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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 AUGUST 30, 1998
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: 0-27090
CKS GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 77-0385435
- -------------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10441 Bandley Drive
Cupertino, CA 95014 (408) 366-5100 95014
- --------------------------- --------------------- -----------------------
(Address of principal (Registrant's telephone (Zip Code)
executive offices) number, including area code)
N/A
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(Former Name, Former Address & Former Fiscal Year, if changed since last report)
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 periods as 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 practical date.
OUTSTANDING AT
CLASS AUGUST 30, 1998
----- -------------
Common Stock - $0.001 par value 15,450,359
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<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets as of August 30, 1998 and
November 30, 1997
Condensed Consolidated Statements of Income - Three months and nine
months ended August 30, 1998 and August 31, 1997
Condensed Consolidated Statements of Cash Flows - Nine months ended
August 30, 1998 and August 31, 1997
Notes to Condensed Consolidated Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
CKS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
August 30, November 30,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $29,817 $18,223
Marketable securities 17,323 24,041
Accounts receivable, net of allowances of $2,233
and $1,442 at August 30, 1998 and November 30,
1997, respectively.............................. 42,385 50,049
Fees and expenditures in excess of billings....... 11,640 4,594
Prepaid expenses and other current assets......... 2,802 1,949
Deferred income taxes............................. 1,736 1,400
----------- -----------
Total current assets......................... 105,703 100,256
Property and equipment, net.......................... 5,867 5,849
Deferred income taxes................................ 6,472 10,140
Goodwill and other assets............................ 34,925 30,228
----------- -----------
Total assets $152,967 $146,473
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $36,052 $38,161
Accrued expenses.................................. 5,926 7,515
Billings in excess of fees and expenditures....... 3,485 2,417
Current portion of liabilities to related parties. 623 2,284
Current portion of notes payable and capital
lease obligations............................... 161 765
Income taxes payable.............................. 1,218 --
----------- -----------
Total current liabilities 47,465 51,142
Notes payable and capital lease obligations, less
current portion................................. 766 739
----------- -----------
Total liabilities............................ 48,231 51,881
----------- -----------
Stockholders' equity:
Preferred stock; $.001 par value; 5,000,000
shares authorized; none issued and outstanding.. -- --
Common stock; $.001 par value; 30,000,000 shares
authorized; 15,450,000 and 14,865,000 issued
and outstanding at August 30, 1998 and
November 30, 1997, respectively................. 15 15
Additional paid-in capital........................ 82,798 80,103
Unrealized gain (loss) on marketable securities... (12) 12
Notes receivable from stockholders................ (198) (198)
Cumulative translation adjustment................. 11 (62)
Retained earnings................................. 22,122 14,722
----------- -----------
Total stockholders' equity................... 104,736 94,592
----------- -----------
Total liabilities and stockholders' equity. $152,967 $146,473
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------- ---------------------
August 30, August 31, August 30, August 31,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues........................... $46,635 $39,750 $118,633 $99,980
---------- ---------- ---------- ----------
Operating expenses:
Direct salaries and related
expenses....................... 9,261 8,870 29,689 24,325
Other direct operating expenses.. 24,102 16,820 52,575 40,238
General and administrative
expenses....................... 6,893 7,880 21,932 20,749
Depreciation and amortization.... 1,076 812 2,985 2,226
Merger costs..................... -- 859 -- 2,452
---------- ---------- ---------- ----------
Total operating expenses..... 41,332 35,241 107,181 89,990
---------- ---------- ---------- ----------
Operating income................... 5,303 4,509 11,452 9,990
Other income, net.................. 411 198 1,158 988
---------- ---------- ---------- ----------
Income before income taxes......... 5,714 4,707 12,610 10,978
Income taxes....................... 2,325 2,327 5,210 4,527
---------- ---------- ---------- ----------
Net income......................... $3,389 $2,380 $7,400 $6,451
========== ========== ========== ==========
Pro forma net income and per
share data: (1)
Income before income taxes,
as reported...................... 10,978
Pro forma income taxes............. 4,845
----------
Pro forma net income............... $6,133
==========
Basic net income per share......... $0.22 $0.16 $0.48
========== ========== ==========
Pro forma basic net income
per share........................ $0.42
==========
Shares used in basic per
share computation................ 15,366 14,732 15,345 14,543
========== ========== ========== ==========
Diluted net income per share....... $0.21 $0.15 $0.45
========== ========== ==========
Pro forma diluted net income
per share........................ $0.39
==========
Shares used in diluted per
share computation................ 16,430 16,072 16,335 15,705
========== ========== ========== ==========
</TABLE>
(1) Pro forma net income gives effect to pooling-of-interests combinations
between the Company and McKinney & Silver ("M&S") and the Company
and SiteSpecific, Inc. ("SiteSpecific") during fiscal 1997. M&S was a
general partnership and, as a result, M&S's historical results of
operations prior to acquisition by the Company, which have been
included with the Company's under the pooling-of-interests method, do
not include a provision for income taxes. Pro forma net income and
net income per share data include a tax provision as if M&S had been
a taxable "C" corporation for all periods.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION> Nine Months Ended
----------------------
August 30, August 31,
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................ $7,400 $6,451
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred taxes..................................... 3,332 (859)
Compensation related to stock options.............. 88 91
Tax benefit from disqualifying dispositions........ 110 2,502
Depreciation and amortization...................... 2,985 2,226
Other non cash items............................... -- (154)
Loss on disposition of property due to acquisition. -- 227
Changes in operating assets and liabilities:
Accounts receivable............................. 7,737 (519)
Fees and expenditures in excess of billings..... (7,046) (3,744)
Prepaid expenses and other current assets....... (853) (52)
Accounts payable................................ (2,109) (5,452)
Accrued expenses................................ (1,589) (2,194)
Billings in excess of fees and expenditures..... 1,068 (702)
Income taxes payable............................ 1,218 366
---------- ----------
Net cash provided by (used in)
operating activities..................... 12,341 (1,813)
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment................... (1,471) (1,244)
Purchases of marketable securities.................... (26,403) (17,259)
Sale of marketable securities......................... 33,110 32,620
Businesses acquired, net of cash received............. (6,485) (13,740)
Other assets.......................................... 303 148
---------- ----------
Net cash provided by (used in) investing
activities.............................. (946) 525
---------- ----------
Cash flows from financing activities:
Net repayments on line of credit and note payable..... (577) (1,659)
Proceeds from sale of common stock.................... 2,632 3,637
Distribution to stockholders.......................... -- (2,405)
Liabilities to related parties........................ (1,856) (1,736)
---------- ----------
Net cash provided by (used in) financing
activities............................. 199 (2,163)
---------- ----------
Net change in cash and cash equivalents.................. 11,594 (3,451)
Change in subsidiaries' fiscal year ends................. -- (4,259)
Cash and cash equivalents, beginning of period........... 18,223 19,385
---------- ----------
Cash and cash equivalents, end of period................. $29,817 $11,675
========== ==========
Supplementary disclosure of cash paid during the period:
Cash paid:
Interest........................................ $72 $131
========== ==========
Income taxes.................................... $509 $1,121
========== ==========
Noncash investing and financing activities:
Businesses acquired for payable to
related parties.............................. $308 $2,146
========== ==========
Issuance of common stock in business
acquisitions................................. $200 $6,030
========== ==========
Deferred tax asset recorded in connection
with taxable pooling of interests............ $ -- $9,346
========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying condensed consolidated financial statements and
related notes to condensed consolidated financial statements include the
accounts of CKS Group, Inc. (the "Company" or "CKS Group") and its
wholly-owned subsidiaries. Companies acquired in business combinations
accounted for under the purchase method have been included from their
respective acquisition dates. The condensed consolidated financial
statements also give retroactive effect to the acquisition of McKinney &
Silver ("M&S") and SiteSpecific, Inc. ("SiteSpecific") in business
combinations accounted for under the pooling-of-interests method for all
periods presented. Results of operations for the three month and nine
month periods ended August 30, 1998, and August 31, 1997, are unaudited
and reflect all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of management, necessary for a
fair presentation of the Company's financial position and operating
results for the interim periods. The condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto, together with management's discussion and
analysis of financial condition and results of operations, contained in
the Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 1997. The results of operations for the quarter and the
nine months ended August 30, 1998 are not necessarily indicative of the
results expected for any subsequent period or for the entire fiscal year
ending November 29, 1998.
2. Pro Forma Net Income and Pro Forma Net Income Per Share
Pro forma net income gives effect to the pooling-of-interests
combinations between the Company and M&S and the Company and
SiteSpecific during fiscal 1997. M&S was a general partnership and, as
a result, M&S' historical results of operations prior to the acquisition
by the Company, which have been included with the Company's historical
results of operations under the pooling-of-interests method, do not
include a provision for income taxes. Pro forma net income and net
income per share data include a tax provision as if M&S had been a
taxable "C" corporation for all periods.
On December 1, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, Earnings Per Share. In
accordance with SFAS No. 128, basic net income per share is computed
using the weighted average number of common shares outstanding during
the period. Diluted net income per share is computed using the
weighted average number of common and dilutive common equivalent shares
outstanding during the period, using the treasury stock method for
options and warrants after giving effect to contingently issuable shares
under acquisition agreements. The Company has restated net income per
share for all periods presented in accordance with SFAS No. 128.
Reconciliation of basic and diluted net income per share and pro forma
net income per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
August 30, 1998 August 31, 1997
-------------------------------- --------------------------------
Net Income Shares EPS Net Income Shares EPS
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Basic net income per share $3,389 15,366 $0.22 $2,380 14,732 $0.16
Effect of dilutive shares:
Common equivalent shares -- 673 -- -- 938 --
Contingent shares -- 391 -- -- 402 --
---------- ---------- ---------- ----------
Diluted net income per share $3,389 16,430 $0.21 $2,380 16,072 $0.15
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
August 30, 1998 August 31, 1997
-------------------------------- --------------------------------
Pro forma Pro forma
Net Income Shares EPS Net Income Shares EPS
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Basic net income per share $7,400 15,345 $0.48 $6,133 14,543 $0.42
Effect of dilutive shares:
Common equivalent shares -- 602 -- -- 812 --
Contingent shares -- 388 -- -- 350 --
---------- ---------- ---------- ----------
Diluted net income per share $7,400 16,335 $0.45 $6,133 15,705 $0.39
========== ========== ========== ==========
</TABLE>
3. Subsequent Event
On September 1, 1998, the Company entered into an Agreement and
Plan of Reorganization (the "Merger Agreement") with USWeb Corporation
("USWeb") and USWeb Acquisition Corporation 134, a wholly owned
subsidiary of USWeb ("Merger Sub"), pursuant to which each outstanding
share of the Company's common stock will be exchanged for 1.5 shares of
USWeb common stock and all of the outstanding options to purchase the
Company's common stock will be assumed and converted into options to
acquire shares of USWeb common stock at a ratio of 1.5 shares of USWeb
common stock to one share of the Company's common stock. The proposed
merger is intended to be accounted for as a pooling of interests.
Consummation of the proposed Merger is subject to satisfaction of
certain conditions, including approval of the Merger by the stockholders
of the Company and USWeb.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
This section contains forward-looking statements that involve
risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking
statements as a result of a number of factors, including those set forth
under "Factors Affecting Operating Results And Market Price Of Stock"
and "Risk Factors." Readers are encouraged to refer to the "Factors
Affecting Operating Results And Market Price Of Stock" found in the
Company's Annual Report on Form 10-K for the fiscal year ended November
30, 1997 for further discussion of the Company's business and the risks
and opportunities attendant thereto, and to the "Risk Factors" found in
the Form S-4 filed September 14, 1998 by USWeb for further discussion on
the risk factors related to the proposed merger with USWeb and the
combined company's business.
Introduction
In reviewing the Company's consolidated financial statements and
the discussion of the Consolidated Results of Operations that appears
below, the following should be taken into consideration. During fiscal
1997, the Company acquired M&S and SiteSpecific in business combinations
accounted for under the pooling-of-interests method of accounting.
Prior to acquisition by the Company, M&S and SiteSpecific prepared their
financial statements on a calendar year basis. Under generally accepted
accounting principles ("GAAP"), after the Company acquired M&S and
SiteSpecific, the Company restated its financial results to include the
financial results of M&S and SiteSpecific for all periods presented.
On September 1, 1998, the Company entered into an Agreement and
Plan of Reorganization (the "Merger Agreement") by and among USWeb,
Merger Sub and the Company providing for the merger of Merger Sub with
and into the Company (the "Merger"), with the Company surviving the
Merger and becoming a wholly owned subsidiary of USWeb. The Merger
Agreement further provides for each outstanding share of Company common
stock to be exchanged for 1.5 shares of common stock, par value $.001
per share, of USWeb ("USWeb Common Stock"), and all outstanding options
to acquire common stock, par value $.001 per share, of the Company
("Company Common Stock") to be assumed and converted into options to
acquire shares of USWeb Common Stock at a ratio of 1.5 shares of USWeb
Common Stock to one share of Company Common Stock. The Merger is
intended to be accounted for as a pooling of interests and qualify as a
tax-free reorganization. The combined company will be called Reinvent
Communications, Inc. In connection with the Merger Agreement, the
Company and USWeb also entered into cross-option agreements allowing
each company, in certain circumstances, to acquire up to 19.9% of the
other company's common stock, measured immediately before exercise of
the option (or 16.6% measured immediately after exercise of the option).
Copies of, and additional information concerning, the Merger Agreement,
the cross-option agreements and certain other related agreements is set
forth in the Company's Current Report on Form 8-K dated September 1,
1998 and its Schedule 13D filed September 11, 1998. Consummation of the
proposed Merger is subject to satisfaction of certain conditions,
including approval of the Merger by the stockholders of the Company and
USWeb.
Certain factors and risks relating to the Merger are described in
Exhibit 99.1 to this Form 10Q entitled "Risk Factors Related to the
Proposed Merger with USWeb Corporation".
Consolidated Results of Operations
Three Months Ended August 30, 1998 and August 31, 1997
Revenues
The Company generates a significant portion of its revenues
through project fees on a fixed fee for service basis and contract based
retainer fees. Revenues increased to $46.6 million in the quarter ended
August 30, 1998 from $39.8 million in the same quarter of fiscal 1997,
representing an increase of approximately 17.3%. This increase in
revenues was due to an increase in the number and value of projects
undertaken for existing clients of the Company and the establishment of
new client relationships. Revenues from new media projects increased to
$14.1 million in the quarter ended August 30, 1998 from $10.3 million in
the same quarter of fiscal 1997, representing an increase of
approximately 36.9%. New media revenues represented approximately 30%
of revenues for the quarter ended August 30, 1998, compared to
approximately 26% for the quarter ended August 31, 1997.
Direct Salaries and Related Expenses
Direct salaries and related expenses consist primarily of wages
for regular and temporary employees and benefits for regular employees.
The Company's direct salaries and related expenses increased
approximately 4.4% to $9.3 million in the quarter ended August 30, 1998
from $8.9 million during the same quarter of fiscal 1997, representing
19.9% and 22.3% of revenues in the third quarter of fiscal 1998 and
fiscal 1997, respectively. In absolute dollars, direct salaries and
related expenses remained relatively flat. The decrease in these
expenses as a percentage of revenues reflects a more rapid increase in
revenues than in direct salaries and related expenses.
Other Direct Operating Expenses
Other direct operating expenses include materials, contract
freelance (independent consultants and contractors), facilities and
equipment expenses necessary to provide services to the Company's
clients. Other direct operating expenses increased approximately 43.3%
to $24.1 million in the quarter ended August 30, 1998 from $16.8 million
in the same quarter of fiscal 1997, representing 51.7% and 42.3% of
revenues in the third quarter of fiscal 1998 and fiscal 1997,
respectively. The increase in absolute dollars was primarily
attributable to increases in material costs and contract freelance costs
necessary to support the higher level of production revenues, including
costs associated with a long term design/build project for one of the
Company's major clients. The increase in other direct operating
expenses as a percentage of revenues reflects an increase in material
costs and contract freelance, necessary to support a higher level of
production revenue including costs associated with a long term
design/build project for one of the Company's major clients, and the
increasingly technical nature of the company's projects.
General and Administrative Expenses
General and administrative expenses include headquarters expenses,
insurance, personnel costs for finance and administration, accounting
and legal fees, bad debt expense, management information systems
expenses, and employee benefits. General and administrative expenses
decreased approximately 12.5% to $6.9 million in the quarter ended
August 30, 1998 from $7.9 million in the same quarter of fiscal 1997,
representing 14.8% and 19.8% of revenues in the third quarter of fiscal
1998 and fiscal 1997, respectively. This period over period decrease in
absolute dollars was primarily attributable to decreases in payroll
expense, business development, and administrative expense. As a
percentage of revenues, general and administrative expenses decreased as
a result of a more rapid increase in revenues than in general and
administrative expenses.
Depreciation and Amortization
Depreciation and amortization expenses include depreciation of
fixed assets and amortization of goodwill and other intangible assets.
Depreciation and amortization expenses increased approximately 32.5% to
$1.1 million in the quarter ended August 30, 1998, from $0.8 million in
the same quarter of fiscal 1997, representing 2.3% and 2.0% of revenues
in the third quarter of fiscal 1998 and fiscal 1997, respectively. The
increase in absolute dollars was primarily attributable to the
amortization of additional goodwill resulting from earnout and buyout
payments relating to the acquisition of Schell/Mullaney, Inc.
("Schell/Mullaney") and CKS Holding Deutschland GmbH ("CKS GmbH") made
during fiscal 1998, respectively. As a percentage of revenues,
depreciation and amortization expenses remained relatively unchanged.
Merger Costs
In connection with the acquisition of Site Specific, the Company
recorded a nonrecurring charge for transaction related costs of
approximately $0.8 million for the three month period ended August 31,
1997. The costs consisted primarily of investment banking, accounting,
consulting and legal fees, financial printing and other related costs.
Other Income, Net
Other income, net consists primarily of interest earned on the
Company's holdings in cash, cash equivalents and marketable securities,
offset by interest expense incurred due to the amortization of imputed
interest on guaranteed cash payments related to subsidiary acquisitions
and interest expense related to debt recorded by the Company's
subsidiaries. Other income, net increased approximately $0.2 million to
$0.4 million in the quarter ended August 30, 1998, from $0.2 million in
the same quarter of fiscal 1997. The increase in absolute dollars was
primarily attributable to an increase in interest income due to a higher
average cash, cash equivalents and marketable securities balance.
Income Taxes
Combined actual federal and state income tax rates were 40.7% in
the quarter ended August 30, 1998 and 49.4% in the quarter ended August
31, 1997. The effective tax rate was higher during the three month
period ended August 30, 1997 primarily due to the nondeductible merger
costs incurred in connection with the acquisition of SiteSpecific,
nondeductible goodwill amortization and a smaller contribution of tax
exempt interest to total revenues.
Nine Months Ended August 30, 1998 and August 31, 1997
Revenues
The Company generates a significant portion of its revenues
through project fees on a fixed fee for service basis and contract based
retainer fees. Revenues increased to $118.6 million during the nine
month period ended August 30, 1998 from $100.0 million in the same
period of fiscal 1997, representing an increase of approximately 18.7%.
This increase in revenues was due to an increase in the number and value
of projects undertaken for existing clients of the Company, the
establishment of new client relationships, and the inclusion of Donovan
& Green ("D&G"), CKS GmbH and Gormley & Partners, Inc. ("Gormley")
revenues in the Company's consolidated results for the full nine month
period ended August 30, 1998. Revenues from new media projects
increased to $32.0 million for the nine months ended August 30, 1998
from $26.2 million in the same period of fiscal 1997, representing an
increase of approximately 22.1%. New media revenues represented
approximately 27% of revenues for the nine month period ended August 30,
1998, compared to approximately 26% for the nine month period ended
August 30, 1997.
Direct Salaries and Related Expenses
Direct salaries and related expenses consist primarily of wages
for regular and temporary employees and benefits for regular employees.
The Company's direct salaries and related expenses increased
approximately 22.1% to $29.7 million during the nine month period ended
August 30, 1998, from $24.3 million during the same period of fiscal
1997, representing 25.0% and 24.3% of revenues for the nine month
periods ended August 30, 1998 and August 31, 1997, respectively. The
increase in absolute dollars was primarily attributable to an increase
in salaries and related expenses necessary to support the Company's
growth. The increase in these expenses as a percentage of revenues
during the nine month period ended August 30, 1998 reflects an increase
in engineering group payroll costs necessary to support the increasingly
technical nature of the Company's new media projects.
Other Direct Operating Expenses
Other direct operating expenses include materials, contract
freelance (independent consultants and contractors), facilities and
equipment expenses necessary to provide services to the Company's
clients. Other direct operating expenses increased approximately 30.7%
to $52.6 million during the nine month period ended August 30, 1998 from
$40.2 million in the same period of fiscal 1997, representing 44.3% and
40.2% of revenues for the nine month periods ended August 30, 1998 and
August 31, 1997, respectively. The increase in absolute dollars was
primarily attributable to increases in material costs and contract
freelance costs necessary to support the higher level of production
revenues. The increase in other direct operating expenses as a
percentage of revenues reflects an increase in material cost and
contract freelance necessary to support a higher level of production
revenue and the increasingly technical nature of the company's projects.
General and Administrative Expenses
General and administrative expenses include headquarters expenses,
insurance, personnel costs for finance and administration, accounting
and legal fees, bad debt expense, management information systems
expenses, and employee benefits. General and administrative expenses
increased approximately 5.7% to $21.9 million during the nine month
period ended August 30, 1998 from $20.7 million in the same period of
fiscal 1997, representing 18.5% and 20.8% of revenues for the nine month
periods ended August 30, 1998 and August 31, 1997, respectively. This
increase in absolute dollars was primarily attributable to an increase
in administrative and facilities expenses necessary to support the
Company's growth. The decrease in general and administrative expenses
as a percentage of revenues reflects a more rapid increase in revenues
than in general and administrative expenses.
Depreciation and Amortization
Depreciation and amortization expenses include depreciation of
fixed assets and amortization of goodwill and other intangible assets.
Depreciation and amortization expenses increased approximately 34.1% to
$3.0 million during the nine month period ended August 30, 1998 from
$2.2 million in the same period of fiscal 1997, representing
approximately 2.5% and 2.2% of revenues for the nine month period ended
August 30, 1998 and August 31, 1997, respectively. The increase in
depreciation and amortization was primarily attributable to goodwill
amortization related to the Company's acquisitions and amortization of
additional goodwill resulting from earnout and buyout payments made to
Schell/Mullaney and CKS GmbH during fiscal 1998. As a percentage of
revenues, depreciation and amortization expenses remained relatively
unchanged.
Merger Costs
In connection with the acquisitions of M&S and Site Specific, the
Company recorded nonrecurring charges for transaction related costs of
approximately $2.5 million for the nine month period ended August 31,
1997. The costs consisted primarily of investment banking, accounting,
consulting and legal fees, financial printing and other related costs.
Other Income, Net
Other income, net consists primarily of interest earned on the
Company's holdings in cash, cash equivalents and marketable securities,
offset by interest expense incurred due to the amortization of imputed
interest on guaranteed cash payments related to subsidiary acquisitions
and interest expense related to debt recorded by the Company's
subsidiaries. Other income, net increased approximately 17.2% to $1.2
million during the nine month period ended August 30, 1998, from $1.0
million for the nine month period ended August 31, 1997. The increase
in absolute dollars was primarily attributable to an increase in
interest income due to a higher average cash, cash equivalents and
marketable securities balances.
Income Taxes
Combined actual federal and state income tax rates were 41.3% for
the nine month period ended August 30, 1998 and 41.2% for the nine month
period ended August 31, 1997. These rates do not include a provision
for income taxes for M&S prior to January 31, 1997, which was a general
partnership prior to its acquisition by CKS Group. The Combined pro
forma federal and state income tax rate was 44.1% for the nine months
ended August 31, 1997. Pro forma tax rates include a tax provision to
reflect M&S income as if M&S had been a taxable "C" corporation for all
periods presented. The actual effective tax rate remained relatively
unchanged for the nine month periods ended August 30, 1998 and August
31, 1997.
Pro Forma Consolidated Financial Data
The following summary of consolidated pro forma income statement
data gives effect to the pooling-of-interests business combinations
between the Company, SiteSpecific, and M&S. The data excludes the $0.8
million and $2.5 million in nonrecurring charges for merger costs, net
of taxes, recorded by the Company for the three month and nine month
periods ended August 31, 1997 respectively, and includes a tax provision
as if M&S had been a taxable "C" Corporation for all periods.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------- ---------------------
August 30, August 31, August 30, August 31,
1998 1997 1998 1997
---------- ---------- ---------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues........................... $46,635 $39,750 $118,633 $99,980
Net income......................... $3,389 $3,239 $7,400 $7,987
Pro forma basic net income
per share........................ $0.22 $0.22 $0.48 $0.55
Shares used in basic per
share computation................ 15,366 14,732 15,345 14,543
Pro forma diluted net income
per share........................ $0.21 $0.20 $0.45 $0.51
Shares used in diluted per
share computation................ 16,430 16,072 16,335 15,705
EBITDA (1) $6,468 $6,125 $14,402 $14,644
</TABLE>
(1) Represents earnings before interest expense, income taxes,
depreciation, amortization and other noncash charges ("EBITDA").
Although EBITDA should not be used as an alternative to operating
income or net cash provided by (used in) operating activities,
investing activities, or financing activities, each as measured under
generally accepted accounting principles, and although EBITDA may not
be comparable to other similarly titled information for other
companies, the Company's management believes that EBITDA is an
additional meaningful measure of performance and liquidity.
Liquidity and Capital Resources
Since inception, the Company has financed its operations and
investments in property and equipment through cash generated from
operations, bank borrowings, equity financing and capital lease
financing arrangements. At August 30, 1998, the Company owed
approximately $0.9 million in bank borrowings and capital lease
financing arrangements.
Cash, cash equivalents and marketable securities, consisting
primarily of high-quality municipal bonds and tax-advantaged money
market instruments, totaled $47.1 million and $42.3 million at August
30, 1998 and November 30, 1997, respectively. The increase in cash,
cash equivalents and marketable securities during this period was
primarily due to $12.3 million provided by operating activities and $2.6
million in proceeds from the sale of common stock, partially offset by
$8.3 million used to fund buyout and guaranteed payments related to
subsidiary acquisitions, $0.6 million used to repay debt and
approximately $1.5 million used for capital expenditures.
Net cash provided by operating activities was approximately $12.3
million in the nine month period ended August 30, 1998, reflecting $7.4
million in net income and $4.9 million provided by working capital
fluctuations.
Net cash used in investing activities was approximately $0.9
million in the nine month period ended August 30, 1998, and included
approximately $7.0 million of proceeds from the sale of marketable
securities and other assets in excess of marketable securities
purchased, partially offset by approximately $6.5 million paid to the
former shareholders of CKS GmbH under a renegotiated purchase agreement,
and $1.5 million used for capital expenditures.
Net cash provided by financing activities was approximately $0.2
million in the nine month period ended August 30, 1998, reflecting $2.6
million in proceeds from the sale of Common Stock through the Company's
Employee Stock Purchase Plan and the exercise of employee stock options,
partially offset by $1.8 million in guaranteed payments to subsidiaries
and $0.6 million in repayment of debt.
In recording the business combinations with M&S and SiteSpecific,
the Company's balance sheet as of November 30, 1996 was combined with
M&S's and SiteSpecific's balance sheets as of December 31, 1996.
Subsequent to November 30, 1996, M&S and SiteSpecific changed their
fiscal year ends to conform to the Company's fiscal year end. The net
decrease in cash and cash equivalents for the three month period ended
March 2, 1997 has been adjusted to eliminate the effect of including
M&S's and SiteSpecific's net income and cash flows for the month ended
December 31, 1996. The cash adjustment amounted to $4.3 million,
primarily as a result of a substantial payment received by M&S in
December 1996 from a client for media placement, for which related costs
were not paid until January 1997. This adjustment is reflected in the
Company's Condensed Consolidated Statements of Cash Flows under the line
item "Change in subsidiaries' fiscal year ends".
As of August 30, 1998, the Company and its subsidiaries had $3.7
million in credit facilities available under revolving lines of credit.
The credit facilities were secured by all the assets of the Company and
bear interest at rates of prime to prime plus 1%. At August 30, 1998,
there was $0.2 million of indebtedness outstanding under these credit
facilities. These credit agreements, which are scheduled to expire
between October 30, 1998 and November 30, 1998, require compliance with
various financial covenants and restrictions, including maintenance of
minimum levels of net worth and profitability, and restrict the
Company's ability to pay dividends or to effect mergers or acquisitions
without the bank's consent.
The Company believes that its cash, cash equivalents and
marketable securities, together with existing credit facilities and cash
flows from operations, if any, will be sufficient to meet the Company's
cash requirements for at least the next twelve months.* The Company may
need to raise additional funds through public or private debt or equity
financing in order to take advantage of opportunities that may become
available to the Company, including expansion and acquisition of
businesses, products or technologies, or to otherwise respond to
competitive pressures. There can be no assurance that the Company will
be able to raise capital on favorable terms or at all.
Factors Affecting Operating Results and Market Price of Stock
The Company's operating results and the market price of the
Company's Common Stock may be affected by numerous factors, many of
which are beyond the Company's control. In addition to the factors
described below, the Company encourages review of the more extensive
discussion set forth in the section entitled "Business -- Factors
Affecting Operating Results and Market Price of Stock" in the Company's
Annual Report on Form 10-K for the fiscal year ended November 30, 1997
and the section entitled "Risk Factors" in the Form S-4 registration
statement filed on September 14, 1998 by USWeb, a copy of which is
attached hereto as Exhibit 99.1.
The Company's operating results have fluctuated in the past and
may fluctuate in the future as a result of a variety of factors. Some
of these factors include timing of the completion, material reduction or
cancellation of major projects or the loss of a major client, the amount
and timing of the receipt of new business, hiring or loss of personnel
and opening or closing of offices, the relative mix of high margin
creative or strategy consulting projects as compared to lower margin
production projects, capital expenditures and other costs relating to
the expansion of operations, the level of demand for intranet, extranet
and Web site development, the productivity of consultants, the ability
to maintain adequate staffing to service clients effectively, the cost
of advertising and related media, the amount and timing of expenditures
by clients for professional services, the introduction of new products
or services by competitors, pricing changes in the industry, the
relative mix of lower cost full-time employees versus higher cost
independent contractors, technical difficulties with respect to the use
of the Internet, and general economic conditions. For instance,
reductions in marketing expenditures by several of the Company's largest
clients resulted in a significant decline in the Company's earnings for
the fourth quarter of fiscal 1997, which in turn resulted in a 63%
decline in the market price of the Company's Common Stock in a single
day. The Company experiences some seasonality in its business which
results from timing of product introductions and business cycles of the
Company's clients. The Company's revenues for the first fiscal quarter
tend to be somewhat lower than for the preceding fourth quarter because
many clients have expended most of their marketing budgets prior to the
end of the calendar year and do not release funds from the next calendar
year's marketing budget until mid to late January. The Company expects
this seasonality to continue in the future. The Company's historical
financial data is of limited value in planning future operating
expenses. Accordingly, the Company's expense levels will be based in
part on its expectations concerning future revenues and will be fixed to
a large extent. The Company will be unable to adjust spending in a
timely manner to compensate for any unexpected shortfall in revenues.
Accordingly, a significant shortfall in demand for services could have
an immediate and material adverse effect on the Company's business,
financial condition, results of operations and prospects. As a result
of the foregoing and other factors, the Company anticipates that it may
experience material and adverse fluctuations in future operating results
on a quarterly or annual basis; and, that such operating results in any
given quarter may fall below the expectations of securities analysts and
investors. In such event, the trading price of the Company's Common
Stock would likely be materially and adversely affected and litigation
may ensure. Moreover, the Company believes that period to period
comparisons of its revenues and operating results are not necessarily
meaningful and that such comparisons cannot be relied upon as indicators
of future performance.
The Company's five largest clients accounted for 37% and 39% of
the Company's revenues for the fiscal years ended November 30, 1997 and
November 30, 1996, respectively, with fluctuations in the amount of
revenue contribution from each such client from quarter to quarter.
Since many of the Company's clients generally retain the Company on a
project by project basis, a client from whom the Company generates
substantial revenue in one period may not be a substantial source of
revenue in a subsequent period. Historically, the Company's typical
project has lasted only four to six weeks, and once a project is
completed there can be no assurance that a client will engage the
Company for further services. In addition, the Company's clients may
unilaterally reduce their use of the Company's services or terminate
existing projects without penalty. The termination of the Company's
business relationship with any of its significant clients or a material
reduction in revenues from a significant client would have a material
adverse effect on the Company's business, financial condition and
operating results.
The Company's future growth is dependent to a significant extent
upon its ability to increase the amount of revenue it derives from
providing marketing and advertising solutions to its customers through
new media, which the Company defines as media that delivers content to
end users in digital form, including the World Wide Web, the Internet,
proprietary online services, CD-ROMs, laptop PC presentations and
interactive kiosks. The market for marketing and advertising through
new media is rapidly evolving and is characterized by an increasing
number of market entrants who have introduced or developed products and
services for communication and commerce through new media. Moreover,
critical issues concerning the use of certain of these new media
(including security, reliability, cost, ease of deployment and
administration and quality of service) remain unresolved and may affect
the growth of the use of such new media for communication and commerce.
Demand and market acceptance for recently introduced products and
services are subject to a high level of uncertainty. There can be no
assurance that communication and commerce through new media will
continue to grow. The Company believes that its focus on and expertise
in new media-based marketing services has been an important factor in
attracting new clients. To the extent that the Company's leadership in
providing new media solutions erodes as established advertising agencies
and other competitors expand their new media capabilities, the Company's
competitive position, business, financial condition and operating
results may be materially adversely affected.
Over the 24-month period ended August 30, 1998, the Company
completed acquisitions of six businesses. The Company's future
performance will depend on its ability to integrate these acquired
businesses, which, even if successful, may take a significant period of
time, will place a significant strain on the Company's resources, and
could subject it to additional expenses during the integration process
and to the risks commonly encountered in acquisitions of businesses.
Such risks include, among other things, the difficulty of assimilating
the operations and personnel of the acquired businesses, the potential
disruption of the Company's ongoing business, the inability of
management to maximize the financial and strategic position of the
Company through the successful incorporation of acquired personnel and
clients, the maintenance of uniform standards, controls, procedures and
policies and the impairment of relationships with employees and clients
as a result of any integration of new management personnel. There can be
no assurance that the services, technologies, key personnel and
businesses of previously acquired companies will be effectively
integrated into the Company's business or service offerings, or that
such integration will not adversely affect the Company's business,
financial condition and results of operations. There can also be no
assurance that any acquired services, technologies or businesses will
contribute at anticipated levels to the Company's sales or earnings, or
that the sales and earnings from such combined businesses will not be
adversely affected by the integration process. The failure to integrate
acquisitions successfully could have a material adverse effect on the
business, financial condition and results of operations of the Company.
A component of the Company's continued growth strategy is expected
to be the acquisition of professional service firms that meet the
Company's goals for strategic growth. The successful implementation of
this acquisition strategy will depend on the Company's ability to
identify suitable acquisition candidates, acquire such companies on
acceptable terms and integrate their operations successfully with those
of the Company. There can be no assurance that the Company will be
able to continue to identify additional suitable acquisition candidates
or that the Company will be able to acquire such candidates on
acceptable terms Moreover, in pursuing acquisition opportunities the
Company may compete with other companies with similar growth strategies,
certain of which may be larger and have greater financial and other
resources than the Company. Competition for acquisition targets may
also result in increased prices of acquisition targets and a diminished
pool of companies available for acquisition. Acquisitions also involve
a number of other risks, including adverse effects on the Company's
reported operating results from increases in goodwill amortization,
acquired in-process technology, stock compensation expense and increased
compensation expense resulting from newly hired employees, the diversion
of management attention, potential disputes with the sellers of one or
more acquired entities and the possible failure to retain key acquired
personnel. For all of these reasons, the Company's pursuit of an
overall acquisition strategy or any individual pending or future
acquisition may have a material adverse effect on the Company's
business, financial condition and results of operations. To the extent
the Company chooses to use cash consideration for acquisitions in the
future, the Company may be required to obtain additional financing, and
there can be no assurance that such financing will be available on
favorable terms, if at all. If stock is issued to complete future and
existing acquisitions, existing stockholders may experience ownership
and/or earnings dilution.
The growth of the Company has placed, and any further expansion of
the Company would continue to place, a significant strain on the
Company's limited personnel, management and other resources. In the
future, the Company will be required to attract, train, motivate and
manage new employees successfully, to effectively integrate new
employees into its operations and to continue to improve its
operational, financial, management and information systems and controls.
There can be no assurance that the Company's systems, procedures or
controls will be adequate to support the Company's operations or that
the Company's management will be able to achieve the rapid execution
necessary to exploit the market for the Company's business model. The
failure to effectively manage any further growth could have a material
adverse effect on the Company's business, financial condition and
results of operations.
The Company generates a significant portion of its revenues
through project fees on a fixed fee for service basis. The Company
assumes greater financial risk on fixed-price type contracts than on
either time-and-material or cost-reimbursable contracts. Failure to
anticipate technical problems, estimate accurately the costs, resources
and time required for an engagement, to manage client expectations
effectively regarding the scope of services to be delivered for the
estimated fees or to complete fixed-price engagements within budget, on
time and to clients' satisfaction would expose the Company to risks
associated with cost overruns and, in certain cases, penalties, any of
which could reduce the Company's profit or cause the Company to incur a
loss. Although many of the Company's projects last four to six weeks
and therefore each individual short-term project creates less exposure
than a long-term fixed-price contract, in the event the Company does not
accurately anticipate the progress of a number of significant revenue-
generating projects, a material adverse effect on the Company's
business, financial condition and operating results could result. As
the complexity of new media projects has increased, the duration and
size of some of these fixed price agreements has increased, thereby
increasing the Company's risk of loss on such projects.
Conflicts of interest are inherent in certain segments of the
marketing communications industry, particularly in advertising. The
Company has in the past, and likely will in the future, be unable to
pursue potential advertising and other opportunities because such
opportunities will require the Company to provide services to direct
competitors of existing Company clients. In addition, the Company risks
alienating or straining relationships with existing clients each time
the Company agrees to provide services to even indirect competitors of
existing Company clients. Conflicts of interest may jeopardize the
stability of revenues generated from existing clients and preclude
access to business prospects, either of which developments could have a
material adverse effect on the Company's business, financial condition
and operating results.
Many currently installed computer systems and software products
are coded to accept only two-digit entries in the date code field.
Beginning in the year 2000, these date code fields will need to accept
four-digit entries to distinguish 21st century dates from 20th century
dates. As a result, in the next 15 months, software and computer
systems used by many companies, including customers and potential
customers of the Company, may need to be upgraded to comply with such
"Year 2000" requirements. The Company is in the process of conducting
an internal review of all systems and contacting all software suppliers
to determine major areas of exposure to Year 2000 issues. Although the
Company's core financial and reporting systems have been identified as
being Year 2000 compliant, a number of ancillary applications may not
yet be Year 2000 compliant. The Company is in the process of correcting
areas of exposure. The Company has not determined an estimate of the
costs required to correct non-complying features, if any, and such costs
could have a material adverse effect on the Company's business, results
of operations and financial condition.
Although the Company believes that its internal systems are Year
2000 compliant, failure to provide Year 2000 compliant business
solutions to its customers could result in liability to the Company or
otherwise have a material adverse effect on the Company's business,
results of operations and financial condition. Furthermore, the Company
believes that the purchasing patterns of customers and potential
customers may be affected by Year 2000 issues as companies expend
significant resources to correct or patch their current software systems
for Year 2000 compliance. These expenditures may result in reduced funds
available to purchase products and services such as those offered by the
Company, which could result in a material adverse effect on the
Company's business, results of operations and financial condition. In
the third-party area, the Company has begun contacting its major
suppliers. Most of these parties have stated that they intend to be Year
2000 compliant by Year 2000. Any failure of these third parties systems
to timely achieve Year 2000 compliance could have a material adverse
effect on the business, financial condition and results of operations of
the Company.
The Company's business of delivering marketing professional
services is labor intensive. Accordingly, the Company's success depends
in large part on its ability to identify, hire, train and retain
consulting professionals who can provide the strategy, technology,
marketing, audience development and creative skills required by clients.
There is currently a shortage of such personnel, and this shortage is
likely to continue for the foreseeable future. The Company will
encounter intense competition for qualified personnel from other
companies, and there can be no assurance that it will be able to
identify, hire, train and or retain other highly qualified technical,
marketing and managerial personnel in the future. The inability to
attract and retain the necessary personnel would have a material adverse
effect on the Company's business, financial condition and results of
operations.
The market for the Company's services is intensely competitive,
and the Company expects competition to persist, intensify and increase
in the future. There are relatively low barriers to entry into the
Company's business. Because professional services firms such as the
Company rely on the skill of their personnel and the quality of their
client service, they have no patented technology that would preclude or
inhibit competitors from entering their markets. Many of the Company's
current and potential competitors have longer operating histories,
larger installed customer bases, longer relationships with clients and
significantly greater financial, technical, marketing and public
relations resources than the Company and could decide at any time to
increase their resource commitments to the Company's target markets.
Competition could materially adversely affect the Company's business,
financial condition and results of operations.
Many of the Company's consulting engagements involve the
development, implementation and maintenance of applications that are
critical to the operations of their clients' businesses. The Company's
failure or inability to meet a client's expectations in the performance
of its services could injure the Company's business reputation or result
in a claim for substantial damages against the Company, regardless of
its responsibility for such failure. In addition, the Company possesses
technologies and content that may include confidential or proprietary
client information. Although the Company has implemented policies to
prevent such client information from being disclosed to unauthorized
parties or used inappropriately, any such unauthorized disclosure or use
could result in a claim for substantial damages. The Company has
attempted to limit contractually its damages arising from negligent
acts, errors, mistakes or omissions in rendering professional services;
however there can be no assurance that any contractual protections will
be enforceable in all instances or would otherwise protect the Company
from liability for damages. Although the Company maintains general
liability insurance coverage, including coverage for errors and
omissions, there can be no assurance that such coverage will continue to
be available on reasonable terms or will be available in sufficient
amounts to cover one or more large claims, or that the insurer will not
disclaim coverage as to any future claim. The successful assertion of
one or more large claims against the Company that are uninsured, exceed
available insurance coverage or result in changes to the Company's
insurance policies, including premium increases or the imposition of a
large deductible or co-insurance requirements, could adversely affect
the Company's business, results of operations and financial condition.
The Company is not currently subject to direct government
regulation, other than securities laws and regulations applicable to all
publicly owned companies and laws and regulations applicable to
businesses generally. There are currently few laws or regulations
directly applicable to access to or commerce on the Internet. However,
due to the increasing popularity and use of the Internet, it is likely
that laws and regulations covering the Internet may be adopted with
respect to issues such as user privacy, freedom of expression, pricing
of products and services, taxation, advertising, intellectual property
rights, information security or the convergence of traditional
communications services with Internet communications. The adoption of
such laws or regulations may decrease the growth of the Internet, which
could in turn decrease demand for the Company's services, increase the
cost of doing business, or in some other manner have a material adverse
effect on the Company's business, financial condition and results of
operations.
The Company's revenues and results of operations are subject to
fluctuations based upon general economic conditions. If there were to
be a general economic downturn or a recession in the United States, then
the Company expects that business enterprises, including its clients and
potential clients, likely will substantially and immediately reduce
their budgets. Because certain of the Company's largest clients have
substantial overseas operations, their budgets may also be adversely
affected by economic conditions in overseas markets, including the
recent volatility in Asian and Russian economies and Asian and Russian
currency and securities markets. In the event of such an economic
downturn, the Company's business, financial condition and results of
operations would not be materially and adversely affected.
Volatility of Company's Common Stock
The trading price of the Company's Common Stock has been, and in
the future is expected to be, subject to extreme fluctuations in
response to both business-related issues, such as quarterly variations
in operating results, the timing of commencement or completion of client
projects, reductions or increases in client spending on marketing
communications services, announcements of new services or business
acquisitions by the Company or its competitors, and the gain or loss of
client accounts, and stock market related influences, such as changes in
estimates of securities analysts, the presence or absence of short-
selling of the Company's Common Stock, and events affecting other
companies that the market deems to be comparable to or to impact the
Company or its business. In addition, the stock market has from time to
time experienced extreme price and volume fluctuations that have
particularly affected the market price of many technology-oriented
companies and that often have been unrelated or disproportionate to the
operating performance of these companies. These broad market
fluctuations may adversely affect the market price of the Company's
Common Stock. The trading prices of many high technology and Internet-
related companies' stocks are at or near their historical highs and
reflect price/earning ratios substantially above historical norms.
There can be no assurance that the trading price of the Company's Common
Stock will remain at or near its current level. The following table
reflects the high and low per share sale prices for the Company's Common
Stock for the seven fiscal quarters ending August 30, 1998:
<TABLE>
<CAPTION>
High Low
---------- ----------
<S> <C> <C>
First Quarter, Fiscal 1997......... $36.25 $20.63
Second Quarter, Fiscal 1997........ $34.25 $20.25
Third Quarter, Fiscal 1997......... $44.75 $29.00
Fourth Quarter, Fiscal 1997........ $46.25 $11.38
First Quarter, Fiscal 1998......... $20.00 $12.25
Second Quarter, Fiscal 1998........ $27.50 $17.56
Third Quarter, Fiscal 1998......... $24.50 $12.88
</TABLE>
- ----------------
*This statement is a forward-looking statement reflecting current expectations.
Investors are strongly encouraged to review the section entitled "Factors
Affecting Operating Results and Market Price of Stock" commencing on this
page, for a discussion of factors that could affect future performance.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Securities Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
99.1 Risk factors related to the proposed merger with USWeb
Corporation. This exhibit includes "Risk Factors" found in the Form
S-4 filed September 14, 1998 by USWeb Corporation, except with respect
the cross references contained therein.
27.1 Financial Data Schedule
b. Reports on Form 8-K
During the period covered by this report, the Company filed the
following Current Report on Form 8-K:
(1) Form 8-K dated September 1, 1998 and filed with the
Commission on September 11, 1998 reporting information under item
5, with respect to the execution of the Agreement and Plan of
Reorganization dated as of September 1, 1998 among USWeb, Merger
Sub, and CKS Group.
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
CKS GROUP, INC.
(Registrant)
Date: October 14, 1998 By: /s/ MARK D. KVAMME
----------------------------------
Mark D. Kvamme, Chairman and Chief
Executive Officer (Principal
Executive Officer)
Date: October 14, 1998 By: /s/ CARLTON H. BAAB
----------------------------------
Carlton H. Baab, Executive Vice
President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- ----------------------------------------------------------------
27.1 Financial Data Schedule
99.1 Risk factors related to the proposed merger with USWeb
Corporation. This exhibit includes "Risk Factors" found in the
Form S-4 filed September 14, 1998 by USWeb Corporation, except
with respect to the cross references contained therein.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE ACCOMPANYING CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-29-1998
<PERIOD-START> DEC-01-1997
<PERIOD-END> AUG-30-1998
<CASH> 29,817
<SECURITIES> 17,323
<RECEIVABLES> 44,618
<ALLOWANCES> 2,233
<INVENTORY> 0
<CURRENT-ASSETS> 105,703
<PP&E> 5,867
<DEPRECIATION> 0
<TOTAL-ASSETS> 152,967
<CURRENT-LIABILITIES> 47,465
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 104,721
<TOTAL-LIABILITY-AND-EQUITY> 152,967
<SALES> 118,633
<TOTAL-REVENUES> 118,633
<CGS> 0
<TOTAL-COSTS> 107,181
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 12,610
<INCOME-TAX> 5,210
<INCOME-CONTINUING> 7,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,400
<EPS-PRIMARY> $0.48
<EPS-DILUTED> $0.45
</TABLE>
Exhibit 99.1
RISKS FACTORS RELATED TO THE PROPOSED MERGER WITH USWEB CORPORATION
RISKS RELATED TO THE MERGER
Difficulties of Integrating USWeb and CKS Group. Following the Merger, to
maintain and increase profitability and to achieve the anticipated benefits of
the Merger, the Combined Company will need to effectively and efficiently
integrate the two companies' operations in a timely manner. In particular, the
Combined Company will need to integrate (i) management, technical, creative
and other personnel, (ii) technical and creative service offerings, (iii)
sales and marketing efforts and (iv) financial, accounting and other
operational controls, procedures, information systems and policies. The
integration process will be further complicated by the need to integrate
widely dispersed operations and distinct corporate cultures. There can be no
assurance that such integration will be accomplished in an efficient or
effective manner, if at all. The integration process will require the
dedication of management and other personnel which may distract their
attention from the conduct of day-to-day business activities, the formulation
of strategy and the rapidly evolving industry in which the Combined Company
will compete. In addition, the integration process will require the
development of new service offerings and the pursuit of other business
acquisition opportunities. These factors, in turn, could interrupt or cause a
loss of momentum in the pre-Merger activities of either or both companies
following the Merger, and could lead customers to defer, reduce and/or cancel
purchase decisions or to select other vendors. The business of the Combined
Company also may be disrupted by employee departures or reductions in employee
productivity due to uncertainty during the integration process. The
integration of USWeb and CKS Group will be made more difficult by the large
number of other relatively small businesses recently acquired by the two
companies, some of which the companies still are in the process of integrating
into their respective businesses. Moreover, while USWeb and CKS Group each
recently have acquired other businesses, neither USWeb nor CKS Group has
attempted an acquisition with the scope or magnitude of the Merger.
Difficulties encountered in the transition and integration process, disruption
caused by the process of combining the companies, the diversion of management
and employee attention from day-to-day and other activities, or an inability
to effectively and efficiently integrate the operations of the companies in a
timely manner could have a material adverse effect on the business, financial
condition, results of operations and prospects of the Combined Company and on
the anticipated benefits of the Merger. See "--Risks Related to the Combined
Company, USWeb and CKS Group--Integration of Other Acquired Businesses."
Risk of Failure to Achieve Synergies. USWeb and CKS Group have entered into
the Reorganization Agreement with the expectation that the Merger will result
in beneficial operating synergies. These expectations are based on certain
assumptions, including that clients desire integrated Internet professional
services and marketing communications from a single vendor, that the two
companies will be able to sell their respective expertise to one another's
current customers, that the increased scale of the business will make the
Combined Company a more desirable partner for Fortune 500 accounts, and that
certain cost savings can be realized. The inability to achieve the desired
synergies for any reason could have a material adverse effect on
the business, financial condition, results of operations and prospects of the
Combined Company and on the benefits anticipated from the Merger. See
"Approval of the Merger and Related Transactions--Joint Reasons for the
Merger."
Uncertain Market Acceptance of the Reinvent Communications Brand; Market
Confusion Caused by Replacement of USWeb and CKS Group Brands. USWeb and CKS
Group have each invested significant efforts in building brand recognition and
customer acceptance of their respective brand names. The Combined Company
believes that transferring market acceptance for the USWeb and CKS Group
brands to the Reinvent Communications brand will be an important aspect of its
efforts to retain and attract clients. The Combined Company expects that the
importance of recognition and acceptance of the Reinvent brand will increase
due to the increasing number of companies entering the market for Internet
marketing and communications services. Promoting and positioning the Reinvent
brand will depend largely on the success of the Combined Company's marketing
efforts and the ability of the Combined Company to provide high quality,
reliable and cost-effective services in the areas of Internet marketing,
communications, strategy consulting, analysis and design, technology
development, implementation and integration, audience development, and
maintenance. If clients do not perceive the Combined Company's services as
meeting their needs, or if the Combined Company fails to market those services
effectively, the Combined Company will be unsuccessful in maintaining and
strengthening its brand. In addition, although the Combined Company intends to
centralize its marketing efforts, it intends to provide a significant part of
its client services through individual consulting offices and client
dissatisfaction with the performance of a single office could diminish the
value of the Reinvent brand. Furthermore, in order to promote the Reinvent
brand in response to competitive pressures, the Combined Company may find it
necessary to increase its marketing expenditures or otherwise increase its
financial commitment to creating and maintaining brand loyalty and awareness
among existing and potential clients. If the Combined Company fails to promote
and maintain its brand, or incurs excessive expenses in an attempt to promote
and maintain its brand, the Combined Company's business, financial condition,
results of operations and prospects will be materially adversely affected and
the Combined Company will not achieve the benefits anticipated from the
Merger. See "USWeb Corporation--USWeb Business--Services" and "--Marketing."
Risks Associated with Fixed Exchange Ratio. At the Effective Time, each
outstanding share of CKS Group Common Stock will be converted into the right
to receive 1.5 shares of USWeb Common Stock. Because the Exchange Ratio is
fixed, it will not increase or decrease with fluctuations in the market price
of either USWeb Common Stock or CKS Group Common Stock. The specific market
value of the shares of USWeb Common Stock to be received by CKS Group
stockholders in the Merger will, therefore, depend on the market price of the
USWeb Common Stock on and after the Effective Time. USWeb Common Stock and CKS
Group Common Stock historically have been subject to substantial price
volatility. In the event that the market price of USWeb Common Stock decreases
or increases prior to the Effective Time, the market value of the USWeb Common
Stock to be received by CKS Group stockholders in the Merger would
correspondingly decrease or increase. USWeb and CKS Group stockholders are
advised to obtain current market quotations for USWeb Common Stock and CKS
Group Common Stock immediately prior to the Special Meetings. See "--Risks
Related to the Combined Company, USWeb and CKS--Volatility of Stock Price",
"Summary--Market and Price Data," and "Comparative Market Price Data."
Dependence upon Key Personnel and Integration of Management. The success of
the Combined Company will depend upon the retention of senior executives and
other key employees who are critical to the continued advancement, development
and support of the companies' technologies as well as ongoing sales and
marketing efforts. As commonly occurs with mergers of technology companies,
during the pre-merger and integration phases competitors may intensify their
efforts to recruit key employees. Employee uncertainty regarding the effects
of the Merger could also cause increased turnover. USWeb and CKS Group
employees are generally not bound by employment agreements or noncompetition
covenants. The recent decline in stock market prices in general, and the stock
prices of both USWeb and CKS Group in particular, may have the effect of
decreasing the incentive value of stock options or other equity held by
employees and thereby increase the risk of employee turnover. There can be no
assurance that the Combined Company will be able
to retain key creative, technical, sales or marketing personnel prior to or
after the Merger. The loss of the services of any key personnel or of any
significant group of employees could have a material adverse effect on the
Combined Company's business, results of operations, financial condition and
prospects and on the benefits anticipated from the Merger.
The Combined Company's success depends to a significant extent on the
ability of its executive officers and other members of senior management to
operate effectively, both independently and as a group. In addition, some
members of management will have new roles in the Combined Company. No
assurance can be given that management will succeed in their roles or that the
Combined Company can efficiently allocate management responsibilities and
cause its officers and senior managers to operate effectively as a group.
Client Uncertainty; Conflicts. Uncertainty regarding the Merger and the
ability of USWeb and CKS Group to effectively integrate their operations
without significant reduction in quality of service could lead certain
customers to defer purchase decisions or select other vendors. In addition,
some clients desire that their vendors avoid providing similar services to the
competitors of such clients. The Merger and resulting combination of client
bases may generate client conflicts and potentially cause the loss of current
clients or an inability to perform services for certain competing businesses.
The loss of significant clients or an inability to provide services to a
significant group of potential clients could have a material adverse effect on
the Combined Company's business, financial condition, results of operations
and prospects.
Substantial Expenses Resulting from the Merger. The negotiation and
implementation of the Merger will result in significant pre-tax expenses to
USWeb and CKS Group. Excluding costs associated with combining the operations
of the two companies and costs associated with the proposed name change of the
Combined Company to Reinvent Communications, Inc. (which costs are difficult
to estimate), pre-tax expenses are estimated at approximately $18 million,
primarily consisting of fees for investment bankers, attorneys, accountants,
regulatory compliance, financial printing and other related charges. The
aggregate amount of such expenses may be greater and unanticipated
contingencies could occur that would substantially increase the costs of
combining the operations of the two companies. In any event, costs associated
with the Merger are expected to negatively affect results of operations in the
quarter ending December 31, 1998 and possibly the quarter ending March 31,
1999. The substantial majority of these costs will have been incurred whether
or not the Merger is approved or consummated.
RISKS RELATED TO THE COMBINED COMPANY, USWEB AND CKS GROUP
Fluctuations in Quarterly Operating Results and Margins; Seasonality of
Business. Each of USWeb's and CKS Group's operating results have fluctuated in
the past and the Combined Company's operating results are likely to fluctuate
in the future as a result of a variety of factors, many of which will be
outside of the Combined Company's control. Some of these factors include
timing of the completion, material reduction or cancellation of major projects
or the loss of a major client; the amount and timing of the receipt of new
business; timing of hiring or loss of personnel; the amount and timing of the
opening or closing of an office; the amount and the relative mix of high-
margin creative or strategy consulting projects as compared to lower margin
projects, capital expenditures and other costs relating to the expansion of
operations; the level of demand for Intranet, Extranet and Web site
development; the productivity of consultants; the ability to maintain adequate
staffing to service clients effectively; the cost of advertising and related
media; the amount and timing of expenditures by clients for professional
services; the introduction of new products or services by competitors; pricing
changes in the industry; the relative mix of lower cost full-time employees
versus higher cost independent contractors; technical difficulties with
respect to the use of the Internet; economic conditions specific to Internet
technology usage; government regulation and legal developments regarding the
use of the Internet; and general economic conditions. The Company Combined may
also experience seasonality in its business, resulting in diminished revenues
as a consequence of decreased demand for professional services during summer
and year-end vacation and holiday periods. Due to all of the foregoing
factors, the Combined Company's operating results in any given quarter may
fall below the expectations of securities analysts and investors. In such
event, the trading price of the Combined Company's Common Stock
would likely be materially and adversely affected and litigation may ensue.
See "USWeb Corporation--USWeb Management's Discussion and Analysis of
Financial Condition and Results of Operations."
CKS Group has experienced some seasonality in its business which results
from timing of product introductions and business cycles of CKS Group's
clients. CKS Group's revenues for the first fiscal quarter tend to be somewhat
lower than for the preceding fourth quarter because many clients have expended
most of their marketing budgets prior to the end of the calendar year and do
not release funds from the next calendar year's marketing budget until mid- to
late January. For the foregoing reasons and other factors, historical revenues
and operating results of USWeb and CKS Group are not necessarily meaningful
and cannot be relied upon as indicators of future performance of the Combined
Company.
USWeb's and CKS Group's historical financial data is of limited value in
planning future operating expenses. Accordingly, the Combined Company's
expense levels will be based in part on its expectations concerning future
revenues and will be fixed to a large extent. The Combined Company will be
unable to adjust spending in a timely manner to compensate for any unexpected
shortfall in revenues. Accordingly, a significant shortfall in demand for
services could have an immediate and material adverse effect on the Combined
Company's business, financial condition, results of operations and prospects.
Limited Operating History; Accumulated Deficit; Evolving Business
Model. USWeb was founded in December 1995, has incurred net losses since
inception and as of June 30, 1998 had an accumulated deficit of $149.4
million. The predecessor company to CKS Group was founded in 1987.
Accordingly, the Combined Company will have only a limited operating history
on which to base an evaluation of its business and prospects. The Combined
Company and its prospects must be considered in light of the risks, expenses
and difficulties frequently encountered by companies in an early stage of
development, particularly companies in new and rapidly evolving markets such
as Internet professional services. Such risks for the Combined Company
include, but are not limited to, an evolving business model. To address these
risks, the Combined Company must, among other things, strengthen its business
development and management activities while continuing to expand its network
of consulting offices, continue to develop the strength and quality of its
operations, maximize the value delivered to clients by the Combined Company
Internet Strategy and Solutions Center (the "Strategy and Solutions Center"),
develop and enhance the Combined Company brand, respond to competitive
developments and continue to attract, retain and motivate qualified employees.
There can be no assurance that the Combined Company will be successful in
meeting these challenges and addressing such risks and the failure to do so
could have a material adverse effect on the Combined Company's business,
financial condition, results of operations and prospects.
Dilution, Earnings and Growth. The Combined Company expects that future
acquisition agreements, if any, could provide for consideration to be paid in
cash, stock or a combination of cash and stock. The number of shares which may
be issued in future acquisitions will depend on the market price of the
Combined Company's Common Stock and a variety of other factors and, as a
result, future acquisitions may have a significant dilutive impact on USWeb's
and CKS Group's existing stockholders. The Merger will dilute the percentage
ownership held by the stockholders of each of USWeb and CKS Group in the
Combined Company when compared to their ownership in each of the respective
companies. USWeb has outstanding a large number of warrants and both USWeb and
CKS Group have outstanding a large number of stock options to purchase Common
Stock of the respective companies, many of which have exercise prices
significantly below the market price of each company's respective Common Stock
as of the date of this Joint Proxy Statement/Prospectus. To the extent such
options or warrants are exercised, there will be further dilution. The
Combined Company expects to continue to make acquisitions to fill strategic
needs and expand internationally. If such acquisitions are made using the
Combined Company's securities, such acquisitions could result in significant
dilution to the Combined Company's stockholders. USWeb currently has in effect
a shelf Registration Statement, which registers 16,666,667 shares of its
Common Stock (of which approximately 11,341,723 shares remain available for
future issuance as of June 30, 1998,, which may be used for future
acquisitions. Pursuant to its prior acquisition agreements, USWeb may be
required to issue substantial additional stock to the sellers of the acquired
companies as well as stock options and stock bonuses to the
employees of the acquired companies. These obligations will continue following
the Merger. Furthermore, the Combined Company expects to continue to enter
into selected acquisition agreements that require it to issue stock, stock
options and stock bonuses to the stockholders and employees of acquired
companies. Although such additional issuances have not resulted in significant
dilution to date, they could be material in the future. For these reasons, the
Combined Company's acquisition program may result in further substantial
ownership dilution.
While the Combined Company is expected to generate higher earnings per share
than those historically generated by USWeb, it is also expected to generate
lower earnings per share than those historically generated by CKS Group and,
therefore, CKS Group stockholders may experience dilution of earnings per
share as a result of the Merger. CKS Group's business has historically grown
at a lower rate than USWeb's historic growth rate. In addition, although USWeb
has had significant growth in net revenue and net income in absolute terms,
USWeb's growth rate has slowed in recent periods. The Combined Company is
expected to have an overall lower growth rate than USWeb's historic growth
rate both because of the Merger and the decrease in growth rate as the size
and maturity of the Combined Company increases.
Recruitment and Retention of Consulting Professionals. The Combined
Company's business of delivering Internet professional services is labor
intensive. Accordingly, the Combined Company's success depends in large part
on its ability to identify, hire, train and retain consulting professionals
who can provide the Internet strategy, technology, marketing, audience
development and creative skills required by clients. There is currently a
shortage of such personnel, and this shortage is likely to continue for the
foreseeable future. The Combined Company will encounter intense competition
for qualified personnel from other companies, and there can be no assurance
that it will be able to identify, hire, train and or retain other highly
qualified technical, marketing and managerial personnel in the future. The
inability to attract and retain the necessary technical, marketing and
managerial personnel would have a material adverse effect on the Combined
Company's business, financial condition, results of operations and prospects.
Integration of Other Acquired Businesses. Over the 24-month period ended
September 1, 1998, USWeb completed acquisitions of over 30 businesses and CKS
Group completed acquisitions of six businesses. The difficulties of
integrating USWeb's and CKS Group's businesses may be exacerbated by the size
and number of prior business combinations. Further, the Combined Company's
future performance will depend on its ability to integrate these acquired
businesses, which, even if successful, may take a significant period of time,
will place a significant strain on the Combined Company's resources, and could
subject it to additional expenses during the integration process and to the
risks commonly encountered in acquisitions of businesses. Such risks include,
among other things, the difficulty of assimilating the operations and
personnel of the acquired businesses, the potential disruption of the Combined
Company's ongoing business, the inability of management to maximize the
financial and strategic position of the Combined Company through the
successful incorporation of acquired personnel and clients, the maintenance of
uniform standards, controls, procedures and policies and the impairment of
relationships with employees and clients as a result of any integration of new
management personnel. There can be no assurance that the services,
technologies, key personnel and businesses of previously acquired companies
will be effectively integrated into the Combined Company's business or service
offerings, or that such integration will not adversely affect the Combined
Company's business, financial condition, results of operations or prospects.
There can also be no assurance that any acquired services, technologies or
businesses will contribute at anticipated levels to the Combined Company's
sales or earnings, or that the sales and earnings from combined businesses
will not be adversely affected by the integration process. Because a majority
of the Combined Company's acquisitions have been completed since March 1997,
the Combined Company is currently facing all of these challenges and its
ability to meet them over the long term has not been established. The failure
to integrate such acquisitions successfully could have a material adverse
effect on the business, financial condition, results of operations and
prospects of the Combined Company. See "USWeb Corporation--USWeb Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Acquisition of Internet Professional Services Firms," "USWeb Corporation--
USWeb Business--Strategy," "--Consulting Office Network Development" and "--
Employees."
Risks Related to Future Acquisitions. A key component of the Combined
Company's continued growth strategy is expected to be the acquisition of
professional service firms that meet the Combined Company's goals for
strategic growth and international expansion. The successful implementation of
this acquisition strategy will depend on the Combined Company's ability to
identify suitable acquisition candidates, acquire such companies on acceptable
terms and integrate their operations successfully with those of the Combined
Company. There can be no assurance that the Combined Company will be able to
continue to identify additional suitable acquisition candidates or that the
Combined Company will be able to acquire such candidates on acceptable terms.
Moreover, in pursuing acquisition opportunities the Combined Company may
compete with other companies with similar growth strategies, certain of which
competitors may be larger and have greater financial and other resources than
the Combined Company. Competition for these acquisition targets may also
result in increased prices of acquisition targets and a diminished pool of
companies available for acquisition. Acquisitions also involve a number of
other risks, including adverse effects on the Combined Company's reported
operating results from increases in goodwill amortization, acquired in-process
technology, stock compensation expense and increased compensation expense
resulting from newly hired employees, the diversion of management attention,
potential disputes with the sellers of one or more acquired entities and the
possible failure to retain key acquired personnel. Lack of client satisfaction
or performance problems with an acquired firm could also have a material
adverse impact on the reputation of the Combined Company as a whole, and any
acquired subsidiary could significantly underperform relative to the Combined
Company's expectations. For all of these reasons, the Combined Company's
pursuit of an overall acquisition strategy or any individual pending or future
acquisition may have a material adverse effect on the Combined Company's
business, financial condition, results of operations and prospects. To the
extent the Combined Company chooses to use cash consideration for acquisitions
in the future, the Combined Company may be required to obtain additional
financing, and there can be no assurance that such financing will be available
on favorable terms, if at all. As the Combined Company issues stock to
complete future acquisitions, existing stockholders will experience further
ownership dilution. See "--Dilution, Earnings and Growth" "--Future Capital
Needs; Uncertainty of Additional Financing," "USWeb Corporation--USWeb
Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "USWeb Corporation--USWeb Business--Consulting Office Network
Development" and Note 1 to Consolidated Financial Statements.
Risks Associated with Failure to Manage Growth. The growth of each of USWeb
and CKS Group has placed, and any further expansion of the Combined Company
would continue to place, a significant strain on the company's limited
personnel, management and other resources. In the future, the Combined Company
will be required to attract, train, motivate and manage new employees
successfully, to effectively integrate new employees into its operations and
to continue to improve its operational, financial, management and information
systems and controls. There can be no assurance that the Combined Company's
systems, procedures or controls will be adequate to support the Combined
Company's operations or that the Combined Company's management will be able to
achieve the rapid execution necessary to exploit the market for the Combined
Company's business model. The failure to effectively manage any further growth
could have a material adverse effect on the Combined Company's business,
financial condition, results of operations and prospects.
Risks Associated with International Operations. Upon completion of the
Merger, the Combined Company will have ten offices outside of the United
States; however, it has limited experience in either managing an international
network of consulting offices or in marketing services to international
clients. The Combined Company expects to incur significant costs to do both.
If revenues from international consulting offices are not adequate to offset
the expenses of establishing and maintaining international operations and of
localizing the Combined Company's marketing programs, the Combined Company's
business, results of operations and financial condition could be materially
adversely affected. There can be no assurance that the Combined Company will
be able to establish and maintain international consulting offices or market
its services to international clients. In addition to the uncertainty as to
the Combined Company's ability to generate revenues from foreign operations
and expand its international presence, there are certain risks inherent in
doing business on an international level, such as unexpected changes in
regulatory requirements, export and import restrictions, tariffs and other
trade barriers; difficulties in staffing and managing foreign
operations; potentially adverse differences in business customs, practices and
norms; longer payment cycles; problems in collecting accounts receivable;
political instability; fluctuations in currency exchange rates; software
piracy; seasonal reductions in business activity; and potentially adverse tax
consequences, any of which could adversely affect the Combined Company's
international operations. There can be no assurance that one or more of the
factors described above will not have a material adverse effect on the
Combined Company's future international operations and, consequently, on the
Combined Company's business, financial condition, results of operations and
prospects. See "USWeb Corporation--USWeb Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Competition; Low Barriers to Entry. The market for Internet professional
services is relatively new, intensely competitive, rapidly evolving and
subject to rapid technological change. The Combined Company expects
competition to persist, intensify and increase in the future. The Combined
Company's competitors can be divided into several groups: computer hardware
and service vendors such as International Business Machines Corporation
("IBM"), Digital Equipment Corporation ("DEC") and Hewlett-Packard Company
("Hewlett-Packard"); advertising and media agencies such as Ogilvy & Mather,
Young & Rubicam, and Foote, Cone & Belding; Internet integrators and Web
presence providers such as Agency.com, iXL Holding, Inc. ("iXL"), Organic
Online, Inc. ("Organic Online"), Proxicom, Inc. ("Proxicom"), Sapient (which
recently announced a business combination with Studio Archetype, a design and
branding firm); large information technology consulting service providers such
as Andersen Consulting, Cambridge Technology Partners and Electronic Data
Systems Corporation ("EDS"); telecommunications companies such as AT&T
Corporation ("AT&T") and MCI Communications Group ("MCI"); Internet and online
service providers such as America Online Incorporated ("America Online"),
NETCOM On-Line Communications Services Inc. ("ICG Netcom") and UUNet
Technologies, Inc. ("UUNet"); and software vendors such as Lotus Development
Corporation ("Lotus"), Microsoft Corporation ("Microsoft"), Netscape
Communications Corp. ("Netscape"), Novell, Inc. ("Novell") and Oracle
Corporation ("Oracle"). Many of the Combined Company's current and potential
competitors have longer operating histories, larger installed customer bases,
longer relationships with clients and significantly greater financial,
technical, marketing and public relations resources than the Combined Company
and could decide at any time to increase their resource commitments to the
Combined Company's target markets. In addition, the market for Intranet,
Extranet and Web site development is relatively new and subject to continuing
definition, and, as a result, may better position the Combined Company's
competitors to compete in this market as it matures. As a strategic response
to changes in the competitive environment, the Combined Company may from time
to time make certain pricing, service, technology or marketing decisions or
business or technology acquisitions that could have a material adverse effect
on the Combined Company's business, financial condition, results of operations
and prospects. Competition of the type described above could materially
adversely affect the Combined Company's business, results of operations,
financial condition and prospects.
In addition, the Combined Company's ability to maintain its existing client
relationships and generate new clients will depend to a significant degree on
the quality of its services and its reputation among its clients and potential
clients, compared with the quality of services provided by, and the
reputations of, the Combined Company's competitors. To the extent the Combined
Company loses clients to its competitors because of dissatisfaction with the
Combined Company's services or its reputation is adversely affected for any
other reason, the Combined Company's business, financial condition, results of
operations and prospects could be materially adversely affected.
There are relatively low barriers to entry into the Combined Company's
business. Because professional services firms such as USWeb and CKS Group rely
on the skill of their personnel and the quality of their client service, they
have no patented technology that would preclude or inhibit competitors from
entering their markets. The Combined Company is likely to face additional
competition from new entrants into the market in the future. There can be no
assurance that existing or future competitors will not develop or offer
services that provide significant performance, price, creative or other
advantages over those offered by the Combined Company, which could have a
material adverse effect on its business, financial condition, results of
operations and prospects. See "USWeb Corporation--USWeb Business--
Competition."
Reliance Upon Key Strategic Relationships. USWeb and CKS Group have
established a number of strategic relationships with leading hardware and
software companies, including Intel Corporation ("Intel"), Microsoft, SAP
America Inc. ("SAP"), Hewlett-Packard, Pandesic LLC ("Pandesic," the Internet
company from Intel and SAP), Sun Microsystems, Inc. ("Sun Microsystems"),
Reuters Ltd. ("Reuters") and NBC Multimedia, Inc., and with the Interpublic
Group of Companies, a leading advertising consortium. The loss of any one of
these strategic relationships would deprive the Combined Company of the
opportunity to gain early access to leading-edge technology, cooperatively
market products with the vendor, cross-sell additional services and gain
enhanced access to vendor training and support. Maintenance of the Combined
Company's strategic relationships is based primarily on an ongoing mutual
business opportunity and a good overall working relationship. The legal
contracts associated with these relationships, certain of which are terminable
at-will by the parties, would not be sufficient to force the strategic
relationship to continue effectively if that were otherwise not in the
strategic partner's best interests. In the event that any strategic
relationship is terminated, the Combined Company's business, financial
condition, results of operations and prospects may be materially adversely
affected. See "USWeb Corporation--USWeb Business--Strategy" and "--Strategic
Relationships."
Developing Internet Economy, Market for e-Commerce Solutions; Unproven
Acceptance of the Combined Company's Complete Media Solutions and Client
Outsourcing. A substantial portion of the Combined Company's revenues is
expected to be derived from services that depend upon the adoption of Internet
solutions by companies to improve their business positioning and processes,
and the continued development of the World Wide Web, the Internet and e-
Commerce. The Internet may not prove to be a viable commercial marketplace
because of inadequate development of the necessary infrastructure, lack of
development of complementary products, implementation of competing technology,
delays in the development or adoption of new standards and protocols required
to handle increased levels of Internet activity, governmental regulation, or
other reasons. The Internet has experienced, and is expected to continue to
experience, significant growth in the number of users and volume of traffic.
There can be no assurance that the Internet infrastructure will continue to be
able to support the demands placed on it by this continued growth. Moreover,
critical issues concerning the use of Internet and e-Commerce solutions
(including security, reliability, cost, ease of deployment and administration
and quality of service) remain unresolved and may affect the growth of the use
of such technologies to maintain, manage and operate a business, expand
product marketing, improve corporate communications and increase business
efficiencies. The adoption of Internet solutions for these purposes,
particularly by those individuals and enterprises that have historically
relied on traditional means, can be capital intensive and generally requires
the acceptance of a new way of conducting business and exchanging information.
If critical issues concerning the ability of Internet solutions to improve
business positioning and processes are not resolved or if the necessary
infrastructure is not developed, the Combined Company's business, financial
condition, results of operations and prospects will be materially adversely
affected.
Even if these issues are resolved, there can be no assurance that businesses
will elect to outsource the design, development and maintenance of their Web
sites to Internet professional services firms. Companies may decide to assign
the design, development and implementation of Internet solutions to their
internal information technology divisions, which have ready 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,
enterprises may choose to design, develop or maintain all or part of their
Intranets, Extranets or Web sites in-house. If the market for such services
does not continue to develop or develops more slowly than expected, or if the
Combined Company's services do not achieve market acceptance, its business,
results of operations, financial condition and prospects will be materially
adversely affected. See "USWeb Corporation--USWeb Business--Industry
Background" and "--Strategy."
Volatility of Stock Price. The trading prices of USWeb Common Stock and CKS
Group Common Stock have historically been subject to wide fluctuations, due to
a variety of factors including announcements regarding financial results,
acquisitions, and significant orders. Failure to achieve periodic revenue,
earnings and other operating and financial results as forecasted or anticipated
by brokerage firms or industry analysts could result in an immediate and
adverse effect on the market price of the Combined Company's common stock. The
Combined Company may not discover, or be able to confirm, revenue or earnings
shortfalls until the end of a quarter, which could result in a greater
immediate and adverse effect on the common stock of the Combined Company. In
addition, the stock market, which has recently been at or near historic highs,
has experienced extreme price and volume fluctuations that have particularly
affected the market prices of equity securities of many technology companies
and that often have been unrelated to the operating performance of such
companies. In the past, following periods of volatility in the market price of
a company's securities, securities class action litigation has often been
instituted against such a company. Such litigation could result in substantial
costs and a diversion of management's attention and resources, which would have
a material adverse effect on the Combined Company's business, financial
condition, results of operations and prospects.
Conflicts of Interest. Conflicts of interest are inherent in certain
segments of the marketing communications industry, particularly in
advertising. CKS Group has in the past, and the Combined Company likely will
in the future, be unable to pursue potential advertising and other
opportunities because such opportunities will require the Combined Company to
provide services to direct competitors of existing CKS Group or USWeb clients.
In addition, CKS Group and USWeb risk alienating or straining relationships
with existing clients each time CKS Group or USWeb agree to provide services
to even indirect competitors of existing CKS Group or USWeb clients. Conflicts
of interest may jeopardize the stability of revenues generated from existing
clients and preclude access to business prospects, either of which
developments could have a material adverse effect on the Combined Company's
business, financial condition, results of operations and prospects.
Rapid Technological Change. The market for Internet professional services
and marketing communications services is characterized by rapid technological
change, changes in user and client requirements and preferences, frequent new
product and service introductions embodying new processes and technologies and
evolving industry standards and practices that could render the Combined
Company's existing service practices and methodologies obsolete. The Combined
Company's success will depend, in part, on its ability to improve its existing
services, develop new services and solutions that address the increasingly
sophisticated and varied needs of its current and prospective clients, and
respond to technological advances, emerging industry standards and practices,
and competitive service offerings. Failure to do so could result in the loss
of existing customers or the inability to attract and retain new customers,
either of which developments could have a material adverse effect on the
Combined Company's business, financial condition, results of operations and
prospects. There can be no assurance that the Combined Company will be
successful in responding quickly, cost-effectively and sufficiently to these
developments. If the Combined Company is unable, for technical, financial or
other reasons, to adapt in a timely manner in response to changing market
conditions or client requirements, its business, financial condition, results
of operations and prospects would be materially adversely affected. See "USWeb
Corporation--USWeb Business--Strategy" and "--Clients."
Risks of Fixed-Price Engagements. CKS Group generates a significant portion
of its revenues through project fees on a fixed fee for service basis and
USWeb intends to increase the percentage of its engagements that are billed on
a fixed-price basis, as well as the percentage of revenues derived from fixed-
price engagements, as distinguished from USWeb's current principal method of
billing on a time and materials basis. Both USWeb and CKS Group assume greater
financial risk from fixed-price type contracts than on either time-and-
material or cost-reimbursable contracts. The failure to estimate accurately
the resources and time required for an engagement, to manage client
expectations effectively regarding the scope of services to be delivered for
the estimated fees or to complete fixed-price engagements within budget, on
time and to clients' satisfaction would expose the Combined Company to risks
associated with cost overruns and, in certain cases, penalties, any of which
could have a material adverse effect on the Combined Company's business,
results of operations and financial condition. See "USWeb Corporation--USWeb
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Intellectual Property Risks. Each of USWeb and CKS Group regard their
copyrights, trademarks, trade secrets (including their methodologies,
practices and tools) and other intellectual property rights as important to
the success of the Combined Company. To protect their rights in these various
intellectual properties, both USWeb and CKS Group have relied on a combination
of trademark and copyright law, trade secret protection and confidentiality
agreements and other contractual arrangements with their employees,
Affiliates, clients, strategic partners, acquisition targets and others to
protect its proprietary rights. USWeb and CKS Group have also registered
several of their trademarks in the U.S. and internationally. Effective
trademark, copyright and trade secret protection may not be available in every
country in which USWeb or CKS Group offer or intend to offer their services.
There can be no assurance that the steps taken by USWeb or CKS Group to
protect their proprietary rights will be adequate or that third parties will
not infringe or misappropriate USWeb's or CKS Group's proprietary rights, or
that USWeb or CKS Group will be able to detect unauthorized use and take
appropriate steps to enforce their rights. In addition, although USWeb and CKS
Group believe that their proprietary rights do not infringe on the
intellectual property rights of others, there can be no assurance that other
parties will not assert infringement claims against the Combined Company. Such
claims, even if not meritorious, could result in the expenditure of
significant financial and managerial resources. In addition, patents recently
issued to third parties regarding business processes, and the potential for
more such patents in the future, may limit the Combined Company's ability to
use processes covered by such patents or expose the Combined Company to claims
of patent infringement or otherwise require the Combined Company to seek to
obtain related licenses. There can be no assurance that such licenses would be
available on acceptable terms or at all. The failure to obtain such licenses
on acceptable terms could have a material adverse effect on the Combined
Company's business, financial condition, results of operations and prospects.
Potential Liability to Clients. Many of USWeb's and CKS Group's consulting
engagements involve the development, implementation and maintenance of
applications that are critical to the operations of their clients' businesses.
The Combined Company's failure or inability to meet a client's expectations in
the performance of its services could injure the Combined Company's business
reputation or result in a claim for substantial damages against the Combined
Company, regardless of its responsibility for such failure. In addition, USWeb
and CKS Group possess technologies and content that may include confidential
or proprietary client information. Although USWeb and CKS Group have
implemented policies to prevent such client information from being disclosed
to unauthorized parties or used inappropriately, any such unauthorized
disclosure or use could result in a claim for substantial damages. USWeb and
CKS Group have attempted to limit contractually their damages arising from
negligent acts, errors, mistakes or omissions in rendering professional
services; however there can be no assurance that any contractual protections
will be enforceable in all instances or would otherwise protect the Combined
Company from liability for damages. Although USWeb and CKS Group maintain
general liability insurance coverage, including coverage for errors and
omissions, there can be no assurance that such coverage will continue to be
available on reasonable terms or will be available in sufficient amounts to
cover one or more large claims, or that the insurer will not disclaim coverage
as to any future claim. The successful assertion of one or more large claims
against the Combined Company that are uninsured, exceed available insurance
coverage or result in changes to USWeb's or CKS Group's insurance policies,
including premium increases or the imposition of a large deductible or co-
insurance requirements, could adversely affect the Combined Company's
business, results of operations and financial condition.
Year 2000 Compliance. Many currently installed computer systems and software
products are coded to accept only two-digit entries in the date code field.
These date code fields will need to accept four digit entries to distinguish
21st century dates from 20th century dates. As a result, in the next 15
months, computer systems and software used by many companies, including
customers and potential customers of USWeb, may need to be upgraded to comply
with such "Year 2000" requirements. USWeb is in the process of conducting an
internal review of all systems and contacting all software suppliers to
determine major areas of exposure to Year 2000 issues. Although USWeb's core
financial and reporting systems have been identified as being Year 2000
compliant due to their recent implementation, a number of applications are not
yet Year 2000 compliant. USWeb is in the process of correcting areas of
exposure. CKS Group's core financial and reporting systems have also been
identified as being Year 2000 compliant, although a number of ancillary
applications may not yet be Year 2000 compliant. CKS Group is also conducting
an internal review of all systems and contacting software suppliers and is in
the process of correcting areas of exposure to Year 2000 issues. CKS Group has
not determined an estimate of the costs required to correct non-complying
features, if any, and such costs could have a material adverse effect on the
Combined Company's business, results of operations and financial condition.
Although USWeb and CKS Group believe that their internal systems are Year
2000 compliant, failure to provide Year 2000 compliant business solutions to
their customers could result in liability to the Combined Company or otherwise
have a material adverse effect on the Combined Company's business, results of
operations, financial condition and prospects. Furthermore, USWeb and CKS
Group believe that the purchasing patterns of customers and potential
customers may be affected by Year 2000 issues as companies expend significant
resources to correct or patch their current software systems for Year 2000
compliance. These expenditures may result in reduced funds available to
purchase products and services such as those offered by USWeb or CKS Group,
which could result in a material adverse effect on the Combined Company's
business, results of operations and financial condition. In the third-party
area, each of USWeb and CKS Group has begun contacting its major suppliers.
Most of these parties have stated that they intend to be Year 2000 compliant
by Year 2000. Any failure of these third parties systems to timely achieve
Year 2000 compliance could have a material adverse effect on the business,
financial condition, results of operations and prospects of the Combined
Company.
Future Capital Needs; Uncertainty of Additional Financing. USWeb and CKS
Group currently anticipate that their available cash resources and credit
facilities will be sufficient to meet the Combined Company's presently
anticipated working capital and capital expenditure requirements for at least
the next 12 months. However, the Combined Company may need to raise additional
funds 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.
The Combined Company's future liquidity and capital requirements will depend
upon numerous factors, including the success of the Combined Company's
existing and new service offerings and competing technological and market
developments. The Combined Company may be required to raise additional funds
through public or private financing, strategic relationships or other
arrangements, particularly as its acquisition strategy matures. There can be
no assurance that such additional funding, if needed, will be available on
terms acceptable to the Combined Company, or at all. Furthermore, any
additional equity financing may be dilutive to stockholders, and debt
financing, if available, may involve restrictive covenants, which may limit
the Combined Company's operating flexibility with respect to certain business
matters. Strategic arrangements, if necessary to raise additional funds, may
require the Combined Company to relinquish its rights to certain of its
intellectual property or selected business opportunities. If additional funds
are raised through the issuance of equity securities, the percentage ownership
of the stockholders of the Combined Company will be reduced, stockholders may
experience additional dilution in net book value per share, and such equity
securities may have rights, preferences or privileges senior to those of the
holders of the Combined Company's Common Stock. If adequate funds are not
available on acceptable terms, the Combined Company may be unable to develop
or enhance its services and products, take advantage of future opportunities
or respond to competitive pressures, any of which could have a material
adverse effect on the Combined Company's business, financial condition,
results of operations and prospects. See "USWeb Corporation--USWeb
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Government Regulation and Legal Uncertainties. USWeb and CKS Group are not
currently subject to direct government regulation, other than pursuant to
certain franchising regulations, the securities laws and the regulations
thereunder applicable to all publicly owned companies, and laws and
regulations applicable to businesses generally, and there are currently few
laws or regulations directly applicable to access to or commerce on the
Internet. However, due to the increasing popularity and use of the Internet,
it is likely that a number of laws and regulations may be adopted at the
local, state, national or international levels with respect to the Internet
covering issues such as user privacy, freedom of expression, pricing of
products and services, taxation, advertising, intellectual property rights,
information security or the convergence of traditional communications services
with Internet communications. For example, the Telecommunications Act of 1996
(the "Telecommunications Act") imposes criminal penalties on anyone who
distributes obscene or indecent communications over the Internet. Although the
anti-indecency provisions of the Telecommunications Act have been declared
unconstitutional by the federal courts, the increased attention focused upon
these liability issues as a result of the Telecommunications Act could
adversely affect the growth of the Internet and therefore demand for the
Combined Company's services. In addition, because of the growth in the
electronic commerce market, Congress has held hearings on whether to regulate
providers of services and transactions in the electronic commerce market, which
regulations could negatively affect client demand for Internet solutions that
facilitate electronic commerce. Moreover, the adoption of any such laws or
regulations may decrease the growth of the Internet, which could in turn
decrease the demand for the Combined Company's services or increase the cost of
doing business or in some other manner have a material adverse effect on the
Combined Company's business, financial condition, results of operations or
prospects. In addition, the applicability to the Internet of existing laws
governing issues such as property ownership, copyrights and other intellectual
property issues, taxation, libel and personal privacy is uncertain. The vast
majority of such laws were adopted prior to the advent of the Internet and
related technologies and, as a result, do not contemplate or address the unique
issues of the Internet and related technologies. Changes to such laws intended
to address these issues, including some recently proposed changes, could create
uncertainty in the marketplace which could reduce demand for the Combined
Company's services or increase the cost of doing business as a result of costs
of litigation or increased service delivery costs, or could in some other
manner have a material adverse effect on the Combined Company's business,
financial condition, results of operations and prospects.
Dependence on Key Accounts. CKS Group's five largest clients accounted for
39% and 37% of CKS Group's revenues for the fiscal years ended November 30,
1996 and November 30, 1997, respectively, with fluctuations in the amount of
revenue contribution from each such client from quarter to quarter. Audi of
America, Inc. and Computer Associates International, Inc., CKS Group's two
largest clients during the fiscal year ended November 30, 1997, accounted for
approximately 15% and 7% of CKS Group's revenues, respectively, during the
period. Since many of CKS Group's clients generally retain CKS Group on a
project by project basis, a client from whom CKS Group generates substantial
revenue in one period may not be a substantial source of revenue in a
subsequent period. For example, of the five largest clients (in terms of fees
paid to CKS Group) during the fiscal year ended November 30, 1997, only two
were in the top five for the fiscal year ended November 30, 1996. To the
extent that any of CKS Group's major clients does not remain a significant
source of revenues, there could be a direct and immediate material adverse
effect on the Combined Company's business, financial condition, results of
operations and prospects. For instance, one of CKS Group's major clients,
Barnett Bank, was acquired during the fourth quarter of 1997 and, as a result,
substantially reduced its level of spending with CKS Group. This reduction in
spending contributed to a significant decline in CKS Group's earnings during
that quarter. Historically, CKS Group's typical project has lasted only four
to six weeks, and once a project is completed there can be no assurance that a
client will engage CKS Group for further services. In addition, CKS Group's
clients may unilaterally reduce their use of CKS Group's services or terminate
existing projects without penalty. The termination of CKS Group's business
relationship with any of its significant clients or a material reduction in
the use of CKS Group's services by a significant client may have a material
adverse effect on the Combined Company's business, financial condition and
operating results.
Risks of Franchising. USWeb has entered into franchise agreements with
certain franchisees (each an "Affiliate"), which manage a number of its
consulting offices. While these agreements permit USWeb to terminate the
franchise relationship if an Affiliate continues to underperform relative to
other Affiliates, such an Affiliate must be given at least 12 months to
improve its performance. Consequently, a significantly underperforming
Affiliate could adversely affect USWeb's, and correspondingly the Combined
Company's, reputation. In addition, a terminated Affiliate may refuse to
comply with the terms of the franchise agreement relating to relinquishment of
the USWeb brand and other USWeb intellectual property or initiate litigation
against the Combined Company. The operational autonomy granted to each
Affiliate through the franchise structure, together with the absence of
certain territorial restrictions on its activities, may inhibit the
Combined Company's control over its market presence or enable the Affiliate to
compete with company-owned offices for client engagements. Further, despite
implementation of contractual safeguards and insurance against such a
possibility, the Combined Company may be held by a court to be responsible for
some action or liability of an Affiliate. Varying rights and protections under
different state laws, lack of control of Affiliate actions, or findings of
vicarious liability for Affiliate actions could have a material adverse effect
on the Combined Company's business, operating results and financial condition.
USWeb has been named as a defendant in a lawsuit filed in the Superior Court
of California for the County of Los Angeles on June 10, 1998, by Larmark Inc.
alleging, among other claims, breach of contract against USWeb's former
affiliate "SystemLogic" in Santa Monica, California, and apparent agency of
USWeb. USWeb believes the claims are without substantial merit and intends to
defend itself vigorously against the claims made. In addition, if a
significant portion of the Affiliates chose not to work cooperatively, or if
any significant Affiliate or group of Affiliates were to leave the USWeb
network, the network would be correspondingly weaker. Furthermore, although
for a period of two years after the end of the Affiliate relationship, the
Affiliate and key persons associated with the Affiliate are prohibited from
certain activities in competition with the Combined Company and from
soliciting the Combined Company employees for alternate employment,
enforceability of these restrictions will vary depending on applicable state
law. To the extent that the action or inaction of any Affiliate proves
deleterious to the reputation associated with the USWeb or the Combined
Company brand, the Combined Company's business, results of operations and
financial condition could be materially adversely affected.
Effect of Certain Provisions; Anti-Takeover Effects of Certificate of
Incorporation, Bylaws and Delaware Law. The board of directors of the Combined
Company (the "Combined Company Board") will have the authority to issue up to
1,000,000 shares of Preferred Stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by its stockholders. The rights of
the holders of the common stock of the Combined Company will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult
for a third party to acquire a majority of the outstanding voting stock.
Further, certain provisions of Delaware law and the Combined Company's
Certificate of Incorporation and Bylaws could delay or impede a merger, tender
offer or proxy contest involving the Combined Company. While such provisions
are intended to enable the Combined Company Board to maximize stockholder
value, they may have the effect of discouraging takeovers which could be in
the best interest of certain stockholders. There is no assurance that such
provisions will not have an adverse effect on the market value of the common
stock of the Combined Company. See "Comparison of Capital Stock."
Concentration of Stock Ownership. The present directors, executive officers
and their respective affiliates beneficially own a substantial portion,
although less than a majority, of the outstanding Common Stock of the Combined
Company. As a result, these stockholders will be able to exercise significant
influence over all matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions. Such
concentration of ownership may also have the effect of delaying or preventing
a change in control of the Combined Company. See "Principal Stockholders" and
"Description of Capital Stock," "--Effect of Certain Provisions; Antitakeover
Effects of Certificate of Incorporation, Bylaws and Delaware Law."
Susceptibility to General Economic Conditions. CKS Group's and USWeb's
revenues and results of operations are subject to fluctuations based upon
general economic conditions. If there were to be a general economic downturn
or a recession in the United States, then the Combined Company expects that
business enterprises, including its clients and potential clients, likely will
substantially and immediately reduce their budgets. Because certain of CKS
Group's and USWeb's largest clients have substantial overseas operations,
their budgets may also be adversely affected by economic conditions in
overseas markets, including the recent volatility in Asian and Russian
economies and Asian and Russian currency and securities markets. In the event
of such an economic downturn, the Combined Company's business, financial
condition, results of operations and prospects would not be materially and
adversely affected.
