<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): January 28, 2000
----------------
Whittman-Hart, Inc.
--------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Delaware 0-28166 36-3797833
- ---------------------------- ------------ ------------------
(State or Other Jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
311 South Wacker Drive, Suite 3500, Chicago, Illinois 60606-6618
- ----------------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (312) 922-9200
--------------
<PAGE>
ITEM 5. OTHER EVENTS.
On December 12, 1999, Whittman-Hart entered into an Agreement and Plan of
Merger by and among Whittman-Hart, UniWhale, Inc., a wholly owned subsidiary
of Whittman-Hart, and USWeb Corporation, pursuant to which UniWhale, Inc.
will merge with and into USWeb Corporation and USWeb Corporation will become
a wholly owned subsidiary of Whittman-Hart. The financial statements of USWeb
Corporation are attached hereto as Exhibit 99.1 and are incorporated herein
by reference.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA
FINANCIAL INFORMATION AND EXHIBITS.
(c) Exhibits
99.1 Audited consolidated financial statements of USWeb
Corporation as of December 31, 1997 and 1998 and for
each of the three years in the period ended December 31,
1998 and unaudited condensed consolidated financial
statements of USWeb Corporation as of September 30,
1999 and for the nine-month periods ended September 30,
1998 and 1999.
2
<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 hereunto duly authorized.
WHITTMAN-HART, INC.
Dated: January 28, 2000 By: /s/ Bert Young
-------------------------------
Bert Young
Chief Financial Officer
3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<S> <C>
99.1 Audited consolidated financial statements of USWeb
Corporation as of December 31, 1997 and 1998 and for each of
the three years in the period ended December 31, 1998 and
unaudited condensed consolidated financial statements of USWeb
Corporation as of September 30, 1999 and for the nine-month
periods ended September 30, 1998 and 1999.
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of USWeb Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
USWeb Corporation and its subsidiaries at December 31, 1997 and 1998, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
January 25, 1999
<PAGE>
USWEB CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------- -------------
1997 1998 1999
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 62,368 $ 64,956 $ 82,311
Short-term investments...................................................... 24,029 36,230 34,325
Accounts receivable, net.................................................... 62,546 89,038 219,691
Other current assets........................................................ 2,606 9,946 20,644
Deferred income taxes....................................................... 1,400 637 637
-------- -------- --------
Total current assets................................................... 152,949 200,807 357,608
Property and equipment, net...................................................... 12,051 18,880 42,140
Marketable equity securities..................................................... -- -- 37,708
Intangible assets, net........................................................... 49,247 168,335 367,042
Deferred income taxes and other assets........................................... 11,464 15,152 19,887
-------- -------- --------
$225,711 $403,174 $824,385
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................ $ 41,084 $ 38,251 $ 61,164
Accrued expenses............................................................ 17,734 52,908 123,776
Deferred revenue............................................................ 2,887 4,210 40,800
Income taxes payable........................................................ -- 3,111 4,210
Borrowings and lease obligations, current................................... 1,564 3,445 16,301
-------- -------- --------
Total current liabilities.............................................. 63,269 101,925 246,251
Lease obligations, non-current................................................... 1,111 1,377 2,633
-------- -------- --------
64,380 103,302 248,884
-------- -------- --------
Commitments and contingencies (Note 9)
Stockholders' equity
Preferred Stock: $0.001 par value; 1,000,000 shares authorized;
no shares issued and..................................................... -- -- --
Common Stock: $0.001 par value;200,000,000 shares
authorized; 56,108,585, 70,070,678 and 85,803,197
(unaudited) shares issued and outstanding at December 31,
1997 and 1998 and September 30, 1999..................................... 51 66 82
Additional paid-in capital.................................................. 218,702 546,976 902,435
Accumulated other comprehensive income...................................... -- -- 38,411
Accumulated deficit......................................................... (57,422) (247,170) (365,427)
-------- -------- --------
Total stockholders' equity............................................. 161,331 299,872 575,501
-------- -------- --------
$225,711 $403,174 $824,385
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
USWEB CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- -------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.................................................... $ 66,389 $114,302 $ 228,600 $ 155,952 324,012
-------- -------- --------- --------- ---------
Cost of net revenues:
Services............................................... 41,323 74,695 146,251 100,353 199,557
Provision for loss on contract......................... -- -- 9,994 2,094 4,071
Stock compensation..................................... -- 2,420 13,037 9,415 13,934
-------- -------- --------- --------- ---------
Total cost of net revenues........................ 41,323 77,115 169,282 111,862 217,562
-------- -------- --------- --------- ---------
Gross profit 25,066 37,187 59,318 44,090 106,450
-------- -------- --------- --------- ---------
Operating expenses:
Marketing, sales and support........................... 14,963 23,374 27,761 19,600 29,843
General and administrative............................. 12,633 27,739 44,694 31,223 56,047
Acquired in-process technology......................... -- 9,472 25,508 25,508 2,212
Stock compensation..................................... -- 6,698 31,760 23,962 27,983
Amortization of intangible assets...................... 74 12,963 74,538 45,776 103,793
CKS merger and integration costs -- -- 28,822 -- 5,316
Impairment of goodwill -- -- 11,079 -- --
-------- -------- --------- --------- ---------
Total operating expenses.......................... 27,670 80,246 244,162 146,069 225,194
-------- -------- --------- --------- ---------
Loss from operations........................................ (2,604) (43,059) (184,844) (101,979) (118,744)
Interest income, net........................................ 2,271 1,706 4,302 3,057 2,732
Impairment of investee carried at cost...................... -- (4,000) -- -- --
-------- -------- --------- --------- ---------
Net loss before income taxes................................ (333) (45,353) (180,542) (98,922) (116,012)
Provision for income taxes.................................. 3,026 5,317 7,739 5,210 2,245
-------- -------- --------- --------- ---------
Net loss.................................................... $ (3,359) $(50,670) $(188,281) $(104,132) $(118,257)
======== ======== ========= ========= =========
Net loss per share:
Basic and diluted...................................... $ (0.15) $ (1.73) $ (3.07) $ (1.81) $ (1.56)
======== ======== ========= ========= =========
Weighted average shares:
Basic and diluted...................................... 21,803 29,262 61,329 57,531 75,806
======== ======== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
USWEB CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL OTHER EARNINGS/ TOTAL
PAID-IN COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
COMMON STOCK CAPITAL INCOME DEFICIT EQUITY
------------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995................ 16,981,500 $ 17 $ 2,809 $ 3,524 $ 6,350
Issuance of Common Stock warrants........... -- -- 269 -- 269
Tax benefit from disqualifying dispositions. -- -- 926 -- 926
Distributions to stockholders............... -- -- (499) (4,481) (4,980)
Issuance of Common Stock, net............... 10,462,000 6 48,449 -- 48,455
Collection of note receivable............... -- -- 600 -- 600
Exercise of stock options................... 281,000 -- 30 -- 30
Stock compensation expense.................. -- -- 146 -- 146
Net loss.................................... -- -- -- (3,359) (3,359)
---------- ------ -------- --------- --------
Balance at December 31, 1996................ 27,724,500 23 52,730 (4,316) 48,437
Tax benefit from disqualifying dispositions. -- -- 3,343 -- 3,343
Distributions to stockholders............... -- -- -- (2,172) (2,172)
Deferred issuance of common stock related to
business acquisitions..................... -- -- 5,582 -- 5,582
Deferred tax asset recorded in connection with
taxable pooling of interests.............. -- -- 9,346 -- 9,346
Repurchase of Common Stock and
cancellation of note receivable from
stockholder............................... (9,000) -- -- --
Change in subsidiaries' fiscal year-ends.... -- -- -- (264) (264)
Exercise of stock options................... 103,079 -- 500 -- 500
Common Stock issued for acquired
businesses................................ 8,201,683 8 46,122 -- 46,130
Issuance of Common Stock, net............... 7,993,964 8 56,410 -- 56,418
Conversion of Mandatorily Redeemable
Preferred Stock........................... 12,094,359 12 32,478 32,490
Issuance of Affiliate warrants.............. -- -- 150 -- 150
Collection of note receivable............... -- -- 1,400 -- 1,400
Stock compensation expense.................. -- -- 10,641 -- 10,641
Net loss.................................... -- -- -- (50,670) (50,670)
---------- ------ -------- --------- --------
Balance at December 31, 1997................ 56,108,585 51 218,702 (57,422) 161,331
Tax benefit from disqualifying dispositions.
-- -- 815 -- 815
Common Stock issued for acquired
businesses............................ 8,431,898 8 208,872 208,880
Issuance of Common Stock, net .............. 2,302,604 3 35,881 35,884
Change in subsidiaries fiscal year-end...... (1,467) (1,467)
Exercise of stock options and warrants...... 3,227,591 4 16,920 16,924
Issuance of warrants ....................... 27,112 27,112
Stock compensation expense ................. 38,674 38,674
Net loss.................................... -- -- -- (188,281) (188,281)
---------- ------ -------- --------- --------
Balance at December 31, 1998................ 70,070,678 66 546,976 (247,170) 299,872
Common Stock issued for acquired
businesses (unaudited)................. 9,997,977 10 223,095 -- 223,105
Issuance of Common Stock, net (unaudited)... 445,608 1 5,745 5,746
Exercise of stock options and warrants
(unaudited)............................ 5,288,934 5 42,733 42,738
Issuance of warrants (unaudited)............ 41,969 41,969
Stock compensation expense (unaudited)...... -- -- 41,917 -- 41,917
Comprehensive Income (unaudited)............ -- -- $ 38,411 -- 38,411
Net loss (unaudited)........................ -- -- -- (118,257) (118,257)
---------- ------ -------- -------- --------- --------
Balance at September 30, 1999 (unaudited)... 85,803,197 $ 82 $902,435 $ 38,411 $(365,427) $575,501
---------- ------ -------- -------- --------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
USWEB CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
----------------------- -----------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................... $ (3,359) $(50,670) $(188,281) $(104,132) $(118,257)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization...................... 1,444 14,271 81,487 50,691 111,533
Provision for doubtful accounts.................... -- 819 1,280 1,391 3,960
Provision for loss on contract..................... -- -- 9,994 2,094 4,071
Stock, option and warrant costs and expenses....... 315 11,891 52,252 33,524 41,917
Acquired in-process technology..................... -- 9,472 25,508 25,508 2,212
Impairment of goodwill............................. -- -- 11,079 -- --
Impairment of investee carried at cost............. -- 4,000 -- -- --
Deferred income taxes.............................. (1,097) (856) 470 3,332 --
Tax benefit from disqualifying dispositions........ 926 3,343 815 110 --
Changes in assets and liabilities:
Accounts receivable............................. (9,932) (23,506) (11,140) (16,759) (90,166)
Other assets.................................... (739) (1,254) (7,152) (5,680) (8,999)
Accounts payable................................ 13,101 13,010 (5,498) (3,282) 10,657
Accrued expenses................................ 6,249 (335) 12,794 (7,340) (8,767)
Deferred revenue................................ 246 517 574 866 35,353
Income taxes payable............................ (1,253) (847) 3,980 1,218 (1,061)
-------- -------- --------- --------- ---------
Net cash provided by (used in)
operating activities.......................... 5,901 (20,145) (11,838) (18,459) (17,547)
-------- -------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment................... (3,070) (5,103) (9,661) (6,575) (22,279)
Cash received (used in) acquisitions.................... 55 (12,611) (11,074) (5,526) (12,572)
Purchase of investment in affiliate..................... (2,850) (1,150) -- -- --
Purchase of short-term investments...................... (39,710) (21,175) (95,714) (88,644) (55,763)
Proceeds from sales of short-term investments........... 1,750 34,934 84,026 65,509 59,827
-------- -------- --------- --------- ---------
Net cash used in investing activities............ (43,825) (5,105) (32,423) (35,236) (30,787)
-------- -------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common and
Preferred Stock, net.................................. 59,276 71,957 52,670 44,591 48,464
Distributions to stockholders........................... (4,635) (2,398) -- -- --
Proceeds from bank borrowings and notes payable......... 500 2,000 -- -- 2,241
Repayment of bank borrowings............................ (382) (3,414) (1,349) (577) --
Proceeds from collection of notes receivable............ 563 1,400 -- -- --
Proceeds from issuance of warrants, net................. -- -- -- -- 15,000
Proceeds from capital lease financing................... 599 431 2,570 2,570 841
Principal payments on capital lease..................... (209) (704) (2,002) (1,630) (1,766)
-------- -------- --------- --------- ---------
Net cash provided by financing activities........ 55,712 69,272 51,889 44,954 64,780
-------- -------- --------- --------- ---------
Effect of the foreign exchange rate changes -- -- -- -- 909
Increase (decrease) in cash and cash equivalents........... 17,788 44,022 7,628 (8,741) 17,355
Change in subsidiary fiscal years.......................... -- (4,259) (5,040) -- --
Cash and cash equivalents, beginning of period............. 4,817 22,605 62,368 62,368 64,956
-------- -------- --------- --------- ---------
Cash and cash equivalents, end of period................... $ 22,605 $ 62,368 $ 64,956 $ 53,627 $ 82,311
======== ======== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS
USWeb Corporation (doing business as USWeb/CKS) and its subsidiaries
("USWeb/CKS" or the "Company") is a leading Internet professional services
firm that offers a comprehensive range of services to deliver Internet
solutions designed to improve clients' business processes. USWeb/CKS has
built a network of consulting offices and what it believes to be one of the
most recognized brands for Internet professional services. The Company
provides Internet professional services including strategy consulting,
analysis and design, technology development, systems implementation and
integration, audience development and maintenance. The Company also provides
consulting services in the areas of strategic corporate and product
positioning, corporate identity and product branding, new media,
environmental design, packaging, collateral systems, advertising, direct
marketing, consumer and trade promotions and media placement services.
On December 17, 1998, USWeb Corporation ("USWeb") issued 23,428,341
shares of its common stock for all of the outstanding common stock of CKS
Group, Inc. ("CKS Group") based on a conversion ratio of 1.5 shares of the
Company's Common Stock for each share of CKS Group's common stock. The
transaction has been accounted for as a pooling of interests and,
accordingly, the Company's consolidated financial statements have been
restated for all periods prior to the merger to include the results of
operations, financial position and cash flows of both USWeb and CKS Group.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. The
accompanying consolidated financial statements have been presented to reflect
the acquisitions accounted for as poolings of interests for all periods
presented. See Note 2. Investments in business entities in which the Company
has an equity interest of less than 20% and does not have the ability to
exercise significant influence are accounted for using the cost method. At
each balance sheet date, the Company assesses the fair market value of its
cost-based investments and recognizes any identified impairment.
UNAUDITED INTERIM RESULTS
The accompanying interim consolidated financial statements for the
nine-month periods ended September 30, 1998 and 1999, together with the
related notes, are unaudited. The unaudited interim consolidated financial
statements have been prepared on the same basis as the consolidated financial
statements for 1996, 1997 and 1998 and, in the opinion of management, reflect
all adjustments, which include only normal recurring adjustments, necessary
to present fairly the Company's financial position at September 30, 1999 and
its results of operations and its cash flows for the nine-month periods ended
September 31, 1998 and 1999.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company invests its excess cash in debt instruments of the U.S.
Government, its agencies, and in high-quality corporate and municipality
issues. The Company considers all highly liquid investments with a remaining
contractual maturity, at the date of their acquisition, of three months or
less to be cash equivalents. All short-term investments are classified as
available-for-sale and are carried at fair value. Any unrealized gains or
losses are reported as a separate component of stockholders' equity when
significant.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the related
assets, generally two to seven years. Equipment under capital leases and
leasehold improvements are amortized on a straight-line basis over the
shorter of the estimated useful lives of the related assets or the remaining
lease terms.
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
INTANGIBLE ASSETS
Goodwill resulting from the Company's acquisitions of Internet
professional services firms is estimated by management to be primarily
associated with the workforce acquired and technological know how.
Accordingly, a significant portion of the purchase price of each acquisition
is considered to relate to workforce in place. As a result of the rapid
technological changes occurring in the Internet industry and the intense
competition for qualified Internet professionals, goodwill recorded in
connection with the Company's acquisitions of Internet professional services
firms is amortized on a straight-line basis over the estimated periods of
benefit, which range from twelve to forty-two months. Goodwill recorded in
connection with the Company's acquisitions of advertising firms is amortized
on a straight-line basis over twenty years. For certain acquisitions where
the Company expects to issue additional shares at the end of the twelve-month
purchase price adjustment periods, amortization rates have been increased to
reflect amortization of the total expected consideration based upon the
estimated fair value of the incremental shares at the end of the purchase
price adjustment periods.
At each balance sheet date, the Company assesses the value of recorded
goodwill for possible impairment based upon a number of factors, including
turnover of the acquired workforce and the undiscounted value of expected
future operating cash flows in relation to its net investment in each
subsidiary. In December 1998, the Company determined that an impairment
provision totaling $11,079 was necessary in connection with its acquisition
of an advertising firm and recognized this amount as a charge to operating
expenses in the year ended December 31, 1998. See Note 2.
Completed technologies obtained through acquisition or merger are
capitalized and amortized on a straight-line basis over an estimated benefit
period of six to twelve months. Costs of in-process technology acquired prior
to the achievement of technological feasibility determined using the working
model approach, and any costs associated with internally developed
proprietary technologies prior to the achievement of technological
feasibility, determined using the working model approach, are expensed in the
period incurred.
REVENUE RECOGNITION
The Company derives its revenues primarily from consulting service
agreements (including retainer fees, fixed-price and time-and-materials
agreements) and advertising commissions. Revenues are recognized over the
period of each engagement using primarily the percentage-of-completion method
using labor hours incurred as the measure of progress towards completion.
Provisions for contract adjustments and losses are recorded in the period
such items are identified. Deferred revenue represents amounts billed in
advance of services being performed. Commissions earned from advertising
placed with media are generally recorded as revenue at the time the
advertising appears or is broadcast. Commissions earned for production
expenditures and fees derived from other services are recognized as revenue
upon performance of the service.
ADVERTISING COSTS
Advertising costs are expensed as incurred in accordance with Statement
of Position ("SOP") 93-7, "Reporting on Advertising Costs." Advertising costs
for the years ended December 31, 1996, 1997 and 1998 totaled $3,223, $4,060
and $1,562 respectively.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements
in accordance with provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation." Under APB No. 25,
compensation cost is recognized based on the difference, if any, on the date
of grant between the fair value of the Company's stock and the amount an
employee must pay to acquire the stock.
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The Company also complies with the provisions of Emerging Issues Task Force
Issue No. 96-18 ("EITF 96-18") with respect to stock options granted to
non-employees who are consultants to the Company. EITF 96-18 requires
variable plan accounting with respect to such non-employee stock options,
whereby compensation associated with such options is measured on the date
such options vest, and incorporates the current fair market value of the
Company's Common Stock into the option valuation model.
INCOME TAXES
Income taxes are accounted for using an asset and liability approach
which requires the recognition of taxes payable or refundable for the current
year and deferred tax liabilities and assets for the future tax consequences
of events that have been recognized in the Company's financial statements or
tax returns. The measurement of current and deferred tax liabilities and
assets are based on provisions of the enacted tax law; the effects of future
changes in tax laws or rates are not anticipated. The measurement of deferred
tax assets is reduced, if necessary, by the amount of any tax benefits that,
based on available evidence, are not expected to be realized.
NET LOSS PER SHARE
The Company computes net loss per share in accordance with the
provisions of SFAS No. 128, "Earnings Per Share" and SEC Staff Accounting
Bulletin No. 98 ("SAB 98"). Under SFAS No. 128 and SAB No. 98, basic net loss
per share is computed by dividing the net loss for the period by the weighted
average number of common shares outstanding during the period. The weighted
average shares used to compute basic net loss per share include outstanding
shares of Common Stock from the date of issuance and shares vested under
stock bonus arrangements computed for each period by dividing cumulative
amortization of deferred compensation expense by the weighted average price
of the Company's Common Stock during the period. The computation excludes (i)
for the year ended December 31, 1997 and 1998, 2,051,000 and 3,682,000
respectively, equivalent acquisition-related shares held in escrow
("Acquisition Shares"), (ii) for the years ended December 31, 1996, 1997 and
1998, 4,286,000, 2,830,000 and 1,518,000, respectively, of equivalent shares
of Common Stock subject to repurchase rights ("Restricted Shares") and (iii)
for the years ended December 31, 1996 and 1997, 5,375,000 and 10,278,000,
respectively, of equivalent shares of Mandatorily Redeemable Convertible
Preferred Stock ("Preferred Stock") prior to their conversion into Common
Stock on December 5, 1997. In addition, the calculation of diluted net loss
per share excludes Common Stock issuable upon exercise of employee stock
options and upon exercise of outstanding warrants, as their effect in all
periods presented is antidilutive.
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The Company's financial instruments consist of cash and cash
equivalents, short-term investments, accounts receivable, accounts payable
and accrued expenses. At December 31, 1997 and 1998 the fair value of these
instruments approximated their carrying values.
The Company's customer base is geographically dispersed and highly
diversified. The Company performs ongoing credit evaluations of its
customers' financial condition and generally requires no collateral to secure
accounts receivable. Although an allowance for doubtful accounts is
maintained, the Company has not experienced any significant credit losses to
date.
The Company is subject to concentrations of credit risk and interest
rate risk related to its short-term investments. The Company's credit risk is
managed by limiting the amount of investments placed with any one issuer,
investing primarily in debt instruments of the US Government and its
agencies, municipal bonds and high quality corporate issues generally with
maturities of one year or less.
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
SEGMENT INFORMATION
Effective January 1, 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS
131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise." SFAS 131 established standards for the way public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports. SFAS 131 also
establishes standards for related disclosures about products and services,
geographic areas, and major customers.
The Company has organized its business in a single operating segment,
providing professional services that help its clients define strategies and
ways to build their businesses by combining the expertise of strategy,
Internet technology and marketing communications. Further, the Company
derives the vast majority of its revenue from its operations in the United
States.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," which will be
effective for the Company's fiscal year 2000. This statement establishes
accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments imbedded in other
contracts, be recorded in the balance sheet as either an asset or liability
measured at its fair value. The statement also requires that changes in the
derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued SOP 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 requires that entities
capitalize certain costs related to internal-use software once certain
criteria have been met. The Company is required to implement SOP 98-1 for the
year ending December 31, 1999. Adoption of SOP-98-1 is expected to have no
material impact on the Company's financial condition or results of operations.
In April, 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." SOP 98-5, which is effective for fiscal years beginning
after December 15, 1998, provides guidance on the financial reporting of
start-up costs and organization costs. SOP 98-5 requires costs of start-up
activities and organization costs to be expensed as incurred. As USWeb/CKS
has expensed these costs historically, the adoption of this standard is not
expected to have a significant impact on the Company's results of operations,
financial position or cash flows.
NOTE 2--ACQUISITIONS
During the period from August 1, 1996, to December 31, 1998, the Company
completed the acquisitions of thirty-eight Internet professional services
firms and advertising firms in various transactions accounted for as purchase
business
<PAGE>
combinations. Collectively, the companies acquired through December 31, 1998
accounted for as purchase business combinations are referred to herein as the
"Acquired Entities." The aggregate purchase price of the Acquired Entities
was approximately $310,100.
The acquisition prices of the Acquired Entities were allocated, on an
entity-by-entity basis, to the assets acquired, including tangible and
intangible assets and liabilities assumed based upon the fair values of such
assets and liabilities on the
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
dates of the acquisitions. Approximately $10,300 of the aggregate purchase
price was allocated to identified net tangible assets consisting primarily of
cash, accounts receivable, property and equipment, and accounts payable. The
historical carrying amounts of such assets approximated their fair values on
the dates of acquisition. Approximately $35,000 of the aggregate purchase
price was allocated to in-process technology. Because such in-process
technology had not reached the stage of technological feasibility at the
acquisition dates and had no alternative future use, these amounts were
immediately charged to operations. Approximately $13,100 of the aggregate
purchase price was allocated to existing technology and is being amortized
over its estimated useful life of six months to one year. Approximately
$251,700 of the aggregate purchase price was allocated to goodwill, primarily
workforce in place, and is being amortized over its estimated useful life of
twelve to forty-two months with respect to the Internet professional services
firms, and twenty years with respect to the advertising firms.
Prior to the combination of USWeb and CKS Group, CKS Group's fiscal year
ended on November 30. In recording the business combination, CKS Group's
consolidated financial statements as of and for each of the two years in the
period ended November 30, 1997 have been combined with USWeb's consolidated
financial statements as of and for each of the two years in the period ended
December 31, 1997. In 1998, CKS Group changed its fiscal year-end to December
31 to conform to USWeb's year-end. As a result, an adjustment has been made
to stockholders' equity as of December 31, 1998, to eliminate the effect of
including CKS Group's unaudited results of operations for the month ended
September 30, 1998 in the year ended December 31, 1998. CKS Group's unaudited
results of operations for the month ended September 30, 1998, included
revenues of $7,893 and a net loss of $1,467.
In December 1998, in connection with the renewal of an employment
arrangement with a key employee of one of the Company's Acquired Entities,
the Company estimated that the future undiscounted net cash flows from this
Acquired Entity would be significantly less than in prior periods. Based upon
the provisions of this employment arrangement and the expected net discounted
cash flows, an impairment charge totaling $11,079 was recorded in operating
expenses in the year ended December 31, 1998.
Between January 31, 1997 and June 17, 1997, CKS Group acquired two
entities in the advertising industry under separate transactions that were
accounted for as poolings of interests (the "CKS Group Acquisitions"). The
aggregate consideration for these transactions was 1,623,599 shares of CKS
Group Common Stock. The following unaudited pro forma consolidated amounts
give effect to the acquisitions of the Acquired Entities as if they occurred
on January 1, 1996 and on January 1, 1997 (or date of inception, if later).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998
---- ----
<S> <C> <C>
Revenues........................................................... $ 172,397 $ 256,640
Net loss .......................................................... $ (225,426) $ (177,869)
.
Pro forma net loss per share:
Basic and diluted.............................................. $ (5.21) $ (2.66)
Weighted average shares:
Basic and diluted.............................................. 43,241,000 66,959,000
</TABLE>
<PAGE>
The following table sets forth revenues and net income (loss) for acquired
entities that were accounted for as poolings of interests and previously
reported separately:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Revenues:
USWeb/CKS...................................................... $ -- $ -- $ 72,648
USWeb.......................................................... 1,820 19,278 73,086
CKS............................................................ 56,951 95,024 82,866
CKS acquired entities.......................................... 7,618 -- --
$ 66,389 $ 114,302 $ 228,600
Net income (loss):
USWeb/CKS...................................................... $ -- $ -- $ (84,149)
USWeb.......................................................... (13,808) (58,336) (111,532)
CKS............................................................ 5,679 7,666 7,400
CKS acquired entities.......................................... 4,770 -- --
$ (3,359) $ (50,670) $ (188,281)
</TABLE>
NOTE 3--SUPPLEMENTAL CASH FLOW INFORMATON:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------- -------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Supplemental disclosures:
Cash paid for interest......................................... $ 121 $ 263 $ 425 $ 50 $ 487
Income taxes................................................... 4,488 1,386 979 128 1,279
Non-cash financing and investing activities:
Common Stock issued for note receivable........................ 2,000 -- -- -- --
Notes payable converted into Common Stock...................... 957 -- -- -- --
Equipment acquired through capital lease....................... 288 578 -- -- --
Common Stock issued for acquisitions........................... 4,997 46,293 208,872 176,998 220,331
Assumptions of liabilities in acquisition...................... 2,146 5,284 4,976 --
Deferred tax asset recorded in connection with taxable
pooling of interests transactions........................... -- 9,346 -- -- --
</TABLE>
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 4--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30
------------ ------------
1997 1998 1999
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Accounts receivable, net:
Accounts receivable............................................... $ 58,363 $ 68,817 $ 161,113
Media receivable.................................................. -- 9,929 23,131
Unbilled revenues................................................. 6,444 15,533 47,388
Less: Allowance for doubtful accounts............................. (2,261) (5,241) (11,941)
--------- --------- ---------
$ 62,546 $ 89,038 $ 219,691
========= ========= =========
Property and equipment, net:
Computer equipment................................................ $ 13,072 $ 25,445 $ 40,956
Furniture and fixtures............................................ 3,536 3,483 8,757
Leasehold improvements............................................ 2,991 3,491 13,762
--------- --------- ---------
19,599 32,419 63,475
Less: Accumulated depreciation and amortization................... (7,548) (13,539) (21,335)
--------- --------- ---------
$ 12,051 $ 18,880 $ 42,140
========= ========= =========
Intangible assets, net:
Goodwill, primarily workforce in place............................ $ 56,572 $ 239,768 $ 528,865
Customer lists.................................................... -- -- 9,000
Purchased technology.............................................. 3,610 13,058 17,459
--------- --------- ---------
60,182 252,826 555,324
Less: Accumulated amortization.................................... (10,935) (84,491) (188,282)
--------- --------- ---------
$ 49,247 $ 168,335 $ 367,042
========= ========= =========
Accrued expenses:
Compensation and benefits......................................... $ 5,128 $ 14,331 $ 50,028
Accrued financing costs........................................... 1,450 -- --
Marketing costs................................................... 1,260 3,458 2,608
Professional fees................................................. 1,012 3,953 4,003
Merger and related costs.......................................... -- 17,892 1,105
Guaranteed acquisition payment.................................... -- -- 27,500
Acquisition related costs......................................... -- 1,422 21,307
Other............................................................. 8,884 11,852 17,225
--------- --------- ---------
$ 17,734 $ 52,908 $ 123,776
========= ========= =========
</TABLE>
NOTE 5--SHORT-TERM INVESTMENTS:
At December 31, 1998, the fair value of the Company's short-term
investments approximated cost. Accordingly, the difference between the
short-term investment portfolio's fair value and its cost has not been presented
as a separate component of stockholders' equity. Information about short-term
investments is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1998
------------ ------------
<S> <C> <C>
Commercial paper and corporate bonds...................................... $ -- $ 15,492
Obligations of the U.S. Government and its agencies....................... -- 893
Obligations of staes and their political subdivisions..................... 24,029 15,606
Other debt securities..................................................... -- 4,329
-------- --------
$ 24,029 $ 36,230
======== ========
</TABLE>
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1998
------------ ------------
<S> <C> <C>
Due within one year....................................................... $ 11,329 $ 34,182
Due after one year through five years..................................... -- 2,048
Due after five years through ten years.................................... 1,900 --
Due after ten years....................................................... 10,800 --
-------- --------
$ 24,029 $ 36,230
======== ========
</TABLE>
NOTE 6--INCOME TAXES:
HISTORICAL INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal $ 2,328 $ 1,562 $ 4,108
State................................................. 942 818 2,123
Foreign............................................... -- 450 (385)
------- ------- -------
Total current.................................... 3,270 2,830 5,846
------- ------- -------
Deferred:
Federal............................................... (937) (771) 1,020
State................................................. (233) (85) (659)
------- ------- -------
Total deferred................................... (1,170) (856) 361
------- ------- -------
Charge in lieu of taxes attributable to employee
stock option plans................................. 926 3,343 1,532
------- ------- -------
$ 3,026 $ 5,317 $ 7,739
------- ------- -------
</TABLE>
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The tax effects of the temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1998
---- -----
<S> <C> <C>
Deferred tax assets:
Net operating losses....................................................... $ 17,000 $ 19,192
Accounts receivable allowances............................................. 533 2,177
Depreciation............................................................... 230 89
Federal benefit of state taxes............................................. -- 190
Basis of assets for tax purposes in excess of book
for taxable pooling transactions........................................ 10,280 10,145
Deferred compensation...................................................... 206 19,562
Benefit and other accruals................................................. 256 7,850
Other 313 406
--------- ----------
Gross deferred tax assets............................................. 28,818 59,611
--------- ----------
Deferred tax liabilities:
Effect of deferred state taxes............................................. (1,211)
Change from cash to accrual method of accounting for income
tax purposes............................................................ (278) (156)
--------- ----------
Total deferred tax liabilities........................................ (278) (1,367)
--------- ----------
Net deferred tax assets.............................................................. 28,540 58,244
Valuation allowance.................................................................. (17,000) (47,139)
--------- ----------
Net deferred tax assets......................................................... $ 11,540 $ 11,105
========= =========
</TABLE>
Deferred tax assets of approximately $47,139 at December 31, 1998
consists of federal and state net operating loss carryforwards which are subject
to separate return limitations rules and other expenses not currently deductible
for tax purposes. Based on these limitations and a number of factors, including
the lack of a history of profits and the fact that the Company competes in a
developing market that is characterized by rapidly changing technology,
management believes that there is sufficient uncertainty regarding the
realization of $47,139 of deferred tax assets such that a valuation allowance
has been provided.
The Company's effective tax rate differs from the statutory federal
income tax rate as shown in the following schedule:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
----- ---- ----
<S> <C> <C> <C>
Federal tax statutory rate................................ (35.0)% (35.0)% (35.0)%
Partnership benefit....................................... (514.0) (0.7) --
State income taxes, net of federal benefit................ 138.0 1.9 0.6
Nondeductible intangible assets........................... -- 23.0 1.4
Change in valuation allowance............................. 1,451.0 22.0 --
Book loss with no current benefit......................... -- -- 37.0
Other..................................................... (131.3) 0.5 0.3
------- ----- ------
908% 11.7% 4.3%
======= ===== ======
</TABLE>
At December 31, 1998, the Company had federal and state net operating
loss carryforwards of approximately $47,618 and $34,099, respectively, available
to reduce future taxable income, which expire in varying amounts through 2013.
The Company's ability to utilize net operating loss carryforwards and tax
credits are subject to limitations as set forth in applicable federal and state
tax laws. As specified in the Internal Revenue Code, an ownership change of more
than 50% by a combination of the Company's significant
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
stockholders during any three-year period would result in certain limitations
on the Company's ability to utilize its net operating loss and credit
carryforward. Such a change occurred in December 1997 resulting in a $13,000
annual limitation.
NOTE 7--COMPREHENSIVE INCOME:
Effective January 1, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." Comprehensive income includes changes in
the balances of items that are reported directly as a separate component of
stockholders' equity on the condensed consolidated balance sheet. USWeb/CKS
had comprehensive income comprising net unrealized gain on equity securities
and foreign currency translation adjustments. The components of comprehensive
income for the years ended December 31, 1996, 1997 and 1998 and nine months
ended September 30, 1999 and 1998 unaudited were as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
--------------------------------- ---------------------
1996 1997 1998 1998 1999
-------- --------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss..................................... $(3,359) $(50,670) $(188,281) $(104,132) $(118,257)
Net unrealized gain on equity securities..... -- -- -- -- 37,502
Foreign currency translation adjustments..... -- -- -- -- 909
-------- --------- ---------- ---------- ----------
Comprehensive income.................... $(3,359) $(50,670) $(188,281) $(104,132) $ (79,846)
======== ========= ========== ========== ==========
</TABLE>
The components of accumulated other comprehensive income at December
31, 1998 and September 30, 1999 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
Net unrealized gain on equity securities................. $-- $37,502
Foreign currency translation adjustments................. -- 909
----- -------
Accumulated other comprehensive income.............. $-- $38,411
===== =======
</TABLE>
NOTE 8--NOTES PAYABLE:
In July 1995, the Company entered into a credit agreement with a
bank which allowed for borrowings of up to $4,600, including a $3,000 line of
credit, a $1,000 equipment line of credit, and a $600 term loan to refinance
existing debt. The equipment line of credit and term loan expired during
1997. Borrowings were secured by all assets of the Company. As of December
31, 1998, the Company has no amounts outstanding under this line of credit.
On October 6, 1997, the Company entered into a credit facility with
a bank that allows the Company to borrow up to maximum of $3,000 to finance
various equipment purchases. Advances accrue interest at the banks prime
lending rate plus 1% (10.0% at December 31, 1998) and are repayable over a
thirty-six month period. The credit facility is secured by the assets of the
Company and expires on September 29, 2001. In addition, the bank requires the
Company to comply with certain financial covenants relating to profitability
and cash flow ratios. The Company was in compliance with all covenants at
December 31, 1998.
In November 1997, the Company obtained a bridge loan facility from a
bank. Under the terms of the facility, the Company borrowed $2,000 (the
maximum amount available), which was secured by substantially all of the
Company's assets. The loan accrued interest at the banks prime rate plus 1%.
On December 10, 1997, the Company repaid the outstanding amount.
NOTE 9--COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases certain office facilities under noncancelable
operating leases. The leases provide for escalating monthly payments that are
charged to operations ratably over the lease term. The leases also provide
for the Company to pay property taxes, insurance and certain other operating
costs of the leased property and generally contain renewal provisions.
Future minimum lease payments under all noncancelable operating and
capital leases as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED OPERATING CAPITAL
DECEMBER 31, LEASES LEASES
------------- ------ ------
<S> <C> <C>
1999.............................................................................. $ 15,112 $ 3,547
2000.............................................................................. 12,498 1,327
2001.............................................................................. 9,948 285
2002.............................................................................. 8,663 --
Thereafter........................................................................ 12,370 --
-------- --------
Total minimum payments............................................................ $ 58,591 5,159
-------- --------
Less: Amount representing interest................................................ (337)
--------
Present value of capital lease obligations........................................ 4,822
Less: Current portion............................................................. 3,445
--------
Lease obligations, long-term...................................................... $ 1,377
========
</TABLE>
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Equipment recorded under capital leases is included in Property and
Equipment as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1998
---- ----
<S> <C> <C>
Computer and equipment................................................ $ 1,234 $ 3,285
Furniture and fixtures................................................ 154 496
Leasehold improvements................................................ -- 177
------- -------
1,388 3,958
Less: Accumulated depreciation........................................ (877) (1,537)
------- -------
$ 511 $ 2,421
======= =======
</TABLE>
Rent expense for operating leases totaled $2,935, $7,872 and $13,275 for
the years ended December 31, 1996, 1997 and 1998, respectively.
LITIGATION
As is typical for companies in USWeb/CKS's business and of
USWeb/CKS's size, the Company is from time to time the subject of lawsuits.
Management does not believe that the outcome of any pending litigation is
likely to be material to USWeb/CKS. However due to the inherent uncertainties
of litigation, there is a risk that the outcome of pending or any future
litigation could have a material adverse effect on the Company's business,
financial condition, cash flows, or results of operations.
On November 5, 1998, a putative class action lawsuit was filed in
the United States District Court for the Northern District of California
against CKS Group and three of its officers and directors. The complaint
alleges that during the period March 20, 1997 to November 7, 1997 (the "Class
Period"), the defendants violated the Securities Exchange Act and the SEC
rules and regulations thereunder by issuing false and misleading statements
about CKS Group's operations, revenues and earnings which allegedly inflated
CKS Group's reported revenues, earnings and stock price. The complaint
further alleges that those who purchased CKS Group's stock did so at
artificially inflated prices. The plaintiff seeks to recover damages in an
unspecified amount (together with interest and attorneys' fees) on behalf of
all purchasers of CKS Group Common Stock during the Class Period. The Company
believes that this lawsuit is without merit and intends to defend this action
vigorously. Certain of such legal proceedings may be covered under insurance
policies or indemnification agreements. Based upon information presently
available, the Company believes that the final outcome of such proceedings
will not have a material adverse effect upon the Company's business, results
of operations or financial condition.
On September 15, 1998, U S WEST filed a complaint against USWeb/CKS
and one of its licensees in the United States District Court for the District
of Nebraska, alleging claims under federal and state law for trademark
infringement, trademark dilution, and unfair competition (the "Nebraska
Action"). U S West filed an Amended Complaint on October 5, 1998. U S West
seeks to enjoin all use by the Company of "USWeb." On March 4, 1999, the
Company filed a motion to dismiss U S West's Amended Complaint. On March 3,
1999, the Company filed a complaint against U S West in the United States
District Court for the Northern District of California, seeking a declaration
that the Company's use of "USWeb" does not infringe upon, dilute, or
otherwise violate any valid rights of U S West (the "California Action").
Discovery has not yet begun in the Nebraska Action or the California Action.
USWeb/CKS believes that the Nebraska Action is without merit and intends to
defend this action vigorously.
NOTE 10--STOCKHOLDERS' EQUITY:
AUTHORIZED STOCK
The Company is authorized to issue 200,000,000 shares of $0.001 par
value Common Stock and 1,000,000 shares of $0.001 par value Preferred Stock.
The Board of Directors has the authority to issue the undesignated Preferred
Stock in one or more series and to fix the rights, preferences, privileges
and restrictions thereof.
COMMON STOCK
During 1996, 5,000,000 shares of Common Stock were purchased by
USWeb's five founders ("Founders
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Shares"). In the event that any one of the founders ceased to be an employee
of the Company, the Company had the right to repurchase ("the Repurchase
Right"), at the original purchase price, a declining percentage of the shares
issued through December 31, 1999. During August 1997, an USWeb founder
terminated his employment. In connection with the termination, the Company
accelerated the vesting of 111,205 shares of Founders Shares and accordingly
recognized a charge in the amount of $1,080. Additionally, 349,502 shares of
unvested Founder's Stock were repurchased by the Company at their original
issuance price of $0.0003 per share. In the event of a change in control of
the Company, the Founders Shares shall become immediately vested in full and
the Repurchase Right shall lapse. At December 31, 1998, 1,059,000 Founders
Shares were subject to repurchase rights.
On September 30, 1997, the Company sold 222,222 shares of Common
Stock in a private transaction to an independent third party in exchange for
a note receivable in the amount of $2,000. On October 14, 1997, the note
receivable was collected in full.
On December 5, 1997, USWeb completed its initial public offering of
5,750,000 shares of its Common Stock. Net proceeds to the Company were
approximately $38,309. In addition, the Company sold 1,666,666 shares of
Common Stock to Intel Corporation in a private placement that closed
contemporaneously with the offering. Net proceeds to the Company aggregated
approximately $9,650. In connection with the discounted sale of Common Stock
to Intel Corporation, the Company recognized a $1,250 non-cash charge that is
included in marketing, sales and support expense.
On April 7, 1998, USWeb completed a follow-on offering whereby the
Company sold 1,581,216 shares of Common Stock. Net proceeds to the Company
from the follow-on offering aggregated approximately $31,151, after deducting
underwriter's discounts and expenses of the offering. In addition, various
option and warrant holders who participated as selling stockholders in the
offering exercised 387,118 stock options and warrants to purchase 56,547
shares of Common Stock. Net proceeds to the Company from the exercise of
stock options and warrants aggregated approximately $2,698.
In September 1998, the Company adopted a stock repurchase program to
buy shares of its Common Stock in the open market. The Board of Directors
authorized the repurchase of up to the lesser of 1,000,000 shares or $15,000.
The stock repurchase program will expire in 1999. As of December 31, 1998, no
shares had been repurchased under this program.
WARRANTS
From January 1996 to December 31, 1996 the Company issued warrants
to purchase 104,721 shares of its Common Stock at exercise prices ranging
from $0.09 to $1.62 per share. The fair value of these warrants on their
respective grant dates was not material. The warrants are exercisable at any
time, and their expiration dates range from May 2001 through February 2006.
In connection with a financing, the Company issued warrants to
purchase a total of 704,549 shares of stock at $7.50 per share. The warrants
are exercisable at any time prior to their expiration in May 2000.
In May 1998, the Company entered into a strategic alliance with NBC
Multimedia, Inc. ("NBC") to expand production capabilities for NBC's
interactive properties and services. As part of the strategic alliance the
Company was awarded a multi-year contract where revenues earned under the
contract are expected to approximate $11,000. In connection with the
strategic alliance, the Company issued warrants to NBC allowing them to
purchase 1,600,000 and 500,000 shares of the Company's Common Stock at $22.50
and $25.43 per share, respectively. Warrants to purchase 1,050,000 shares are
exercisable at any time prior to their expiration in November 1999 (the
"Fixed Warrants"). Warrants to purchase the remaining 1,050,000 shares are
subject to cancellation or, if previously exercised, are subject to
repurchase by the Company at the original purchase price, in the event that
the agreement is cancelled by NBC prior to May 2002 (the "Variable
Warrants"). The warrants were initially valued at $12,568. Of the total value
ascribed to the NBC warrants, $6,286 was attributable to the Fixed Warrants
and recorded as part of stock compensation in operating expenses. The
remaining $6,282 of the initial value was attributed to the Variable
Warrants, which are included as part of
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
the costs of the NBC contract. The Variable Warrants are subject to
revaluation at each balance sheet date through the date the related
cancelation or repurchase rights lapse. The Variable Warrants were revalued
at December 31, 1998, and the original charge was increased to $9,994 based
on current market data. The Variable Warrants were revalued at September 30,
1999, and the cumulative charge of $9,994 that had been recorded through
December 31, 1998 was increased by $4,071 based on current market data.
Because the inclusion of the value of the Variable Warrants as part of the
NBC contract results in an overall loss on the contract, the amount of any
increase in the value of the variable warrants is reflected in the Company's
Statement of Operations as a provision for loss on contract for each period
presented.
In connection with the Company's consulting agreement related to
certain mergers and acquisitions, the Company issued warrants to purchase
1,050,583 shares of the Company's Common Stock at exercise prices ranging
from $18.35 to $21.99 per share. The warrants are exercisable at any time and
expire in five years from the date of grant. The fair value of warrants
granted was measured at the grant date using the Black-Scholes formula. At
December 31, 1998 $7,455 related to acquisitions accounted for as poolings of
interests, and was included in the merger and related costs and $2,601
related to purchase business Combinations was recognized as direct
acquisition cost and included in the purchase price of the acquired companies.
NOTE 11--STOCK-BASED COMPENSATION:
At December 31, 1998, the Company has various stock-based
compensation plans, which are described below. The Company applies APB No. 25
and related interpretations and SFAS No. 123 with respect to grants to other
than employees in accounting for its plans. Had compensation cost for the
Company's various stock-based compensation plans been determined based on the
minimum and fair values at the grant dates for awards under those plans
consistent with the methods prescribed by SFAS No. 123, the Company's net
loss and net loss per share would have been increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
--------- --------- ------------
<S> <C> <C> <C>
Net loss:
As reported--pro forma.............................. $ (3,359) $ (50,670) $ (188,281)
========= ========= ============
As adjusted (unaudited)............................. $ (5,568) $ (59,208) $ (213,405)
========= ========= ============
Net loss per share:
Basic and diluted, as reported--pro forma........... $ (0.15) $ (1.73) $ (3.07)
========= ========= ============
Basic and diluted, as adjusted (unaudited).......... $ (0.26) $ (2.02) $ (3.48)
========= ========= ============
</TABLE>
FAIR VALUE ESTIMATES
For purposes of complying with the disclosure provisions of SFAS No.
123, prior to USWeb's initial public offering in December 1997, the fair
value of each option grant of USWeb was determined on the date of grant using
the minimum value method. Subsequent to the offering, the fair value was
determined using the Black-Scholes option pricing model. Except for the
volatility assumption, which was only used under the Black-Scholes model, the
following weighted-average assumptions were used for grants during the years
ended December 31, 1997 and 1998.
<PAGE>
<TABLE>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
Dividend yield........................................... 0.0% 0.0% 0.0%
Volatility............................................... 0.0% 64.0% 70.0%
Risk-free interest rate.................................. 6.1% 6.04% 5.27%
Expected life............................................ 4.0 years 3.9 years 3.5 years
</TABLE>
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
STOCK OPTION PLANS
1996 STOCK OPTION PLAN
The Company has reserved an aggregate of 600,000 shares of Common
Stock for issuance under its 1996 Stock Option Plan (the "1996 Plan"). The
1996 Plan provides for grants of options to employees and consultants
(including officers and directors) of the Company and its subsidiaries. The
exercise price of options granted under the 1996 Plan is determined by the
1996 Plan Administrator, as defined. With respect to incentive stock options
granted under the 1996 Plan, the exercise price must be at least equal to the
fair market value per share of the Common Stock on the date of grant, and the
exercise price of any incentive stock option granted to a participant who
owns more than 10% of the voting power of all classes of the Company's
outstanding Common Stock must be equal to a least 110% of fair market value
of the Common Stock on the date of grant.
Each option outstanding under the 1996 Plan may be exercised in
whole or in part at any time. Exercised but unvested shares are subject to
repurchase by the Company. Options generally vest, assuming continued service
by the optionee as an employee or consultant, at the rate of 25% of the
shares subject to the option on the first anniversary of the commencement of
vesting date and 1/48th of the shares each month thereafter, such that all
shares under the option vest in full four years from the date of commencement
of vesting. Options outstanding under the 1996 Plan generally have a term of
ten years.
1996 EQUITY COMPENSATION PLAN
The Company's 1996 Equity Compensation Plan (the "1996 Equity Plan")
provides for the granting to employees of incentive stock options, and for
the grant to employees and consultants of nonstatutory stock options and
stock purchase rights ("SPRs"). At December 31, 1998, a total of 7,000,000
shares of Common Stock are reserved for issuance pursuant to the 1996 Equity
Plan.
The 1996 Equity Plan Administrator, as defined, has the power to
determine the terms of the options of SPRs granted, including the exercise
price, the number of shares subject to each option or SPR, the exercisability
thereof, and the form of consideration payable upon such exercise.
Each option outstanding under the 1996 Equity Plan may be exercised
in whole or in part at any time. Exercised but unvested shares are subject to
repurchase by the Company. Options generally vest, assuming continued service
by the optionee as an employee or consultant, at the rate of 25% of the
shares subject to the option on the first anniversary of the commencement of
vesting date and 1/48th of the shares each month thereafter, such that all
shares under the option vest in full four years from the date of commencement
of vesting. Options outstanding under the 1996 Equity Plan generally have a
term of ten years.
The restricted stock purchase agreement pursuant to which the SPR is
exercised shall grant the Company a repurchase option exercisable upon the
voluntary or involuntary termination of the purchasers' employment with the
Company for any reason (including death or disability). The repurchase option
shall lapse at a rate determined by the 1996 Equity Plan Administrator.
The exercise price of all incentive stock options granted under the
1996 Equity Plan must be at least equal to the fair market value of the
Common Stock on the date of grant. The exercise price of nonstatutory stock
options and SPRs granted under the 1996 Equity Plan is determined by the 1996
Equity Plan Administrator, but with respect to nonstatutory stock options
intended to qualify as "performance-based compensation", the exercise price
must at least be equal to the fair market value of the Common Stock on the
date of grant. With respect to any participant who owns stock possessing more
than 10% of the voting power of all classes of the Company's outstanding
capital stock, the exercise price of any incentive stock option granted must
equal at least 110% of the fair market value on the grant date and the term
of such incentive stock option must not exceed five years. The term of all
other options granted under the 1996 Equity Plan
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
may not exceed ten years. As of December 31, 1998, no SPRs had been granted.
1997 ACQUISITION STOCK OPTION PLAN
The Company's 1997 Acquisition Stock Option Plan (the "1997 Plan")
provides for the grant of incentive stock options to employees (including
officers and employee directors) and for the grant of nonstatutory stock
options and SPRs to employees, directors and consultants. A total of
20,000,000 shares of Common Stock, plus annual increases equal to the lesser
of (i) 400,000 shares, (ii) 5% of the outstanding shares, or (iii) a lesser
amount determined by the Board of Directors, are currently reserved for
issuance pursuant to the 1997 Plan.
The 1997 Plan Administrator, as defined, has the power to determine
the terms of the options or SPRs granted, including the exercise price of the
option or SPR, the number of shares subject to each option or SPR, the
exercisability thereof, and the form of consideration payable upon such
exercise.
The restricted stock purchase agreement pursuant to which the SPR is
exercised shall grant the Company a repurchase option exercisable upon the
voluntary or involuntary termination of the purchasers' employment with the
Company for any reason (including death or disability). The repurchase option
shall lapse at a rate determined by the Administrator.
The exercise price of all incentive stock options granted under the
1997 Plan must be at least equal to the fair market value of the Common Stock
on the date of grant. The exercise price of nonstatutory stock options and
SPRs granted under the 1997 Plan is determined by the 1997 Plan
Administrator, but with respect to nonstatutory stock options intended to
qualify as "performance-based compensation", the exercise price must at least
be equal to the fair market value of the Common Stock on the date of grant.
With respect to any participant who owns stock possessing more than 10% of
the voting power of all classes of the outstanding capital stock of the
Company, its parent and its subsidiaries, the exercise price of any incentive
stock option granted must equal at least 110% of the fair market value on the
grant date and the term of such incentive stock option must not exceed five
years. The term of all other options granted under the 1997 Plan may not
exceed ten years. As of December 31, 1998, no SPRs had been granted.
CKS GROUP STOCK OPTION PLANS
In connection with the merger with CKS Group, which was consummated
on December 17, 1998 (See Note 1), the Company assumed all of the outstanding
stock options under CKS Group's 1995 Series B Common Stock Plan, 1995 Stock
Plan, 1995 Director Option Plan, 1996 Supplemental Stock Plan, and Site
Specific Option Plan (collectively the "CKS Group Stock Option Plans").
Outstanding options assumed from CKS Group Stock Option Plans generally vest
25% after one year from the date of grant, and then ratably over 36 months
thereafter, and are exercisable for a period of 10 years. No further grants
will be made under the CKS Group Stock Option Plans.
A summary of the status of the Company's various fixed stock option
plans as of December 31, 1997 and 1998, and changes during the years then
ended is presented below:
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1998
---- ----
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
FIXED STOCK OPTIONS SHARES PRICE SHARES PRICE
------------------- ------ -------- ------ --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year....................... 2,529,617 $ 11.13 12,887,185 $ 9.72
Granted................................................ 11,866,080 25.21 16,792,961 14.34
Exercised.............................................. (103,079) 10.51 (3,227,591) 6.70
Canceled............................................... (1,405,433) 19.18 (4,837,815) 13.36
---------- ----------
Outstanding at end of year............................. 12,887,185 $ 22.42 21,614,740 $ 12.93
---------- ----------
Options exercisable at end of year..................... 3,097,052 $ 8.14 4,625,307 $ 10.19
Weighted-average minimum and fair values of
options granted during the year..................... $ 1.47 $ 8.78
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE OUTSTANDING PRICE
-------------- ----------- ------------ -------- ----------- -----------
<S> <C> <C> <C>
$ 0.50 - $6.00 699,320 6.723 2.112 348,739 1.674
$ 6.07 - $1.99 12,709,622 8.787 8.857 3,456,388 8.545
$12.25 - $18.25 1,724,290 9.504 14.438 202,637 16.368
$18.37 - $25.84 6,185,673 9.477 20.994 568,492 20.914
$26.50 - $36.75 295,835 9.348 35.608 49,051 36.750
</TABLE>
ACQUISITION STOCK BONUS PLAN
During the years ended December 31, 1997 and 1998, the Company
agreed to issue bonuses contingent on future employment that are payable in
shares of Common Stock to employees previously employed by Acquired Entities
(each a "New Employee").
Under the agreements, the stock bonuses vest over a thirty-six month
period from the date of first employment by the Company and will be paid at
the conclusion of the vesting period. However, to the extent that a New
Employee's status as an employee is terminated, the New Employee will be
entitled only to the vested portion of the stock bonus and such bonus shall
become due and payable upon such New Employee's termination. The aggregate
stock bonus for awards through December 31, 1998 totaled $139,004 and will be
paid in shares of Common Stock at the fair market value of the Common Stock
at the date of issuance. Stock bonus awards are recognized as compensation
expense over the thirty-six month vesting periods and comprise stock
compensation expense in the accompanying consolidated financial statements.
Stock compensation recorded related to vested stock bonuses aggregated $9,118
and $33,411 for the years ended December 31, 1997 and 1998, respectively. Of
these amounts, $2,420 and $11,694, respectively, have been recorded in cost
of revenues, with the remainder recorded in stock compensation.
<PAGE>
EMPLOYEE STOCK PURCHASE PLAN
In September 1997, the Board of Directors approved the 1997 Employee
Stock Purchase Plan (the "Purchase Plan"). A total of 3,000,000 shares of
Common Stock have been reserved for issuance under this plan. Terms of the
plan permit eligible employees to purchase Common Stock through payroll
deductions of up to 15% of each employees' compensation. Amounts deducted and
accumulated by the participant are used to purchase shares of the Company's
Common Stock at 85% of the lower of the fair value of the Common
USWEB/CKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Stock at the beginning or the end of the offering period, as defined. During
1998, 445,268 shares were issued pursuant to the Purchase Plan at a weighted
average price of $7.31 per share. During the years ended December 31, 1997
and 1998, shares totaling 192,824 and 255,764, respectively, were issued
under CKS Group's Employee Stock Purchase Plan at average prices of $9.81 and
$10.16 per share, respectively.
NOTE 12--SUBSEQUENT EVENTS--UNAUDITED:
ACQUISITIONS
On September 3, 1999, the Company acquired Mitchell Madison Group
("MMG") for a total consideration of approximately $215,617, comprising
$10,000 in cash, 7,210,160 shares of the Company's Common Stock valued at
$170,882, warrants to purchase 1,665,000 shares of the Company's Common Stock
issued to financial advisors valued at $14,369 and other acquisition costs
aggregating approximately $20,366. The acquisition agreement also provides
for additional payments of up to 7,210,160 shares of the Company's Common
Stock payable over a two-year period to those former MMG partners ("Members")
who remain employees of the combined entity during that period.
During the nine months ended September 30, 1999, the Company also
acquired all of the outstanding ownership interests of Martha Felt Group,
Inc., Internetworking Systems Group, Inc., BI Business Information SA, Modern
Business Technology and Case Consult International S.A./N.V. in separate
transactions in exchange for a total of $6,500 in cash, a $17,500 guaranteed
payment, payable within one year at the Company's option in cash and/or the
Company's Common Stock, 2,644,371 shares of the Company's Common Stock,
warrants issued to financial advisors and other acquisition costs resulting
in an aggregate purchase price of $88,078.
The acquisitions have been accounted for as purchase business
combinations and, accordingly, purchase prices have been allocated to the
tangible and identifiable intangible assets acquired and liabilities assumed
on the basis of their fair values on the acquisition dates. Approximately
$12,104 of the aggregate purchase price was allocated to net tangible assets
consisting primarily of cash, accounts receivable, property and equipment and
accounts payable. The historical carrying amounts of such net assets
approximated their fair values. Approximately $2,212 was allocated to
in-process technology and was immediately charged to operations because such
in-process technology had not reached the stage of technological feasibility
at the acquisition dates and had no alternative future use. Approximately
$4,401 was allocated to existing technology and approximately $9,000 was
allocated to customer list which are being amortized over their estimated
useful lives of one and seven years, respectively. Approximately $275,978 of
the aggregate purchase price was allocated to goodwill, primarily work force
in place, and is being amortized over its estimated life of 18 to 60 months.
In addition, due to earnout valuations performed on past
acquisitions, typically at six and twelve months after acquisition, USWeb/CKS
issued additional shares of the Company's Common Stock to the former
stockholders of the acquired companies. The issuance of these additional
shares, together with residual acquisition costs, has resulted in purchase
price adjustments totaling approximately $13,119, which has been recorded as
incremental goodwill.
ALLIANCE
In September 1999, the Company expanded its strategic alliance
("Alliance") with Microsoft Corporation ("Microsoft") to assist in the
development of the USWeb/CKS Internet framework (iFrame), a standardized
architecture for developing integrated e-business solutions. Under terms of
the strategic alliance, Microsoft will provide the Company with a
non-refundable $67.5 million, to be paid over twelve months, to offset the
costs necessary for the development, marketing and training needed to bring
iFrame and associated application services to market. Microsoft will also
provide a joint technology lab to assist in such development and will provide
certain other funding, including a joint marketing fund. During September
1999, the Company received the first payment under the agreement in the
amount of $33.8 million, which has been recorded as deferred revenue and will
be recorded as a reduction of operating expenses as costs are incurred under
the percentage-of-completion method. As part of the agreement, Microsoft
purchased, for $15.0 million, a warrant allowing Microsoft to acquire up to
1,000,000 shares of USWeb/CKS Common Stock at an exercise price of $27.59 per
share, which represents the fair value of the Company's Common Stock at the
date of the alliance. The warrant is exercisable anytime prior to its
expiration in September 2004. Should the Company be successful in developing
iFrame and its associated applications, the Company will pay to Microsoft a
royalty, beginning in July 2001, equal to 8.9% of such revenues, if any. The
royalty will continue until the earlier of December 31, 2007, or the
aggregate royalty paid totals $105 million.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board issued SFAS No.
137, "Accounting for Derivatives Instruments and Hedging Activities--Deferral
of Effective Date of FASB Statement No. 133." SFAS No. 133, as amended by
SFAS No. 137, is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000, with earlier applications encouraged.
USWeb/CKS does not expect the adoption of this pronouncement to have a
material impact on its financial condition or results of operations.
