any other intellectual property or proprietary
rights, along with all rights of publication, registration, extension and
renewal associate with each of the foregoing and all related rights and causes
of action, including, without limitation, for infringement, dilution or
misappropriation.
"Licensed Technology" means any Preexisting Technology which USI has
licensed from a third party not controlling, controlled by, or under common
control with USI which USI has (i) incorporated into the Work or Deliverables
and/or (ii) delivered to CZ hereunder.
"Preexisting Technology" means any items which (i) USI is able to prove
were owned, leased or licensed by USI prior to commencement of the work under
any Statement of Work, (ii) USI is able to prove have been developed, leased or
licensed by USI independently of the work under any Statement of Work, (iii) are
protected by any Intellectual Property Rights of USI secured prior to
commencement of the work under any Statement of Work, or (iv) are identified to
CZ in writing as is more specifically discussed in Section 5.4 below.
"Results and Proceeds" means: (i) any results or proceeds of any Work
that are accumulated, authored, made, developed, conceived or first reduced to
practice by USI in connection with performance of the Work under this Agreement,
in any language, format or medium now existing or hereafter developed, whether
or not patentable or copyrightable, including without limitation, any and all
notes, abstracts, summaries, calculations, algorithms, computer programs,
software (including source codes), concepts, designs, drawings, ideas,
processes, procedures, methods, know-how, materials, products, discoveries,
inventions, technologies, improvements, models, molds, tools, literary works,
musical compositions, pictorial, graphic and sculptural works (including images,
artwork, logos and insignia), plans, reports, scripts, sound and special
effects, audiovisual displays, multimedia works, pilots, themes, characters,
renderings, story lines, scenes, specifications, sketches, trade secrets,
treatments, intangible work product, tangible deliverables and other results or
proceeds of any Work; and (ii) all Intellectual Property Rights associated with
any of the foregoing items or with any Work, but excluding for all of the above,
<PAGE>
however, the Preexisting Technology and any Intellectual Property Rights
associated with the Preexisting Technology.
"Statement of Work" means the descriptions of and specifications for
the Work to be performed by USI, as set forth in such statements of work as may
be mutually agreed upon in writing between the parties.
"Work" means all the work described in the attached Statement(s) of
work, as such may be amended from time to time by Change Orders, regardless of
the extent to which it is completed, and includes all other labor, materials,
equipment and services provided or to be provided by USI to fulfill its
obligations.
2.0 Term of Agreement
This Agreement shall commence on the date set forth above and shall continue
until the acceptance, by CZ, of the services set forth in the Statement(s) of
Work, unless sooner terminated in accordance with the terms of this Agreement.
All provisions which by their nature should survive termination, including,
without termination, any warranties made by USI regarding the Results and
Proceeds and/or Deliverables and any intellectual property indemnification made
by USI, shall so survive.
3.0 Scope and Timing of Services
3.1 During the term of this Agreement, USI will provide materials and
perform services described in each Statement of Work. The services will be
performed in accordance with the general schedule set forth in the initial, and
in any subsequent, Statement(s) of Work that may be executed by the parties for
other services.
3.2 Time limits stated in this Agreement are of the essence of this
Agreement. By executing this Agreement, USI acknowledges and confirms that the
schedule provides for a sufficient period of time for performing the Work. USI
agrees to proceed competently, diligently, and expeditiously with adequate
resources and shall complete the Work in accordance with the schedule. USI shall
furnish sufficient resources, and shall work such hours, including night shifts,
overtime operations and weekend and holiday work, as may be necessary to insure
the production and completion of the Work in accordance with the schedule.
4.0 Acceptance of Deliverables
USI will provide the deliverables described and scheduled in the attached
Statement(s) of Work ("Deliverables", which term shall also include all Work and
all Results and Proceeds). within 15 business days after receipt of each
Deliverable, CZ will test and evaluate the Deliverable. In the event the
Deliverable meets the specifications in the respective Statement(s) of Work, CZ
shall notify USI in writing that such Deliverable has been tested and accepted.
In the event that a Deliverable fails to meet such specifications, CZ will
advise USI in writing as to which aspects of the Deliverable do not meet the
specifications. USI shall, at no cost of CZ, remedy such failure and deliver the
corrected Deliverable to CZ for review as soon as feasible following receipt by
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USI of notice of the failure to meet the specifications. Following receipt of
the corrected Deliverable, the test and evaluation procedures set forth in this
Section 4 shall commence anew. In the event that CZ does not notify USI of
acceptance or failure to meet specifications of a Deliverable within 15 business
days after its receipt of such Deliverable, USI shall notify CZ (both via
telephone and via at least one form of the appropriate notice methods set forth
herein) that 15 business days have elapsed from delivery and that USI has not
received notice of acceptance or rejection of the Deliverables. In the vent that
CZ does not notify USI of acceptance or rejection within 15 business days of
such second notice, the underlying Deliverable shall be deemed accepted.
5.0 Title to Property
5.1 Property of USI. USI shall retain ownership of its Preexisting
Technology. CZ agrees that it will not, directly or through others, disassemble,
reverse engineer or decompile property of USI, or otherwise attempt to discover
any portion of the source code or trade secrets which are part of the USI
Preexisting Technology.
5.2 Property of CZ.
(a) All materials provided to USI by or through CZ, including
but not limited to al artwork, screen presentations, drawings, pictorial works,
motion pictures, audiovisual works, images, text and displays viewable on any
internet site, shall be and remain the property of CZ.
(b) CZ shall own upon their creation all right and title to, and
interest in and to, all Work, Deliverables and Results and Proceeds, and all
associated Intellectual Property Rights, to use in any language and in any
medium whether now existing or developed in the future, throughout the universe
in perpetuity, regardless of any close-out or prior termination of this
Agreement, and USI agrees to promptly disclose and furnish all Work,
Deliverables and Results and Proceeds to CZ. To the extent that the Work,
Deliverables and/or Results and Proceeds include copyrightable materials or
designs, they shall be deemed "works for hire" for CZ under all applicable
copyright laws (including the United States Copyright Act) with CZ as the
author, creator, or inventor upon creation of these materials. CZ shall own all
rights pertaining to the Work, Deliverables and Results and Proceeds as "works
for hire" and CZ shall have the right to apply for and obtain in its name or in
the name of its designee(s) all copyrights and copyright renewals and any other
protections in connection with the protection of these copyrights. To the extent
that any Work, Deliverables and/or Results and Proceeds (including any
patentable inventions) do not constitute "works for hire," USI expressly assigns
and agrees to assign CZ, without separate compensation, all right, title and
interest in and to such Work, Deliverables and/or Results and Proceeds and all
associated Intellectual Property Rights, for CZ to use, in its sole discretion,
in any language and in any medium whether now existing or developed in the
future, throughout the universe in perpetuity. USI acknowledges that as between
USI and CZ, CZ has the exclusive right to any and all Intellectual Property
Rights associated with any Work, Deliverables and Results and Proceeds
conceived, developed and/or produced by USI under this Agreement. USI agrees
that it will communicate to CZ any facts known to USI respecting the Work,
Deliverables and Results and Proceeds and any associated Intellectual Property
<PAGE>
Rights, testify in any legal proceedings when called upon by CZ, sign all lawful
papers considered by CZ as expedient to vest in it the legal title being
conveyed (including, without limitation, patent applications and declarations,
if applicable) or for the filing and prosecution of all copyrights and other
Intellectual Property Rights, United States and foreign, and otherwise
reasonably cooperate with and assist CZ and its successors and Assigns in
obtaining full copyright and other Intellectual Property Right protection for
any Work, Results and Proceeds and Deliverables, and in enforcing proper
protection under these Intellectual Property Rights, but in every instance at
CZ's expense.
5.3 License to CZ. In the event that any of the Results and Proceeds,
Work or Deliverables developed under this agreement are improvements to, or rely
upon for their exploitation, and USI Preexisting Technology, whether or not
identified by USI, USI hereby grants to CZ, its subsidiaries and Affiliates and
its and their successors and assigns, as applicable, an irrevocable, fully-paid
and non-assessable, royalty-free, nonexclusive, worldwide right and license to
use, execute, reproduce, display, perform, distribute internally and externally,
sell copies of, and, unless expressly limited as disclosed pursuant to Section
5.4, below, prepare derivative works of the Preexisting Technology in
conjunction with the work, Deliverables and Results and Proceeds developed under
this Agreement, without cost beyond any payments otherwise required by this
Agreement. All rights granted and obligations incurred under this Section 5.3
shall survive and continue in effect following any close-out or sooner
termination of this Agreement. USI agrees to take all action reasonably
requested by CZ (including, without limitation, execution of affidavits and
other documents) to evidence, perfect, confirm or vest the rights granted to CZ
herein.
5.4 Preexisting Technology Disclosure. USI shall make best efforts to
provide CZ with a full and complete list of all Preexisting Technology
(including Licensed Technology) which USI has incorporated into the Work or
Deliverables and/or delivered to CZ hereunder, as soon as practicable, and to
continue to update the list as such may change. Such disclosures shall not be
deemed dispositive as to the issue as to whether any listed item meets the
specifications of the definition of Preexisting Technology. To the extent any
Licensed Technology has been incorporated into the Work or Deliverables and/or
delivered to CZ hereunder, and prior to USI's incorporation of Licensed
Technology into the Deliverables, USI shall disclose the name and version number
of such Licensed Technology, and any limitations which may be imposed by the
underlying license agreement for such Licensed Technology on the rights granted
under Section 5.3 above. In the event that CZ does not agree with the
incorporation of Licensed Technology whose license terms would affect CZ's
rights to use, execute, reproduce, display, perform, distribute internally and
externally, sell copies of and/or prepare derivative works, the parties shall
discuss, in good faith, alternate software to fulfill the functions of such
disputed Licensed Technology.
6.0 Changes
CZ may, at any time, by written notice advise USI of its intent to make changes
in, or additions to, or reductions from, the work to be performed by USI under
this Agreement. If such intended changes cause an increase or decrease in the
amount or character of the work under the Agreement, or in the time required for
performance as determined by USI, USI shall promptly so advise CZ in writing,
<PAGE>
specifying the impact of such change on the price and/or the time required for
performance. Thereafter, if CZ elects in writing to make such changes, an
equitable adjustment to all appropriate terms and conditions, including the
amount to be paid to USI and the time for performance, shall be made and this
Agreement modified accordingly with an amendment executed by both parties.
7.0 Confidential Information
7.1 Ownership. All Confidential Information shall remain the property
of the disclosing party and shall be returned to the disclosing party no later
than the termination of this Agreement.
7.2 Nondisclosure. Each party agrees and acknowledges that it shall
have no proprietary interest in the Confidential Information of the other party
and will not disclose, communicate or publish the nature or content of such
information to any person or entity, or use, except as contemplated by this
Agreement, any of the Confidential Information it produces, receives, acquires
or obtains from the disclosing party. Each party shall take reasonable steps
under the circumstances to ensure that the Confidential Information is securely
maintained but, in no event, less than a reasonable standard of care.
7.3 Remedies. The parties acknowledge and agree that the other party's
remedy at law for breach or threatened breach of any of the provisions of this
Section 7 would be inadequate and, in recognition of this fact, in the event of
breach or threatened breach by such party of any of the provisions of Section 7,
the parties agree that, in addition to its remedy at law, the disclosing party,
without any obligation to post bond, shall be entitled to equitable relief in
the form of specific performance, temporary restraining order, preliminary or
permanent injunction, or any other equitable remedy that may then be available.
Nothing herein contained shall be construed as prohibiting the disclosing party
from pursuing any other remedies available to it based on such breach or
threatened breach. Pursuit of any remedy at law or in equity shall not be deemed
an election of remedies.
8.0 Warranty/Maintenance Provisions
8.1 Representations
(a) USI hereby represents and warrants to CZ that:
(i) USI has, and at all times during the performance of the
work will continue to have, the professional experience
and skill to perform the Work required to be performed
under this Agreement;
(ii) USI will, at all times during the performance of the
Work, comply with all applicable laws, statutes,
regulations, codes, ordinances and orders of all
countries, states, provinces, counties, cities and any
other governing bodies in any country having jurisdiction
over the Work;
<PAGE>
(iii) USI will, at all times during performance of the Work,
perform such Work in accordance with generally accepted
professional standards;
(iv) there is no claim, litigation, or proceeding pending or,
to USI's knowledge, threatened, that will prevent or
impair USI form performing and delivering the Work,
Deliverables and the Results and Proceeds when and as
required under this Agreement;
(v) USI has, and at all times, during the performance of the
Work will continue to have, sufficient capital assets and
be adequately financed to meet all financial obligations
USI may be required to incur in the performance of the
Work under this Agreement;
(vi) USI is the sole author, creator, or inventor of the Work
and the Results and Proceeds, other than as may be
tendered by CZ and except for such third parties'
properties which USI is authorized to incorporate into
the Work and Deliverables;
(vii) USI has the legal authority to make, use and/or sell the
Work, Deliverables and Results and proceeds and to grant
all rights granted to CZ under this Agreement; and
(viii) the Work, Deliverables, Results and proceeds and the
components of each do not infringe upon or violate any
Intellectual Property Rights of any third party;
(ix) the Deliverables shall be free from defects in materials
and workmanship for a period of six (6) months following
acceptance by CZ (pursuant to Section 4.0 above). During
such six (6) month period, USI shall promptly correct, at
USI's expense, any defects reported by CZ provided such
defects arise from systems meeting the minimum operating
specifications as are set forth in the Statement(s) of
Work.
(b) Each party represents to the other that it is authorized to
execute, deliver and perform its obligations under this Agreement, that the
person signing this Agreement on behalf of such party is authorized to do so,
and that this Agreement is enforceable against such party in accordance with its
terms.
8.2 Unless otherwise specified in a written Statement of work for a
particular project, USI shall not be responsible to maintain any Work.
Maintenance services, if any, will be provided by separate contract. Nothing
contained in this Section 8.2 is intended by the parties to limit any warranty
set forth in this Agreement.
8.3 USI represents and warrants that the Deliverables (other than any
portion of any Deliverable provided by or through CZ) are and shall be capable
of performing all functions, specifications, user requirements and/or
documentation both prior to and following January 1, 2000. The software
<PAGE>
programming design and performance capabilities to ensure year 2000
compatibility shall include, but shall not be limited to, date data century
recognition, calculations which accommodate same century and multi-century
formulas and data values, and date data interface values which reflect the
correct century and recognize the year 2000 as a leap year. In the event that at
any time such software is found not to function as specified herein as a result
of the date change from December 31, 1999 to January 1, 2000, notwithstanding
any other obligation or any remedy for breach thereof, at no additional charge,
USI shall immediately upon receipt of a report of defect, correct any such
defect so as to enable the software to fully function in accordance with this
Section and the relevant specifications, user requirements and/or documentation.
In doing so, USI shall not require CZ to make any changes to the software except
to install such changes provided by USI. The USI shall indemnify and hold CZ,
its subsidiaries and affiliates, as well as their respective directors,
officers, employees, consultants and assigns, harmless from and against any
cost, loss, damage or expense (including reasonable attorney's fees) incurred by
CZ or its parent, affiliates or subsidiaries, as a result of a breach of the
foregoing warranty.
8.4 USI represents and warrants that it will not knowingly, without the
express prior written consent of CZ, insert or program into any Deliverable
provided any program, routine, device or other undisclosed feature, including,
without limitation, a time bomb, virus, software lock, drop dead device,
malicious logic, worm, Trojan horse, or trap door, which is (a) designed to
delete, disable, deactivate, interfere with or otherwise harm the Results and
Proceeds or the Deliverables, CZ's (or a subsidiary's or affiliate's) hardware,
data or software, or (b) intended to provide unauthorized access or produce
unauthorized modifications to such Deliverables (collectively, "disabling
procedures"). If CZ incorporates programs or routines supplied by other vendors,
licensors or contractors into the deliverables, USI shall obtain comparable
warranties from such providers or USI shall be entitled to take appropriate
action to ensure that such programs or routines are free of disabling
procedures. Notwithstanding any other limitations in this Agreement, USI agrees
to notify CZ immediately upon discovery of any disabling procedures which are or
may be included in deliverables. If disabling procedures are discovered or
reasonably suspected to be present in the Results and Proceeds and/or the
Deliverables, USI agrees to take action immediately, at its own expense, to
identify and eradicate (or to have CZ do so on its behalf or to equip CZ to
identify and eradicate) such disabling procedures and carry out any recovery
necessary to remedy any impact of such disabling procedures.
8.5 USI HEREBY DISCLAIMS ANY GENERAL WARRANTY OF "MERCHANTABILITY" OR
"FITNESS FOR A PARTICULAR PURPOSE". There are no warranties provided by USI
except as expressly set forth in this Agreement. CZ's remedies for breach of
warranty or based on any other legal theory are limited to the reasonable cost
of correction of the critical fault, and do not include any rights to indirect,
special, exemplary, punitive, incidental or consequential damages. Any action
for breach of any warranty, or based on any other legal theory, must be
commenced within one (1) year after the cause of action has accrued.
<PAGE>
9.0 Payment
Every project to be performed pursuant to this Agreement will begin with a
"kickoff payment" equal to such amount as is specifically set forth in the
associated Statement of Work. All billings after that will be provided by USI to
CZ on a monthly basis at the end of each month, with payment due net thirty (30)
days except with respect to currently outstanding amounts which shall be paid in
accordance with the Statement of Work. The amount billed monthly will be the
balance of the agreed budget over the number of months for the project as set
forth in the respective Statement(s) of Work. Payment of all amounts due,
including expenses, will be made within thirty days after the date of invoice.
Interest of 10% per annum will accrue on overdue amounts form the date of
invoice. If any collection action is commenced, the prevailing party will be
entitled to a reasonable attorney's fee equal to at least 25% of the amount at
issue.
10.0 Expense Policy
CZ agrees to reimburse or pay directly all reasonable and pre-authorized
expenses, without mark-up, actually incurred by USI in connection with the
services to be provided under this Agreement. All such expenses, including
travel costs, where practical, shall be estimated in writing by USI (plus or
minus 15%) and approved in writing by CZ prior to such expenses being incurred.
USI shall present an invoice representing the actually incurred expenses,
without mark-up, together with appropriate receipts to CZ on a monthly basis for
routine expenses, and will invoice expense for major trips as they are
completed. CZ will pay such expenses or provide reimbursement within thirty (30)
days of receipt of any such invoice. USI may require CZ to incur or pay major
project expenses directly provided the timing and amounts of such are approved
in advance, in writing, by CZ. Any expenses incurred by USI which do not comply
with this Section 10 will not be paid or reimbursed by CZ.
11.0 Indemnification
Upon final payment required under this Agreement, to the fullest extent
permitted by applicable law, and subject to the following conditions, USI shall,
at its sole cost and expense, defend, indemnify and hold harmless CZ (and its
Affiliates) from and against any and all Indemnifiable Claims of whatever nature
arising out of or resulting from (i) the gross negligence or willful misconduct
of USI; (ii) property damage caused by USI, its employees, agents, and
consultants, (iii) any failure of any of the representations made by USI in this
Agreement to be true when made, (iv) any actual breach by USI of any of its
obligations under this Agreement; or (v) any infringement of any of the Work,
Deliverables and Results and Proceeds upon any intellectual property rights of
any third party, and USI will, promptly upon written request, fully reimburse CZ
for expenses incurred by CZ (or its Affiliates) by reason of any of the
foregoing Indemnifiable Claims. CZ shall defend, indemnify and hold harmless USI
for any Indemnifiable Claim arising out of any items supplied by or through CZ
in connection with USI's performance of its obligations under this Agreement.
12.0 Announcements
Provided USI is not in breach of this Agreement, and upon issuance by CZ of
prior written approval of the content of such disclosure, USI may mention CZ in
connection with USI speaking engagements, USI web sites, and nonpublic
communications sent by USI to existing and potential clients and others,
<PAGE>
indicating the CZ client relationship with USI, and generally what USI is doing
or has done for CZ, without disclosing strategic information about CZ. Written
approval from CZ must be obtained before disclosing any details about specific
engagements by CZ of USI. USI may issue a press release, provided to and
approved in writing in advance by CZ, disclosing the client relationship between
CZ and USI.
13.0 Personnel
13.1 Each party agrees not to knowingly hire or knowingly solicit for
employment or otherwise knowingly engage the services of any individual known to
the soliciting party to be employed by or under contract with the other party
and utilized to complete any of the projects contemplated by this Agreement,
without the other party's consent, for a period of twelve (12) months after the
completion of the work specified in the Statement(s) of Work or termination of
this Agreement; provided, however, a party may accept applications received in
connection with an open recruitment for employment opportunities.
13.2 With respect to any portion of the Work done in the United States,
and solely for purposes of complying with the Immigration Reform and Control Act
of 1986 and its regulations ("IRCA"), USI warrants to CZ and agrees that, to the
best of USI's ability, USI will (i) not assign any individual to perform work
hereunder who is an authorized alien under IRCA, (ii) immediately remove any
alien discovered to be unauthorized from such work and replace him/her with
someone who is not an unauthorized alien, and (iii) to the extent permitted by
law, indemnify, defend and hold CZ harmless from and against all liabilities,
damages, losses or expenses and reasonable attorneys' fees arising out of USI's
breach of this Section 13.2.
14.0 Status
14.1 It is the express intention of the parties that, in the performance
of the Work to be provided under this Agreement, USI is an independent
contractor and not an employee, agent, franchisee, joint venturer or partner of
CZ, and USI shall have complete control over and responsibility for all
personnel performing the Work. USI shall have no authority to act for, bind, or
commit CZ in any way. Nothing in this Agreement will be interpreted as creating
the relationship of employer and employee or of agent and principal between CZ,
on the one hand, and USI or any employee or agent of USI, on the other hand, and
USI will retain the right to perform services for others during the term of this
Agreement. Further, both parties acknowledge that USI is not a CZ employee for
city, county, province, state, federal or national (or other governing body
having jurisdiction over the Work) tax purposes and USI is solely responsible
and liable for paying all applicable taxes and social insurance levied by any
competent authorities and/or any governing bodies in any country having
jurisdiction over the Work, and shall pay such in a timely manner. USI shall be
responsible for maintaining workman's compensation insurance coverage for its
employees.
14.2 USI shall supervise and direct all Work, using USI's best skills
and attention. USI shall be solely responsible for and have control over means,
methods, techniques, sequences, assembly details and procedures and for
coordinating all portions of the Work under this Agreement.
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15.0 Termination
15.1 Termination by CZ. Upon thirty (30) days advance written notice to
USI by CZ, CZ may terminate all of the services called for by this Agreement. In
the event of such termination, and so long as USI is not in default hereunder,
CZ shall be obligated to pay USI, upon termination, the agreed price for all
Work performed by USI through the effective date of termination plus any
approved third party expenses incurred by USI in reliance on the Statement(s) of
Work undertaken in compliance with the expense provisions set forth above. Upon
receipt of such termination, USI immediately will stop all Work, place no
additional orders, attempt to return goods which have been already received on
the best possible terms and immediately cancel any existing orders on the best
possible terms. USI will preserve and protect materials on hand, work in
progress, data and completed Work, whether in USI's facilities or otherwise. CZ
will have an immediate right of possession, and as promptly as possible, USI
will provide to CZ all Work then completed or partially completed including all
materials, equipment, receipts and records, and originals and copies of all
computer generated designs on all electronic storage media, as well as all
calculations, specifications and all other information then performed by USI. In
no event will USI be entitled to any payment under this Section 15.1 until USI
complies with these obligations.
15.2 Termination by Either. Either party may terminate this Agreement
upon written notice if the other party breaches any of its material obligations
hereunder, if the breach is not cured (if reasonably curable at all) within
thirty (30) days of receipt of written notice of such breach if such breach is
capable of being cured.
16.0 Notices
The agents for receipts of notices hereunder, including any necessary legal
summons or other sorts of legal papers, are as follows:
To CZ: Chromazone.com, Inc.
Attention: Greg Pasetta
2901 West Alameda Avenue
7th Floor
Burbank, CA 91505
Facsimile: 818-526-5000
With a copy to: Attention: Legal Department
To USI: U.S. Interactive, Inc.
Attention: Jim Huser
11911 San Vicente Blvd.
Suite 225
Brentwood, CA 90049
Facsimile: 310-440-3388
<PAGE>
All such notices, including legal summons or legal papers, shall be given in
writing and may be provided (a) by personal delivery, (b) by nationally
recognized overnight courier, or (c) by facsimile followed by postage prepaid
first-class mail. Notices will be considered to have been given at the time of
the actual delivery in person, three (3) business days after deposit into the
United States mail, two (2) business days after delivery to an overnight air
courier service, or the moment of completion of transmission if sent by
facsimile. Either party may change its notice address by a notice given in the
manner provided for in this Section.
17.0 Force Majeure
Neither party shall be held responsible for any delay or failure in performance
of any part of this Agreement to the extent such delay or failure is caused by
act of God (including, without limitation, hurricane, flood, tsunami, tidal wave
or earthquake), war, fire, riot, acts of public enemies, or actions of any
governmental authorities in any country (other than any such actions that result
in any laws, ordinances, regulations, judgments or decrees with which such party
must comply) or other similar causes beyond its control and without the fault or
negligence or failure to act of the delayed or non-performing party ("Force
Majeure Condition"). If any Force Majeure Condition occurs, the party affected
by the other party's delay or inability to perform may elect to (a) suspend this
Agreement for the duration of the Force Majeure Condition and, once the Force
Majeure Condition ceases, resume performance under this Agreement with an option
in the affected party to extend the period of this Agreement up to the length of
time the Force Majeure Condition was endured; or (b) when the delay or
non-performance continues for a period of at least thirty (30) continuous days,
terminate the part of this Agreement relating to material not already shipped or
services not already performed. Unless written notice is given within forty-five
(45) days after the affected party is notified of the Force Majeure Condition,
election (a) shall be deemed selected.
18.0 Dispute Resolution
Any claim, controversy, or dispute, whether sounding in contract, statute, tort,
fraud, misrepresentation or other legal theory, whenever brought and whether
between the parties to this Agreement or between one of the parties to this
Agreement and the employees, agents or affiliated businesses of the other party,
shall be resolved by arbitration as prescribed in this paragraph. A single
arbitrator engaged in the practice of law shall conduct the arbitration under
the then current commercial arbitration rules of the American Arbitration
Association ("AAA"). The arbitrator shall be selected in accordance with AAA
procedures from a list of qualified people (i.e., knowledgeable in the industry
to which this Agreement applies) maintained by AAA. The arbitration shall be
conducted in Los Angeles, California, and all expedited procedures prescribed by
the AAA rules shall apply. The arbitrator shall have authority to award
compensatory damages only and shall not have authority to award incidental,
consequential, exemplary or punitive damage, or non-compensatory damages
(including, without limitation, damages for loss of business, profits or
revenues, loss of goodwill, business interruption, or failure to realize
expected savings) or any other form of relief; provided, however, either party
may apply to any court having jurisdiction thereof solely for the entry of
injunctive relief to maintain the status quo until such time as the arbitration
award is rendered or the controversy is otherwise resolved. Each party shall
bear its own costs and attorney's fees and the parties shall share equally the
<PAGE>
fees and expenses of the arbitration. The arbitrator's decision and award shall
be final and binding, and judgment upon the award rendered by the arbitrator may
be entered in any court having jurisdiction thereof. If any party files a
judicial or administrative action asserting claims subject to arbitration, as
prescribed herein, and another party successfully stays such action and/or
compels arbitration of said claims, the party filing said action shall pay the
other party's costs and expenses incurred in obtaining such stay and/or
compelling arbitration, including reasonable attorneys' fees and court costs.
19.0 Source Code
USI will provide to CZ, as part of the Deliverables, any and all source code for
all Preexisting Technology which is not Licensed Technology.
20.0 General Provisions
20.1 Entire Agreement. Each party acknowledges that it has read this
Agreement, understands it and agrees to be bound by its terms and conditions and
further agrees that this Agreement, together with any and all exhibits,
attachments, riders and schedules referred to therein is the complete and
exclusive statement of this Agreement between the parties, superseding all
proposals, negotiations, or prior arrangements, oral or written, and all other
communications between the parties relating to the subject matter of this
Agreement, all of which are expressly merged herein and there are no terms,
conditions, representations, warranties or covenants other than those set forth
therein.
20.2 Governing Law. The Agreement shall be governed by and construed in
accordance with the laws of the State of California pertaining to contracts made
and to be performed entirely therein, without regard to its choice of law or
conflict of law provisions. The parties exclude the application of the United
States Convention on Contracts for the International Sale of Goods.
20.3 Amendment and Modification. No term or provision of this Agreement
may be amended, waived, released, discharged or modified in any respect, except
in writing signed by a duly authorized officer of each of the parties hereto.
20.4 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and will become
effective and binding upon the parties at such time as all of the signatories
hereto have signed each counterpart of the Agreement. Copies of this Agreement
may be transmitted via telefax for signature and each mutually executed fax copy
may be used for all purposes as an original by either party.
20.5 Captions. Paragraph titles or captions contained in this Agreement
are used for reference only and are not intended to and shall not in any way
enlarge, define, limit, extend or describe the rights or obligations of the
parties or affect the meaning or construction of the Agreement or any provision
hereof.
<PAGE>
20.6 Severability. If any term or provision of the Agreement or the
application thereof to any person or circumstance shall, to any extent, be
invalid or unenforceable, the remainder or this Agreement or the application of
such term or provision to persons or circumstances other than those as to which
it is held invalid or unenforceable, shall not be affected thereby and all other
terms and provisions of this Agreement shall be valid and enforceable to the
fullest extent permitted by law. Except as otherwise expressly provided, the
remedies available under this Agreement will be cumulative and in addition to
any other remedies provided at law and in equity.
20.7 Waiver. No failure or delay on the part of any party to the
Agreement in exercising any right, power or remedy hereunder shall operate as a
waiver thereof; nor shall any single or partial exercise of any such right,
power or remedy preclude any other or further exercise thereof or the exercise
of any other right, power, or remedy hereunder. No waiver, amendment or
modification, including those by custom, usage of trade or course of dealing, of
any provision of this Agreement will be effective unless in writing and signed
by the party against whom such waiver, amendment or modification is sought to be
enforced. No waiver by any party of any default in performance by the other
party under the agreement or of any breach of series of breaches by the other
party of any of the terms or conditions of this Agreement shall constitute a
waiver of any subsequent default in performance under the Agreement or any
subsequent breach of any terms or conditions of the Agreement. Performance of
any obligation required of a party under this Agreement may be waived only by a
written waiver signed by a duly authorized officer of the other party, and such
waiver shall be effective only with respect to the specific obligation described
in that waiver.
20.8 Assignment. This Agreement may not be assigned or otherwise
transferred by either party, in whole or in part, voluntarily, involuntarily, by
operation of law or otherwise, without the prior written consent of the other
party; and any purported attempt to do so shall be deemed void. Notwithstanding
the foregoing, CZ may assign or otherwise transfer this Agreement to a successor
entity to CZ or to an entity controlling, controlled by, or under common control
with, CZ without requiring consent provided that CZ shall remain liable for any
money's owed to USI in the event of a default in the payment of such by such
success or assignee. The Agreement shall be binding upon, and inure to the
benefit of, the parties hereto and, as applicable, their permitted respective
heirs, executors, administrators, representatives and successors.
20.9 Construction of Language. The language in all parts of this
Agreement will be interpreted simply, according to its fair meaning and not
strictly for or against any of party. Each party acknowledges that the language
contained in this Agreement is the product of an arms length negotiation
conducted by that party's duly appointed legal counsel. As a result, neither
party (i) shall be deemed to have drafted this Agreement nor (ii) shall be
entitled to construe this Agreement, either in whole or in part, against the
other party on the theory that contract provisions are construed against the
party that drafted it.
20.10 Audit. USI shall keep complete and accurate records of the
charges for services rendered pursuant to this Agreement. USI shall allow CZ, or
its representative and its auditors and regulators, during office hours and at
CZ's expense, to inspect and copy the books and records and all other documents
<PAGE>
and materials in the possession or under the control of USI with respect to this
Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
CHROMAZONE.COM, INC. U.S. INTERACTIVE, INC.
By: /s/ Gregory Pasetta By: /s/ James J. Huser
----------------------------------- ------------------
Title: President & COO Title: Sr. Vice President/COO
----------------------------------- ----------------------
Date: 12/16/99 Date: 12/17/99
----------------------------------- --------
<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.
KPMG LLP
Philadelphia, Pennsylvania
March 22, 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.
KPMG LLP
Mountain View, California
March 22, 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.
BDO Seidman, LLP
Los Angeles, California
March 22, 2000
