<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File Number 0-26923
U.S. INTERACTIVE, INC.
(Exact name of registrant as specified in its charter)
Delaware 23-3316696
(State or Other Jurisdiction of (I.R.S. Employer)
Incorporation or Organization) (Identification Number)
2012 Renaissance Boulevard, 19406
King of Prussia, Pennsylvania (Zip Code)
(Address of principal executive offices)
(610) 313-9700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 25,951,895 shares of common
stock, $.001 par value per share, as of July 31, 2000.
<PAGE>
U.S. Interactive, Inc. and Subsidiaries
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Page No.
Consolidated Balance Sheets as of June 30, 2000 (Unaudited) and December 31, 1999...... 1
Consolidated Statements of Operations for the three and six months ended June 30, 2000
and 1999 (Unaudited)................................................................... 2
Consolidated Statements of Cash Flows for the six months ended June 30, 2000 and 1999
(Unaudited)............................................................................ 3
Notes to Condensed Consolidated Financial Statements................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................. 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................. 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ..................................................................... 15
Item 2. Changes in Securities and Use of Proceeds.............................................. 16
Item 4 Submission of Matters to a Vote of Security Holders.................................... 17
Item 6. Exhibits and Reports on Form 8-K....................................................... 18
SIGNATURES............................................................................. 19
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
(unaudited)
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents .............................................. $ 30,942 $ 34,130
Accounts receivable (net of allowance of $685 in
2000 and $75 in 1999) .............................................. 25,991 12,274
Fees and expenditures in excess of billings ............................ 5,225 353
Prepaid expenses and other current assets .............................. 3,974 2,383
--------- ---------
Total current assets .............................................. 66,132 49,140
Furniture and equipment, net ................................................ 16,387 5,451
Goodwill and other intangibles, net ......................................... 343,612 5,988
Other assets ................................................................ 2,292 1,699
--------- ---------
Total Assets ................................................................ $ 428,423 $ 62,278
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ......................................................... $ 4,717 $ 2,641
Accrued expenses and other liabilities ................................... 14,002 5,164
Notes payable-shareholders ............................................... 80,000 --
Current portion of long-term debt ........................................ 1,550 977
Billings in excess of fees and expenditures .............................. 1,930 1,854
Deferred revenue ......................................................... 525 --
--------- ---------
Total current liabilities ............................................. 102,724 10,636
Long-term debt, net of current portion ...................................... 2,697 1,666
--------- ---------
Total Liabilities ........................................................... 105,421 12,302
Stockholders' Equity
Preferred stock, $.001 par value, 15,000,000 shares authorized,
none issued or outstanding ............................................... -- --
Common stock $.001 par value, 90,000,000 shares authorized, 26,659,237 shares
issued in 2000 (unaudited), 20,551,192 shares
issued in 1999 ........................................................... 27 21
Additional paid-in capital .................................................. 385,437 80,581
Deferred stock compensation ................................................. (325) (831)
Treasury stock, 1,098,027 and 1,062,709 shares, at cost ..................... (5,231) (5,055)
Accumulated translation adjustment .......................................... (131) --
Accumulated deficit ......................................................... (56,775) (24,740)
--------- ---------
Total Stockholders' Equity .................................................. 323,002 49,976
--------- ---------
Total Liabilities and Stockholders' Equity .................................. $ 428,423 $ 62,278
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue .................................................................. $ 29,517 $ 7,641 $ 48,067 $ 13,763
Operating costs and expenses:
Project personnel and related expenses .............................. 14,203 4,181 22,388 7,298
Management and administrative ....................................... 10,917 3,921 18,339 6,594
Research and development ............................................ 795 -- 985 --
Selling and marketing ............................................... 3,734 728 6,079 1,451
Depreciation and amortization ....................................... 21,556 2,597 29,125 5,057
-------- -------- -------- --------
Total operating expenses .......................................... 51,205 11,427 76,916 20,400
-------- -------- -------- --------
Operating loss ........................................................... (21,688) (3,786) (28,849) (6,637)
Other income (expense):
Interest expense .................................................... (1,445) (119) (1,892) (239)
Interest income ..................................................... 597 29 990 58
-------- -------- -------- --------
Loss before extraordinary item ........................................... (22,536) (3,876) (29,751) (6,818)
Extraordinary item - loss from early extinguishment of debt ........ -- -- (2,284) --
-------- -------- -------- --------
Net loss ................................................................. (22,536) (3,876) (32,035) (6,818)
Accretion of mandatorily redeemable preferred stock to
redemption value ...................................................... -- (374) -- (748)
-------- -------- -------- --------
Net loss attributable to common stockholders ............................. $(22,536) $ 4,250 $(32,035) $ (7,566)
======== ======== ======== =======
Basic and diluted loss per share before extraordinary item and
before accretion of mandatorily redeemable preferred stock
to redemption value ...................................................... $ (.89) $ (.43) $ (1.30) $ (.78)
Basic and diluted loss per share for extraordinary item .................. -- -- (.10) --
-------- -------- -------- --------
Basic and diluted loss per share before accretion of mandatorily
redeemable preferred stock to redemption value ........................... $ (.89) $ (.43) $ (1.40) $ (.78)
======== ======== ======== =======
Basic and diluted loss per share attributable to common stockholders...... $ (.89) $ (.47) $ (1.40) $ (.87)
======== ======== ======== =======
Weighted average shares outstanding used in the loss per common share
calculation:
Basic and diluted ........................................................ 25,217 9,037 22,871 8,723
</TABLE>
See accompanying notes to consolidated financial statements.
2
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U.S. INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
---- ----
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss ...................................................... $(32,035) $ (6,818)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of deferred stock compensation and other non-cash 1,987 202
charges
Depreciation and amortization ................................ 29,125 5,057
Changes in operating assets and liabilities, net of effects of
acquisitions:
Increase in accounts receivable ........................... (7,429) (4,618)
Increase in fees and expenditures in excess of billings ... (3,257) (497)
Decrease in prepaid expenses and other current assets ..... 986 27
Increase in accounts payable and accrued expenses ......... 5,008 3,100
Increase in billings in excess of fees and expenditures ... 76 2,927
-------- --------
Net cash used in operating activities ......................... (5,539) (620)
-------- --------
Cash flows from investing activities:
Purchase of furniture and equipment ........................... (10,656) (1,090)
Acquisition, net of cash acquired ............................. (27,048) 17
Other ......................................................... (140) 12
-------- --------
Net cash used in investing activities ......................... (37,844) (1,061)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock ........................ 42,518 --
Net proceeds from equipment financing ......................... 1,075 837
Net repayments under bank line of credit ...................... (3,605) (631)
Net proceeds from the exercise of stock options ............... 1,135 172
Deferred offering costs ....................................... (797) (397)
-------- --------
Net cash provided by (used in) financing activities ........... 40,326 (19)
-------- --------
Effect of exchange rate differences on cash ................... (131) --
-------- --------
Net decrease in cash and cash equivalents ..................... (3,188) (1,700)
Cash and cash equivalents, beginning of period ................ 34,130 3,698
-------- --------
Cash and cash equivalents, end of period ...................... $ 30,942 $ 1,998
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest ................................... $ 324 $ 115
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Interim Financial Information
The interim condensed consolidated financial statements of U.S.
Interactive, Inc. (the Company) for the three and six months ended June 30, 2000
and 1999, included herein have been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and regulations
relating to interim financial statements. These unaudited consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto as of December 31, 1999 included in the Company's
Form 10-K. In the opinion of management, the accompanying unaudited interim
consolidated financial statements reflect all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial position
of the Company at June 30, 2000, and the results of its operations for the three
and six months ended June 30, 2000 and 1999, and the results of its cash flows
for the six months ended June 30, 2000 and 1999.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The Company is a leading Internet professional services firm focused on
providing e2e SolutionsSM to Global 2000 organizations. e2e solutions utilize
Internet, wireless and broadband technologies to enable organizations to fully
leverage their information resources to effectively communicate, share knowledge
and conduct business transactions with key constituencies such as employees,
customers, suppliers and partners. When developing our solutions, we draw upon
our expertise in Internet strategy consulting, application development, digital
brand creation, security and enterprise application integration.
The Company has sustained significant net losses and negative cash
flows from operations since its inception. The Company's ability to meet its
obligations in the ordinary course of business is dependent upon its ability to
establish profitable operations or raise additional capital through public or
private equity financing, bank financing or other sources of capital. Management
believes that its current funds combined with other available sources of funding
will be sufficient to enable the Company to meet its planned expenditures
through at least December 31, 2000. The Company may require additional capital
to finance its future operations beyond 2000. Additional financing may not be
available when needed and, if such financing is available, it may not be
available on terms favorable to the Company.
Principles of Consolidation
The accompanying consolidated financial statements include the
financial statements of the Company and its three wholly owned subsidiaries, Web
Access, Inc., U.S. Interactive Corp. (Delaware) and U.S. Interactive (Canada),
Inc. All significant intercompany balances and transactions have been eliminated
in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of any potential contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Deferred Offering Costs
Specific incremental costs directly attributable to the Company's
public offering process aggregate approximately $800,000 and were charged
against additional paid-in-capital in connection with the consummation of the
offering in April 2000.
4
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U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Historical Net Loss Per Share
The Company computes earnings per share in accordance with SFAS No.
128, "Earnings per Share" ("SFAS No. 128"). Basic earnings per share is computed
using the weighted average number of common shares outstanding during the
period. Diluted earnings per share is computed using the weighted-average number
of common and common equivalent shares outstanding during the period. For all
loss periods, the effect of common equivalent shares were excluded from the
computation as their effect is anti-dilutive. Net loss per share amounts for all
periods have been presented to conform to SFAS No. 128 requirements and the
accounting rules set forth in Staff Accounting Bulletin No. 98 issued by the SEC
in February 1998.
2. ACQUISITIONS
In March 1999, the Company acquired certain assets and assumed certain
liabilities of InVenGen LLC, a regional Internet professional service firm, in
exchange for 584,800 shares of the Company's common stock having an estimated
fair market value of $2,924,000 at the time of the transaction. The acquisition
was accounted for using the purchase method of accounting. Accordingly, a
portion of the purchase price was allocated to the net assets acquired and
liabilities assumed. The balance of the purchase price was recorded as goodwill
and is being amortized over two years.
The Company also issued 275,200 shares of restricted common stock in
connection with the transaction. The former employees of InVenGen LLC who became
employees of the Company are required to be employed by the Company during the
next two-year period in order for the restricted shares to be released. If an
employee leaves the Company during the two-year period all unvested shares for
such employee are forfeited. 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. As of June 30, 2000, 35,318 shares have been
forfeited. The historical results of operations of InVenGen, LLC are not
material to the Company.
On March 8, 2000, the Company acquired by merger (the Merger) SoftPlus,
Inc. (SoftPlus), a privately-held e-solutions company. The Company paid to the
SoftPlus shareholders 3.4 million shares of the Company's common stock and 1.4
million options to acquire shares of the Company's common stock with an
estimated combined fair value of $262 million, $20 million in cash paid at
closing and an unsecured $80 million note bearing interest at 6.2% due to the
selling shareholders to be paid upon the earlier of one year from the date of
the Merger or the receipt by the Company of not less than $80 million from the
net proceeds of public offerings of the Company's common stock. The Merger has
been accounted for using the purchase method of accounting. Accordingly, the
purchase price has been allocated to the fair value of the net assets acquired
and liabilities assumed. The balance of the purchase price has been allocated to
goodwill and other intangible assets and amortized over their estimated useful
lives of approximately five years.
5
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. ACQUISITIONS - (Continued)
The following table reflects unaudited pro forma combined results of
operations of the Company and Soft Plus on the basis that the acquisition had
taken place at the beginning of 1999 (in thousands, except per share data).
<TABLE>
<CAPTION>
Three Months Ending Six Months Ending
June 30, June 30,
1999 2000 1999
---- ---- ----
<S> <C> <C> <C>
Revenue ................................................. $13,179 $54,378 $24,684
Net loss attributable to common stockholders.............. (23,975) (51,842) (46,670)
Basic and diluted loss per common share................... $ (1.93) $ (2.24) $ (3.85)
</TABLE>
In management's opinion, the unaudited pro forma combined results of
operations are not indicative of the actual results that would have occurred had
the acquisition been consummated at the beginning of 1999 or of future
operations of the combined companies under the ownership and management of the
Company.
3. REVOLVING CREDIT FACILITY
In March 2000, the Company entered into a revolving credit facility
with a commercial bank which provides for maximum borrowings of $15 million.
Interest is charged at the bank's prime lending rate plus 0.50%. On June 30,
2000 there were no outstanding borrowings under the line. The line is
collateralized by substantially all of the Company's assets and expires on
December 7, 2000; however, if the Company repays in full the $80 million note
issued in the Merger prior to that date, the line of credit will expire on March
21, 2001.
4. LITIGATION
The Company is a party to legal proceedings and claims. In the opinion
of management, the amount of the ultimate liability with respect to these
actions will not materially affect the Company's financial position, results of
operations or cash flows.
5. EXTRAORDINARY ITEM
On March 21, 2000, the Company repaid all of the outstanding debt
acquired in the Merger (note 2). The early extinguishment of this debt resulted
in an extraordinary charge of $2.3 million that consisted of $1.8 million of
deferred financing costs and a $500,000 early termination fee.
6. PUBLIC OFFERING
In April 2000, the Company completed a public offering of securities
and issued a total of 2,274,567 shares of common stock at $19.63 per share. An
additional 225,433 shares were sold by existing stockholders at $19.63 per
share. Proceeds to the Company from its public offering net of underwriting
discounts and costs of the offering were approximately $41.8 million. The
Company used a total of $6.0 million of the net proceeds to repay all debt then
outstanding under its line of credit (note 3).
6
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. Related Party Transactions
The Company and NetSmart, Inc. (formerly known as Chromazone, LLC) are
related parties because a common shareholder holds an ownership interest in the
Company and NetSmart, Inc. The Company provided professional services to
NetSmart, Inc. during the three and six months ended June 30, 2000 and 1999. The
price of these services were negotiated at an arm's length basis and amounted to
$3.1 million and $4.7 million for the three and six months ended June 30, 2000,
respectively and $1.2 million and $1.4 million from the same periods in 1999,
respectively. Accounts receivable from these services was $1.1 million at June
30, 2000 and $2.4 million at December 31, 1999.
8. Subsequent Event
On July 25, 2000, the Company acquired The Fourth Room Ltd. a
London-based strategic marketing and brand consulting firm. The Company paid to
The Fourth Room Ltd. shareholders 382,802 shares of the Company's common stock,
with an estimated fair value of $5.7 million and $600,000 in cash paid at
closing. In addition the Company issued 50,000 options to acquire shares of the
Company's common stock, with an estimated fair value of $249,000, to certain
employees of The Fourth Room Ltd. who will continue with the Company. The
acquisition will be accounted for using the purchase method of accounting.
Accordingly, a portion of the purchase price will be allocated to net assets
acquired and liabilities assumed. The balance of the purchase price will be
recorded as goodwill and amortized over five years. The historical results of
operations of The Fourth Room Ltd. are not material to the Company.
7
<PAGE>
U.S. INTERACTIVE, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of U.S. Interactive, Inc. should be read in conjunction with the
unaudited condensed consolidated financial statements and notes thereto included
elsewhere in this report. This Quarterly Report on Form 10-Q contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 1E of the Securities Exchange Act of 1934,
as amended. These forward-looking statements involve risks and uncertainties,
and actual results could be significantly different than those discussed in this
Quarterly Report on Form 10-Q. These forward-looking statements include
statements about the following:
o implementing our business strategy
o managing our growth and employee costs
o our business and growth strategies and other statements contained
herein that are not historical facts.
When used in this Report, the words "anticipate," "believe,"
"estimate," "expect," "seek," "intend," "may" and similar expressions are
generally intended to identify forward-looking statements. There are important
factors that could cause actual results to differ materially from those
expressed or implied by such forward-looking statements including: changes in
general economic and business conditions and those in the Internet professional
services market in particular; changes in Internet-related technologies; actions
of competitors; the extent to which we are able to expand our business into new
markets; our inability to effectively manage our growth (including growth
through acquisitions), including problems which may arise in integrating
acquired businesses into the Company's operations and in achieving satisfactory
operating results from the acquired businesses; the level of demand for our
services; changes in our business strategies; Year 2000 issues including those
affecting the Company or its clients; our inability to obtain financing when
required including funds required to repay the $80 million note issued to former
SoftPlus shareholders, and other factors discussed under the caption "Risk
Factors" in our prospectus dated April 12, 2000.
Overview
Revenue. Revenue is derived from fixed-fee or time and materials
contracts. Revenue under fixed-fee arrangements is recognized on the
percentage-of-completion method based on the ratio of costs incurred to total
estimated costs. Fees and expenditures in excess of billings represent the costs
incurred on projects and anticipated profits earned on projects in excess of
amounts billed to date. These amounts are recorded as an asset. Billings in
excess of fees and expenditures represent amounts billed in excess of costs
incurred and estimated profit earned. These amounts are recorded as a liability.
Revenues exclude reimbursable expenses charged to clients. Losses on projects in
progress are recognized when known.
Approximately 44% of our revenue for the six months ended June 30, 2000
was derived from fixed-fee arrangements. The percentage of our revenue that is
derived from fixed-fee arrangements may increase in the future. Substantially
all of our client projects may be terminated early by the client without
penalty.
Cost Structure. The largest portion of our costs consists of
employee-related expenses for our project personnel and other direct costs, such
as third-party vendor costs. The remainder of our costs are associated with the
development of our business and support of our project personnel, such as
marketing and sales, and management and administrative support. Marketing and
sales consists primarily of personnel costs and commissions as well as the cost
associated with our development and maintenance of the marketing materials and
programs. Management and administrative expense consists primarily of the costs
associated with:
o operations
o finance
o human resources
o information systems
o facilities
o other administrative support for project personnel
8
<PAGE>
We regularly review our fees for services, compensation and overhead
costs in an effort to remain competitive within our industry. In addition, we
monitor the progress of client projects with client senior management from time
to time. Monitoring the costs and progress associated with each project is aided
by our web-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 projects, we must maintain a sufficient number of senior
professionals to oversee existing and anticipated client projects and
participate with our sales efforts to secure new client projects.
Variability of Operating Results. Our operating results have fluctuated
from quarter to quarter and may continue to fluctuate in the future. These
fluctuations may be significant. It is difficult for us to forecast accurately
the frequency and duration of our projects. We incur expenses, which are mainly
fixed expenses, based on our expectations concerning the costs of our future
projects. We may not be able to adjust our spending in a timely manner to
compensate for any shortfall in our projected revenues. In the event of such a
shortfall, our expenses as a percentage of our revenue would increase. We also
have experienced seasonality with respect to our revenues that has resulted in
lower revenue during summer, year-end vacation and holiday periods.
In March 1999, the Company acquired certain assets and assumed certain
liabilities of InVenGen LLC, a regional Internet professional service firm, in
exchange for 584,800 shares of the Company's common stock having an estimated
fair market value of $2,924,000 at the time of the transaction. The acquisition
was accounted for using the purchase method of accounting. Accordingly, a
portion of the purchase price was allocated to the net assets acquired and
liabilities assumed. The balance of the purchase price was recorded as goodwill
and is being amortized over two years. The results of operations of InVenGen LLC
have been consolidated with the Company's results of operations since April 1,
1999.
In March 2000, we acquired by merger (the Merger) SoftPlus, a provider
of e-CRM solutions. We paid to the SoftPlus 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 SoftPlus
to be paid upon the earlier of one year or the receipt by us of not less than
$80 million from the net proceeds of a public offering of the Company's common
stock. In addition, we assumed the stock options which were outstanding under
SoftPlus' stock option plans, which became options to purchase a total of
1,408,866 shares of our common stock. The Merger has been accounted for using
the purchase method of accounting. Accordingly, the purchase price has been
allocated to the net assets acquired and liabilities assumed. The balance of the
purchase price has been allocated to goodwill and other intangible assets and
amortized over their estimated useful lives of approximately five years.
9
<PAGE>
Results of Operations
The following table presents, for the periods indicated, the relative
composition of revenue and selected statements of operations data as a
percentage of revenue:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues ................................... 100% 100% 100% 100%
Operating expenses:
Project personnel and related expenses.... 48 55 47 53
Management and administration ............ 37 51 38 48
Research and development ................. 3 -- 2 --
Marketing and sales ...................... 13 10 13 11
Depreciation and amortization ............ 72 34 60 36
---- ---- ---- ----
Total operating expenses .............. 173 150 160 148
---- ---- ---- ----
Loss from operations ........................... (73) (50) (60) (48)
Other income (expense), net .................... (3) (1) (2) (2)
---- ---- ---- ----
Loss before extraordinary item ................. (76) (51) (62) (50)
Extraordinary item-loss from early
extinguishment of debt ................ -- -- (5) --
---- ---- ---- ----
Net loss ....................................... (76%) (51%) (67%) (50%)
==== ==== ==== ====
</TABLE>
Three Months Ended June 30, 2000 Compared to the Three Months Ended June 30,
1999
Revenue. Revenue increased $21.9 million, or 286%, to $29.5 million for
the three months ended June 30, 2000, from $7.6 million for the three months
ended June 30, 1999. The increase in revenue was primarily due to growth in
services delivered to new clients, additional projects for existing clients and
larger average project size as well as the acquisition of SoftPlus, Inc.
(SoftPlus) which was effective March 8, 2000 which accounted for approximately
$10.3 million of the revenue increase.
Project Personnel and Related Expenses. Project personnel and related
expenses consist primarily of payroll, associated taxes, employee benefits and
any third-party contracted services incurred in the delivery of our services.
These costs increased $10.0 million, or 240%, to $14.2 million for the three
months ended June 30, 2000, from $4.2 million for the three months ended June
30, 1999. The increase was primarily due to the increase in the hiring of
project personnel as well as contracted services associated with the increased
demand for the Company's services and $5.2 million additional personnel related
expenses associated with the SoftPlus acquisition.
Management and Administrative. Management and administrative expenses
increased $7.0 million, or 178%, to $10.9 million for the three months ended
June 30, 2000, from $3.9 million for the three months ended June 30, 1999. The
increase was principally due to expenses incurred to accommodate current and
anticipated growth, including the expansion of office facilities and the
increased cost of management and administrative personnel and other general
operating expenses in the areas of legal, accounting, human resources and
general operations. There was also increased management and administrative
expenses associated with the SoftPlus acquisition.
Selling and Marketing. Selling and marketing expenses increased $3.0
million, or 413%, to $3.7 million for the three months ended June 30, 2000, from
$728,000 for the three months ended June 30, 1999. The increase was attributable
to the continuing investment in the Company's marketing and sales programs
including the hiring of new business development and marketing personnel and
additional marketing and selling expenses resulting from the SoftPlus
acquisition.
Depreciation and Amortization. Depreciation and amortization increased
$19.0 million to $21.6 million for the three months ended June 30, 2000 as
compared to $2.6 million for the three months ended June 30, 1999. The increase
was primarily due to amortization of approximately $18.3 million from the
SoftPlus acquisition. The amount is being amortized over a five-year period.
There was also increased capital expenditures for new equipment and leasehold
improvements.
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Other Income (Expense). Other expense increased $758,000 to $848,000
for the three months ended June 30, 2000, compared to $90,000 for the three
months ended June 30, 1999. The increase was primarily attributable to interest
expense on the $80 million note due to former SoftPlus shareholders as a result
of the merger on March 8, 2000. The increase was partially offset by increased
interest income from cash equivalents primarily the result of the Company's
public offerings.
Income Tax Expense. As a result of the Company's losses there was no
income tax expense for the three months ended June 30, 2000, or the three months
ended June 30, 1999.
Six Months Ended June 30, 2000 Compared to the Six Months Ended June 30, 1999
Revenue. Revenue increased $34.3 million, or 249%, to $48.1 million for
the six months ended June 30, 2000, from $13.8 million for the three months
ended June 30, 1999. The increase in revenue was primarily due to growth in
services delivered to new clients, additional projects for existing clients and
larger average project size as well as the acquisition of SoftPlus, Inc.
(SoftPlus) which was effective March 8, 2000 which accounted for approximately
$12.7 million of the revenue increase.
Project Personnel and Related Expenses. Project personnel and related
expenses consist primarily of payroll, associated taxes, employee benefits and
any third-party fees incurred in the delivery of our services. These costs
increased $15.1 million, or 207%, to $22.4 million for the six months ended June
30, 2000, from $7.3 million for the six months ended June 30, 1999. The increase
was primarily due to the increase in the hiring of project personnel as well as
contracted services associated with the increased demand for the Company's
services and $6.4 million additional personnel related expenses associated with
the SoftPlus acquisition.
Management and Administrative. Management and administrative expenses
increased $11.7 million, or 178%, to $18.3 million for the six months ended June
30, 2000, from $6.6 million for the six months ended June 30, 1999. The increase
was principally due to expenses incurred to accommodate current and anticipated
growth, including the expansion of office facilities and the increased cost of
management and administrative personnel and other general operating expenses in
the areas of legal, accounting, human resources and general operations as well
as increased management and administrative expenses associated with the SoftPlus
acquisition.
Selling and Marketing. Selling and marketing expenses increased $4.6
million, or 319%, to $6.1 million for the six months ended June 30, 2000, from
$1.5 million for the six months ended June 30, 1999. The increase was
attributable to the continuing investment in the Company's marketing and sales
programs including the hiring of new business development and marketing
personnel as well as additional marketing and selling expenses associated with
the SoftPlus acquisition.
Depreciation and Amortization. Depreciation and amortization increased
$24.1 million to $29.1 million for the six months ended June 30, 2000 as
compared to $5.1 million for the six months ended June 30, 1999. The increase
was primarily due to amortization of approximately $22.8 million from the
SoftPlus acquisition. The amount is being amortized over a five-year period.
There was also increased capital expenditures for new equipment and leasehold
improvements.
Other Income (Expense). Other expense increased $721,000 to $902,000
for the six months ended June 30, 2000, compared to $181,000 for the six months
ended June 30, 1999. The increase was primarily attributable to interest expense
on the $80 million note due to former SoftPlus shareholders as a result of the
merger on March 8, 2000. The increase was partially offset by increased interest
income from cash equivalents primarily the result of the Company's public
offerings.
Income Tax Expense. As a result of the Company's losses there was no
income tax expense for the six months ended June 30, 2000, or the six months
ended June 30, 1999.
Liquidity and Capital Resources
Prior to the completion of our initial public offering in August 1999,
the Company had financed operations primarily from sales of preferred stock and
borrowings under a line of credit and term loan from a commercial bank. Through
December 31, 1998, we had raised approximately $12.7 million, net of offering
expenses, through the sale of our preferred stock. At June 30, 2000 the Company
had approximately $30.9 million in cash and cash equivalents.
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In August 1999, we completed our initial public offering of 4,865,848
shares of common stock at a price of $10.00 per share. We received net proceeds
from our initial public offering of approximately $44.5 million (net of
underwriters' discount and offering expenses).
In April 2000, the Company completed a public offering of securities
and issued a total of 2,274,567 shares of common stock at $19.63 per share. An
additional 225,433 shares were sold by existing stockholders at $19.63 per
share. Proceeds to the Company from its public offering net of underwriting
discounts and costs of the offering were approximately $41.8 million. The
Company used a total of $6.0 million of the net proceeds to repay all
outstanding debt under its line of credit.
Net cash used in operating activities was $5.5 million for the six
month period ended June 30, 2000, as compared to $620,000 for the comparable
period in 1999. Cash used in operating activities in each of these periods was
primarily the result of net losses, which were partially offset by non-cash
charges for depreciation and amortization, as well as increases in accounts
receivable and other assets which were offset by increases in accounts payable
and other liabilities.
Net cash used in investing activities was $37.8 million for the six
months ended June 30, 2000, as compared to $1.1 million for the six months ended
June 30, 1999. The increase in net cash used was primarily due to the cash paid
and expenses accrued for in the SoftPlus acquisition and increased purchases of
furniture and equipment.
Net cash provided by financing activities was $40.3 million for the six
months ended June 30, 2000, as compared to net cash used of $19,000 for the six
months ended June 30, 1999. The principal reason for the increase was proceeds
received from the Company's public offering completed in April, 2000, which was
partially offset by the repayment of the SoftPlus credit facility.
On March 8, 2000, we acquired by merger SoftPlus, 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, SoftPlus became our
wholly owned Delaware subsidiary with the name "U.S. Interactive Corp.
(Delaware)."
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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 SoftPlus under the Merger
Agreement, (ii) the results of certain audits being performed after the closing
of the Merger, and (iii) certain costs incurred by SoftPlus in the Merger. The
$80 million note is due and payable on the earlier of March 8, 2001, or the
receipt by us of not less than $80 million from the net proceeds of a public
offering of our capital stock.
We anticipate that we will repay the $80 million note with proceeds to
be obtained from one or more of the following: borrowings under our credit
facilities, a refinancing, or a sale of capital stock or debt securities in the
public or private markets, together with revenues generated from operations.
However, there can be no assurances that we will be able to obtain funds
sufficient to repay the $80 million note on terms satisfactory to us. The
inability of the Company to obtain funds sufficient to repay the $80 million
note on terms satisfactory to the Company would have a material adverse effect
on the Company.
On July 25, 2000, the Company purchased all of the outstanding shares
of the Fourth Room Limited ("Fourth Room"), with headquarters in London,
England. Fourth Room provides marketing and high-end strategy consulting
services. The Company paid to the Fourth Room shareholders: (i) 382,802
unregistered shares of the Company's common stock, and (ii) $600,000 in cash. In
addition, the Company issued options to purchase 50,000 shares of the Company's
common stock to certain employees of Fourth Room who will continue with the
Company.
The Company believes that the net proceeds from the recently completed
public offering, combined with current cash balances and borrowings available
under the credit facilities will be sufficient to fund requirements for working
capital and capital expenditures for at least through December 31, 2000. The
Company may seek to obtain additional capital from time to time through the sale
of equity or debt securities, through additional credit facilities or otherwise.
Sales of additional equity or convertible debt securities would result in
additional dilution to the Company's stockholders. The Company may need to raise
additional funds sooner in order to support more rapid expansion, develop new or
enhanced services and products, respond to competitive pressures, acquire
complementary businesses or technologies or take advantage of unanticipated
opportunities. Future liquidity and capital requirements will depend on numerous
factors, including the success of existing and new service offerings and
competing technological and market developments. Additional financing, if any,
may not be available on satisfactory terms.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk for changes in interest rates
relates primarily to the increase or decrease in the amount of interest income
we can earn on our available funds for investment and on the increase or
decrease in the amount of interest expense we must pay with respect to our
various outstanding debt instruments. The risk associated with fluctuating
interest expense is limited, however, to the exposure related to those debt
instruments and credit facilities which are tied to variable market rates. We do
not plan to use derivative financial instruments in our investment portfolio. We
plan to ensure the safety and preservation of our invested principal funds by
limiting default risks, market risk and reinvestment risk. We plan to mitigate
default risk by investing in high-credit, quality securities. If market interest
rates were to increase by 10% from rates as of August 11, 2000 we do not believe
that the effect would be material to the Company.
Currently, substantially all of our revenues are realized in U.S.
dollars and are from clients primarily in the United States. We do not believe
that we currently have any significant direct foreign currency exchange rate
risk. As a result of the Merger, our future financial results could be affected
by factors such as changes in foreign currency, exchange rates or weak economic
conditions in foreign markets.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
We are not a party to any material legal proceedings. As previously
disclosed, we are party to the following proceedings.
On April 7, 2000, First Albany Corporation (FAC) filed a complaint
against U.S. Interactive, Inc., SoftPlus and U.S. Interactive Corp. (Delaware),
our wholly-owned subsidiary into which SoftPlus merged (USIC), in the U.S.
District Court, Northern District of California, San Jose Division (Case No.
C-0020383), alleging that SoftPlus had breached an agreement dated November 29,
1999 (the Engagement Agreement) between SoftPlus and FAC under which SoftPlus
had engaged FAC to render financial advisory and investment banking services in
connection with the possible sale of SoftPlus. FAC had submitted to SoftPlus a
claim for fees and expenses, which FAC asserted it was entitled to receive in
connection with the SoftPlus Merger. After we rejected FAC's claims, FAC
commenced its lawsuit. FAC alleges that the defendants breached their
obligations under the Engagement Agreement by failing to pay First Albany the
fees in excess of $6.1 million it claims it is entitled to receive, including
amounts which FAC alleges it is entitled to receive at various times commencing
upon closing of the Merger. FAC requests that the court require the defendants
to pay these fees, with interest, together with FAC's costs and expenses. We
intend to defend vigorously against FAC's claims. While the outcome of this
litigation, as with litigation generally, is inherently uncertain, our
management believes that the ultimate resolution of this proceeding would not be
likely to have material adverse effect on our business or financial condition.
On April 11, 2000, five former shareholders of SoftPlus (the Former
Shareholders) filed a complaint against U.S. Interactive, Inc., SoftPlus, USIC,
Mohan Uttarwar, Vijay Uttarwar, Vinay Deshpande, O.P. Srinivasan and Does 1-25,
in the Superior Court of California, County of Santa Clara (case number
CV789065). Upon the closing of the Merger, Mohan Uttarwar became a member of our
board of directors, and president of USIC; he is the brother of Vijay Uttarwar.
Messrs. Uttarwar, Vinay Dehspande and O.P. Srinivasan (the Principal
Shareholders) are former shareholders, officers and (except for Mr. Srinivasan)
directors of SoftPlus. The complaint alleges, among other things, that the
Former Shareholders requested but were improperly denied inspection of some of
the corporate records of SoftPlus in connection with evaluating the Merger and
whether to exercise their dissenters' rights. The complaint also alleges that
some transactions involving or for the benefit of the Principal Shareholders or
their relatives were improper, including the issuance of common stock and
preferred stock of SoftPlus and options to purchase common stock of SoftPlus,
which issuance and grants the Former Shareholders allege the Principal
Shareholders breached their fiduciary duty to the Former Shareholders and seek
damages in excess of $5.0 million. The Former Shareholders also request that the
court compel the defendants to produce for the Former Shareholders various
corporate records and materials for inspection and request attorneys' fees,
compensatory and punitive damages, interest and costs in its possession, as it
deemed appropriate. One of the Former Shareholders has also alleged that Mr.
Deshpande made material misrepresentations to him in connection with and offer
of employment and employee stock options. On this claim the Former Shareholder
is seeking damages in excess of $1.0 million.
We have notified counsel to SoftPlus that the Former Shareholders have
claimed that the notice of dissenter's rights prepared by them was defective and
that they issued on opinion stating that all SoftPlus stock had been validly
issued and fully paid, and that the Company intends to seek indemnification from
them for any damages arising therefrom in the event that the Court determines
that the notice was defective or the SoftPlus stock was not properly issued.
As previously reported, we notified representatives of the Principal
Shareholders that, in accordance with the terms of the Merger, we intended to
seek indemnification from them for any costs or liabilities arising from the
pending litigation, including asserting our right to retain shares of our common
stock escrowed in the Merger or to reduce payments we are to make under the $80
million note. Based on subsequent discussions among the Principal Shareholders,
the Company and USIC, the Principal Shareholders, the Company and USIC entered
into an agreement under which the parties will reserve all indemnification
rights which the Principal Shareholders may have against the Company and USIC
under the SoftPlus merger agreement. Under the merger agreement, the Company
agreed to assume USIC's obligations, as successor to SoftPlus, Inc., contractual
and otherwise, to indemnify the former officers and directors of SoftPlus to the
fullest extent permitted by California law. While the outcome of this
litigation, as with litigation generally, is inherently uncertain, our
management believes that the ultimate resolution of this proceeding would not be
likely to have a material adverse effect on our business or financial condition.
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Item 2. Changes in Securities and Use of Proceeds.
(c) Sales of Unregistered Securities.
No unregistered equity securities of the Company were sold by the Company
during the period covered by this report.
(d) Use of Proceeds of Public Offering
On August 5, 1999, the Company's registration statement on Form S-1 (SEC
File No. 333-78571) was declared effective, for the initial public offering by
the Company (the "IPO"). The Company received $44.5 million in net proceeds from
the offering.
The Company has used a total of $25.4 million of the net proceeds for the
SoftPlus acquisition, $6.4 million to repay all outstanding debt under its line
of credit and term loan, $5.6 million for the purchase of fixed assets including
leasehold improvements, equipment and furniture and $7.1 million for working
capital.
On April 12, 2000, the Company's registration statement on Form S-1 (SEC
File No. 333-32224) was declared effective, for the public offering by the
Company (the "Offering") of a total of 2,274,567 shares of its common stock, for
an aggregate offering price of $44,638,377, or $19.625 per share, all of which
were sold in the Offering. An additional 225,433 shares were offered and sold by
existing stockholders of the Company for an aggregate offering price of
$4,424,123, or $19.625 per share.
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, acted as
managing underwriters for the Offering. The Offering was completed in April
2000.
The Company paid to the underwriters underwriting discounts totaling
$2,119,896. In addition, in connection with the Offering, the Company paid an
estimated $800,000 in expenses through June 30, 2000. The Company received $41.8
million in proceeds from the Offering, net of underwriter discounts and expenses
of the Offering. None of the expenses of the Company in connection with the
Offering were paid directly or indirectly to directors or officers of the
Company or their associates or to persons owning 10% or more of the Company's
common stock or other affiliates of the Company.
The Company used a total of $6.0 million to repay all outstanding debt
under its revolving credit facility, $8.0 million for the purchase of fixed
assets including leasehold improvements, equipment and furniture, and $4.0
million for working capital. The balance of the net proceeds of $23.8 million
has been invested in short-term investment grade securities and will be used for
general corporate purposes and for future acquisitions.
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Item 4. Submission of Matters to a Vote of Security Holders
The Company held its 2000 Annual Meeting of Stockholders on May 23, 2000.
At the annual meeting, three Class II directors, Stephen T. Zarrilli, William C.
Jennings, and Robert V. Napier, were elected for a three-year term. John H.
Klein, Mohan Uttarwar, Robert E. Keith, Jr., Class III directors, and Eric
Pulier, E. Michael Forgash and John D. Shulman, Class I directors, continued to
serve directors after the annual meeting.
The stockholders also approved an amendment and restatement to the
Company's 1998 Performance Incentive Plan to increase the number of shares
authorized under the plan from 3,000,000 to 6,500,000, to provide for grants and
awards to consultants and to provide for the discretion to grant options
exercisable within six months of the date of grant (with 11,429,231 affirmative
votes, 1,392,618 votes against, 15,079 abstentions, and no broker non-votes).
The stockholders also approved the adoption of the Company's Employee Stock
Purchase Plan, which reserves 1,000,000 shares of common stock for issuance
under the plan (with 12,656,373 affirmative votes, 168,131 votes against, 12,424
abstentions, and no broker non-votes).
The stockholders also approved the grant of a stock option to Michael M.
Carter, the Company's Senior Vice President and Chief Marketing Officer (with
15,750,598 affirmative votes, 1,163,632 votes against, 274,431 abstentions, and
no broker non-votes).
The stockholders also ratified the appointment of KPMG LLP as the Company's
independent auditors for the fiscal year ending December 31, 2000 (with
17,162,206 affirmative votes, 17,523 votes against, and 8,932 abstentions).
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
The exhibits required by Item 601 of Regulation S-K are listed below
and are incorporated as indicated.
Exhibit Number Description
-------------- -----------
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No current reports on Form 8-K were filed by the Company during the quarter
ended June 30, 2000.
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U.S. INTERACTIVE, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
U.S. INTERACTIVE, INC.
(Registrant)
Date: August 14, 2000 By: /s/ Stephen T. Zarrilli
-------------------------------------
Stephen T. Zarrilli
Chief Executive Officer
Date: August 14, 2000 By: /s/ Philip L. Calamia
--------------------------------------
Philip L. Calamia
Vice President, Chief Financial Officer
(Principal Financial Officer and
Chief Accounting Officer)
19
