<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 4, 1998
REGISTRATION NO. 333-38351
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
USWEB CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
<TABLE>
<S> <C> <C>
DELAWARE 8742 870551650
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
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USWEB CORPORATION
2880 LAKESIDE DRIVE, SUITE 300
SANTA CLARA, CA 95054
(408) 987-3200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
JAMES J. HEFFERNAN
CHIEF FINANCIAL OFFICER
USWEB CORPORATION
2880 LAKESIDE DRIVE, SUITE 300
SANTA CLARA, CA 95054
(408) 987-3200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
---------------
COPIES TO:
MARK BONHAM, ESQ.
PAUL TOBIAS, ESQ.
KEVIN GALLIGAN, ESQ.
WILSON SONSINI GOODRICH & ROSATI
PROFESSIONAL CORPORATION
650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304
(650) 493-9300
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
PROSPECTUS
16,666,667 SHARES
[LOGO OF USWEB]
COMMON STOCK
This Prospectus relates to 16,666,667 shares (the "Shares") of Common Stock,
$0.001 par value per share (the "Common Stock"), of USWeb Corporation ("USWeb"
or the "Company") which may be issued by the Company and offered for sale from
time to time in connection with future acquisitions of the assets,
technologies or securities of complementary businesses in such amounts, at
such prices and on such terms as may be determined at the time of offering. No
period of time has been fixed within which the Shares may be offered or sold.
The consideration for acquisitions may consist of shares of Common Stock,
cash, assumptions of liabilities or a combination thereof as determined by
negotiations between the Company's representatives and the owners or
controlling persons, the assets, technologies or securities of the
complementary businesses to be acquired. Factors taken into account in
acquisitions include quantitative factors, including historical revenues,
profitability, financial condition and contract backlog, and the Company's
qualitative evaluation of the acquisition candidates' managerial team,
operation scalability and customer base, of the assets, technologies or
securities of the complementary businesses to be acquired, market value of the
Common Stock and other relevant factors. In addition, the Company may lease
property from and enter into employment, management, consulting or non-
competition agreements with former owners and key executive personnel of the
businesses to be acquired. The Company's management anticipates that the
Shares issued in any acquisition will be valued at a price reasonably related
to the market price of the Common Stock, near the time of the acquisition.
All expenses of this offering will be paid by the Company. No underwriting
discounts or commissions will be paid in connection with the issuance of
Shares by the Company in business combination transactions or technology
acquisitions, although finder's fees may be paid with respect to specific
acquisitions. Any person receiving a finder's fee may be deemed to be an
underwriter within the meaning of Section 2(11) of the Securities Act of 1933,
as amended (the "Securities Act").
The Common Stock is traded on the Nasdaq National Market under the symbol
"USWB." On April 30, 1998, the last reported sale price for the Common Stock
on the Nasdaq National Market was $22.81 per share.
----------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 5.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is May 4, 1998
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-4
under the Securities Act and the rules and regulations promulgated thereunder
with respect to the Common Stock offered hereby. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. Statements contained in the Prospectus as to the contents
of any contract or other document that is filed as an exhibit to the
Registration Statement are not necessarily complete and each such statement is
qualified in all respects by reference to the full text of such contract or
document. For further information with respect to the Company and the Common
Stock, reference is hereby made to such exhibits and schedules thereto, which
may be inspected and copied at the principal office of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission located at Seven World Trade Center, Suite 1300, New York, New York
10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661, and copies of all or any part thereof may be obtained at
prescribed rates from the Commission's Public Reference Section at such
addresses. Also, the Commission maintains a World Wide Web site on the
Internet at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file
electronically with the Commission. Such reports, proxy and information
statements and other information also can be inspected at the office of Nasdaq
Operations, 1735 K Street, N.W., Washington, D.C. 20006.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by an independent accounting firm and
make available to its stockholders quarterly reports for the first three
quarters of each fiscal year containing interim unaudited financial
information.
USWeb, the USWeb logo, A Strategic Partner for the Information Age and the
names of products and services offered by USWeb are trademarks, registered
trademarks, service marks or registered service marks of USWeb Corporation.
This Prospectus also includes product names, trade names and trademarks of
other companies.
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<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Pro Forma
Consolidated Financial Information, including the Notes thereto, appearing
elsewhere in this Prospectus. This Prospectus contains, in addition to
historical information, forward-looking statements that involve risks and
uncertainties and the Common Stock offered hereby involves a high degree of
risk. The Company's actual results or experience could differ significantly
from those discussed in the forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in "Risk Factors," as well as those discussed elsewhere in this
Prospectus. Investors should carefully consider the information set forth under
the heading "Risk Factors."
THE COMPANY
USWeb is a leading Internet professional services firm that provides
Intranet, Extranet and Web site solutions and services to medium-sized and
large companies. International Data Corporation estimates that the worldwide
market for Internet professional services was $2.5 billion in 1996 and will
grow to $13.8 billion in 2000. To take advantage of the opportunity presented
by this market, the Company has invested substantial resources to establish a
national network of consulting offices. Because of this investment, the Company
believes it has built one of the most recognized brands for Internet
professional services and developed a highly scalable organization that can
leverage central resources as its operations expand through acquisitions as
well as internal growth. The Company has developed and is aggressively pursuing
an acquisition program that uses a consistent methodology designed to identify,
acquire and integrate qualified Internet professional services firms.
The Company offers a comprehensive range of services to deliver Internet
solutions designed to improve clients' business processes. The Company's
services include strategy consulting; analysis and design; technology
development; implementation and integration; audience development; and
maintenance. The Company delivers these services to clients through its network
of consulting offices, whose regional presence enables each office to develop
close client relationships and an understanding of client needs. In addition,
individual consulting offices may draw as needed upon the assistance of one or
more additional offices with specialized creative or technical expertise.
The Company has developed central resources to provide clients with Internet
solutions based on the most effective technologies and proven methodologies.
The USWeb Internet Strategy and Solutions Center aggregates and redeploys the
best practices, technologies and creative work delivered by USWeb consulting
offices. The Strategy and Solutions Center provides the offices with efficient,
real-time access to these resources through USWeb Central, the Company's secure
Intranet, thereby enabling them to leverage the capabilities of the entire
USWeb operation.
The Company markets its services to medium-sized and large companies. Among
the clients of Company owned offices during the year ended December 31, 1997
were Amgen, Barnes & Noble, Charles Schwab, Chevron, Harley-Davidson, Ingram
Micro, Microsoft, REI, Silicon Graphics and Sony Music. Clients typically begin
their adoption of Internet solutions by establishing a basic Web site costing
several thousand dollars and then implementing increasingly powerful business
solutions, which can include business critical, fully integrated Intranets or
Extranets costing several million dollars. The Company's strategy is to provide
clients with services at all stages of their adoption of Internet solutions.
The Company has made a significant investment in building and maintaining the
USWeb brand. Increasing recognition of the USWeb brand improves the ability of
USWeb consulting offices to access and influence key client decision makers,
hire skilled employees and leverage strategic relationships. The Company
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<PAGE>
believes that its marketing, advertising, seminars and other brand development
efforts have established USWeb as one of the most recognized Internet
professional services firms.
Strategic relationships are an important element of the Company's efforts to
enter new markets, gain early access to leading-edge technology, cooperatively
market products and services with leading technology vendors, cross-sell
additional services and gain enhanced access to vendor training and support.
The Company has entered into, and intends to continue entering into, strategic
relationships with a limited number of leading Internet hardware, software and
content vendors. The Company currently has strategic relationships with Intel,
Microsoft, Hewlett-Packard, Pandesic LLC (the Internet company from Intel and
SAP), Sun Microsystems and Reuters.
The Company's objective is to become and remain the leading global Internet
professional services firm. To achieve its goal, the Company's strategy is to
continue to expand its network of consulting offices, develop additional
Internet services and solutions, enhance the USWeb brand and leverage
operational economies of scale. To add consulting offices through acquisitions,
the Company uses a consistent valuation methodology that includes purchase
price adjustments to align target company management objectives with those of
the overall USWeb organization and stock bonus and stock option grants to all
target company employees to provide them with an incentive to contribute to the
success of the overall USWeb organization. As of April 30, 1998, the Company
had acquired 26 companies and one additional acquisition was probable.
The Company regularly evaluates potential acquisition candidates, is
currently holding preliminary discussions with a number of such candidates and
is in active negotiations with a number of such other candidates. If, after due
diligence review and negotiation, such companies can be acquired on a basis
considered fair to the Company and its stockholders, the Company may proceed
with such acquisitions. The Company is also evaluating or negotiating
acquisition transactions outside the United States. The Company expects most of
its future acquisitions to include the issuance of additional shares of the
Company's Common Stock in the future. The Company has filed a "shelf"
Registration Statement on Form S-4, which this Prospectus is a part,
registering 16,666,667 shares of its Common Stock for use in future
acquisitions. See "Risk Factors--Risks Related to Acquisitions," "--Management
of Growth; Integration of Acquisitions," "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Acquisition of Internet Professional Services Firms," and "Business--Strategy"
and "--Consulting Office Network Development."
The Company was incorporated in Utah in December 1995 and changed its
jurisdiction of incorporation to Delaware in December 1997. The Company's
principal executive offices are located at 2880 Lakeside Drive, Suite 300,
Santa Clara, California 95054, its World Wide Web address is
http://www.usweb.com and its telephone number is (408) 987-3200. As used in
this Prospectus, the "Company" and "USWeb" refer to USWeb Corporation, a
Delaware corporation and its Utah predecessor.
----------------
Unless otherwise indicated, all information contained in this Prospectus: (i)
assumes the Company receives no proceeds from the offerings pursuant to this
Prospectus; and (ii) unless otherwise indicated, refers to historical and not
pro forma results of operations. See "Use of Proceeds," "Capitalization,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Recent Events," "Description of Capital Stock" and "Plan of
Distribution." The phrase "Company-owned office" refers to an office managed by
an entity included in the Company's Consolidated Financial Statements as of the
date indicated.
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<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those discussed in
the forward-looking statements as a result of certain factors, including the
factors set forth below and elsewhere in this Prospectus. The following risk
factors should be considered carefully in addition to the other information
contained in this Prospectus before purchasing the Common Stock offered
hereby.
Limited Operating History; Accumulated Deficit. The Company was founded in
December 1995 and enrolled its first franchisee ("Affiliate") in April 1996.
Accordingly, the Company has only a limited operating history on which to base
an evaluation of its business and prospects. The 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 Company include, but are not limited to, an
evolving business model and the management of both internal and acquisition-
based growth. To address these risks, the Company must, among other things,
continue 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 USWeb Internet Strategy and Solutions Center (the "Strategy and
Solutions Center"), enhance the USWeb brand, respond to competitive
developments and continue to attract, retain and motivate qualified employees.
There can be no assurance that the 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 Company's business, results of operations and
financial condition.
The Company has incurred net losses since inception and as of March 31,
1998, had an accumulated deficit of $88.5 million. Although the Company has
experienced revenue growth in recent months, such growth rates may not be
sustainable or indicative of future operating results. In addition, the
Company intends to continue to invest heavily in acquisitions, infrastructure
development and marketing. As a result, the Company expects to continue to
incur substantial operating losses at least through the remainder of 1998, and
there can be no assurance that the Company will achieve or sustain
profitability. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Risks Related to Acquisitions. A key component of the Company's growth
strategy is the acquisition of Internet professional service firms that meet
the Company's criteria for revenues, profitability, growth potential and
operating strategy. The successful implementation of this strategy depends 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. As of April 30, 1998, the Company had acquired 26
companies and one additional acquisition was probable. 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 competitors may be larger and have greater
financial and other resources than the Company. Competition for these
acquisition targets likely could 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. Client satisfaction or performance problems with an
acquired firm could also have a material adverse impact on the reputation of
the Company as a whole, and any acquired subsidiary could significantly
underperform relative to the Company's expectations. Because all of the
Company's acquisitions have been completed since March 1997, the Company is
currently facing all of these challenges and its ability to meet them over the
long term has not been established. For all of these reasons, the Company's
pursuit of an overall acquisition strategy or any individual completed,
pending or
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<PAGE>
future acquisition may have a material adverse effect on the Company's
business, results of operations and financial condition. 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.
As the Company issues stock to complete future acquisitions, existing
stockholders will experience further ownership dilution. See "--Dilution," "--
Future Capital Needs; Uncertainty of Additional Financing," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
"Business--Consulting Office Network Development" and Note 1 to Consolidated
Financial Statements.
Potential Fluctuations in Quarterly Results. As a result of the Company's
limited operating history, rapid growth and the emerging nature of the markets
in which it competes, the Company's historical financial data is of limited
value in planning future operating expenses. Accordingly, the Company's
expense levels are based in part on its expectations concerning future
revenues and are fixed to a large extent. The Company's revenues are derived
primarily from consulting fees for Internet solution engagements, which are
difficult to forecast accurately. The Company may be unable to adjust spending
in a timely manner to compensate for any unexpected shortfall in revenues.
Accordingly, a significant shortfall in demand for the Company's services
could have an immediate and material adverse effect on the Company's business,
results of operations and financial condition. Further, the Company intends to
increase its business development and marketing expenses significantly to
expand operations and enhance the Company's brand name and to increase other
operating expenses as required to build the Strategy and Solutions Center and
support the operations of the Company's consulting offices. To the extent that
such expenses precede or are not rapidly followed by increased revenues, the
Company's business, results of operations and financial condition may be
materially adversely affected.
The Company's quarterly operating results may fluctuate significantly in the
future as a result of a variety of factors, many of which are outside the
Company's control. These factors include the level of demand for Intranet,
Extranet and Web site development; the productivity of the Company's
consulting offices; the Company's success in finding and acquiring suitable
acquisition candidates; the Company's ability to attract and retain personnel
with the necessary strategic, technical and creative skills required to
service clients effectively; the cost of advertising and related media; the
amount and timing of expenditures by USWeb clients for Internet professional
services; client budgetary cycles; the amount and timing of capital
expenditures and other costs relating to the expansion of the Company's
operations; the introduction of new products or services by the Company or its
competitors; pricing changes in the industry; 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. As a strategic response
to changes in the competitive environment, the 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
Company's business, results of operations and financial condition. The Company
may also experience seasonality in its business in the future, resulting in
diminished revenues to the Company as a consequence of decreased demand for
Internet professional services during summer and year-end vacation and holiday
periods. Due to all of the foregoing factors, in some future quarter the
Company's operating results 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 ensue. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Recruitment and Retention of Internet Solutions Professionals. The Company's
business of delivering Internet professional services is labor intensive.
Accordingly, the Company's success depends in 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 Company
competes intensely for qualified personnel with other companies, and there can
be no assurance that the
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Company will be able to attract, assimilate 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 Company's business, results of
operations and financial condition.
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 Company expects competition to
persist, intensify and increase in the future. The 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 CKS Group, Inc. ("CKS"), Foote, Cone &
Belding and Ogilvy & Mather; Internet integrators and Web presence providers
such as iXL Holding, Inc. ("iXL"), Organic Online, Inc. ("Organic Online"),
Poppe Tyson and Proxicom, Inc. ("Proxicom"); 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.
("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"). Although only a few of these
competitors have to date offered a full range of Internet professional
services, several have announced their intention to offer comprehensive
Internet technology solutions. Furthermore, most 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 market. 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 Company's competitors to compete in
this market as it matures. Competition of the type described above could
materially adversely affect the Company's business, results of operations and
financial condition.
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, the Company has no
patented technology that would preclude or inhibit competitors from entering
the Internet professional services market. The Company expects that it will
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 Company, which could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Business--Competition."
Management of Growth; Integration of Acquisitions. The Company's rapid
growth has placed, and is expected to continue to place, a significant strain
on the Company's managerial, operational, financial and other resources. As of
March 31, 1998, the Company had grown to 813 employees since its inception in
December 1995, and the Company expects that continued hiring of new personnel
will be required to support its business. The Company's future success will
depend, in part, upon its ability to manage its growth effectively, which will
require that the Company continue to implement and improve its operational,
administrative and financial and accounting systems and controls and to
expand, train and manage its employee base. 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. Furthermore, the Company's future performance will depend on the
Company's ability to integrate the organizations acquired by the Company,
which, even if successful, may take a significant period of time, will place a
significant strain on the Company's resources, and could subject the Company
to additional expenses during the integration
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process. As a result, there can be no assurance that the Company will be able
to integrate acquired businesses successfully or in a timely manner in
accordance with its strategic objectives. If the Company is unable to manage
internal or acquisition-based growth effectively, the Company's business,
results of operations and financial condition will be materially adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business--Strategy," "--Consulting Office Network
Development" and "--Employees."
Dilution. Investors participating in these offerings will incur immediate,
substantial dilution. The Company also has outstanding a large number of stock
options and warrants to purchase the Company's Common Stock with exercise
prices significantly below the initial public offering price. To the extent
such options or warrants are exercised, there will be further dilution. The
Company expects to continue its acquisition program through at least the end
of 1998, and pursuant to a "shelf" Registration Statement of which this
Prospectus is a part, is registering 16,666,667 shares of its Common Stock
which the Company intends to issue as acquisition consideration in addition to
granting substantial stock options and stock bonuses to the employees of the
acquired companies. Furthermore, the Company may be required, pursuant to the
terms of the definitive acquisition agreements, to issue additional shares,
stock options and stock bonuses to the stockholders and employees of the
acquired companies at each of six and twelve months after acquisitions of the
acquired companies. Although the Company's experience to date with such
additional issuances has not resulted in significant changes, they could be
material in the future. For these reasons, the Company's acquisition program
will result in further substantial ownership dilution to investors
participating in these offerings.
Uncertain Maintenance and Strengthening of the USWeb Brand. The Company
believes that maintaining and strengthening the USWeb brand is an important
aspect of its efforts to attract clients and that the importance of brand
recognition will increase due to the increasing number of companies entering
the market for Internet professional services. Promoting and positioning the
USWeb brand will depend largely on the success of the Company's marketing
efforts and the ability of the Company to provide high quality, reliable and
cost effective Internet solution strategy consulting, analysis and design,
technology development, implementation and integration, audience development
and maintenance services. If clients do not perceive the Company's services as
meeting their needs, or if the Company fails to market those services
effectively, the Company will be unsuccessful in maintaining and strengthening
its brand. In addition, while the Company centralizes its marketing efforts,
it provides client service through the individual consulting offices and
client dissatisfaction with the performance of a single office could tarnish
the perception of the USWeb brand as a whole. Furthermore, in order to promote
the USWeb brand in response to competitive pressures, the Company may find it
necessary to increase its marketing budget or otherwise increase its financial
commitment to creating and maintaining brand loyalty among clients. If the
Company fails to promote and maintain its brand, or incurs excessive expenses
in an attempt to promote and maintain its brand, the Company's business,
results of operations and financial condition will be materially adversely
affected. See "Business--Services" and "--Marketing."
Reliance Upon Key Strategic Relationships. The Company has established a
number of strategic relationships with leading hardware and software
companies, including Intel Corporation ("Intel"), Microsoft, Hewlett-Packard,
Pandesic LLC ("Pandesic," the Internet company from Intel) and SAP America
Inc. ("SAP"), Sun Microsystems, Inc. ("Sun Microsystems") and Reuters Ltd.
("Reuters"). The loss of any one of these strategic relationships would
deprive the 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 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 partners' best interests. In the event that any strategic
relationship is terminated, the Company's business,
8
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results of operations and financial condition may be materially adversely
affected. See "Business--Strategy" and "--Strategic Relationships."
Uncertain Adoption of Internet Solutions; Dependence on Client
Outsourcing. The market for the Company's services will depend upon the
adoption of Internet solutions by companies to improve their business
processes. 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, such as high speed modems and high
speed communication lines, 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 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 solve business problems. The adoption of Internet solutions
for commerce and communications, particularly by those individuals and
enterprises that have historically relied on alternative means of commerce and
communication, generally requires the acceptance of a new way of conducting
business and exchanging information, which may be difficult for those with
substantial investments in alternate means that might be made obsolete. If
critical issues concerning the ability of Internet solutions to improve
business processes are not resolved or if the necessary infrastructure is not
developed, the Company's business, results of operations and financial
condition 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
Intranets, Extranets and 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 the Company's services does not continue to develop or develops
more slowly than expected, or if the Company's services do not achieve market
acceptance, the Company's business, results of operations and financial
condition will be materially adversely affected. See "Business--Industry
Background" and "--Strategy."
Rapid Technological Change. The market for Internet professional 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 Company's existing service practices and
methodologies obsolete. The 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. There can
be no assurance that the Company will be successful in responding quickly,
cost-effectively and sufficiently to these developments. If the 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, results of operations and financial condition would be materially
adversely affected. See "Business--Strategy" and "--Clients."
Risks Associated with International Operations and Expansion. The Company
intends to expand its operations into international markets. However, to date
the Company has established only two consulting offices outside of the United
States and has no experience in either managing an international network of
consulting offices or in marketing services to international clients. The
Company expects to incur significant costs to do both. If revenues from
international consulting offices are not adequate to offset the expenses of
9
<PAGE>
establishing and maintaining an international network and of localizing the
Company's marketing programs, the Company's business, results of operations
and financial condition could be materially adversely affected. There can be
no assurance that the 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 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 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 Company's future international operations and,
consequently, on the Company's business, results of operations and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Risks of Fixed-Price Engagements. The Company 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 the Company's current principal method of billing on a time
and materials basis. To date, the Company has had only limited experience with
fixed-price engagements. The Company's 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 Company to risks associated with cost
overruns and, in certain cases, penalties, any of which could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Risks of Franchising. USWeb has entered into franchise agreements with
Affiliates, which manage a number of its consulting offices. While these
agreements permit the Company 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
the 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 Company intellectual property or initiate litigation
against the 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 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, USWeb 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 Company's business, operating
results and financial condition. 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
USWeb and from soliciting USWeb 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 brand, the Company's
business, results of operations and financial condition could be materially
adversely affected.
Dependence on Key Personnel. The Company's performance is substantially
dependent on the continued services and on the performance of its executive
officers and other key employees, many of whom have worked together for only a
short period of time. Particularly in light of the Company's relatively early
10
<PAGE>
stage of development, the Company is dependent on retaining and motivating
highly qualified personnel, especially its senior management. The Company does
not have "key person" life insurance policies on any of its executive
officers. The loss of the services of any of its executive officers or other
key employees could have a material adverse effect on the business, results of
operations or financial condition of the Company. See "Management."
Intellectual Property Risks. The Company regards its copyrights, trademarks,
trade secrets (including its methodologies, practices and tools) and other
intellectual property rights as critical to its success. To protect its rights
in these various intellectual properties, the Company relies on a combination
of trademark and copyright law, trade secret protection and confidentiality
agreements and other contractual arrangements with its employees, Affiliates,
clients, strategic partners, acquisition targets and others to protect its
proprietary rights. The Company has also registered several of its trademarks
in the U.S. and internationally. Effective trademark, copyright and trade
secret protection may not be available in every country in which the Company
offers or intends to offer its services. There can be no assurance that the
steps taken by the Company to protect its proprietary rights will be adequate
or that third parties will not infringe or misappropriate the Company's
copyrights, trademarks and similar proprietary rights, or that the Company
will be able to detect unauthorized use and take appropriate steps to enforce
its rights. In addition, although the Company believes that its 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 Company. Such claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources.
Potential Liability to Clients. Many of the Company's consulting engagements
involve the development, implementation and maintenance of applications that
are critical to the operations of its 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 the Company's
responsibility for such failure. In addition, the Company aggregates and makes
available through the Strategy and Solutions Center methodologies,
technologies and content which 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 attempts to limit contractually its
damages arising from negligent acts, errors, mistakes or omissions in
rendering Internet 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.
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 less than two
years, computer systems and software used by many companies, including
customers and potential customers of the Company, may need to be upgraded to
comply with such "Year 2000" requirements. Although the Company believes that
its internal systems are Year 2000 compliant, failure to provide Year 2000
compliant business solutions to its customers could 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.
11
<PAGE>
Future Capital Needs; Uncertainty of Additional Financing. The Company
currently anticipates that its available cash resources and credit facilities,
combined with the net proceeds to the Company from its initial and follow-on
public offerings, will be sufficient to meet its presently anticipated working
capital and capital expenditure requirements for at least the next 12 months.
However, the 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 Company's future liquidity
and capital requirements will depend upon numerous factors, including the
success of the Company's existing and new service offerings and competing
technological and market developments. The Company may be required to raise
additional funds through public or private financing, strategic relationships
or other arrangements. There can be no assurance that such additional funding,
if needed, will be available on terms acceptable to the 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 Company's operating flexibility with respect to certain business
matters. Strategic arrangements, if necessary to raise additional funds, may
require the Company to relinquish its rights to certain of its intellectual
property. If additional funds are raised through the issuance of equity
securities, the percentage ownership of the stockholders of the 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 Company's Common Stock. If
adequate funds are not available on acceptable terms, the 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 Company's business, results of
operations and financial condition. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Government Regulation and Legal Uncertainties. The Company is 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
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 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 Company's services or increase the
cost of doing business or in some other manner have a material adverse effect
on the Company's business, results of operations or financial condition. 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 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 Company's business, results of
operations and financial condition.
12
<PAGE>
Volatility of Stock Price. Prior to the Company's initial public offering,
there was no public market for the Company's Common Stock. The market price of
the Company's Common Stock has been and is likely to continue to be highly
volatile and could be subject to wide fluctuations in response to quarterly
variations in operating results, announcements of technological innovations or
new products by the Company or its competitors, changes in financial estimates
by securities analysts, or other events or factors. In addition, the stock
market, which has recently been at or near historic highs, has experienced
significant 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 Company's business, operating results and
financial condition.
Effect of Certain Charter Provisions; Antitakeover Effects of Certificate of
Incorporation, Bylaws and Delaware Law. The Board of Directors has 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 the
stockholders. The rights of the holders of Common Stock 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 of the
Company. The Company has no present plans to issue shares of Preferred Stock.
Further, certain provisions of the Company's Amended and Restated Certificate
of Incorporation and Bylaws and of Delaware law could delay or make difficult
a merger, tender offer or proxy contest involving the Company. See
"Description of Capital Stock--Preferred Stock" and "--Certain Antitakeover
Effects of Provisions of the Certificate of Incorporation, Bylaws and Delaware
Law."
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. 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 Company. See "Principal Stockholders" and "Description of
Capital Stock--Certain Antitakeover Effects of Provisions of the Certificate
of Incorporation, Bylaws and Delaware Law."
13
<PAGE>
FORWARD LOOKING STATEMENTS
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act which
are subject to the "safe harbor" created by those sections. These forward-
looking statements include, but are not limited to, statements concerning the
Company's strategy, mission, acquisition program, opportunities and goals and
the potential development of the market for Intranet, Extranet and Web site
solutions and services.
These forward-looking statements may be found in the "Prospectus Summary,"
"Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business." Forward-looking
statements not specifically set forth above may also be found in these and
other sections of this Prospectus. Actual results could differ materially and
adversely from those discussed in the forward-looking statements as a result
of certain factors, including those discussed in "Risk Factors" and elsewhere
in this Prospectus. See "Risk Factors."
USE OF PROCEEDS
This Prospectus relates to shares of Common Stock that the Company may issue
from time to time in connection with proposed acquisitions by the Company or
one or more of its subsidiaries. The Company will not receive any proceeds
from these offerings other than the value of the businesses or properties
acquired by the Company or one or more of its subsidiaries in the proposed
acquisitions.
MARKET INFORMATION
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "USWB." Prior to the completion of the Company's initial public
offering on December 5, 1997, there had been no established trading market for
the Common Stock. The Common Stock was first offered to the public at a price
of $7.50 per share. The last reported sales price by the Nasdaq National
Market for the Common Stock on April 30, 1998, was $22.81.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain any future earnings to finance
the growth and development of its business and therefore does not anticipate
paying any cash dividends in the foreseeable future. The payment of cash
dividends in the future will be at the discretion of the Board of Directors
and subject to certain limitations under the Delaware General Corporation Law
and will depend upon factors such as the Company's earnings levels, capital
requirements, financial condition and other factors deemed relevant by the
Board of Directors. There can be no assurance that the Company will pay any
dividends in the future.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1998 (i) on an actual basis, (ii) pro forma to reflect the acquisition by
the Company of Xplora Limited and the probable acquisition by the Company of
Kallista, Inc. and (iii) as adjusted to give effect to the authorization of
the 16,666,667 shares offered hereby, and the sale by the Company in April
1998, of 1,581,216 shares of Common Stock offered pursuant to the Registration
Statement on Form S-1 (Registration No. 333-46821) at a public offering price
of $22.00 per share, the exercise of 387,118 stock options and 56,547 common
stock warrants in April 1998 by various options and warrant holders who
participated as selling stockholders in the Company's public offering, and the
application of the net proceeds, after underwriting discounts and commissions
and related expenses, from the public offering and the exercise of options and
warrants. This table should be read in conjunction with the Consolidated
Financial Statements and Pro Forma Consolidated Financial Information and
Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------------
AS
ACTUAL PRO FORMA ADJUSTED
-------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Lease obligations, long-term portion............. $ 1,245 $ 1,245 $ 1,245
-------- -------- --------
Stockholders' equity:
Preferred Stock, $.001 par value, 1,000,000
shares authorized; no shares issued and
outstanding actual or as adjusted............. -- -- --
Common Stock, $.001 par value, 100,000,000
shares authorized; 35,395,446 shares issued
and outstanding actual; 35,748,089 shares
issued and outstanding pro forma; 37,772,970
shares issued and outstanding as adjusted (1). 31 31 33
Additional paid-in capital..................... 173,599 182,365 217,378
Accumulated deficit............................ (88,504) (89,308) (89,308)
-------- -------- --------
Total stockholders' equity................... 85,126 93,088 128,103
-------- -------- --------
Total capitalization....................... $ 86,371 $ 94,333 $129,348
======== ======== ========
</TABLE>
- ---------------------
(1) Excludes, as of March 31, 1998, (i) 12,600,000 shares of Common Stock
reserved for issuance under the Company's stock option plans, of which
11,929,812 shares were issuable upon exercise of outstanding options at a
weighted average exercise price of $10.51 per share, (ii) 809,270 shares
of Common Stock issuable upon exercise of outstanding warrants at a
weighted average exercise price of $6.81 per share, (iii) 333,333 shares
of Common Stock reserved for issuance under the Company's Affiliate
Warrant Program, of which 267,284 shares were issuable upon exercise of
outstanding warrants at a weighted average exercise price of $2.55 per
share, (iv) 1,000,000 shares of Common Stock reserved for issuance under
the Company's 1997 Employee Stock Purchase Plan, and (v) additional shares
of Common Stock that are considered probable of issuance as stock bonuses
and acquisition purchase price adjustments. Also excludes an additional
5,000,000, 10,000,000 and 2,000,000 shares of Common Stock for issuance
under the 1996 Equity Compensation Plan, 1997 Acquisition Stock Option
Plan, and the 1997 Employee Stock Purchase Plan, respectively, authorized
by the Company's Board of Directors on April 20, 1998. See "Risk Factors--
Dilution," "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Acquisition of Internet Professional Services
Firms," "Business--Consulting Office Network Development," "Management--
Employee Benefit Plans" and Notes 1, 9 and 10 to Consolidated Financial
Statements.
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
included elsewhere herein. The statement of operations data set forth below
with respect to the years ended December 31, 1996 and 1997 and the balance
sheet data at December 31, 1996 and 1997 are derived from, and are qualified
by reference to, the audited consolidated financial statements of the Company
included elsewhere in this Prospectus. The selected consolidated financial
data for the three months ended March 31, 1997 and 1998, are derived from
unaudited financial statements prepared by the Company and include all
adjustments, consisting only of normal recurring adjustments, which the
Company believes are necessary for a fair presentation of the Company's
results of operations for those periods. Operating results for the three
months ended March 31, 1998 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1998. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The unaudited pro forma consolidated statement of operations data for the
year ended December 31, 1997 and the three months ended March 31, 1998,
reflect the effects of the acquisitions of XCom Corporation, Cosmix
Corporation, Fetch Interactive, Inc., NewLink Corporation, InterNetOffice,
LLC, NetWORKERS Corporation, Infopreneurs Inc., Netphaz Corporation,
Electronic Images, Inc., Multimedia Marketing & Design Inc., KandH, Inc.,
DreamMedia, Inc., Internet Cybernautics, Inc., Synergetix Systems Integration,
Inc., Online Marketing Company, Zendatta, Inc., W3-design, USWeb-Apex, Inc.,
Reach Networks, Inc., InnoMate Online Marketing GmbH, Utopia Inc.,
Inter.logic.studios, inc., Quest Interactive Media, Inc., Ensemble
Corporation, Ikonic Interactive, Inc., and Xplora Limited, and the probable
acquisition of Kallista, Inc., as if each of the acquisitions had occurred on
January 1, 1997. All intercompany transactions have been eliminated in
consolidation. The unaudited pro forma balance sheet data reflects (i) the
acquisition of Xplora Limited which occurred subsequent to March 31, 1998, and
the probable acquisition of Kallista, Inc., as if such acquisitions occurred
on March 31, 1998.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------------------- -------------------------
YEAR ENDED THREE MONTHS THREE MONTHS
DECEMBER 31, ENDED MARCH 31, YEAR ENDED ENDED
------------------ ----------------- DECEMBER 31, MARCH 31,
1996 1997 1997 1998 1997 1998
-------- -------- ------- -------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA (1):
Revenues:
Services............... $ -- $ 18,366 $ 59 $ 13,455 $ 58,787 $ 20,395
Other.................. 1,820 912 436 196 403 196
-------- -------- ------- -------- --------- --------
Total revenues......... 1,820 19,278 495 13,651 59,190 20,591
-------- -------- ------- -------- --------- --------
Cost of revenues:
Services............... -- 13,468 165 8,835 38,982 11,530
Other.................. 208 1,294 132 209 1,294 209
Stock compensation (2). -- 2,420 -- 1,681 8,216 2,054
-------- -------- ------- -------- --------- --------
Total cost of revenues. 208 17,182 297 10,725 48,492 13,793
-------- -------- ------- -------- --------- --------
Gross profit............ 1,612 2,096 198 2,926 10,698 6,798
-------- -------- ------- -------- --------- --------
Operating expenses:
Marketing, sales and
support .............. 12,764 20,672 3,751 4,540 30,637 6,522
General and administra-
tive.................. 2,813 10,271 1,444 3,848 19,641 6,071
Acquired in-process
technology (2)........ -- 9,472 711 4,323 14,597 --
Stock compensation (2). -- 6,698 36 2,568 25,112 6,278
Amortization of intan-
gible assets (2) ..... -- 9,476 106 4,495 43,246 6,535
-------- -------- ------- -------- --------- --------
Total operating ex-
penses................ 15,577 56,589 6,048 19,774 133,233 25,406
-------- -------- ------- -------- --------- --------
Loss from operations.... (13,965) (54,493) (5,850) (16,848) (122,535) (18,608)
Interest and other in-
come................... 215 233 7 538 292 540
Interest and other ex-
pense.................. (58) (76) -- (50) (837) (215)
Impairment of investee
carried at cost ....... -- (4,000) -- -- (4,000) --
-------- -------- ------- -------- --------- --------
Net loss................ $(13,808) $(58,336) $(5,843) $(16,360) $(127,080) $(18,283)
======== ======== ======= ======== ========= ========
Net loss per share:
Basic and diluted
(3)(4)................ $ (10.35) $ (7.98) $ (2.00) $ (0.56) $ (10.06) $ (0.54)
======== ======== ======= ======== ========= ========
Weighted average shares
outstanding (3)(4).... 1,334 7,312 2,915 29,441 12,635 33,761
======== ======== ======= ======== ========= ========
Supplemental pro forma
net loss per share:
Basic and diluted
(3)(4)................ $ (2.46) $ (4.78) $ (0.90) $ (0.47) $ (6.41) $ (0.46)
======== ======== ======= ======== ========= ========
Weighted average shares
outstanding (3)(4).... 5,620 12,193 6,462 34,904 19,821 40,031
======== ======== ======= ======== ========= ========
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------------- ---------
DECEMBER 31,
---------------- MARCH 31, MARCH 31,
1996 1997 1998 1998
------- ------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments......................... $ 3,220 $44,145 $ 36,802 $37,098
Working capital...................... 73 40,516 33,153 33,986
Total assets......................... 7,482 79,250 107,321 116,044
Lease obligations, long-term portion. 436 372 1,245 1,245
Mandatorily Redeemable Convertible
Preferred Stock..................... 16,200 -- -- --
Stockholders' equity (deficit)....... (12,492) 66,689 85,126 93,088
</TABLE>
16
<PAGE>
- -------------------
(1) The Company was incorporated on December 6, 1995 and had insignificant
activities from inception through December 31, 1995, which have been
included in the 1996 financial statements to facilitate presentation.
(2) Non-cash acquisition-related charges incurred as a result of the Company's
acquisition program. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 1 to Consolidated
Financial Statements.
(3) See computation of net loss per share in Note 2 to the Consolidated
Financial Statements.
(4) See computation of pro forma net loss per share and supplemental pro forma
net loss per share in Note (G) to the Pro Forma Consolidated Financial
Information.
17
<PAGE>
PRO FORMA SELECTED CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated statement of operations data
reflects the acquisitions of XCom Corporation, Cosmix Corporation, Fetch
Interactive, Inc., NewLink Corporation, InterNetOffice, LLC, NetWORKERS
Corporation, Infopreneurs Inc., Netphaz Corporation, Electronic Images, Inc.,
Multimedia Marketing & Design Inc., KandH, Inc., DreamMedia, Inc., Internet
Cybernautics, Inc., Synergetix Systems Integration, Inc., Online Marketing
Company, Zendatta, Inc., W3-design, USWeb-Apex, Inc., Reach Networks, Inc.,
InnoMate Online Marketing GmbH, Utopia Inc., Inter.logic.studios, inc., Quest
Interactive Media, Inc., Ensemble Corporation, Ikonic Interactive, Inc., and
Xplora Limited, and the probable acquisition of Kallista, Inc., as if each of
the acquisitions had occurred on January 1, 1997. All intercompany
transactions have been eliminated in consolidation. The pro forma consolidated
statement of operations data is presented for informational purposes only and
may not be indicative of the results of operations had the acquisitions
occurred on January 1, 1997, nor do they purport to indicate the future
results of operations of the Company. The following pro forma consolidated
statement of operations data should be read in conjunction with the
Consolidated Financial Statements and the Pro Forma Consolidated Financial
Information and related notes appearing elsewhere in this Prospectus.
Management believes that all adjustments necessary to present fairly such pro
forma consolidated statement of operations data have been made.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED --------------------
DECEMBER 31, MAR. 31, MAR. 31,
1997 1997 1998
------------ --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C>
Revenues:
Services.................................... $ 58,787 $ 12,504 $ 20,395
Other....................................... 403 159 196
--------- --------- ---------
Total revenues.............................. 59,190 12,663 20,591
--------- --------- ---------
Cost of revenues:
Services.................................... 38,982 8,112 11,530
Other....................................... 1,294 132 209
Stock compensation (1)...................... 8,216 2,054 2,054
--------- --------- ---------
Total cost of revenues...................... 48,492 10,298 13,793
--------- --------- ---------
Gross profit................................. 10,698 2,365 6,798
--------- --------- ---------
Operating expenses:
Marketing, sales and support ............... 30,637 5,975 6,522
General and administrative.................. 19,641 4,013 6,071
Acquired in-process technology (1) ......... 14,597 14,597 --
Stock compensation (1)...................... 25,112 6,278 6,278
Amortization of intangible assets (1)....... 43,246 12,065 6,535
--------- --------- ---------
Total operating expenses.................... 133,233 42,928 25,406
--------- --------- ---------
Loss from operations......................... (122,535) (40,563) (18,608)
Interest and other income.................... 292 33 540
Interest and other expense................... (837) (140) (215)
Impairment of investee carried at cost....... (4,000) -- --
--------- --------- ---------
Net loss..................................... $(127,080) $ (40,670) $ (18,283)
========= ========= =========
Net loss per share:
Basic and diluted (2)....................... $ (10.06) $ (4.58) $ (0.54)
========= ========= =========
Weighted average shares outstanding (2)..... 12,635 8,889 33,761
========= ========= =========
Supplemental pro forma net loss per share:
Basic and diluted (2)....................... $ (6.41) $ (2.43) $ (0.46)
========= ========= =========
Weighted average shares outstanding (2)..... 19,821 16,751 40,031
========= ========= =========
</TABLE>
- ---------------------
(1) Non-cash acquisition-related charges incurred as a result of the Company's
acquisition program. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 1 to Consolidated
Financial Statements.
(2) See computations of pro forma net loss per share and supplemental pro
forma net loss per share in Note (G) to the Pro Forma Consolidated
Financial Information.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data," "Pro Forma Selected Consolidated
Financial Data," "Pro Forma Consolidated Financial Information" and the
Company's Consolidated Financial Statements, including the Notes thereto,
included elsewhere in this Prospectus. The discussion in Management's
Discussion and Analysis of Financial Condition and Results of Operations
contains forward-looking statements that involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations and intentions,
as well as financial trends. The cautionary statements made in Management's
Discussion and Analysis of Financial Condition and Results of Operations
should be read as being applicable to all related forward-looking statements
wherever they appear in this Prospectus. The Company's actual results could
differ materially from those discussed below. Factors that could cause or
contribute to such differences include those discussed in "Risk Factors," as
well as those discussed elsewhere herein.
OVERVIEW
USWeb is a leading Internet professional services firm that provides
Intranet, Extranet and Web site solutions and services to businesses. The
Company has built an international network of consulting offices and what it
believes to be one of the most recognized brands for Internet professional
services. The Company offers a comprehensive range of services to deliver
Internet solutions designed to improve clients' business processes. The
Company's services include strategy consulting; analysis and design;
technology development; implementation and integration; audience development;
and maintenance. The Company markets its services to medium-sized and large
companies.
From December 6, 1995 (inception) to March 31, 1997, the Company's operating
activities related primarily to recruiting personnel, raising capital,
preparing and securing approval of its Uniform Franchise Offering Circular and
conducting business as a franchisor of Internet professional services firms.
Each such firm that entered into a franchise agreement with USWeb was
designated an "Affiliate." In March 1997, the Company entered into its last
Affiliate agreement and does not expect to enter into any additional Affiliate
agreements. In the first quarter of 1997, the Company initiated the second
phase of its corporate development strategy and began to acquire Internet
professional services firms, starting with certain qualified Affiliates. To
date, the Company has derived its revenues from a combination of service
revenues generated by its Company-owned offices and fees paid by its
Affiliates. The Company expects that revenues attributable to its Company-
owned offices, which represented approximately 95% of total revenues for the
year ended December 31, 1997, will increase as a percentage of total revenues.
This transition in business strategy from a franchising model to one based on
Company-owned operations accounts for the primary differences in the results
of operations between periods. In addition, because of this transition in
business strategy, the Company believes that its historical financial
statements for periods ending on or before March 31, 1997 may not be
indicative of future operating results.
The Company has only a limited operating history upon which to base an
evaluation of its business and prospects. The 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 Company include, but are not limited to, an
evolving business model and the management of both internal and acquisition-
based growth. To address these risks, the Company must, among other things,
continue to expand its network of consulting offices, continue to develop the
strength and quality of its operations, maximize the value delivered to
clients, enhance the USWeb brand, respond to competitive developments and
continue to attract, retain and motivate qualified employees. There can be no
assurance that the 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 Company's business, results of operations and financial
condition. The Company has incurred net losses since inception, and as of
March 31, 1998 had an accumulated deficit of $88.5 million. Although the
Company
has experienced revenue growth in recent months, such growth rates may not be
sustainable or indicative of future operating results. The Company expects to
continue to incur substantial operating losses through at
19
<PAGE>
least 1998, and there can be no assurance that the Company will achieve or
sustain profitability. See "Risk Factors--Limited Operating History;
Accumulated Deficit."
RECENT EVENTS
The Company filed a Registration Statement on Form S-1 (Registration No.
333-46821) and registered 5,950,000 shares of the Company's Common Stock plus
an additional 892,500 shares of the Company's Common Stock solely to cover
over-allotments that were issued on December 5, 1997 in connection with the
Company's initial public offering. On April 7, 1998, the Company completed a
follow-on offering whereby 1,581,216 and 5,261,284 shares of Common Stock were
sold by the Company and existing stockholders, respectively. Net proceeds to
the Company from the follow-on offering aggregated approximately $32.3
million, after underwriting discounts and commissions and related expenses. In
addition, various option and warrant holders who participated as selling
stockholders in the offering exercised 387,118 Common Stock options and 56,547
Common Stock warrants. Net proceeds to the Company from the exercise of stock
options and common stock warrants aggregated approximately $2.7 million. The
Company has filed its Proxy Statement on Schedule 14A in connection with its
1998 Annual Meeting of Stockholders and has requested the stockholders to
approve amendments to the 1996 Equity Compensation Plan, the 1997 Acquisition
Stock Option Plan and the 1997 Employee Stock Purchase Plan to increase the
number of shares reserved for issuance under each of the respective plans by
5,000,000 shares, 10,000,000 shares and 2,000,000 shares.
ACQUISITION OF INTERNET PROFESSIONAL SERVICES FIRMS
The Company began to acquire selected Internet professional services firms
in the first quarter of 1997. The Company transitioned from a franchise-based
business model to one based on Company-owned operations to provide greater
economies of scale, enable the consulting offices to focus on providing
Internet professional services and facilitate their growth by furnishing
needed working capital. See Note 1 to Consolidated Financial Statements.
The Company generally uses a consistent valuation and process methodology
for its acquisitions. The Company determines the initial purchase price of
each candidate company based on quantitative factors, including historical
revenues, profitability, financial condition and contract backlog, and the
Company's qualitative evaluation of the candidate's management team,
operational scalability and customer base. The Company typically acquires
suitable candidates through mergers in exchange for shares of USWeb Common
Stock. Generally, on the closing date of the acquisition, at least fifty
percent of the shares to be issued are deposited into a one-year escrow and
the remaining shares are delivered to the acquired company's shareholders. The
acquired company is valued again, typically at each of six and twelve months
after acquisition, and additional shares are issued or escrowed shares are
returned depending on whether the valuation has increased or decreased. After
all such purchase price adjustments have been made, all shares remaining in
escrow are issued to the acquired company's shareholders. The Company expects
to continue using this valuation methodology for future acquisitions; however,
in certain situations the Company may use other methodologies as appropriate.
The Company's acquisition program will result in further substantial ownership
dilution to investors participating in this offering. See "Risk Factors--
Dilution" and Note 1 to Consolidated Financial Statements.
The acquisitions have been accounted for using the purchase method of
accounting. For each acquisition, a portion of the purchase price is allocated
to the tangible and identifiable intangible assets acquired and liabilities
assumed based on their respective fair values on the acquisition date.
Identifiable intangible assets include both (i) amounts allocated to in-
process technology and immediately charged to operations and (ii) amounts
allocated to completed technology and amortized on a straight-line basis over
the estimated useful life of the technology of six months. The portion of the
purchase price in excess of tangible and identifiable intangible assets and
liabilities assumed is allocated to goodwill and amortized on a straight-line
basis over the estimated period of benefit, which ranges from one to two
years. The results of operations of the acquired entity are consolidated with
those of the Company as of the date the Company acquires effective control of
the entity, which generally occurs prior to the formal legal closing of the
transaction and the physical exchange of acquisition consideration.
20
<PAGE>
All target company employees and non-employee shareholders that enter into
consulting agreements are granted options to purchase shares of the Company's
Common Stock. Generally, each option becomes exercisable over a 36-month
period. All options have an exercise price per share equal to at least the
fair market value of a share of USWeb Common Stock on the date of grant.
Additional options generally are granted at the revaluation dates if the
target company's formula-based valuation increases. In most cases, each
optionee is also given the right to receive a stock bonus at the time an
option is granted. The stock bonus vests at the same rate as the corresponding
option and is equal in value to the aggregate exercise price of this option.
The stock bonus is payable at the earlier of three years from the date of
grant or, to the extent vested, upon termination of employment. The stock
bonus amount is amortized ratably over a 36-month period and recorded as
compensation expense. This charge is identified as "Stock Compensation" and
allocated to cost of revenues or operating expenses depending on whether the
optionee is acting in a service delivery or administrative capacity.
As a result of both the purchase accounting adjustments and the stock
compensation charges described above, the Company has incurred significant
non-cash expenses related to its acquisitions. For example, for the quarter
ended March 31, 1998, stock compensation expense included in cost of revenues
totaled $1.7 million, stock compensation expense included in operating
expenses totaled $2.6 million and amortization of intangible assets totaled
$4.5 million, all of which were related to the acquisition of the initial
nineteen Company-owned offices. In addition, the Company has recognized an
aggregate cost of $4.3 million for acquired in-process technology related to
the six acquisitions during the quarter ended March 31, 1998. The Company
expects these acquisition-related non-cash expenses to increase as it
continues its acquisition program.
To capitalize on the growth opportunities for a newly acquired consulting
office, the Company generally hires a number of additional Internet
professionals during the three-month period following the office's integration
into the USWeb network. The capacity utilization rates of these new employees
are initially not as high as those of seasoned employees because of the time
spent on training and professional development. Consequently, the Company
expects that the cost of service revenues as a percentage of service revenues
of an integrated office will generally increase during the first three months
following such integration. The Company believes that this investment in
training and professional development will contribute to its ability to meet
its growth targets.
The successful implementation of the Company's acquisition strategy depends
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 do so. Moreover, in pursuing acquisitions the Company may compete with
companies with similar acquisition strategies, certain of which competitors
may be larger and have greater financial and other resources than the Company.
Competition for these acquisition targets could also result in increased
prices for 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 expenses resulting from newly hired
employees, the diversion of management attention, risks associated with the
subsequent integration of acquired businesses, potential disputes with the
sellers of one or more acquired entities and the failure to retain key
acquired personnel. Client satisfaction or performance problems with an
acquired firm could also have a material adverse impact on the reputation of
the Company as a whole, and any acquired subsidiary could significantly under-
perform relative to the Company's expectations. For all of these reasons, the
Company's pursuit of an overall acquisition strategy or any individual
completed, pending or future acquisition may have a material adverse effect on
the Company's business, results of operations and financial condition. To the
extent the Company chooses to use cash consideration in the future to pay for
all or part of any acquisitions, 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. See
21
<PAGE>
"Risk Factors--Risks Related to Acquisitions," "--Future Capital Needs;
Uncertainty of Additional Financing" and Note 1 to Consolidated Financial
Statements.
SOURCES OF REVENUES
The Company operated under its Affiliate model from December 1995
(inception) through the first quarter of 1997. During that period, revenues
were derived almost exclusively from initial fees and monthly royalties from
Affiliates. Initial fees were typically recognized when received because all
obligations required of USWeb by the Affiliate agreement were substantially
performed concurrently with the execution of the agreement. Monthly royalties
are equal to the greater of (a) a minimum monthly payment or (b) the aggregate
of a five percent royalty and a two percent marketing promotion fee applied to
each Affiliate's "Adjusted Gross Revenues," defined as the Affiliate's gross
revenues from Internet professional services less (i) rebates,
discounts and taxes the Affiliate is required to collect, (ii) the Affiliate's
direct cost for third-party hardware and software resold to clients, (iii)
Internet access services purchased from USWeb-approved suppliers and resold to
clients, and (iv) certain other goods and services purchased and resold to
clients. Monthly royalty revenue is recognized as reported by the Affiliate to
the Company. During the year ended December 31, 1997, revenues from Affiliates
were insignificant.
In the first quarter of 1997, the Company ended its program for attracting
new Affiliates and initiated the acquisition phase of its corporate
development strategy. As discussed above under "--Acquisition of Internet
Professional Services Firms," the Company consolidates the financial
statements of acquired entities beginning on the date the Company assumes
effective control of those entities. Revenues from Company-owned operations
consist of fees for consulting services rendered over the course of an
engagement, recognized primarily on a percentage-of-completion basis. The
services offered by the Company include strategy consulting; analysis and
design; technology development; implementation and integration; audience
development; and maintenance. Each engagement is billed over the course of the
engagement on either a time and materials basis or a fixed-price basis.
Billable rates vary by the service provided and geographical region and
typically range from $100 to $250 per hour. Although a majority of engagements
are currently performed on a time and materials basis, the Company intends to
increase the percentage of engagements billed on a fixed-price basis. The
pricing, management and execution of individual engagements are the
responsibility of the consulting office that performs or coordinates the
services. The Company also recognizes revenues from third-party hardware,
software, Internet access and hosting services (which include hardware,
software, connectivity and support that allows users to access a website) and
certain other goods and services purchased and resold to clients; however,
revenues from such activities have been immaterial to date.
To date, the Company has had only limited experience with fixed-price
engagements. The Company's failure to estimate accurately the resources and
time required for an engagement, to manage effectively client expectations
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 have a material adverse
effect on the Company's business, results of operations and financial
condition. See "Risk Factors--Risks of Fixed-Price Engagements."
COST STRUCTURE
Consulting offices owned by the Company recognize revenues primarily using
the percentage-of-completion method. Direct costs, such as personnel salaries
and benefits and the cost of any third-party hardware or software included in
an Internet solution, and related overhead expenses, such as depreciation and
occupancy charges, associated with the generation of the revenues are
classified as cost of revenues. The technology, sales, marketing and
administrative costs of each Company-owned office are classified as operating
expenses. Corporate expenses are primarily classified as operating expenses.
Marketing, sales and support expenses include product and service research,
advertising, brand name promotions and lead-generation activities, as well as
the salary and benefits costs of the personnel in these functions. General and
administrative expenses include accounting, legal and human resources costs.
22
<PAGE>
PRO FORMA RESULTS OF OPERATIONS
The following table presents unaudited pro forma quarterly results of
operations as a percentage of pro forma total revenues. The Company believes
that all necessary adjustments, consisting only of normal recurring
adjustments, have been included in the amounts stated below to present fairly
such quarterly information. The operating results for any quarter are not
necessarily indicative of results for any subsequent period. Because of the
Company's transition from a franchise business model to one based on Company-
owned operations, the Company believes that its historical financial
statements are not necessarily indicative of future operating results. The
Company has therefore included its quarterly results of operations on a pro
forma basis to facilitate the understanding of the effects of business
acquisitions on the Company's operations. See "Pro Forma Consolidated
Financial Information" following the Notes to Consolidated Financial
Statements.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ---------------------
1997 1997 1998
------------ --------- ---------
<S> <C> <C> <C>
Revenues:
Services................................. 99 % 99 % 99 %
Other.................................... 1 1 1
---- --------- ---------
Total revenues........................... 100 100 100
---- --------- ---------
Cost of revenues:
Services................................. 66 64 56
Other.................................... 2 1 1
Stock compensation (1)................... 14 16 10
---- --------- ---------
Total cost of revenues................... 82 81 67
---- --------- ---------
Gross profit.............................. 18 19 33
---- --------- ---------
Operating expenses:
Marketing, sales and support............. 52 47 32
General and administrative............... 33 32 29
Acquired in-process technology (1)....... 25 115 71
Stock compensation (1)................... 42 50 30
Amortization of intangible assets (1).... 73 95 59
---- --------- ---------
Total operating expenses.................. 225 339 221
---- --------- ---------
Loss from operations...................... (207) (320) (188)
Interest and other income................. 1 -- 2
Interest and other expense................ (2) (1) (1)
Impairment of investee carried at cost.... (7) -- --
---- --------- ---------
Net loss.................................. (215)% (321)% (187)%
==== ========= =========
</TABLE>
- ---------------------
(1) Non-cash acquisition-related charges incurred as a result of the Company's
acquisition program. See "--Acquisition of Internet Professional Services
Firms" and Note 1 to Consolidated Financial Statements.
PRO FORMA RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 AND QUARTER ENDED MARCH 31, 1998
Revenues. Pro forma revenues were $59.2 million for the year ended December
31, 1997 and $20.6 million for the quarter ended March 31, 1998. These amounts
comprise primarily service revenues generated by Company-owned offices, which
totaled $58.8 million for the year ended December 31, 1997 and $20.4 million
for the quarter ended March 31, 1998. Increases in revenues are primarily
attributable to increases in the number of billable consultants, the addition
of new clients and expanded relationships with existing clients.
23
<PAGE>
Cost of Revenues. Pro forma cost of revenues totaled $48.5 million for the
year ended December 31, 1997 and $13.8 million for the quarter ended March 31,
1998. These amounts consisted of cost of services, other costs and stock
compensation.
The decrease in cost of services as a percentage of total revenues from
81.9% for the year ended December 31, 1997 to 67.0% for the quarter ended
March 31, 1998 is primarily attributable to increased hiring of additional
consultants in various offices during 1997 who achieved higher utilization in
1998 compared to 1997. Consultants typically are not fully utilized during the
initial months of employment as they undergo training and become integrated
into the Company's operations.
Costs of other revenues represent costs associated with the Affiliate
Warrant Program and other services costs such as web site hosting.
Stock compensation represents a non-cash charge related to the amortization
of stock bonuses.
Marketing, Sales and Support Expenses. Pro forma marketing, sales and
support expenses totaled $30.6 million for the year ended December 31, 1997
and $6.5 million for the quarter ended March 31, 1998. These amounts comprise
primarily expenditures and personnel-related costs incurred in advertising and
promoting the USWeb brand. Marketing, sales and support expenses during the
year ended December 31, 1997 included a one-time, non-cash charge of $1.3
million, relating to the discounted sale of Common Stock to Intel at $6.00 per
share contemporaneously with the Company's initial public offering.
General and Administrative Expenses. Pro forma general and administrative
expenses totaled $19.6 million for the year ended December 31, 1997 and $6.1
million for the quarter ended March 31, 1998. These amounts consisted
primarily of personnel costs related to growth of the Company's operations and
professional services fees incurred in relation to the Company's acquisition
program.
General and administrative expenses during the year ended December 31, 1997
include a one-time non-cash compensation charge of $1.1 million related to the
Company's decision to end its program for attracting new Affiliates.
Acquired In-Process Technology. On a pro forma basis, assuming all of the
acquisitions occurred on January 1, 1997, the Company recognized the cost of
acquired in-process technology totaling $14.6 million during the year ended
December 31, 1997. The acquired in-process technology had not reached the
stage of technological feasibility at the date of acquisition and had no
alternative future use.
Stock Compensation Expense. Pro forma stock compensation expense, including
amounts allocated to cost of revenues, totaled $33.3 million for the year
ended December 31, 1997 and $8.3 million for the quarter ended March 31, 1998
and represents amortization of stock bonuses awarded to employees of Company-
owned offices. Such amount is amortized over the related vesting period of
thirty-six months on a straight-line basis.
Amortization of Intangible Assets. Pro forma amortization of intangible
assets totaled $43.2 million for the year ended December 31, 1997 and $6.5
million for the quarter ended March 31, 1998. Such amounts represents
amortization of identified intangible assets and goodwill resulting from the
Company's various acquisitions amortized over various periods ranging from six
to twenty-four months. Decreases in amortization of intangible assets as a
percentage of revenues result from increasing service revenues and completion
of the amortization of capitalized technologies of Company-owned offices.
Impairment of Investee. During the year ended December 31, 1997, the Company
recognized an impairment provision totaling $4.0 million, representing the
total amount of its cost basis investment in Utopia Inc., an independent
Internet consulting firm. In assessing the level of impairment, the Company
considered the entity's current financial position, recent operating
performance and the likelihood of recovery of some or all of its investment in
the event of liquidation, sale or merger.
24
<PAGE>
Income Taxes. No provision for federal and state income taxes has been
recorded by the Company, because the Company incurred net operating losses
during that year.
Net Loss. Pro forma net loss was $127.1 million for the year ended December
31, 1997 and $18.3 million for the quarter ended March 31, 1998. Included in
cost of revenues and operating expenses are approximately $91.2 million and
$14.9 million of non-cash charges associated with the Company's ongoing
acquisition program for the year ended December 31, 1997 and the quarter ended
March 31, 1998, respectively.
HISTORICAL RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenues. Total revenues increased to $19.3 million for the year ended
December 31, 1997 from $1.8 million for the year ended December 31, 1996. This
increase was primarily attributable to the Company beginning its acquisition
program in the first quarter of 1997. No service revenues were recorded for
the year ended December 31, 1996 because during this period the Company did
not have any Company-owned offices and instead derived its revenues from
initial fees and monthly royalties from Affiliates. The Company anticipates
that revenues will be impacted in future periods as a result of internal
growth and as a result of acquisitions of additional Internet professional
service firms.
Cost of Revenues. Cost of revenues increased to $17.2 million for the year
ended December 31, 1997 from $208,000 for the year ended December 31, 1996.
The increase in cost of revenues was primarily attributable to the cost of
revenues associated with Company-owned offices subsequent to their respective
acquisition dates. The Company anticipates that cost of revenues will increase
in absolute dollars as service fees generated by the Company-owned offices and
the level of services increases, and as a result of acquisitions of additional
Internet professional service firms.
Marketing, Sales and Support Expenses. Marketing, sales and support expenses
increased to $20.7 million for the year ended December 31, 1997 from $12.8
million for the year ended December 31, 1996. This increase was primarily
attributable to USWeb branding campaigns, increases in personnel to support
the growth in the Company's operations and the consolidation of the results of
operations of Internet professional services firms with those of the Company
throughout 1997. In addition, during December 1997, the Company recognized a
non-cash charge of $1.3 million associated with the discounted sale of Common
Stock to Intel Corporation. The Company anticipates that marketing, sales and
support expenses will increase in future periods in absolute dollars as it
continues to pursue an aggressive brand building strategy and continues to
acquire and consolidate the results of Internet professional service firms.
General and Administrative Expenses. General and administrative expenses
increased to $10.3 million for the year ended December 31, 1997, from $2.8
million for the year ended December 31, 1996. This increase was primarily
attributable to a non-cash compensation charge of $1.1 million during the
quarter ended September 30, 1997, related to the Company's decision to end its
program for attracting new Affiliates and increases in personnel to support
the internal growth in the Company's operations and the consolidation of the
results of operations of acquired Internet professional services firms with
those of the Company throughout 1997. The Company believes that the absolute
dollar level of general and administrative expenses will increase in future
periods, as a result of increased staffing, fees for professional services,
and costs associated with acquiring and consolidating the results of Internet
professional service firms with those of the Company.
Acquired In-Process Technology. The Company recognized the cost of acquired
in-process technology totaling $9.5 million during the year ended December 31,
1997. The Company did not record any such
expenses for the year ended December 31, 1996, because the Company did not
acquire any entities during such period. The acquired in-process technology
had not reached the stage of technological feasibility at the date of
acquisition and had no alternative future use. The Company anticipates that
acquired in-process technology expenses will increase in future periods in
absolute dollars as it continues to acquire Internet professional service
firms with in-process technology.
25
<PAGE>
Stock Compensation. Stock compensation expense relating to stock bonus
awards to employees of acquired entities totaled $6.7 million for the year
ended December 31, 1997. The Company did not record any such expenses for the
year ended December 31, 1996 because the Company did not acquire any entities
during such period. The Company anticipates that stock compensation expense
will increase in future periods in absolute dollars as it continues to acquire
Internet professional service firms.
Amortization of Intangible Assets. Amortization of intangible assets,
consisting primarily of purchased technology and goodwill, was $9.5 million
for the year ended December 31, 1997. The Company did not record any such
expenses for the year ended December 31, 1996 because the Company did not
acquire any entities during such period. The Company anticipates that costs
related to the amortization of intangible assets will increase in future
periods in absolute dollars as it continues to acquire Internet professional
service firms.
Impairment of Investee. During June 1997, the Company recognized an
impairment provision totaling $4.0 million, representing the total amount of
its cost basis investment in Utopia Inc., an independent Internet consulting
firm. In assessing the level of impairment, the Company considered the
entity's current financial position, recent operating performance and the
likelihood of recovery of some or all of its investment in the event of
liquidation, sale or merger.
Income Taxes. No provision for federal and state income taxes was recorded
for either of the years ended December 31, 1997 and 1996 because the Company
incurred net operating losses in each of those periods.
Net Loss. Net losses for the years ended December 31, 1997 and 1996 were
$58.3 million and $13.8 million, respectively. The increase in the net loss
was primarily attributable to increases in marketing, sales and support
expenditures, approximately $28.1 million of non-cash charges associated with
the Company's acquisition program and a $4.0 million impairment charge
relating to an investee carried at cost.
QUARTERS ENDED MARCH 31, 1998 AND 1997
Revenues. Total revenues increased to $13.7 million for the quarter ended
March 31, 1998, from $495,000 for the quarter ended March 31, 1997. This
increase was primarily attributable to the Company's acquisition program,
which began in the first quarter of 1997. The Company recognized twenty-five
acquisitions as of March 31, 1998 compared to one as of March 31, 1997.
Service revenues for the quarter ended March 31, 1997 were minimal as the
Company derived its revenues from initial fees and monthly royalties from
Affiliates. The Company anticipates that revenues will vary in future periods
as a result of internal growth and as a result of acquisitions of additional
Internet professional service firms.
Cost of Revenues. Cost of revenues increased to $10.7 million for the
quarter ended March 31, 1998, from $297,000 for the quarter ended March 31,
1997. The increase in cost of revenues was primarily attributable to the cost
of revenues associated with acquired companies subsequent to their respective
acquisition dates. The Company recognized twenty-five acquisitions as of March
31, 1998 compared to one as of March 31, 1997. The Company anticipates that
cost of revenues will increase in absolute dollars as a result of acquisitions
of additional Internet professional service firms, and as service fees
generated by the Company-owned offices and the level of services increases.
Marketing, Sales and Support Expenses. Marketing, sales and support expenses
increased to $4.5 million for the quarter ended March 31, 1998, from $3.8
million for the quarter ended March 31, 1997. This increase was primarily
attributable to USWeb branding campaigns, increases in personnel to support
the growth in the Company's operations and the consolidation of the results of
operations of Internet professional services firms with those of the Company
during each period. The Company recognized twenty-five acquisitions as of
March 31, 1998 compared to one as of March 31, 1997. The Company anticipates
that marketing, sales and support expenses will increase in future periods in
absolute dollars as it continues to pursue an aggressive brand building
strategy and continues to acquire and consolidate the results of Internet
professional service firms.
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General and Administrative Expenses. General and administrative expenses
increased to $3.8 million for the quarter ended March 31, 1998, from $1.4
million for the quarter ended March 31, 1997. This increase was primarily
attributable to increases in personnel to support the internal growth in the
Company's operations and the consolidation of the operations of acquired
Internet professional services firms with those of the Company during each
period. The Company recognized twenty-five acquisitions as of March 31, 1998
compared to one as of March 31, 1997. The Company believes that the absolute
dollar level of general and administrative expenses will increase in future
periods as a result of increased staffing, fees for professional services, and
costs associated with acquiring and consolidating the results of Internet
professional service firms with those of the Company.
Acquired In-Process Technology. Acquired in-process technology increased to
$4.3 million for the quarter ended March 31, 1998, from $711,000 for the
quarter ended March 31, 1997. This increase was primarily attributable to the
recognition of five acquisitions by the Company during the quarter ended
March 31, 1998 compared to one during the quarter ended March 31, 1997. The
acquired in-process technology related to each company had not reached the
stage of technological feasibility at the date of acquisition and had no
alternative future use. The Company anticipates that acquired in-process
technology expenses will increase in future periods in absolute dollars as it
continues to acquire Internet professional service firms with in-process
technology.
Stock Compensation. Stock compensation expense relating to stock bonus
awards to employees of acquired entities increased to $2.6 million for the
quarter ended March 31, 1998, from $36,000 for the quarter ended March 31,
1997. This increase was primarily attributable to the recognition of twenty-
five acquisitions by the Company as of March 31, 1998 compared to one as of
March 31, 1997. The Company anticipates that stock compensation expense will
increase in future periods in absolute dollars as it continues to acquire
Internet professional service firms.
Amortization of Intangible Assets. Amortization of intangible assets,
consisting primarily of purchased technology and goodwill, increased to $4.5
million for the quarter ended March 31, 1998, from $106,000 for the quarter
ended March 31, 1997. This increase was primarily attributable to the
recognition of twenty-five acquisitions by the Company as of March 31, 1998
compared to one as of March 31, 1997. The Company anticipates that costs
related to the amortization of intangible assets will increase in future
periods in absolute dollars as it continues to acquire Internet professional
service firms.
Income Taxes. No provision for federal and state income taxes was recorded
for either of quarters ended March 31, 1998 and 1997 because the Company
incurred net operating losses in each of those periods.
Net Loss. Net losses for the quarters ended March 31, 1998 and 1997 were
$16.4 million and $5.8 million, respectively. The increase in the net loss was
primarily attributable to non-cash charges of $13.1 million associated with
the Company's acquisition program for the quarter ended March 31, 1998
compared to non-cash charges of $853,000 for the quarter ended March 31, 1997
and increases in general and administrative expenditures.
FACTORS AFFECTING OPERATING RESULTS
The Company's operating results may fluctuate significantly in the future as
a result of a variety of factors, many of which are outside the Company's
control. These factors include the level of demand for Intranet, Extranet and
Web site development; the productivity of the Company's consulting offices;
the Company's success in finding and acquiring suitable acquisition
candidates; the Company's ability to attract and retain personnel with the
necessary strategic, technical and creative skills required to service clients
effectively; the cost of advertising and related media; the amount and timing
of expenditures by USWeb clients for Internet professional services; client
budgetary cycles; the amount and timing of capital expenditures and other
costs relating to the expansion of the Company's operations; the introduction
of new products or services by the Company or its competitors; pricing changes
in the industry; technical difficulties with respect to the use of the
Internet; economic conditions specific to Internet technology usage; and
general economic conditions. As
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a strategic response to changes in the competitive environment, the 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 Company's business, results of operations and financial
condition. The Company may also experience seasonality in its business in the
future, resulting in diminished revenues to the Company as a consequence of
decreased demand for Internet professional services during summer and year-end
vacation and holiday periods. Due to all of the foregoing factors, in future
periods the Company's operating results 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. See
"Risk Factors--Potential Fluctuations in Quarterly Results."
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The
adoption of SFAS No. 131 is required for fiscal years beginning after December
15, 1997. SFAS No. 131 requires that companies report separately in their
financial statements certain financial and descriptive information about
operating segments, if applicable. The Company does not expect the adoption of
SFAS No. 131 to have any impact on the Company's consolidated financial
results and is currently assessing the disclosure requirements of the new
pronouncement.
The Company 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. Compensation expenses associated with
such non-employee stock options granted to date have not been significant.
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income" in the quarter
ended March 31, 1998. SFAS No. 130 requires the Company to report in their
financial statements, in addition to its net income (loss), comprehensive
income (loss), which includes all changes in equity during a period from non-
owner sources including, as applicable, foreign currency items, minimum
pension liability adjustments and unrealized gains and losses on certain
investments in debt and equity securities. During the quarter ended March 31,
1998, such items were not significant, and the Company's comprehensive loss
approximated its net loss.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance for determining whether computer software is internal-use software
and on accounting for the proceeds of computer software originally developed
or obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer
software developed or obtained for internal use. The Company has not yet
determined the impact, if any, of adopting SOP 98-1, which will be effective
for the Company's year ending December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had approximately $36.8 million in cash, cash
equivalents and short-term investments. In December 1997, the Company
completed an initial public offering of its Common Stock, resulting in net
proceeds to the Company of approximately $38.3 million. The Company has also
financed its operations through private sales of equity securities. For the
period from December 6, 1995 (inception) to March 31, 1998, the Company used
approximately $41.2 million and approximately $5.6 million to fund operating
activities and capital equipment purchases, respectively. These operating and
investing expenditures were financed primarily with the net proceeds from
private sales of Preferred Stock totaling approximately $32.5 million, the
issuance of Common Stock totaling approximately $2.0 million, the issuance of
$500,000 in promissory notes that were subsequently converted into Common
Stock and equipment lease obligations totaling approximately $1.0 million.
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In October 1997, the Company entered into a credit facility with a bank that
allows the Company to borrow up to a maximum of $3.0 million to finance
various equipment purchases. As of December 31, 1997, borrowings outstanding
under the credit facility approximated $1.3 million. Expenditures for property
and equipment, including those subsequently financed under capitalized
equipment leases, are primarily for purchases of computer hardware and
software used in the Company's operations, including expenditures for
management information and communications systems.
In November 1997, the Company obtained a bridge loan facility from a bank.
Under the terms of the facility the Company borrowed $2.0 million, which was
secured by substantially all of the Company's assets. The loan accrued
interest at the bank's prime rate plus 1%. On December 10, 1997, the Company
repaid the outstanding amount.
In addition to the 5,750,000 shares of Common Stock sold by the Company in
its initial public offering, including the underwriter's over-allotment
option, contemporaneously with that offering the Company sold to Intel in a
private placement 1,666,666 shares of unregistered Common Stock at a price of
$6.00 per share. Such sale was effected pursuant to a separate agreement with
Intel entered into in November 1997 and not pursuant to the Underwriting
Agreement entered into by the Company in connection with its initial public
offering.
During April 1998, the Company completed a follow-on public offering. As
part of such offering, the Company sold 1,581,216 shares of Common Stock,
including the Underwriters' over-allotment, at $22.00 per share, resulting in
net proceeds of $32.3 million, after underwriting discounts and commissions
and related expenses. Additionally, the Company received $2.7 million from the
exercise of stock options and warrants exercised by option and warrant holders
who participated as selling stockholders in the follow-on offering.
The Company believes that the net proceeds from this offering, combined with
current cash and cash equivalent balances, borrowings available under its
credit facilities and proceeds from the private placement, will be sufficient
to fund its requirements for working capital and capital expenditures for at
least the next 12 months. Thereafter the Company may sell additional equity or
debt securities or seek additional credit facilities. Sales of additional
equity or convertible debt securities would result in additional dilution to
the Company's stockholders. The Company may need to raise additional funds
sooner in order to support more rapid expansion, develop new or enhanced
services and products, respond to competitive pressures, acquire complementary
businesses or technologies or take advantage of unanticipated opportunities.
The Company's future liquidity and capital requirements will depend upon
numerous factors, including the success of the Company's existing and new
service offerings and competing technological and market developments. See
"Risk Factors--Future Capital Needs; Uncertainty of Additional Financing."
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BUSINESS
OVERVIEW
USWeb is a leading Internet professional services firm that provides
Intranet, Extranet and Web site solutions and services to medium-sized and
large companies. The Company has built a national network of consulting
offices and what it believes to be one of the most recognized brands for
Internet professional services. The Company offers a comprehensive range of
services to deliver Internet solutions designed to improve clients' business
processes. The Company's services include strategy consulting; analysis and
design; technology development; implementation and integration; audience
development and maintenance. The Company markets its services to medium-sized
and large companies.
INDUSTRY BACKGROUND
Intranets, Extranets and Web sites (collectively, "Internet solutions")
provide companies with a new set of tools for improving basic business
processes such as communications, data transmission, marketing, transaction
processing and customer service. An Intranet enables a company's employees to
receive corporate information and training efficiently, communicate through e-
mail, use the internal network's business applications, and access proprietary
information and legacy databases. An Extranet can extend part or all of the
functionality of a secure Intranet to selected business partners outside of
the company, such as customers, suppliers or distributors. Forrester Research,
Inc. ("Forrester") estimates that the worldwide market for Intranet
development services will grow from approximately $100 million in 1996 to
approximately $6.9 billion in 2000. Web sites, which are accessible by the
general public, can present advertising and marketing materials in new and
compelling fashions, display products and services in electronic catalogs,
offer products and services for sale online, process transactions and fulfill
orders, provide customers with rapid and accurate responses to their
questions, and gather customer feedback efficiently. Forrester estimates that
the worldwide market for Web site content and electronic commerce solution
development will grow from approximately $1.2 billion in 1996 to approximately
$9.4 billion in 2000.
Although businesses are adopting Internet solutions rapidly and at
increasing rates, the basic technical differences of such solutions from
earlier technologies and the broad scope of business process improvements that
such solutions can provide require companies to take fundamentally new
approaches toward implementing them. Businesses seeking to realize the
benefits provided by Internet solutions face a formidable series of challenges
presented by the need to link business strategy, new and rapidly changing
technologies and continuously updated content. Before creating an Intranet,
Extranet or Web site, a company must first conduct a thorough needs assessment
to review its strategic business requirements and compare them to the
capabilities of its existing processes and systems. Next, the company must
architect the solution and develop an implementation plan. The implementation,
establishment and maintenance of the solution will require significant
technical expertise in a number of areas, such as electronic commerce systems,
security and privacy technologies, application and database programming,
mainframe and legacy integration technologies and advanced user interface and
multimedia production.
To perform this multitude of functions in-house, a company would have to
make substantial commitments of time, money and technical personnel to keep
current with rapidly evolving technologies, content presentation techniques
and competitors' offerings. Professionals with the requisite strategic,
technical and creative skills are often in short supply and many organizations
are reluctant to expand their internal information systems or marketing
departments for particular engagements at a time when they are attempting to
minimize fixed costs to increase returns on investment. At the same time,
external economic factors encourage organizations to focus on their core
competencies and trim workforces in the information technology management
area. Accordingly, many businesses have chosen to outsource a significant
portion of the design, development and maintenance of their Intranets,
Extranets and Web sites to independent professionals who can leverage
accumulated strategic, technical and creative talent and stay current with
ongoing developments in a field characterized by extremely short technology,
process and content lifecycles.
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Companies seeking to establish Internet solutions may turn to their
traditional marketing or technology service providers for assistance. However,
most of these providers have neither a proven track record of successful
Internet solution deployment nor the full portfolio of strategy, technology,
marketing and creative skills required to serve client needs effectively. Most
advertising and marketing communications agencies lack the extensive technical
skills, such as application development and legacy system and database
integration, required to produce the increasingly complex and functional
solutions demanded by clients. Most national information technology consulting
service providers have sizable corporate infrastructures and have therefore
chosen to focus on multi-million dollar engagements such as Year 2000 projects
and client/server enterprise resource planning software deployments, not
Internet solution consulting engagements. Most large computer technology
product and service vendors lack the creative and marketing skills required to
build audiences and deliver unique and compelling content, and are further
constrained by their need to recommend their proprietary brands. Internet
access service providers, whose core strength is in providing Internet access
and site hosting rather than solution development, typically lack both the
necessary creative and application development skills.
A number of small Internet professional services firms have emerged to
address the significant and rapidly growing market for Internet solutions.
However, the small size and capital constraints of most of these firms
restrict their ability to supply clients with the necessary depth and
integration of strategic, technical and creative skills. Furthermore, many of
these providers tend to develop expertise in a limited number of vertical
markets because of the need to leverage the information and experiences gained
from the relatively small number of Internet solution engagements they have
completed.
The Company believes that the rapidly increasing demand for Internet
solutions, combined with the inability of most current providers to supply the
full range and integration of strategic, technical and creative skills
required by clients, has created a significant market opportunity for a scaled
Internet professional services firm. In the currently fragmented and rapidly
changing environment, an organization that could deliver the creative
strengths of advertising and marketing firms, the strategic skills and
technical capabilities of information technology consulting service providers,
and the national reputation, economies of scale, multiple points of local
presence and information sharing capabilities of a large organization could
capitalize on this opportunity to help companies significantly improve their
business processes.
THE USWEB SOLUTION
USWeb's mission is to provide clients with the vision, expertise and
resources required to develop new strategies and improve business processes
using Internet solutions. To capitalize on the opportunity presented by the
rapid growth in demand for such solutions combined with a fragmented group of
organizations serving this demand, USWeb has built and is continuing to expand
through acquisitions and internal growth an Internet professional services
firm with 39 Company-owned and Affiliate offices as of March 31, 1998. The
Company's services include strategy consulting; analysis and design;
technology development; implementation and integration; audience development;
and maintenance.
The Company delivers value to its clients through the application of its
Internet strategy and solutions methodology. Through its focus on Internet
technologies, the Company believes that it is well positioned to provide wide-
ranging and leading edge expertise with regard to:
. Internet browsers, servers and plug-ins
. Electronic commerce and transaction systems
. Security authentication and privacy technologies
. E-mail and advanced collaboration systems
. Digital asset management systems
. Client/server and database application systems
. Mainframe and legacy integration technologies
. Advanced user interface and multimedia production
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. Internet-based video conferencing
. Custom programming and tool applications
. Site administration and reporting tools
. Internet marketing systems and services
. Client, server and routing hardware
. Internet access and hosting services
The Company delivers these services to clients through its network of
consulting offices, whose regional presence enables each office to develop
close client relationships and an understanding of client needs. Each
consulting office also benefits from the resources of the overall USWeb
organization. For example, individual consulting offices may draw as needed
upon the assistance of one or more additional offices with specialized
creative or technical expertise. Each consulting office also draws upon the
USWeb Internet Strategy and Solutions Center, which aggregates the expertise
of the entire USWeb network of offices to provide resources such as USWeb
Business Solutions that target selected client market segments or business
functions, a centralized index of best demonstrated practice methodologies, a
technology library of proprietary reusable software and content objects, a
central project registry, executive briefing programs for client decision
makers, SiteCast Internet solution education broadcasts and professional
Internet technology certification programs. The consulting offices can
leverage these central resources to provide clients efficiently with effective
Internet business solutions. The Company believes that its methodology has a
proven track record of delivering value to clients and is an important factor
in retaining existing clients and marketing to new ones.
USWeb believes that its operational model enables it to scale rapidly by
leveraging its central resources as its operations expand. First, the Company
believes that its aggregation and deployment of the accumulated experience and
expertise of its network of offices provides clients with enhanced business
solutions. Second, the Company's ability to leverage central technology and
operational resources enables the Company to scale efficiently, both through
the growth of existing consulting offices and the acquisition of new offices,
which also provides significant numbers of additional skilled personnel.
Finally, the Company's aggressive brand development campaign, which reinforces
the message that USWeb is a secure, reliable, high quality choice for the
provision of Internet professional services, increases the Company's ability
to access and influence key client decision makers.
STRATEGY
The Company's objective is to become and remain the leading global Internet
professional services firm. The Company's strategy to achieve this objective
includes the following elements:
Continue to Expand Network of Company-Owned Offices. The Company is
continuing to build its network of Company-owned offices through acquisitions
and internal growth. The Company believes that in the fragmented market for
providing Internet solutions, rapidly building a critical mass of strategic,
technical and creative talent through both internal growth and acquisitions
will provide USWeb with a substantial competitive advantage. As of March 31,
1998, USWeb had Company-owned offices in 31 locations across the United
States, including Atlanta, Austin, Boston, Chicago, Detroit, Los Angeles,
Milwaukee, New York, Philadelphia, Phoenix, Pittsburgh, Santa Clara, San
Diego, San Francisco, Seattle and Washington, D.C., as well as an office in
Dusseldorf, Germany and an office in Windsor, United Kingdom. The Company
intends to acquire additional entities in both the U.S. and abroad by
continuing to implement its acquisition methodology for identifying, acquiring
and integrating Internet professional services firms that meet the Company's
criteria for revenues, profitability, growth potential and operating strategy.
Strengthen Position as a Leading Internet Professional Services Firm. The
Company is continuing to strengthen its position as a leading Internet
professional services firm in order to provide clients with superior Internet
solutions. The Company intends to continue investing significantly in
identifying, reviewing and integrating the latest Internet technologies and
accumulating and deploying the best demonstrated practices for developing and
implementing Internet solutions. The Company is continuing to develop USWeb
Business Solutions, partially pre-built Internet solutions that combine USWeb
methodologies, services and reusable
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software and content objects with third-party software. The Company's
consulting offices intend to continue leveraging the Company's nationwide
presence, operational scale and professional marketing tools, which provide
each consulting office with resources and credibility to convince client
decision makers that USWeb can provide successful Internet solutions to meet
the most demanding business needs. The Company also intends to remain focused
on delivering the Internet solution best suited to a client's needs.
Enhance USWeb Brand. In a fragmented industry that lacks brands strongly
identified with Internet professional services, USWeb believes that it has
built one of the most well-recognized brands. The Company's brand development
programs are designed to reinforce the message that USWeb is a national
company with a local presence that can provide a complete range of services to
build and deploy business solutions and has a proven track record of doing so.
The Company is continuing to build and differentiate this brand through the
use of publicity campaigns that include Internet, print and radio advertising;
national seminars and executive briefings; Internet broadcasts; extensive
marketing tools and educational "white papers"; and co-marketing programs with
selected strategic partners.
Develop Additional Strategic Relationships. The Company intends to continue
developing strategic relationships because they enable USWeb to enter new
markets, gain early access to leading-edge technology, cooperatively market
products and services with leading technology vendors, cross-sell additional
services and gain enhanced access to vendor training and support. USWeb has
developed a number of strategic relationships with leading Internet hardware,
software and content companies, including Intel, Microsoft, Hewlett-Packard,
Pandesic LLC (the Internet company from Intel and SAP), Sun Microsystems and
Reuters. Collectively these relationships provide for co-marketing programs,
joint research and development on leading implementations of Internet
solutions, technical education, client feedback channels and hardware and
software distribution rights.
Leverage Operational Economies of Scale. USWeb provides certain operational
and administrative services centrally, allowing the network of offices to
benefit from the economies of scale created by a large operation while
enabling the consulting offices to focus on their core competency of providing
superior client services. These centrally provided services include business
development programs, operations management guides, client support assistance,
carrier-grade site hosting, human resources programs, financial reporting and
forecasting, performance appraisals and standardized methodologies.
SERVICES
The Company offers a comprehensive range of services to deliver Internet
solutions designed to improve clients' business processes. In each consulting
engagement, the client can contract for the specific services it requires,
depending on the nature of the engagement and the capabilities of the client's
organization. The Company bills most of its engagements on a time and
materials basis, although it has delivered several solutions on a fixed-price
basis and intends to increase the percentage of engagements provided on such a
basis.
INTERNET SOLUTION DEVELOPMENT AND DEPLOYMENT. The Company's Internet
solution development and deployment methodology consists of six phases:
Strategy Consulting. USWeb works closely with the client to conduct a
thorough study of the client's strategic market position, business
requirements and existing systems and capabilities to determine the ways in
which Internet solutions can most improve the client's business processes. The
Company then delivers its recommendations, which define the strategic basis
for a specific Internet solution that takes into account the client's budget,
timeline and available resources.
Analysis and Design. Once the strategic groundwork has been established, the
Company translates the client's strategic requirements into a system or
process design architecture, a blueprint that defines the roles the system
will perform to meet those requirements. By choosing USWeb, the Company's
clients receive vendor-neutral solutions prepared by Internet-focused
consultants. USWeb researches, tests and evaluates
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virtually all major Internet technologies and tools to design system and
process architectures that successfully meet client needs. The Company's
objective is to design, build and deploy a solution that is logically planned,
scales well over time, is sufficiently secure, and is easy to use, administer
and manage.
Technology Development. In the development phase, the Company builds a
testable version of the client's solution based on the blueprint produced in
the analysis and design phase. The Company designs, codes, integrates and
tests all necessary programs and components using a broad range of expertise,
including object-based and relational database systems; electronic commerce
systems; custom ActiveX, Java and C++ programming and host integration;
implementation of third-party applications and security technologies; and
integration of hardware, software and Internet access products. USWeb's
experienced and professional graphic designers also work to create a
compelling user interface for the solution to enable it to attract and hold
the attention of the client's target audience while conforming to the client's
brand image and marketing campaigns. In performing these functions, USWeb
professionals benefit from access to an extensive library of re-usable
software and content objects.
Implementation and Integration. In the implementation phase, USWeb tests the
solution created in the development phase and readies it to be deployed into a
full production system. The Company delivers the system to the client,
installs it, converts and initializes all necessary data, performs acceptance
testing and puts the system into operation. The Company also integrates
Intranet solutions with back-office legacy systems to ensure that each
client's critical applications are secure and seamless. USWeb maintains third-
party vendor relationships that offer its clients secure, state-of-the-art,
high-availability Intranet, Extranet and Web site hosting and integrated
services for relational databases, workgroup collaboration, streaming audio
and video, management and monitoring, e-mail and secure electronic commerce.
Audience Development. The Company can work with the client to develop a
strategy for achieving its online marketing objectives by increasing Web site
traffic, strengthening brand awareness and generating sales leads. The Company
provides online media planning and purchasing services and advice regarding
online public relations. The Company has also developed a proprietary audience
creation methodology designed to optimize a Web site's search engine presence,
increase site access through hyperlink recruitment and disseminate the
client's key messages to Internet newsgroups, mailing lists and forums.
Maintenance. USWeb can provide the client with ongoing support services for
its Internet solutions, from content maintenance to site administration, for
as long as the client wishes. The Company's technical staff can also assist
clients on a case-by-case basis to resolve technical problems, provide
assistance with the hosting environment, and deliver support for Internet
solution software.
EXAMPLES OF USWEB INTERNET SOLUTIONS. The following examples illustrate the
Company's Internet solution development capabilities.
Ingram Micro E-Commerce Extranet. Ingram Micro Inc. ("Ingram Micro"), a
leading wholesale distributor of technology products and services, teamed with
USWeb to build and deploy an e-commerce Extranet for on-line distribution. The
business-to-business commerce solution, called Auction Block, is a real-time,
on-line bidding service that allows resellers to purchase new, unopened
products that are not returnable to the manufacturer. USWeb developed a
customized Java-based inventory auction system that automates inventory
negotiation processes in real-time and integrated it with Ingram Micro's back-
end database to facilitate user authentication and inventory tracking. This
new Internet distribution channel has become a new source of revenues for
Ingram Micro.
Harley-Davidson Dealer Extranet. Harley-Davidson, a motorcycle manufacturer,
was seeking ways to streamline two specific business processes: technical
documentation distribution and warranty claims processing. To obtain
instruction sheets, service bulletins or other technical documentation,
dealers previously had to request the appropriate documents by telephone and
then wait for Harley-Davidson to process the request manually and fax the
documents back to the dealership. To process warranty claims, dealers
previously
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had to mail such claims to Harley-Davidson and wait for them to be manually
entered into a database and checked for errors through overnight batch
processing. Both of these procedures were slow, inefficient and prone to
errors. To improve these basic business processes, USWeb created an Extranet
accessible via a Web browser that allows dealers to securely search, view and
print technical documents at their convenience and submit warranty claims
directly online. Using the Extranet has reduced turnaround time for
documentation distribution and warranty claims processing, reduced the error
rate and reduced overhead costs associated with providing information through
paper forms or telephone support.
Real Estate Tax Services Intranet. Real Estate Tax Services ("RETS"), a
provider of corporate tax assessment and property appraisal services, wanted
to improve its network infrastucture and its mission critical system of
managing and distributing data. Processing more than 200,000 tax bills
annually, RETS uses mainframe computers for storing client tax-related
information. Frequently, RETS field agents require quick turn-around on custom
client reports. To prepare these reports, administrators previously used
proprietary software to import mainframe data into desktop spreadsheet
applications. After manipulating and reformatting the content, the data was
then exported into word-processing applications suitable for presentations.
Following this highly administrative, time-consuming effort, RETS
administrators would then forward these reports to agents around the country.
Beginning with the deployment of a new high-speed network infrastructure,
USWeb automated these processes by designing a database-integrated Intranet
solution. The RETS Intranet streamlines internal resources and empowers field
agents to easily and effectively store and retrieve data, as well as generate
client presentations from any geographic location using lap-top computers and
an intuitive Web browser.
The foregoing examples of the Company's Internet solutions show the breadth
of the Company's Internet solution capabilities. Because each USWeb client and
its needs is different from others, the Internet solutions in these examples
may be more extensive and successful than others that do not achieve all the
goals of a particular client. There can be no assurance that any particular
client project will meet the client's objectives, stay within budgeted expense
levels, be completed at the desired or scheduled date or otherwise allow the
Company's clients to realize the intended benefits of a project. Promoting and
positioning the USWeb brand will depend largely on the success of the
Company's marketing efforts and the ability of the Company to provide high
quality, reliable and cost effective Internet solution strategy consulting,
analysis and design, technology development, implementation and integration,
audience development and maintenance services. If clients do not perceive the
Company's solutions or services as meeting their needs, or if the Company
fails to market those solutions or services effectively, the Company will be
unsuccessful in maintaining and strengthening its brand, which could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Risk Factors--Uncertain Maintenance and
Strengthening of the USWeb Brand," "--Potential Liability to Clients" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
CONSULTING OFFICE NETWORK DEVELOPMENT
USWeb has established and is continuing to expand a network of consulting
offices. As of March 31, 1998, the Company had 39 consulting offices, 28 of
which were Company-owned and 11 of which were owned by Affiliates. The number
of Affiliate offices has decreased over time because of acquisitions of
Affiliates by USWeb consolidation of offices and discontinuance of franchise
relationships. The Company believes that in the fragmented market for
providing Internet solutions, rapidly building a critical mass of strategic,
technical and creative talent through both internal growth and acquisition
will provide USWeb with a substantial competitive advantage. The Company
promotes internal growth through its continued investment in branded marketing
programs, expansion and improvement of the Strategy and Solutions Center, new
and existing strategic partnerships, and rigorous management of business
fundamentals.
The Company is aggressively pursuing its selective acquisition program. The
Company typically uses a standardized transaction structure that includes a
purchase price adjustment feature to provide target company management with an
incentive to improve and expand their organizations. The Company also
generally grants stock options to all employees of a target company to provide
them with an incentive to
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<PAGE>
contribute to the success of the overall USWeb organization. The Company
believes that use of a consistent acquisition structure can speed the
negotiation and closing of acquisitions.
The Company has a team of professionals dedicated to identifying potential
acquisition candidates and implementing the Company's acquisition methodology.
This team identifies those Internet professional services firms that meet its
acquisition criteria, engages in a series of meetings and due diligence
activities with each candidate to explore whether it meets USWeb's criteria
for growth potential and operating strategy, and completes the acquisition of
a significant percentage of those candidates. The Company stresses to each
desired candidate the advantages of merging with USWeb, including client
recognition and acceptance of the USWeb brand, additional funding required to
pursue profitably large, long-term client opportunities and strategic
partnerships with leading hardware, software and content vendors. Following
the closing of each acquisition, the Company moves rapidly to integrate the
new subsidiary into USWeb operations by deploying a conversion team to
integrate financial, marketing and operating procedures, providing access to
USWeb Central, the Company's secure Intranet, and delivering a thorough
orientation to all employees.
The Company regularly evaluates potential acquisition candidates, is
currently holding preliminary discussions with a number of such candidates and
is in active negotiations with a number of such other candidates. If, after
due diligence review and negotiation, such companies can be acquired on a
basis considered fair to the Company and its stockholders, the Company may
proceed with such acquisitions. The Company is also evaluating or negotiating
acquisitions outside the United States. The Company expects most of its future
acquisitions to include the issuance of additional shares of the Company's
Common Stock. The Company filed a "shelf" Registration Statement on Form S-4
of which this Prospectus is a part to register 16,666,667 shares of its Common
Stock for use in future acquisitions. See "Risk Factors--Risks Related to
Acquisitions," "--Management of Growth; Integration of Acquisitions," and "--
Dilution," "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Acquisition of Internet
Professional Services Firms."
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<PAGE>
As of April 30, 1998, the Company had acquired the following companies and
signed an acquisition agreement with one additional company:
<TABLE>
<CAPTION>
OFFICE MONTH OF NUMBER OF
NAME LOCATIONS CONSOLIDATION (1) EMPLOYEES
---- ----------------------- ----------------- ----------
<S> <C> <C> <C>
XCom Corporation........ San Francisco, CA March 1997 37
San Diego, CA
Cosmix Corporation...... Seattle, WA April 1997 30
Fetch Interactive, Inc.. Milwaukee, WI April 1997 37
NewLink Corporation..... Los Angeles, CA April 1997 22
NetWORKERS Corporation.. Santa Clara, CA May 1997 33
InterNetOffice, LLC..... Atlanta, GA May 1997 33
Austin, TX
Infopreneurs Inc........ Washington, D.C. June 1997 39
Netphaz Corporation..... Phoenix, AZ June 1997 15
Electronic Images, Inc.. Pittsburgh, PA July 1997 64
Multimedia Marketing & Chicago, IL July 1997 15
Design Inc.............
DreamMedia, Inc. (2).... Hollywood, CA August 1997 26
KandH, Inc. (2)......... Hollywood, CA August 1997 --
Internet Cybernautics, Sausalito, CA September 1997 44
Inc....................
Synergetix Systems Long Island, NY September 1997 14
Integration, Inc.......
Online Marketing Compa- Detroit, MI September 1997 13
ny.....................
Zendatta, Inc........... San Mateo, CA September 1997 15
USWeb--Apex, Inc........ Houston, TX November 1997 12
W3-design............... Culver City, CA November 1997 30
Reach Networks, Inc..... New York, NY November 1997 22
InnoMate Online Market- Dusseldorf, Germany February 1998 25
ing GmbH...............
Utopia, Inc............. Boston, MA March 1998 21
Inter.logic.studios, Atlanta, GA March 1998 46
inc.(3)................
Quest Interactive Media, Memphis, TN March 1998 --
Inc. (3)...............
Ensemble Corporation.... Dallas, TX March 1998 58
Ikonic Interactive, San Francisco, CA March 1998 78
Inc.................... New York, N.Y.
Xplora Limited.......... Windsor, United Kingdom April 1998 33
Probable Acquisition
Kallista, Inc........... Chicago, IL Pending 16
</TABLE>
- ---------------------
(1) The Company consolidates the target entity's financial statements as of
the date USWeb establishes effective control of the target entity, which
date is generally in advance of the legal completion of the underlying
merger.
(2) DreamMedia, Inc. and KandH, Inc. combined their operations into a single
wholly owned subsidiary of the Company upon the consummation of the
acquisitions. The combined entity had an aggregate of 26 employees. W3-
design shares facilities and is expected to combine its operations with
these entities in the future.
(3) Inter.logic.studios, inc. and Quest Interactive Media, Inc. combined their
operations into a single wholly owned subsidiary of the Company upon the
consummation of the acquisitions. The combined entity had an aggregate of
46 employees.
The Company believes that there are many other potential acquisition
candidates in the U.S. and abroad that satisfy its acquisition criteria. The
Company is currently discussing on a non-binding basis the acquisitions of
several companies in the U.S. To penetrate foreign markets, the Company may
use joint ventures as well as acquisitions, so as to capitalize on a foreign
partner's local knowledge and reputation as well as USWeb's brand name and
central technical, marketing and administrative resources. The Company's
acquisition strategy involves a number of risks and uncertainties, and there
can be no assurance that the Company will be
37
<PAGE>
able to identify suitable acquisition candidates, acquire such companies on
acceptable terms or integrate their operations successfully with those of the
Company. As the Company issues stock to complete future acquisitions, there
will be ownership dilution to existing stockholders. In addition, to the
extent the Company chooses to pay cash consideration for such acquisitions,
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.
See "Risk Factors--Risks Related to Acquisitions," "--Dilution," "--Management
of Growth; Integration of Acquisitions" and "--Future Capital Needs;
Uncertainty of Additional Financing."
In addition to its Company-owned offices, as of March 31, 1998 USWeb had 8
Affiliates which collectively managed an aggregate of 11 consulting offices.
Each Affiliate agreement typically grants a nonexclusive right to the
Affiliate to maintain an office and advertise in a designated metropolitan
area or territory. The Affiliate agreements, which have terms ranging from
five to ten years, also include a nonexclusive license to use the Company's
intellectual property and proprietary information, including the USWeb brand,
the Company's Internet solution development methodology and the Strategy and
Solutions Center. In exchange for these rights, most Affiliates paid the
Company an initial fee and all Affiliates make monthly royalty payments to the
Company. Monthly royalties are equal to the greater of (i) a minimum monthly
payment or (ii) the aggregate of a five percent royalty and a two percent
marketing promotion payment, each based on the Affiliate's adjusted gross
revenues. For the year ended December 31, 1997 and the quarter ended March 31,
1998, initial fees and monthly royalty payments together represented 4% and
1%, respectively, of the Company's total revenues. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company selected a franchise business model as the first phase of its
corporate development strategy because it enabled the Company to rapidly scale
its operations and build its brand with relatively low risk and capital
commitment while leveraging the existing infrastructure, expertise and client
relationships of the Affiliates. The Company launched the second phase of its
market entry strategy, the acquisition of those Affiliates and other Internet
professional services firms that meet its acquisition criteria, in the first
quarter of 1997. The Company last enrolled an Affiliate in March 1997 and does
not intend to enter into any additional Affiliate agreements. The Company may
also decide to terminate the Affiliate agreements of those Affiliates that do
not meet the performance criteria required by such agreements to ensure their
continuation. A significant number of Affiliates remain and the operation of
franchises does entail certain risks to the Company's business. See "Risk
Factors--Risks of Franchising."
CLIENTS
The Company markets its services to medium-sized and large companies, which
it defines as those with over 100 employees or $10 million in annual revenues.
Such companies have several desirable characteristics as potential clients: a
need for Internet solutions ranging from basic Web sites to complex and highly
functional Intranets, substantial budgets devoted to information technology
expenditures, and a relatively high willingness to adopt Internet-based
strategies and solutions. The Company tailors its professional services to
meet the specific needs of these clients. No individual customer accounted for
more than 10% of the Company's total revenues for the year ended December 31,
1997 and the quarter ended March 31, 1998. The Company's top 10 clients
accounted for 31% and 27% of the Company's total revenues during such
respective periods.
The Company provides Internet professional services to clients in a variety
of industries, as indicated by the selected clients set forth below, each of
which was responsible for at least $50,000 in services revenues for the year
ended December 31, 1997.
Amgen Harley-Davidson Real Estate Tax
Bantam Doubleday Dell Ingram Micro Services
Barnes & Noble Marcus & Millichap Silicon Graphics
Catalina Marketing Microsoft Thomasville
Charles Schwab New York Magazine Furniture
Chevron Polk Audio Time
Toshiba
World Economic Forum
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<PAGE>
Clients typically begin their adoption of Internet solutions by establishing
a basic Web site costing several thousand dollars and then implement
increasingly powerful business solutions, which can include business critical,
fully integrated Intranets or Extranets costing several million dollars. The
Company's strategy is to provide clients with services at all stages of their
adoption of Internet solutions. The Company targets clients whose Internet
technology consulting needs will result in contracts ranging from $25,000 to
$3,000,000 per engagement. The Company's 30 largest clients spent
approximately $25,000 to $3,000,000 each for USWeb services, on a pro forma
basis, for the year ended December 31, 1997.
USWEB INTERNET STRATEGY AND SOLUTIONS CENTER
The Strategy and Solutions Center, located at the Company's headquarters in
Santa Clara, California, is designed to provide clients with more effective
Internet solutions by aggregating and redeploying the best methodologies,
technologies and creative work delivered by USWeb consulting offices. The
Company believes that the Strategy and Solutions Center provides USWeb
consulting offices with a competitive advantage by giving them efficient, real
time access to these assets, thereby allowing them to leverage the
capabilities of the entire USWeb operation in their efforts on behalf of each
client. The Strategy and Solutions Center is a centrally managed resource that
can be made available to a large number of consulting offices through USWeb
Central, the Company's secure Intranet.
The Strategy and Solutions Center provides the following resources and
programs for the USWeb Network and its clients:
USWeb Solutions Library. The Strategy and Solutions Center aggregates the
best demonstrated practices of its offices to develop USWeb Business
Solutions, partially pre-built Internet solutions that combine USWeb
methodologies, services and reusable software and content objects with third-
party software. One of the first USWeb Business Solutions was designed for
human resources in collaboration with Coopers & Lybrand and leading providers
of Internet-based human resource management technologies. The Company intends
to target each USWeb Business Solution toward a selected vertical market or
business function and offer it at a fixed price range. The Company's goal is
to provide through each USWeb Business Solution a large volume of high-quality
sales and implementation tools that leverage the cumulative experience of all
USWeb consulting offices.
USWeb Technology Library. The Strategy and Solutions Center maintains and
continually expands a technology library of proprietary reusable software and
content objects developed during the course of client engagements. The Company
believes that access to these assets helps reduce the costs of designing and
implementing individual Internet solutions, improves the quality of client
service and facilitates the Company's development of USWeb Business Solutions.
USWeb Project Registry. The Strategy and Solutions Center has constructed a
database in which each client engagement is summarized and registered,
enabling each consulting office to find rapidly which offices have performed
certain types of work. This project registry is used to facilitate the real-
time distribution of engagement activity to those consulting offices best
equipped to serve the client.
USWeb Executive Briefing Program. The Strategy and Solutions Center has
established a program that enables USWeb consulting offices to provide their
key clients with executive seminars, solution demonstrations and discussions
with senior USWeb executives on-site at the Strategy and Solutions Center.
These sessions provide key client decision makers with first-hand experience
on the ways Internet solutions can significantly improve business processes.
USWeb SiteCasts. The Strategy and Solutions Center develops and distributes
the USWeb SiteCast Intranet Series, a sequence of Internet broadcasts designed
to show businesses how to use Internet solutions to improve business
processes. The Company sponsors the SiteCasts jointly with Microsoft and each
SiteCast incorporates leading Microsoft Internet technologies. The first
SiteCast, held on June 24, 1997 using Microsoft's NetShow 2.0, brought
together computer industry leaders to discuss how to use Intranets to
39
<PAGE>
achieve business objectives. This SiteCast, which attracted approximately 800
participants, was the first Internet broadcast to incorporate simultaneous
video conferencing, chat sessions and presentations and include both pre-taped
and live video. The second SiteCast, held on September 16, 1997, attracted
more than 2,300 participants and demonstrated how Internet solutions can
automate business processes, using as an example the Intranet USWeb created
for the Stanford University Graduate School of Business.
On December 10, 1997, the Company held a third SiteCast to provide an
interactive, online forum to discuss trends and issues surrounding electronic
commerce. Attracting more than 3,400 participants, this SiteCast was broadcast
live from the Intel booth at Internet World in New York and included a
discussion on how e-Business solutions can improve business processes and
profitability and create competitive advantages for businesses.
In each area where methodologies, technologies and content are aggregated,
the Company has implemented policies to ensure that confidential or
proprietary client information and assets are accessible only by properly
authorized personnel and not disclosed to unauthorized parties.
MARKETING
The Company's marketing efforts are dedicated to demonstrating the benefits
of Internet solutions, and the proven effectiveness of the USWeb organization
in providing such solutions, to key decision makers in client organizations.
The Company believes that a strong USWeb brand provides USWeb consulting
offices with a competitive advantage over those Internet professional services
firms whose brands may not be as well known or may not convey the same focused
message of competence, security and results. The Company's marketing programs
are also highly scalable because most advertising campaigns and marketing
tools are developed by the Company's corporate marketing group and can be
delivered to all of the consulting offices without requiring significant
additional expenses.
The Company's marketing program includes the following initiatives:
Enhance the USWeb Brand. The continued strengthening of the USWeb brand is
crucial to the achievement of the Company's objective of becoming the most
recognized provider of Internet professional services to medium-sized and
large business clients. The Company's brand development programs are designed
to reinforce the message that USWeb is a national company with a local
presence that can provide a complete range of services to build and deploy
business solutions and has a proven track record of doing so. The Company is
continuing to build and differentiate this brand through the use of publicity
campaigns that include Internet, print and radio advertising; national
seminars and executive briefings; Internet broadcasts; extensive marketing
tools and educational "white papers"; and co-marketing programs with strategic
partners.
Generate Client Leads. The Company's marketing campaigns are intended to
generate client leads for its consulting offices in several ways. First,
central lead management programs direct leads generated by the Company's
national advertising to consulting offices based on client zip code and other
substantive lead attributes. Second, regional marketing derived from corporate
advertising templates for multiple forms of media, including direct mail and
tradeshow programs, are personalized for an office's target market to drive
demand directly to that office. Third, the Company has implemented programs to
encourage cross-office lead referral when clients have vertical market needs
or proximity concerns that would be best addressed by another office. Finally,
the Company has established a national account program to help manage the
accounts of clients with multiple locations and direct service fulfillment to
the consulting office best situated by geography and specialty to meet the
client's needs.
Develop Marketing and Sales Tools for Consulting Offices. The Company has
developed a toolkit of marketing and sales materials to be used by consulting
offices in their business generation efforts. These materials include
brochures, reprints of articles, fact sheets, white papers, summary "success
stories," PR handbooks, business development guides and client presentation
templates and technologies. These materials are designed to increase the
effectiveness of the sales and marketing efforts of the Company's consulting
offices by providing them with centralized expert advice and consistent,
professional marketing tools.
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<PAGE>
STRATEGIC RELATIONSHIPS
The Company has entered into, and intends to continue entering into,
strategic relationships with a limited number of leading Internet hardware,
software and content companies. The Company believes that these relationships,
which typically are non-exclusive, enable it to deliver clients more effective
solutions with greater efficiency because the strategic relationships provide
the Company with the opportunity to gain early access to leading-edge
technology, cooperatively market products and services with leading technology
vendors, cross-sell additional services and gain enhanced access to vendor
training and support. The Company also believes that these relationships are
important because they leverage the strong brand and technology positions of
these market leaders.
The Company has strategic relationships with the following companies:
[LOGO] Intel. In November 1997, the Company entered into a Relationship
Agreement with Intel pursuant to which the Company and Intel
will jointly define and develop a program designed to establish
and promote end-to-end e-business solutions running on high-end Intel
Architecture-based platforms. Activities under the program will range from
creation of specific business solutions to joint advertising. These programs
will be administered by representatives of each party. Intel purchased
$10.0 million of the Company's Common Stock in a private placement transaction
which closed contemporaneously with the Company's initial public offering.
[LOGO] Microsoft. The Company and Microsoft have entered into a joint
marketing and technical information sharing agreement. The
companies are engaging in a jointly branded marketing campaign designed to
increase demand for Microsoft's Internet software products and USWeb's
professional services. Microsoft is also providing USWeb consulting offices
with education and support in the use of Microsoft's Internet products, and
the USWeb consulting offices are providing Microsoft with product feedback and
customer reactions.
[LOGO] Hewlett-Packard. The Company and Hewlett-Packard have entered
into an agreement to launch collaborative marketing and
technical support programs to offer business clients a complete set of
Internet solutions. The companies are engaging in a joint branded marketing
campaign designed to increase demand for Hewlett-Packard's Internet systems
and USWeb's professional services. Hewlett-Packard is also providing USWeb
consulting offices with education and support in the use of Hewlett-Packard's
Internet systems and USWeb consulting offices are providing Hewlett-Packard
with product feedback and client reactions.
[LOGO] Pandesic. Intel and SAP have formed Pandesic LLC to deliver a
comprehensive hardware, software and service solution for
managing Internet-based electronic commerce. The Company and
Pandesic have entered into a letter agreement regarding plans to
implement a joint systems integration program, develop joint marketing and
sales programs, build field development programs and conduct ongoing technical
exchanges to ensure the proper deployment and efficient utilization of the
Pandesic electronic commerce platform.
[LOGO] Sun Microsystems. The Company and Sun Microsystems have entered
into an agreement enabling USWeb consulting offices to become
authorized resellers of Sun NETRA network servers after having
filed the appropriate documentation and attended required training classes.
This marketing program enables USWeb affiliates to deliver a complete UNIX
Intranet solution to a customers.
[LOGO] Reuters. The Company and Reuters have entered into a letter
agreement regarding plans to develop USWeb Business Solutions
that will integrate Reuters data feeds into corporate Intranet environments.
The two parties also intend to develop joint sales and marketing programs.
The contractual agreements regarding these strategic relationships do not
cover the entire scope of the strategic relationship and are typically
terminable at will by either party. In the event that any strategic
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<PAGE>
relationship is discontinued, either in connection with termination of an
agreement or otherwise, the Company's business, results of operations and
financial condition may be materially adversely affected. See "Risk Factors--
Reliance Upon Key Strategic Relationships."
In early 1998, the Company assisted in the formation of USWeb Learning,
Inc., a separate company with the mission to become the leading provider of
education and certification services relating to Internet technologies to
address the shortage of technology professionals. USWeb Learning will license
the USWeb name from the Company and the Company will contribute certain
training materials it has created. In April 1998, the Company made a minority
equity investment in USWeb Learning and intends to add management experience
through board representation.
OPERATIONS
The Company's organization includes its headquarters in Santa Clara,
California and as of March 31, 1998, over 39 Company-owned and Affiliate
consulting offices in the U.S. Each consulting office is responsible for
providing Internet professional services to its clients, either alone or in
conjunction with one or more other offices. The managers of each office also
make all client sales, engagement pricing, and staffing decisions for that
office. However, the Company's executive officers take an active role in
directing the activities of all consulting offices.
USWeb headquarters manages the Strategy and Solutions Center, the Company's
marketing campaigns, the strategic relationships with partner companies and
the acquisition program. The Company's headquarters also provides consulting
offices with operational support in financial management and reporting, human
resources, office administration, and management performance improvement
tools. USWeb also negotiates with product, office equipment and financing
vendors to deliver quality products to its consulting offices at favorable
prices. Finally, the Company has established relationships with leading
Internet communications companies to provide clients with carrier-grade,
highly reliable central hosting and value-added services such as shared
databases, electronic commerce, and audio and video streaming.
USWeb headquarters also manages USWeb Central, the Company's Intranet and
the Company's primary channel for enterprise-wide interaction and
communication. The Company developed and maintains USWeb Central in-house.
USWeb Central provides Company-owned and Affiliate consulting offices with
rapid, secure and efficient online access to each other and to all of the
Company's centrally managed resources, such as the Strategy and Solutions
Center libraries, sales and marketing tools, vendor information and
operational assistance. The Company believes that USWeb Central is both
scalable and critical to its strategy of strengthening its position as a
leading Internet professional services firm, because USWeb Central is the
primary mechanism by which the Company is able to aggregate and redeploy the
best strategic, technical and creative work developed by the consulting
offices.
COMPETITION
The market for Internet professional services is relatively new, intensely
competitive, rapidly evolving and subject to rapid technological change. The
Company expects competition to persist, intensify and increase in the future.
The Company's competitors can be divided into several groups: computer
hardware and service vendors such as IBM, DEC and Hewlett-Packard; advertising
and media agencies such as CKS, Foote, Cone & Belding and Ogilvy & Mather;
Internet integrators and Web presence providers such as iXL, Organic Online,
Poppe Tyson and Proxicom; large information technology consulting service
providers such as Andersen Consulting, Cambridge Technology Partners and EDS;
telecommunications companies such as AT&T and MCI; Internet and online service
providers such as America Online, NETCOM and UUNet; and software vendors such
as Lotus, Microsoft, Netscape, Novell and Oracle. Although only a few of these
competitors have to date offered a full range of Internet professional
services, several have announced their intention to offer comprehensive
Internet technology solutions.
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<PAGE>
The Company believes that the principal competitive factors in its market
are strategic expertise, technical knowledge and creative skills, brand
recognition, reliability of the delivered solution, client service and price.
Most of the Company's current and potential competitors have longer operating
histories, larger installed client 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 market. In addition, the market for
Internet solutions is relatively new and subject to continuing definition,
and, as a result, the core business of certain of the Company's competitors
may better position them to compete in this market as it matures. Competition
of the type described above could materially adversely affect the Company's
business, results of operations and financial condition.
There are relatively low barriers to entry into the Company's business. For
example, the Company has no patented technology that would preclude or inhibit
competitors from entering the Internet professional services market. The
Company expects that it will 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
Company, which could have a material adverse effect on the Company's business,
results of operations and financial condition. Moreover, in pursuing
acquisition opportunities the 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 Company. Competition for these
acquisition targets likely could also result in increased prices of
acquisition targets and a diminished pool of companies available for
acquisition. See "Risk Factors--Competition; Low Barriers to Entry."
EMPLOYEES
As of March 31, 1998 the Company had 813 employees, of which 83 were located
at the Company's headquarters in Santa Clara, California and 730 were located
in consulting offices. The headquarters employees included 50 in sales and
marketing, 9 in hosting and education and 24 in finance, administration and
the Strategy and Solutions Center. None of the Company's employees is
represented by a labor union. The Company has experienced no work stoppages
and believes its relationship with its employees is good. Competition for
qualified personnel in the industry in which the Company competes is intense.
The Company believes that its future success will depend in part on its
continued ability to attract, hire or acquire and retain qualified employees.
See "Risk Factors--Recruitment and Retention of Internet Solutions
Professionals" and "--Dependence on Key Personnel."
FACILITIES
The Company's principal administrative, sales, marketing, training, and
research and development facilities occupy approximately 27,100 square feet in
a single building in Santa Clara, California, pursuant to a lease that expires
in January 2007. All Company-owned offices also lease their facilities. The
Company believes its current facilities are adequate to meet its needs for the
foreseeable future. No facilities have been identified for acquisition in
connection with potential acquisition candidates and the Company does not
anticipate acquiring property or buildings in the foreseeable future.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages as of
March 31, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Joseph Firmage...................... 27 Chairman of the Board and Chief Executive Officer
Tobin Corey......................... 36 President
James Heffernan..................... 56 Executive Vice President, Chief Financial Officer,
Secretary and Director
Sheldon Laube....................... 47 Executive Vice President and Chief Technology
Officer
Jeffrey Ballowe(1).................. 41 Director
Robert Hoff(1)(2)................... 44 Director
Gary Rieschel(2).................... 40 Director
Barry Rubenstein.................... 54 Director
</TABLE>
- ---------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Mr. Joseph Firmage co-founded the Company in December 1995 and has served as
its Chairman and Chief Executive Officer since that time. From August 1994 to
December 1995, Mr. Firmage served as Vice President of Strategic Planning of
the Systems Group of Novell. Prior to joining Novell, Mr. Firmage founded
Serius Corporation ("Serius"), where he served as Chief Executive Officer from
1989 through 1993, when Serius was sold to Novell.
Mr. Tobin Corey co-founded the Company in December 1995 and has served as
its President since June 1996. Prior to June 1996, Mr. Corey served as its
Executive Vice President, Marketing. From 1994 to December 1995, Mr. Corey
served as Vice President of Marketing for the NetWare Products Division of
Novell. From 1991 through 1994, Mr. Corey served as Director of Marketing for
the Desktop Division of Novell.
Mr. James Heffernan co-founded the Company in December 1995 and has served
as its Executive Vice President, Chief Financial Officer, Secretary and a
Director since that time. Mr. Heffernan has indicated he will resign from his
positions as Executive Vice President, Chief Financial Officer and Secretary
effective June 1, 1998; however, he will remain on the Company's Board of
Directors and serve as a consultant to the Company. From May 1993 to July
1994, he worked as an independent consultant and then joined Interlink
Computer Sciences, Inc. in July 1994 as Chief Financial Officer, where he
served until January 1996. From March 1992 to May 1993, Mr. Heffernan served
as Chief Financial Officer and Chief Operating Officer of Serius. Mr.
Heffernan has also served as an officer of several other technology companies,
including Software Publishing Corp., Zital Inc. and Measurex Corp. Mr.
Heffernan is a director of Savoir Technology Group, Inc.
Mr. Sheldon Laube co-founded the Company and has served as its Executive
Vice President and Chief Technology Officer since January 1996. From July 1995
through January 1996, Mr. Laube served as Chief Technology Officer for Novell.
Prior to joining Novell, Mr. Laube was employed by Price Waterhouse LLP as a
partner and served as Director of Information and Technology from 1986 to May
1995.
Mr. Jeffrey Ballowe has served as a Director of the Company since February
1996. From March 1996 to December 1997, Mr. Ballowe served as President of the
Ziff-Davis Interactive Media and Development Group. Prior to March 1996,
Mr. Ballowe served as President of the Ziff-Davis Interactive Media Group in
1995 and as President of the Ziff-Davis Marketing and Development Group in
1994. He became Group Vice President of the Ziff-Davis Business Media Group in
1993 and Vice President of the Ziff-Davis Worldwide Network of Direct
Publications in 1991.
44
<PAGE>
Mr. Robert Hoff has served as a Director of the Company since February 1996.
He has been a general partner of Crosspoint Venture Partners, a private
venture capital investment company, since September 1983. Mr. Hoff also serves
as a director of PairGain Technologies, Inc. and Onyx Acceptance Corporation.
Mr. Gary Rieschel has served as a Director of the Company since March 1996.
Mr. Rieschel has been a Senior Vice President of SOFTBANK Holdings since
January 1996. Prior to January 1996, Mr. Rieschel served as Vice President of
Marketing for nCube from September 1994 to December 1995; as Director of
Channel Sales for Cisco Systems from July 1993 to October 1994; and as General
Manager, Asia for Sequent Computer from January 1989 to July 1993. Mr.
Rieschel is a director of Concentric Networks and several privately held
companies.
Mr. Barry Rubenstein has served as a Director of the Company since May 1997.
Mr. Rubenstein is President, a director and a shareholder of InfoMedia
Associates, Ltd. which is a General Partner of the 21st Century Partnerships.
Mr. Rubenstein is also Chief Executive Officer of Wheatley Partners, L.L.C.,
the General Partner of Wheatley Foreign Partners, L.P. Seneca Ventures and
Woodland Venture Fund, each of which is an investment partnership. Prior to
his experience as an investor, Mr. Rubenstein served as the founder of several
technology companies, including Applied Digital Data Systems, Inc. and
Cheyenne Software, Inc. Mr. Rubenstein also serves as a director of
Infonautics, Inc., The Milbrook Press, Inc. and Source Media Inc.
Ms. Carolyn Aver has been Vice President and Chief Financial Officer of
BackWeb Technologies, an internet technology company, since May 1997. Prior to
joining BackWeb Technologies, Ms. Aver acted as Vice President and Chief
Financial Officer of Parc Place-Digitalk from March 1993 to May 1997. Ms. Aver
was also employed by AutoDesk, Inc. from October 1984 to March 1993 where she
served in various capacities including Controller, Chief Financial Officer and
Vice President, Finance. Ms. Aver will be joining the Company in mid-May 1998
and will succeed Mr. Heffernan as the Company's Executive Vice President and
Chief Financial Officer effective June 1, 1998.
Executive officers of the Company are appointed by the Board of Directors
and serve at the discretion of the Board. There are no family relationships
among any of the directors or executive officers of the Company.
BOARD COMMITTEES
The Board of Directors has established an Audit Committee and a Compensation
Committee. The Audit Committee, consisting of Mr. Ballowe and Mr. Hoff,
recommends the selection of independent public accountants to the Board of
Directors, reviews the scope and results of the audit and other services
provided by the Company's independent accountants, and reviews the Company's
accounting practices and its systems of internal accounting controls.
The Compensation Committee, consisting of Mr. Hoff and Mr. Rieschel, reviews
and approves the salaries, bonuses and other compensation payable to the
Company's executive officers and administers and makes recommendations
concerning the Company's employee benefit plans.
DIRECTOR COMPENSATION
The Company reimburses its directors for all out-of-pocket expenses incurred
in the performance of their duties as directors of the Company. The Company
currently does not pay fees to its directors for attendance at meetings. The
Company also grants stock options to directors. See "--Employee Benefit
Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee of the Company serves as a member of
the board of directors or compensation committee of any entity that has one or
more executive officers serving as a member of the Company's Board of
Directors or Compensation Committee. See "Certain Transactions" for a
description of transactions between the Company and entities affiliated with
members of the Compensation Committee.
45
<PAGE>
MANAGEMENT CONTINUITY AGREEMENTS
The Company has entered into Management Continuity Agreements with each of
Messrs. Firmage, Corey, Heffernan and Laube. Pursuant to the agreements with
each of Messrs. Firmage, Corey and Heffernan, if the Company (a) terminates
his employment without cause at any time more than 60 days before or more than
18 months after a "change in control" (as defined in the agreement), the
Company shall provide severance pay to him equal to his 12 months' base
compensation or (b) if the Company terminates his employment or he voluntarily
terminates his employment at any time 60 days or less before or within 18
months after a change in control, the Company shall provide him severance pay
equal to the greater of his base compensation for the year immediately
preceding or the year coinciding with the year of payment of such severance
pay. In either case, the Company shall also provide health insurance coverage
to the extent provided immediately prior to his termination until the earlier
of 12 months following such termination or the date that he receives health
insurance coverage from another employer. In the event of a change of control,
the Company shall provide a release of all repurchase rights over unvested
stock and an acceleration of the vesting period for any unvested options. In
the event that he is terminated as a result of death or disability (regardless
of whether there is a change in control), any repurchase rights of the Company
with respect to 50% of the shares that he holds shall lapse and options that
he holds shall become vested as to an additional 50% of the shares subject to
such options. The term of each of the agreements is for the period of each of
Mr. Corey's, Mr. Heffernan's and Mr. Laube's at will employment.
Pursuant to the agreement with Mr. Laube, if the Company terminates his
employment without cause (a) at any time more than 60 days before or more than
18 months after a "change in control" (as defined in the agreement), the
Company shall provide severance pay equal to his 12 months' base compensation
or (b) at any time 60 days or less before or within 18 months after a change
in control, the Company shall provide severance pay equal to the greater of
his base compensation for the year immediately preceding or the year
coinciding with the year of payment of such severance pay. In either case, the
Company shall also provide health insurance coverage to the extent provided
immediately prior to his termination until the earlier of 12 months following
such termination or the date that he receives health insurance coverage from
another employer. In the event of a change of control, the Company shall
provide a release of all repurchase rights over unvested stock and an
acceleration of the vesting period for any unvested options. In the event that
he is terminated as a result of death or disability (regardless of whether
there is a change in control), any repurchase rights of the Company with
respect to 50% of the shares that he holds shall lapse and options that he
holds shall become vested as to an additional 50% of the shares subject to
such options. In the event that he is terminated for good business reasons
during the initial two-year period, he is entitled to receive severance pay
equal to 24 months' base compensation together with a release of all
repurchase rights over unvested stock and an acceleration of the vesting
period for any unvested options (as defined in the agreement). In addition to
his base compensation of $260,000, he is entitled to receive a quarterly bonus
of $25,000 so long as he is employed by the Company.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation, the Company's Bylaws, Section
145 of the Delaware General Corporation Law and the form of indemnification
agreement entered into between the Company and certain of its directors and
officers, subject to certain conditions, authorize the Company to indemnify,
or indemnify by their terms, as the case may be, the directors and officers of
the Company against certain liabilities and expenses incurred by such persons
in connection with claims made by reason of their being such a director or
officer.
The Company has obtained directors' and officers' insurance providing
indemnification for certain of the Company's directors, officers, affiliates,
partners or employees for certain liabilities.
The Company has entered into agreements to indemnify its directors and
executive officers, in addition to indemnification provided for in the
Company's Bylaws. These agreements, among other things, indemnify the
Company's directors and executive officers for certain expenses (including
attorneys' fees), judgments,
46
<PAGE>
fines and settlement amounts incurred by any such person in any action or
proceeding, including any action by or in the right of the Company, arising
out of such person's services as a director or executive officer of the
Company, any subsidiary of the Company or any other company or enterprise to
which the person provides services at the request of the Company. The Company
believes that these provisions and agreements are necessary to attract and
retain qualified directors and executive officers.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification is
expected to be required or permitted. The Company is not aware of any
threatened litigation or proceeding that might result in a claim for such
indemnification.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
by the Company during the fiscal year ended December 31, 1997 to the Company's
Chief Executive Officer and each of the Company's four other executive
officers (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------ ------------
SECURITIES
UNDERLYING OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION COMPENSATION
- --------------------------- ---- ---------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Joseph Firmage........... 1997 $ 200,000 $ -- 105,000 $ -- $ 168(3)
Chairman and Chief 1996 200,000(1) -- -- 115,216(2) 140(3)
Executive Officer and
Director
Tobin Corey.............. 1997 200,000 -- 105,000 -- 139,230(5)
President 1996 197,307(4) 5,582 -- 48,787(2) 193(3)
James Heffernan.......... 1997 200,000 -- 60,000 -- 1,571(3)
Executive Vice 1996 191,667(4) -- -- -- 1,313(3)
President, Chief
Financial Officer,
Secretary and Director
Sheldon Laube............ 1997 259,992 100,000 30,000 -- 816(3)
Executive Vice President 1996 241,886(4) 100,000 -- -- 508(3)
and Chief Technology
Officer
Kenneth Campbell (6)..... 1997 126,641 -- -- -- 668(3)
Executive Vice 1996 220,000 -- -- -- 840(3)
President, Affiliate
Operations
</TABLE>
- ---------------------
(1) Does not include $16,666 earned in 1995 but not paid until 1996.
(2) Consists of payments made in reimbursement for relocation expenses for Mr.
Firmage and Mr. Corey.
(3) Consists of life insurance premiums paid on behalf of Mr. Firmage, Mr.
Corey, Mr. Heffernan, Mr. Laube and Mr. Campbell.
(4) The annual base salaries for Mr. Corey, Mr. Heffernan and Mr. Laube are
$200,000, $200,000 and $260,000, respectively. The figures listed
represent payment for actual employment during 1996, which was slightly
less than 12 months.
(5) Consists of $230 of life insurance premiums paid on behalf of Mr. Corey
and $139,000 of loan forgiveness. See "Certain Transactions."
(6) Mr. Campbell resigned from the Company effective July 29, 1997. See
"Certain Transactions" for a description of the terms of the Company's
agreement with Mr. Campbell. The annual base salary for Mr. Campbell was
$220,000. The figure listed represents payment for actual employment
during 1997, which was slightly less than seven months.
47
<PAGE>
OPTION GRANTS AND EXERCISES IN LAST FISCAL YEAR
The following table sets forth the stock options granted during the fiscal
year ended December 31, 1997 to each of the Named Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS (1)
-------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE
UNDERLYING GRANTED TO APPRECIATION FOR
OPTIONS EMPLOYEES IN EXERCISE OPTION TERM (3)
GRANTED FISCAL PRICE EXPIRATION ---------------------
NAME (#)(1) YEAR (2) ($/SH.) DATE 5% ($) 10% ($)
- ---- ---------- ------------ -------- ---------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Joseph Firmage.......... 105,000 6.4% $9.75 11/13/07 $ 643,831 $ 1,631,594
Tobin Corey............. 105,000 6.4% $9.75 11/13/07 $ 643,831 $ 1,631,594
James Heffernan......... 60,000 3.7% $9.75 11/13/07 $ 367,903 $ 932,339
Sheldon Laube........... 30,000 1.8% $9.75 11/13/07 $ 183,952 $ 466,170
Kenneth Campbell(4)..... -- -- -- -- -- --
</TABLE>
- ---------------------
(1) These options were granted under the Company's 1996 Equity Compensation
Plan (the "1996 Equity Plan"). Options granted under the 1996 Equity Plan
generally have a ten-year term and become exercisable in annual 25%
increments commencing on the first anniversary of the original grant date,
with full exercisability occurring on the fourth anniversary date. The per
share exercise price is the estimated fair market value of the Company's
Common Stock on the date of grant. The 1996 Equity Plan provides for the
automatic acceleration of vesting of all outstanding options (such that
they become exercisable in full) in the event of a "change in control," as
defined in the 1996 Equity Plan.
(2) Based on options to purchase an aggregate of 1,635,653 shares granted to
employees during 1997 under the 1996 Equity Plan.
(3) Potential realizable value is based on an assumption that the stock price
appreciates at the annual rate shown (compounded annually) from the date
of grant until the end of the ten-year option term. These numbers are
calculated based on requirements promulgated by the SEC and do not reflect
the Company's estimate of its future stock price.
(4) Mr. Campbell resigned from the Company effective July 29, 1997. See
"Certain Transactions" for a description of the terms of the Company's
agreement with Mr. Campbell.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END VALUES
The following table sets forth, for each of the Named Officers, information
with respect to stock options exercised during the fiscal year ended December
31, 1997 and stock options held at fiscal year end:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-
UNDERLYING UNEXERCISED THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR END (#) AT FISCAL YEAR END ($) (2)
ACQUIRED ON VALUE ----------------------------------- --------------------------------
NAME EXERCISE (#) REALIZED ($) (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ---------------- -------------- ----------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Joseph Firmage.......... -- -- -- 105,000 -- --
Tobin Corey............. -- -- -- 105,000 -- --
James Heffernan......... -- -- -- 60,000 -- --
Sheldon Laube........... -- -- -- 30,000 -- --
Kenneth Campbell........ -- -- -- -- -- --
</TABLE>
- ---------------------
(1) Market value of underlying securities on the exercise date minus the
exercise price.
(2) Market value of underlying securities at December 31, 1997 minus the
exercise price.
48
<PAGE>
EMPLOYEE BENEFIT PLANS
1996 Stock Option Plan
The Company's 1996 Stock Option Plan (the "1996 Plan") was adopted by the
Board of Directors in December 1995 and approved by the stockholders in
December 1996. The 1996 Plan will terminate in December 2005 unless terminated
earlier by the Board of Directors. The 1996 Plan provides for grants of
options to employees and consultants (including officers and directors) of the
Company and its subsidiaries. A total of 600,000 shares of Common Stock were
reserved for issuance pursuant to the 1996 Plan. The 1996 Plan may be
administered by the Board of Directors or by a committee appointed by the
Board, in a manner that satisfies the legal requirements relating to the
administration of stock plans under all applicable laws (the "Administrator").
The 1996 Plan is currently administered by the Board of Directors. The Company
does not intend to issue any additional options under the 1996 Plan.
The exercise price of options granted under the 1996 Plan is determined by
the Administrator. 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 capital stock
must be equal to at least 110% of fair market value of the Common Stock on the
date of grant. The maximum term of an option granted under the 1996 Plan may
not exceed ten years from the date of grant (five years in the case of a
participant who owns more than 10% of the voting power of all classes of the
Company's outstanding capital stock). In the event of termination of an
optionee's employment or consulting arrangement, an option may only be
exercised, to the extent vested as of the date of termination, for a period
not to exceed 90 days (12 months, in the case of termination as a result of
death or disability) following the date of termination. Options granted under
the 1996 Plan are not generally transferable by the optionee, and may be
exercised during the life of the optionee only by the optionee.
The 1996 Plan provides that in the event of a merger of the Company with or
into another corporation, or a sale of substantially all of the Company's
assets, each option shall be assumed or an equivalent option substituted for
by the successor corporation. If the outstanding options are not assumed or
substituted for by the successor corporation, the optionee shall have the
right to exercise the option as to all of the optioned stock, including shares
as to which it would not otherwise be exercisable. If an option becomes
exercisable in full in the event of a merger or sale of assets, the
Administrator shall notify the optionee that the option shall be fully
exercisable for a period of 15 days from the date of such notice, and the
option will terminate upon the expiration of such period.
The 1996 Plan provides that in the event of a proposed dissolution or
liquidation, the Administrator may provide for the optionee to have the right
to exercise the option as to all of the optioned stock, including shares as to
which it would not otherwise be exercisable. If the Administrator makes an
option exercisable in full in the event of a proposed dissolution or
liquidation, the Administrator shall notify the optionee that the option shall
be fully exercisable until 10 days prior to such transaction. To the extent
the option has not been exercised, such option will terminate immediately
prior to the consummation of such proposed action.
As of April 7, 1998, the Company had outstanding options to purchase 116,346
shares of Common Stock under the 1996 Plan held by an aggregate of 23 persons
at a weighted average exercise price of $0.76 per share. As of April 7, 1998,
options to purchase an aggregate of 323,551 shares of Common Stock under the
1996 Plan had been exercised.
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 within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), and for the granting to employees and consultants of nonstatutory
stock options and stock purchase rights ("SPRs"). The 1996 Equity Plan was
approved by the Board of Directors in October
49
<PAGE>
1996 and by the stockholders in December 1996 and amended in September and
November 1997. Unless terminated sooner by the Board of Directors, the 1996
Equity Plan will terminate automatically in December 2006. A total of
2,000,000 shares of Common Stock, plus annual increases equal to the lesser of
(i) 400,000 shares, (ii) 4% of the outstanding shares, or (iii) a lesser
amount determined by the Board of Directors are currently reserved for
issuance pursuant to the 1996 Equity Plan and the stockholders of the Company
are currently being requested to approve an amendment to the 1996 Equity Plan
to increase the number of shares reserved for issuance thereunder by an
additional 5,000,000 shares (without giving effect to the annual increases).
The 1996 Equity Plan may be administered by the Board of Directors or a
committee of the Board (the "Administrator"), which Administrator shall, in
the case of options intended to qualify as "performance-based compensation"
within the meaning of Section 162(m) of the Code, consist of two or more
"outside directors" within the meaning of Section 162(m) of the Code. The
Administrator has the power to determine the terms of the options or 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. In addition, the Committee has the authority to
amend, suspend or terminate the 1996 Equity Plan, provided that no such action
may impair the rights of any optionee under the 1996 Equity Plan unless
mutually agreed. Notwithstanding the foregoing, no existing employee, director
or consultant may be granted options to purchase more than an aggregate of
150,000 shares of Common Stock in any fiscal year and no newly hired employee,
director or consultant may be granted options to purchase more than an
aggregate of 300,000 shares of Common Stock in any fiscal year. The 1996
Equity Plan also provides for certain non-employee directors to receive a one-
time initial option grant of 25,000 shares that becomes exercisable over 48
months so long as the individual remains a director and for all non-employee
directors to receive option grants for 7,000 shares that become exercisable
over 12 months upon their reelection each year.
Unless otherwise determined by the Administrator, options and SPRs granted
under the 1996 Equity Plan are not generally transferable by the optionee, and
each option or SPR is exercisable during the lifetime of the optionee only by
such optionee. Options granted under the 1996 Equity Plan must generally be
exercised within three months of the end of the optionee's status as an
employee or consultant of the Company, or within 12 months after such
optionee's termination by death or disability, but in no event later than the
expiration of the option's ten year term. In the case of SPRs, unless the
Committee determines otherwise, 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
purchaser's employment with the Company for any reason (including death or
disability). The purchase price for shares repurchased pursuant to such
restricted stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
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
Administrator, but with respect to nonstatutory stock options intended to
qualify as "performance-based compensation" within the meaning of Section
162(m) of the Code, 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 may not exceed ten years.
The 1996 Equity Plan provides that in the event of a merger of the Company
with or into another corporation, a sale of substantially all of the Company's
assets or a like transaction involving the Company, each option shall be
assumed or an equivalent option substituted by the successor corporation. If
the outstanding options are not assumed or substituted as described in the
preceding sentence, the optionee shall have the right to exercise the option
or SPR as to all of the optioned stock, including shares as to which it would
not otherwise be exercisable. If an option or SPR becomes exercisable in full
in the event of a merger
50
<PAGE>
or sale of assets, the Administrator shall notify the optionee that the option
or SPR shall be fully exercisable for a period of 15 days from the date of
such notice, and the option or SPR will terminate upon the expiration of such
period.
The 1996 Equity Plan provides that in the event of a proposed dissolution or
liquidation, the Administrator may provide for the optionee to have the right
to exercise the option or SPR as to all of the optioned stock, including
shares as to which it would not otherwise be exercisable. If the Administrator
makes an option or SPR exercisable in full in the event of a proposed
dissolution or liquidation, the Administrator shall notify the optionee that
the option or SPR shall be fully exercisable until 10 days prior to such
transaction. To the extent the option or SPR has not been exercised, such
option or SPR will terminate immediately prior to the consummation of such
proposed action.
As of April 7, 1998, the Company had outstanding options to purchase
2,532,598 shares of Common Stock under the 1996 Equity Plan held by an
aggregate of 345 persons at a weighted average exercise price of $11.45 per
share. As of April 7, 1998, 2,740 options to purchase shares of Common Stock
under the 1996 Equity Plan had been exercised.
1997 Acquisition Stock Option Plan
The Company's 1997 Acquisition Stock Option Plan (the "1997 Plan") was
approved by the Board of Directors in February 1997 and amended in July and
November 1997. The 1997 Plan provides for the grant of incentive stock
options, within the meaning of Section 422 of the Code, to employees
(including officers and employee directors) and for the grant of nonstatutory
stock options and SPRs to employees, directors and consultants. Unless
terminated sooner by the Board of Directors, the 1997 Plan will terminate
automatically in February 2007. A total of 10,000,000 shares of Common Stock,
plus annual increases equal to the lesser of (i) 400,000 shares, (ii) 4% 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 and
the stockholders of the Company are currently being requested to approve an
amendment to the 1997 Plan to increase the number of shares reserved for
issuance thereunder by an additional 10,000,000 shares (without giving effect
to the annual increases).
The 1997 Plan may be administered by the Board of Directors or a committee
of the Board (the "Administrator"). The Administrator 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. In addition, the Administrator has the authority to amend,
suspend or terminate the 1997 Plan, provided that such action may not impair
the rights of any optionee under the 1997 Plan unless mutually agreed.
Options and SPRs granted under the 1997 Plan are generally not transferable
by the optionee, and each option or SPR is exercisable during the lifetime of
the optionee only by such optionee. Options granted under the 1997 Plan must
generally be exercised within three months after the end of optionee's status
as an employee, director or consultant of the Company, or within 12 months
after such optionee's termination by death or disability, but in no event
later than the expiration of the option's ten year term.
In the case of SPRs, unless the Administrator determines otherwise, the
restricted stock purchase agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's employment with the Company for any reason (including death or
disability). The purchase price for shares repurchased pursuant to the
restricted stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. 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
51
<PAGE>
options and SPRs granted under the 1997 Plan is determined by the
Administrator, but with respect to nonstatutory stock options intended to
qualify as "performance-based compensation" within the meaning of Section
162(m) of the Code, 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 or any
subsidiary, 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.
The 1997 Plan provides that in the event of a merger of the Company with or
into another corporation, or a sale of substantially all of the Company's
assets, each option and SPR shall be assumed or an equivalent option
substituted for by the successor corporation. If the outstanding options or
SPRs are not assumed or substituted for by the successor corporation, the
optionee shall have the right to exercise the option or SPR as to all of the
optioned stock, including shares as to which it would not otherwise be
exercisable. If an option or SPR becomes exercisable in full in the event of a
merger or sale of assets, the Administrator shall notify the optionee that the
option or SPR shall be fully exercisable for a period of 15 days from the date
of such notice, and the option or SPR will terminate upon the expiration of
such period.
The 1997 Plan provides that in the event of a proposed dissolution or
liquidation, the Administrator may provide for the optionee to have the right
to exercise the option or SPR as to all of the optioned stock, including
shares as to which it would not otherwise be exercisable. If the Administrator
makes an option or SPR exercisable in full in the event of a proposed
dissolution or liquidation, the Administrator shall notify the optionee that
the option or SPR shall be fully exercisable until 15 days prior to such
transaction. To the extent the option or SPR has not been exercised, such
option or SPR will terminate immediately prior to the consummation of such
proposed action.
As of April 7, 1998, the Company had outstanding options to purchase
9,203,518 shares of Common Stock under the 1997 Plan held by an aggregate of
550 persons at a weighted average exercise price of $11.44 per share. As of
April 7, 1998, 418,442 options to purchase shares of Common Stock under the
1997 Plan had been exercised.
1997 Employee Stock Purchase Plan
The Company's 1997 Employee Stock Purchase Plan (the "ESPP") was adopted by
the Board of Directors in September 1997. A total of 1,000,000 shares of
Common Stock has been reserved for issuance under the ESPP, plus annual
increases equal to the lesser of (i) 50,000 shares, (ii) 4% of the outstanding
shares on such date or (iii) a lesser amount determined by the Board and the
stockholders of the Company are being requested to approve an amendment to the
ESPP to increase the number of shares reserved for issuance thereunder by an
additional 2,000,000 shares (without giving effect to the annual increases).
The ESPP, which is intended to qualify under Section 423 of the Code,
contains consecutive, overlapping, 24-month offering periods. Each offering
period includes four six-month purchase periods. The offering periods
generally start on the first trading day on or after May 1 and November 1 of
each year, except for the first such offering period which commences on the
first trading day on or after the effective date of this Offering and ends on
the last trading day on or before October 31, 1999.
Employees are eligible to participate if they are customarily employed by
the Company or any participating subsidiary for at least 20 hours per week and
more than five months in any calendar year. However, no employee may be
granted an option to purchase under the ESPP who (i) immediately after grant
owns stock possessing 5% or holds equivalent outstanding options or more of
the total combined voting power or value of all classes of the capital stock
of the Company, or (ii) whose rights to purchase stock under all employee
stock purchase plans of the Company accrues at a rate which exceeds $25,000
worth of stock for each calendar year. The ESPP permits participants to
purchase Common Stock through payroll deductions of
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<PAGE>
up to 15% of the participant's "compensation." Compensation is defined as the
participant's base straight time gross earnings, overtime and commissions but
excludes payments for shift premium, incentive compensation, incentive
payments, bonuses and other compensation. The maximum number of shares a
participant may purchase during a single purchase period is 2,500 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of Common Stock at the end of each purchase period. The price of stock
purchased under the ESPP is 85% of the lower of the fair market value of the
Common Stock at the beginning of the offering period or at the end of the
purchase period. In the event the fair market value at the end of a purchase
period is less than the fair market value at the beginning of the offering
period, the participants will be withdrawn from the current offering period
following exercise and automatically re-enrolled in a new offering period. The
new offering period will use the lower fair market value as of the first date
of the new offering period to determine the purchase price for future purchase
periods. Participants may end their participation at any time during an
offering period, and they will be paid their payroll deductions to date.
Participation ends automatically upon termination of employment with the
Company.
Rights granted under the ESPP are generally not transferable by a
participant unless otherwise provided under the ESPP. The ESPP provides that,
in the event of a merger of the Company with or into another corporation or a
sale of substantially all of the Company's assets, each outstanding option may
be assumed or substituted for by the successor corporation. If the successor
corporation refuses to assume or substitute for the outstanding options, the
offering period then in progress will be shortened and a new exercise date
will be set. The ESPP will terminate by its own terms in September 2007. The
Board of Directors has the authority to amend or terminate the ESPP, except
that no such action may adversely affect any outstanding rights to purchase
stock under the ESPP.
Affiliate Warrant Program
In June 1996, the Company established the Affiliate Warrant Program (the
"Program") with the intent of attracting new Affiliates and to create
performance incentives for such Affiliates. Under the Program, each Affiliate
that signed an Affiliate agreement on or before March 31, 1997 was granted a
warrant to purchase shares of the Company's Common Stock upon execution of the
Affiliate agreement and earns additional warrants to purchase shares of Common
Stock at the rate of one share of Common Stock per $50 of Affiliate adjusted
gross revenue, as defined. The exercise price of all warrants issued and
issuable to an individual Affiliate was set at the time of signing of the
Affiliate agreement. Warrants vest 25% after one year and then ratably each
month over the following 36 month period. Warrants are exercisable for a
maximum period of five years from the effective date of the Affiliate
agreement. Warrants may not be exercised prior to the earlier of the closing
of this offering or any acquisition of the Company. A total of 333,333 shares
of Common Stock has been reserved for issuance under the Program, and the
Company does not intend to increase this amount. As of April 7, 1998, the
Company had issued warrants under the program to purchase an aggregate of
271,121 shares of Common Stock at a weighted average exercise price of $2.51
per share. See Note 10 to Consolidated Financial Statements.
53
<PAGE>
CERTAIN TRANSACTIONS
Since its inception, the Company has issued, in private placement
transactions, shares of Preferred Stock as follows: 6,172,833 shares of Series
A Preferred Stock at $1.62 per share, 3,103,333 shares of Series B Preferred
Stock at $2.01 per share and 2,818,193 shares of Series C Preferred Stock at
$6.21 per share. In connection with the issuance of Series C Preferred Stock,
the Company issued warrants (the "Series C Warrants") to purchase an aggregate
of 704,549 shares of Series C Preferred Stock at an exercise price of $7.50
per share. Each such share of Preferred Stock converted into one share of
Common Stock upon the closing of the Company's initial public offering in
December 1997. The holders of such shares of converted Preferred Stock are
entitled to certain registration rights with respect to the Common Stock
issued upon conversion thereof. See "Description of Capital Stock--
Registration Rights." The following table sets forth the number of shares of
Preferred Stock, Series C Warrants and Common Stock purchased by the Company's
directors, five percent stockholders and their respective affiliates:
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES C COMMON
INVESTOR PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK WARRANTS STOCK
-------- --------------- --------------- --------------- -------- -------
<S> <C> <C> <C> <C> <C>
Crosspoint Venture
Partners (1)........... 1,233,333 -- 48,309 12,077 500,000
SOFTVEN No. 2 Investment
Enterprise
Partnership (2)........ 4,625,000 3,103,333 -- -- --
21st Century
Communications
Partners, L.P. (3)..... -- -- 805,153 201,288 --
The Cutler Group (4).... 308,333 -- 24,892 6,223 958,982
</TABLE>
- ---------------------
(1) Robert Hoff, a general partner of Crosspoint Venture Partners, serves on
the Company's Board of Directors.
(2) Jeffrey Ballowe and Gary Rieschel, Executive Managing Director of SOFTBANK
Holdings, an affiliate of SOFTVEN No. 2 Investment Enterprise Partnership,
serve on the Company's Board of Directors.
(3) Includes 545,893 shares of Series C Preferred Stock and warrants to
purchase 136,473 shares of Series C Preferred Stock held by 21st Century
Communications Partners, L.P., 185,668 shares of Series C Preferred Stock
and warrants to purchase 46,417 shares of Series C Preferred Stock held by
21st Century Communications T-E Partners, L.P., and 73,591 shares of
Series C Preferred Stock and warrants to purchase 18,398 shares of Series
C Preferred Stock held by 21st Century Communications Foreign Partners,
L.P., each of which is an affiliate of 21st Century Communications
Partners, L.P., a general partnership of which Barry Rubenstein, who
serves on the Company's Board of Directors, is a general partner. Mr.
Rubenstein disclaims beneficial ownership of such shares.
(4) Includes 24,892 shares of Series C Preferred Stock, 533,333 shares of
Common Stock and warrants to purchase 6,223 shares of Series C Preferred
Stock held by Storie Partners, an affiliate of The Cutler Group. Frank
Cutler, principal of The Cutler Group, has a shared ownership interest in
these shares and warrants. Also includes 8,982 shares of Common Stock held
by Frank Cutler, principal of the Cutler Group.
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<PAGE>
In December 1995, the Company entered into Restricted Stock Purchase
Agreements with each of Joseph Firmage, Tobin Corey, James Heffernan and
Kenneth Campbell. In January 1996, the Company entered a Restricted Stock
Purchase Agreement with Sheldon Laube. Pursuant to these Restricted Stock
Purchase Agreements, Messrs. Firmage, Corey, Heffernan, Laube and Campbell
acquired the number of shares of the Company's Common Stock set forth opposite
their names in the table below:
<TABLE>
<CAPTION>
SHARES OF COMMON
EXECUTIVE OFFICER STOCK ACQUIRED
----------------- ----------------
<S> <C>
Joseph Firmage.......................................... 1,779,993
Tobin Corey............................................. 932,360
James Heffernan......................................... 762,549
Sheldon Laube........................................... 762,549
Kenneth Campbell........................................ 762,549
</TABLE>
The shares of Common Stock subject to the Restricted Stock Purchase
Agreements were issued in exchange for cash. The Restricted Stock Purchase
Agreements provide the Company the right to repurchase at the original
purchase price all shares of Common Stock not released from such right of
repurchase, and 1/48th of the shares issued under the Restricted Stock
Purchase Agreements are released from the Company's right of repurchase each
month after the date of purchase. Further, the Company retains a right of
first refusal to purchase any shares issued pursuant to a Restricted Stock
Purchase Agreement until 90 days after the effective date of this offering.
The Company has entered into indemnification agreements with each of its
directors and executive officers. These agreements require the Company to
indemnify such individuals for certain liabilities to which they may be
subject as a result of their affiliation with the Company, to the fullest
extent allowed by Delaware law. See "Management--Limitation on Liability and
Indemnification Matters."
The Company has entered into Management Continuity Agreements with Messrs.
Firmage, Corey, Heffernan and Laube. See "Management--Employment Agreements."
In January 1996, the Company extended a loan of $70,000 (with interest
accruing at 5% per annum) to Tobin Corey, to cover the expenses of Mr. Corey's
relocation to California from Utah (the "Corey Loan"). In July 1997, the
Company forgave the Corey Loan, together with accrued interest and a tax
gross-up, for a total amount forgiven of $139,000.
In August 1997, the Company entered into a General Release Agreement with
Kenneth Campbell (the "Campbell Release Agreement"). Pursuant to the terms of
the Campbell Release Agreement, Mr. Campbell shall receive an amount equal to
his base salary of $220,000, payable semimonthly over the 12 month period
beginning August 1, 1997. In addition, on Mr. Campbell's termination date, the
Company paid Mr. Campbell $15,229, an amount equal to the value of his accrued
and unused vacation. Further, pursuant to the terms of the Campbell Release
Agreement, the Company accelerated vesting of certain shares of Common Stock
held by Mr. Campbell so that, as of the date of the Campbell Release
Agreement, Mr. Campbell held 413,047 shares. The Company repurchased the
remaining 349,502 shares of Common Stock held by Mr. Campbell at a price of
$.0003 per share.
In November 1997, the Company granted the following options to executive
officers pursuant to the 1996 Equity Plan: 105,000 shares to Joseph Firmage,
105,000 shares to Tobin Corey, 60,000 shares to James Heffernan and 30,000
shares to Sheldon Laube. Each option has an exercise price of $9.75 per share
and becomes exercisable over 36 to 60 months.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of April 7, 1998 for (i)
each person or entity who is known by the Company to beneficially own more
than 5% of the outstanding Common Stock of the Company, (ii) each of the
Company's directors, (iii) each Named Executive Officer and (iv) all directors
and executive officers of the Company as a group:
<TABLE>
<CAPTION>
DIRECTORS, NAMED EXECUTIVE OFFICERS, 5% STOCKHOLDERS NUMBER OF SHARES PERCENT OF SHARES
AND ALL EXECUTIVE OFFICERS AND DIRECTORS AS A GROUP BENEFICIALLY OWNED (1) BENEFICIALLY OWNED (1)(2)
- ---------------------------------------------------- ---------------------- -------------------------
<S> <C> <C>
SOFTVEN No. 2 Investment Enterprise Partnership......... 5,943,323 16.6%
24-1 Nihonbashi-Hakozakicho
Chuo-Ku
Tokyo, 103 Japan
Gary Rieschel (2)....................................... 5,943,323 16.6
Barry Rubenstein (3).................................... 1,610,303 4.5
Robert Hoff (4)......................................... 1,543,719 4.3
Crosspoint Venture Partners (4)......................... 1,543,719 4.3
Joseph Firmage (5)...................................... 925,590 2.6
Tobin Corey (6)......................................... 668,949 3.6
Sheldon Laube (7)....................................... 589,716 1.7
James Heffernan (8)..................................... 554,375 1.6
Kenneth Campbell........................................ 178,708 *
Jeffrey Ballowe (9)..................................... 4,167 *
All executive officers and directors as a group
(9 persons) (10)....................................... 12,018,850 33.6%
</TABLE>
- ---------------------
* less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of Common Stock subject to options or warrants held by
that person that are currently exercisable or exercisable within 60 days
of April 7, 1998 are deemed outstanding. Such shares, however, are not
deemed outstanding for the purposes of computing the percentage ownership
of each other person. Except as indicated in the footnotes to this table
and pursuant to applicable community property laws, each stockholder
named in the table above has sole voting and investment power with
respect to the shares set forth opposite such stockholder's name.
Percentage beneficial ownership is based on 35,713,821 shares of Common
Stock outstanding as of April 7, 1998.
(2) Consists of 5,943,323 shares of Common Stock held by SOFTVEN No. 2
Investment Enterprise Partnership. Gary Rieschel, Executive Managing
Director of SOFTBANK Holdings, an affiliate of SOFTVEN No. 2 Investment
Enterprise Partnership, serves on the Company's Board of Directors.
Mr. Rieschel disclaims beneficial ownership of such shares. Mr.
Rieschel's mailing address is c/o USWeb Corporation, 2880 Lakeside Drive,
Santa Clara, CA 95054.
(3) Includes 545,893 shares and warrants to purchase 136,473 shares held by
21st Century Communications Partners, L.P., 185,668 shares and warrants
to purchase 46,417 shares held by 21st Century Communications T-E
Partners, L.P., 73,591 shares and warrants to purchase 18,398 shares held
by 21st Century Communications Foreign Partners, L.P., 442,841 shares and
warrants to purchase 110,710
(4) Includes warrants to purchase 12,077 shares held by Crosspoint Venture
Partners. Mr. Hoff is a general partner of Crosspoint Venture Partners.
Mr. Hoff disclaims beneficial ownership of all such shares. Mr. Hoff's
mailing address is c/o USWeb Corporation, 2880 Lakeside Drive, Santa
Clara, CA 95054.
56
<PAGE>
shares held by Wheatley Partners, L.P. and 40,250 shares and warrants to
purchase 10,062 shares held by Wheatley Foreign Partners, L.P. Mr.
Rubenstein is President of InfoMedia Associates, Ltd., a general partner
of 21st Century Communications Partners, L.P., 21st Century Communications
T-E Partners, L.P. and 21st Century Communications Foreign Partners, L.P.
Mr. Rubenstein is also a member and CEO of Wheatley Partners, LLC, a
general partner of Wheatley Partners, L.P. and Wheatley Foreign Partners,
L.P. Mr. Rubenstein disclaims beneficial ownership of such shares. Mr.
Rubenstein's mailing address is c/o USWeb Corporation, 2880 Lakeside
Drive, Santa Clara, CA 95054.
(5) Includes 120,000 shares held by certain relatives of Mr. Firmage. Mr.
Firmage disclaims beneficial ownership of such shares. Also includes
14,583 shares representing options exercisable for Company Common Stock
within 60 days. Mr. Firmage's mailing address is c/o USWeb Corporation,
2880 Lakeside Drive, Santa Clara, CA 95054.
(6) Includes 200,457 shares held by certain relatives of Mr. Corey. Mr. Corey
disclaims beneficial ownership of all such shares. Also includes 14,583
shares representing options exercisable for Company Common Stock within
60 days.
(7) Includes 20,000 shares held by certain relatives of Mr. Laube. Mr. Laube
disclaims beneficial ownership of all such shares. Also includes 4,167
shares representing options exercisable for Company Common Stock within
60 days.
(8) Includes 115,000 shares held by certain relatives of Mr. Heffernan. Mr.
Heffernan disclaims beneficial ownership of all such shares. Also
includes 8,334 shares representing options exercisable for Company Common
Stock within 60 days.
(9) Represents options exercisable within 60 days for 4,167 shares of the
Company's Common Stock.
(10) See notes (2)-(9) above.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company and certain
provisions of the Company's Certificate of Incorporation and Bylaws is a
summary and is qualified in its entirety by the provisions of the Certificate
of Incorporation and Bylaws, which have been filed as exhibits to the
Company's Registration Statement of which this Prospectus is a part.
Upon the closing of these offerings, the authorized capital stock of the
Company, after giving effect to the conversion of all outstanding Preferred
Stock into Common Stock and the reincorporation of the Company in the State of
Delaware, will be 101,000,000 shares, consisting of 100,000,000 shares of
Common Stock, par value $.001 per share, and 1,000,000 shares of undesignated
Preferred Stock, par value $.001 per share.
COMMON STOCK
As of March 31, 1998 there were 35,395,446 shares of Common Stock
outstanding held of record by approximately 525 stockholders.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferences that may be applicable to any then outstanding Preferred Stock,
holders of Common Stock are entitled to receive ratably such dividends as may
be declared by the Board of Directors out of funds legally available therefor.
In the event of a liquidation, dissolution or winding up of the Company,
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities and the liquidation preferences of any
outstanding shares of Preferred Stock, if any. Holders of Common Stock have no
preemptive rights or rights to convert their Common Stock into any other
securities. There are no redemption or sinking fund provisions applicable to
the Common Stock. All outstanding shares of Common Stock are, and all shares
of Common Stock to be outstanding upon completion of the offering will be,
fully paid and nonassessable. The rights of holders of Common Stock are
subject to, and may be adversely affected by, the rights of any series of
Preferred Stock which the Company may issue in the future.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders, to issue up to 1,000,000 shares of Preferred Stock in one or
more series, and to fix the rights, designations, preferences, privileges,
qualifications and restrictions thereof, including dividend rights, conversion
rights, voting rights, rights and terms of redemption, liquidation preferences
and sinking fund terms, any or all of which may be greater than the rights of
the Common Stock. No shares of Preferred Stock will be outstanding upon the
closing of this offering. The issuance of Preferred Stock could adversely
affect the voting power of holders of Common Stock and the likelihood that
such holders will receive dividend payments and payments upon liquidation.
Such issuance could have the effect of decreasing the market price of the
Common Stock. The issuance of Preferred Stock may have the effect of delaying,
deterring or preventing a change in control of the Company with any further
action by the stockholders. The Company has no present plans to issue any
shares of Preferred Stock.
WARRANTS
As of March 31, 1998, the Company had warrants outstanding to purchase
1,080,391 shares of its Common Stock at a weighted average exercise price per
share of $5.73.
No fractional shares of Common Stock will be issued in connection with the
exercise of warrants. In the event a holder of warrant fails to exercise the
warrants prior to their expiration, the warrants will expire and the holder
thereof will have no further rights with respect to such warrants.
58
<PAGE>
A holder of warrants will not have any rights, privileges or liabilities as
a stockholder of the Company prior to exercise of the warrants. The Company is
required to keep available a sufficient number of authorized shares of Common
Stock to permit exercise of the warrants.
The exercise price of the warrants and the number of shares issuable upon
exercise of the warrants will be subject to adjustment to protect against
dilution in the event of stock dividends, stock splits, combinations,
subdivisions and reclassifications. See "Management--Affiliate Warrant
Program."
REGISTRATION RIGHTS
The holders of approximately 12 million shares of Common Stock, including
approximately 800,000 shares of Common Stock issuable upon the conversion of
outstanding warrants, are entitled to certain rights with respect to the
registration of such shares under the Securities Act. Under the terms of the
agreement between the Company and the holders of such registrable securities,
if the Company proposes to register any of its securities under the Securities
Act, either for its own account or for the account of other security holders
exercising registration rights, such holders are entitled to notice of such
registration and are entitled to include shares of such Common Stock therein.
Further, holders may require the Company to file additional registration
statements on Form S-3 at the Company's expense. These rights are subject to
certain conditions and limitations, among them the right of the underwriters
of an offering to limit the number of shares included in such registration in
certain circumstances.
CERTAIN ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF
INCORPORATION, BYLAWS AND DELAWARE LAW
General
Certain provisions of the Delaware General Corporation Law and the Company's
Certificate of Incorporation and Bylaws could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
to acquire, control of the Company. Such provisions could limit the price that
certain investors might be willing to pay in the future for shares of the
Company's Common Stock. These provisions of Delaware law and the Company's
Certificate of Incorporation and Bylaws may also have the effect of
discouraging or preventing certain types of transactions involving an actual
or threatened change of control of the Company (including unsolicited takeover
attempts), even though such a transaction may offer the Company's stockholders
the opportunity to sell their stock at a price above the prevailing market
price. The Certificate of Incorporation allows the Company to issue Preferred
Stock with rights senior to those of the Common Stock and other rights that
could adversely affect the interests of holders of Common Stock, which could
decrease the amount of earnings or assets available for distribution to the
holders of Common Stock or could adversely affect the rights and powers,
including voting rights, of the holders of Common Stock. In certain
circumstances, such issuance could have the effect of decreasing the market
price of the Common Stock, as well as having the anti-takeover effect
discussed above. See "Risk Factors--Effect of Certain Charter Provisions;
Antitakeover Effects of Certificate of Incorporation, Bylaws and Delaware
Law."
Delaware Takeover Statute
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which prohibits a Delaware corporation from engaging in a
"business combination" with certain persons ("Interested Stockholders") for
three years following the date any such person becomes an Interested
Stockholder. Interested Stockholders generally include (i) persons who are the
beneficial owners of 15% or more of the outstanding voting stock of the
corporation and (ii) persons who are affiliates or associates of the
corporation and who hold 15% or more of the corporation's outstanding voting
stock at any time within three years before the date on which such person's
status as an Interested Stockholder is determined. Subject to certain
59
<PAGE>
exceptions, a business combination includes, among other things, (i) a merger
or consolidation, (ii) the sale, lease exchange, mortgage, pledge, transfer or
other disposition of assets having an aggregate market value equal to 10% or
more of either the aggregate market value of all assets of the corporation
determined on a consolidated basis or the aggregate market value of all the
outstanding stock of the corporation, (iii) any transaction that results in
the issuance or transfer by the corporation of any stock of the corporation to
the Interested Stockholder, except pursuant to a transaction that effects a
pro rata distribution to all stockholders of the corporation, (iv) any
transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series, or securities
convertible into the stock of any class or series, of the corporation that is
owned directly or indirectly by the Interested Stockholder, or (v) any receipt
by the Interested Stockholder of the benefit (except proportionately as a
stockholder) of any loans, advances, guarantees, pledges or other financial
benefits provided by or through the corporation.
Section 203 does not apply to a business corporation if (i) before a person
becomes an Interested Stockholder, the board of directors of the corporation
approves the transaction in which the Interested Stockholder became an
Interested Stockholder or approved the business combination, or (ii) upon
consummation of the transaction that resulted in the Interested Stockholder
becoming an Interested Stockholder, the Interested Stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commences, other than certain the affirmative vote of the holders
of at least two-thirds of the outstanding voting stock of the corporation not
owned by the Interested Stockholder.
Certificate of Incorporation and Bylaws
The Company's Bylaws also require that special meetings of the stockholders
of the Company may be called only by the Board of Directors, the Chief
Executive Officer of the Company or by any person or persons holding shares
representing at least 20% of the outstanding capital stock. The Company's
Bylaws also require advance written notice, which must be received by the
Secretary of the Company not less than 90 days prior to the meeting, by a
stockholder of a proposal or directors nomination which such stockholder
desires to present at an annual or special meeting of stockholders. The
Company's Certificate of Incorporation does not include a provision for
cumulative voting in the election of directors. Under cumulative voting, a
minority stockholder holding a sufficient number of shares may be able to
ensure the election of one or more directors. The absence of cumulative voting
may have the effect of limiting the ability of minority stockholders to effect
changes in the Board of Directors and, as a result, may have the effect of
deterring hostile takeover or delaying or preventing changes in control or
management of the Company.
The Company's Bylaws provide that the authorized number of directors may be
changed by an amendment to the Bylaws adopted by the Board of Directors or by
the stockholders. Vacancies in the Board of Directors may be filled either by
holders of a majority of the Company's voting stock or a majority of directors
in office, although less than a quorum. See "Risk Factors--Effect of Certain
Charter Provisions; Antitakeover Effects of Incorporation, Bylaws and Delaware
Law."
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services has been appointed as transfer agent and
registrar for the Company's Common Stock.
60
<PAGE>
PLAN OF DISTRIBUTION
The Company will issue the Common Stock from time to time in connection with
acquisition by the Company of other businesses, assets or securities. It is
expected that the terms of the acquisitions involving the issuance of
securities covered by this Prospectus will be determined by direct
negotiations with the owners or controlling persons of the businesses, assets
or securities to be acquired by the Company. No underwriting discounts or
commissions will be paid in connection with the issuance of the Shares by the
Company, although finder's fees may be paid from time to time with respect to
specific mergers or acquisitions. Any person receiving such fees may be deemed
to be an underwriter within the meaning of the Securities Act.
RESTRICTIONS ON RESALE
The Common Stock offered hereby is registered under the Securities Act, but
this registration does not cover resale or distribution by the person who
receives Common Stock issued by the Company in its acquisitions. Affiliates of
entities acquired by the Company who do not become affiliates of the Company
may not resell Common Stock registered under the Registration Statement to
which this Prospectus relates except pursuant to an effective registration
statement under the Securities Act covering such shares, or in compliance with
Rule 145 promulgated under the Securities Act or another applicable exemption
from the registration requirements of the Securities Act. Generally, Rule 145
permits such affiliates to sell such shares immediately following the
acquisition in compliance with certain volume limitations and manner of sale
requirements. Under Rule 145, sales by such affiliates during any three-month
period cannot exceed the greater of (i) 1% of the shares of Common Stock of
the Company outstanding and (ii) the average weekly reported volume of trading
of such shares of Common Stock on all national securities exchanges during the
four calendar weeks preceding the proposed sale. These restrictions will cease
to apply under most other circumstances if the affiliate has held the Common
Stock for at least two years, provided that the person or entity is not then
an affiliate of the Company. Individuals who are not affiliates of the entity
being acquired and do not become affiliates of the Company will not be subject
to resale restrictions under Rule 145 and, unless otherwise contractually
restricted, may resell Common Stock immediately following the acquisition
without an effective registration statement under the Securities Act. The
ability of affiliates to resell shares of the Common Stock under Rule 145 will
be subject to the Company having satisfied its reporting requirements under
the Securities Exchange Act of 1934, as amended, for specified periods prior
to the time of sale.
LEGAL MATTERS
Certain legal matters with respect to the validity of the issuance of the
shares of Common Stock offered hereby will be passed upon for the Company by
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Attorneys employed by Wilson Sonsini Goodrich & Rosati, or
investment partnerships of which they are beneficial owners, hold 7,554 shares
of Common Stock.
EXPERTS
The financial statements included in this Prospectus have been audited by
Price Waterhouse LLP, independent accountants. The companies and periods
covered by these audits are indicated in the individual reports of Price
Waterhouse LLP. Such financial statements have been so included in reliance on
the reports of Price Waterhouse LLP given on the authority of said firm as
experts in auditing and accounting.
61
<PAGE>
USWEB CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
USWEB CORPORATION
Report of Independent Accountants.......................................... F-5
Consolidated Balance Sheet................................................. F-6
Consolidated Statement of Operations....................................... F-7
Consolidated Statement of Stockholders' Equity (Deficit)................... F-8
Consolidated Statement of Cash Flows....................................... F-9
Notes to Consolidated Financial Statements................................. F-10
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Overview................................................................... F-27
Pro Forma Consolidated Statement of Operations............................. F-30
Pro Forma Consolidated Balance Sheet....................................... F-31
Notes to Pro Forma Consolidated Financial Information...................... F-32
USWEB SAN FRANCISCO (FORMERLY XCOM CORPORATION)
Report of Independent Accountants.......................................... F-33
Balance Sheet.............................................................. F-34
Statement of Operations.................................................... F-35
Statement of Shareholders' Equity.......................................... F-36
Statement of Cash Flows.................................................... F-37
Notes to Financial Statements.............................................. F-38
USWEB MILWAUKEE (FORMERLY FETCH INTERACTIVE, INC.)
Report of Independent Accountants.......................................... F-41
Balance Sheet.............................................................. F-42
Statement of Operations.................................................... F-43
Statement of Stockholders' Deficit......................................... F-44
Statement of Cash Flows.................................................... F-45
Notes to Financial Statements.............................................. F-46
USWEB LA METRO (FORMERLY NEWLINK CORPORATION)
Report of Independent Accountants.......................................... F-50
Balance Sheet.............................................................. F-51
Statement of Operations.................................................... F-52
Statement of Shareholders' Equity.......................................... F-53
Statement of Cash Flows.................................................... F-54
Notes to Financial Statements.............................................. F-55
USWEB ATLANTA (FORMERLY INTERNETOFFICE, LLC)
Report of Independent Accountants.......................................... F-58
Balance Sheet.............................................................. F-59
Statement of Operations.................................................... F-60
Statement of Stockholders' Equity.......................................... F-61
Statement of Cash Flows.................................................... F-62
Notes to Financial Statements.............................................. F-63
USWEB DC (FORMERLY INFOPRENEURS INC.)
Report of Independent Accountants.......................................... F-66
Consolidated Balance Sheet................................................. F-67
Consolidated Statement of Operations....................................... F-68
Consolidated Statement of Stockholders' Deficit............................ F-69
Consolidated Statement of Cash Flows....................................... F-70
Notes to Consolidated Financial Statements................................. F-71
</TABLE>
F-1
<PAGE>
USWEB CORPORATION
INDEX TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
USWEB PITTSBURGH (FORMERLY ELECTRONIC IMAGES, INC.)
Report of Independent Accountants......................................... F-74
Balance Sheet............................................................. F-75
Statement of Operations................................................... F-76
Statement of Shareholders' Equity......................................... F-77
Statement of Cash Flows................................................... F-78
Notes to Financial Statements............................................. F-79
USWEB CHICAGO METRO (FORMERLY MULTIMEDIA MARKETING & DESIGN INC.)
Report of Independent Accountants......................................... F-84
Balance Sheet............................................................. F-85
Statement of Operations................................................... F-86
Statement of Shareholders' Equity......................................... F-87
Statement of Cash Flows................................................... F-88
Notes to Financial Statements............................................. F-89
USWEB HOLLYWOOD (FORMERLY KANDH, INC.)
Report of Independent Accountants......................................... F-91
Balance Sheet............................................................. F-92
Statement of Operations................................................... F-93
Statement of Shareholders' Equity......................................... F-94
Statement of Cash Flows................................................... F-95
Notes to Financial Statements............................................. F-96
USWEB HOLLYWOOD (FORMERLY DREAMMEDIA, INC.)
Report of Independent Accountants......................................... F-97
Balance Sheet............................................................. F-98
Statement of Operations................................................... F-99
Statement of Shareholders' Equity......................................... F-100
Statement of Cash Flows................................................... F-101
Notes to Financial Statements............................................. F-102
USWEB MARIN (FORMERLY INTERNET CYBERNAUTICS, INC.)
Report of Independent Accountants......................................... F-104
Balance Sheet............................................................. F-105
Statement of Operations................................................... F-106
Statement of Shareholders' Equity......................................... F-107
Statement of Cash Flows................................................... F-108
Notes to Financial Statements............................................. F-109
USWEB LONG ISLAND (FORMERLY SYNERGETIX SYSTEMS INTEGRATION, INC.)
Report of Independent Accountants......................................... F-114
Balance Sheet............................................................. F-115
Statement of Operations................................................... F-116
Statement of Shareholders' Equity......................................... F-117
Statement of Cash Flows................................................... F-118
Notes to Financial Statements............................................. F-119
</TABLE>
F-2
<PAGE>
USWEB CORPORATION
INDEX TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
USWEB DETROIT (FORMERLY ONLINE MARKETING COMPANY)
Report of Independent Accountants......................................... F-123
Balance Sheet............................................................. F-124
Statement of Operations................................................... F-125
Statement of Shareholders' Equity (Deficit)............................... F-126
Statement of Cash Flows................................................... F-127
Notes to Financial Statements............................................. F-128
USWEB SAN MATEO (FORMERLY ZENDATTA, INC.)
Report of Independent Accountants......................................... F-131
Balance Sheet............................................................. F-132
Statement of Operations................................................... F-133
Statement of Shareholders' Equity......................................... F-134
Statement of Cash Flows................................................... F-135
Notes to Financial Statements............................................. F-136
USWEB LA CENTRAL (FORMERLY W3-DESIGN)
Report of Independent Accountants......................................... F-138
Balance Sheet............................................................. F-139
Statement of Operations................................................... F-140
Statement of Shareholders' Equity......................................... F-141
Statement of Cash Flows................................................... F-142
Notes to Financial Statements............................................. F-143
USWEB HOUSTON (FORMERLY USWEB-APEX, INC.)
Report of Independent Accountants......................................... F-146
Combined Balance Sheet.................................................... F-147
Combined Statement of Operations.......................................... F-148
Combined Statement of Shareholders' Equity................................ F-149
Combined Statement of Cash Flows.......................................... F-150
Notes to Combined Financial Statements.................................... F-151
USWEB NEW YORK CENTRAL (FORMERLY REACH NETWORKS, INC.)
Report of Independent Accountants......................................... F-153
Consolidated Balance Sheet................................................ F-154
Consolidated Statement of Operations...................................... F-155
Consolidated Statement of Stockholders' Equity (Deficit).................. F-156
Consolidated Statement of Cash Flows...................................... F-157
Notes to Consolidated Financial Statements................................ F-158
INTER.LOGIC.STUDIOS, INC.
Report of Independent Accountants......................................... F-165
Balance Sheet............................................................. F-166
Statement of Operations................................................... F-167
Statement of Shareholders' Equity......................................... F-168
Statement of Cash Flows................................................... F-169
Notes to Financial Statements............................................. F-170
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
QUEST INTERACTIVE MEDIA, INC.
Report of Independent Accountants......................................... F-173
Balance Sheet............................................................. F-174
Statement of Operations................................................... F-175
Statement of Shareholders' Deficit........................................ F-176
Statement of Cash Flows................................................... F-177
Notes to Financial Statements............................................. F-178
ENSEMBLE CORPORATION
Report of Independent Accountants......................................... F-181
Balance Sheet............................................................. F-182
Statement of Operations................................................... F-183
Statement of Shareholders' Equity......................................... F-184
Statement of Cash Flows................................................... F-185
Notes to Financial Statements............................................. F-186
IKONIC INTERACTIVE, INC.
Report of Independent Accountants......................................... F-191
Balance Sheet............................................................. F-192
Statement of Operations................................................... F-193
Statement of Shareholders' Deficit........................................ F-194
Statement of Cash Flows................................................... F-195
Notes to Financial Statements............................................. F-196
</TABLE>
F-4
<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 (deficit) and
of cash flows present fairly, in all material respects, the financial position
of USWeb Corporation and its subsidiaries at December 31, 1996 and 1997, and
the results of their operations and their cash flows for each of the years
then ended, 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.
PRICE WATERHOUSE LLP
San Jose, California
January 20, 1998
F-5
<PAGE>
USWEB CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1996 1997 1998
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 3,220 $ 44,145 $ 14,186
Short-term investments...................... -- -- 22,616
Accounts receivable, net.................... 137 7,903 14,687
Other current assets........................ 54 657 2,614
-------- -------- --------
Total current assets...................... 3,411 52,705 54,103
Property and equipment, net................... 1,084 6,202 8,214
Intangible assets, net........................ -- 19,019 43,213
Investment in affiliate....................... 2,850 -- --
Other assets.................................. 137 1,324 1,791
-------- -------- --------
$ 7,482 $ 79,250 $107,321
======== ======== ========
LIABILITIES, MANDATORILY REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................ $ 906 $ 2,923 $ 3,883
Accrued expenses............................ 2,190 7,997 10,367
Deferred revenue ........................... -- 470 957
Current portion of debt and lease obliga-
tions...................................... 242 799 5,743
-------- -------- --------
Total current liabilities................. 3,338 12,189 20,950
Lease obligations, long-term portion.......... 436 372 1,245
-------- -------- --------
3,774 12,561 22,195
-------- -------- --------
Commitments and contingencies (Notes 1 and 11)
Mandatorily Redeemable Convertible Preferred
Stock (Note 7)............................... 16,200 -- --
-------- -------- --------
Stockholders' equity (deficit):
Preferred Stock, $0.001 par value, 1,000,000
shares authorized;
no shares issued and outstanding........... -- -- --
Common Stock, $0.001 par value, 100,000,000
shares authorized;
6,381,000, 33,811,085 and 35,395,446 shares
issued
and outstanding............................ 2 29 31
Additional paid-in capital.................. 2,714 138,804 173,599
Note receivable............................. (1,400) -- --
Accumulated deficit......................... (13,808) (72,144) (88,504)
-------- -------- --------
Total stockholders' equity (deficit)...... (12,492) 66,689 85,126
-------- -------- --------
$ 7,482 $ 79,250 $107,321
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
USWEB CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
------------------ -----------------
1996 1997 1997 1998
-------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Services.............................. $ -- $ 18,366 $ 59 $ 13,455
Other................................. 1,820 912 436 196
-------- -------- ------- --------
Total revenues...................... 1,820 19,278 495 13,651
-------- -------- ------- --------
Cost of revenues:
Services.............................. -- 13,468 165 8,835
Other................................. 208 1,294 132 209
Stock compensation (Note 9)........... -- 2,420 -- 1,681
-------- -------- ------- --------
Total cost of revenues.............. 208 17,182 297 10,725
-------- -------- ------- --------
Gross profit............................ 1,612 2,096 198 2,926
-------- -------- ------- --------
Operating expenses:
Marketing, sales and support.......... 12,764 20,672 3,751 4,540
General and administrative............ 2,813 10,271 1,444 3,848
Acquired in-process technology (Note
1)................................... -- 9,472 711 4,323
Stock compensation (Note 9)........... -- 6,698 36 2,568
Amortization of intangible assets
(Note 1)............................. -- 9,476 106 4,495
-------- -------- ------- --------
Total operating expenses............ 15,577 56,589 6,048 19,774
-------- -------- ------- --------
Loss from operations.................... (13,965) (54,493) (5,850) (16,848)
Interest income......................... 215 233 7 538
Interest expense........................ (58) (76) -- (50)
Impairment of investee carried at cost.. -- (4,000) -- --
-------- -------- ------- --------
Net loss................................ $(13,808) $(58,336) $(5,843) $(16,360)
======== ======== ======= ========
Net loss per share:
Basic and diluted (Note 2)............ $ (10.35) $ (7.98) $(2.00 ) $ (0.56)
======== ======== ======= ========
Weighted average shares outstanding
(Note 2)............................. 1,334 7,312 2,915 29,441
======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
USWEB CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL ACCUMU- STOCKHOLDERS'
------------------ PAID-IN NOTE LATED EQUITY
SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT (DEFICIT)
---------- ------ ---------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of Common
Stock.................. 5,000,000 $ -- $ 1 $ -- $ -- $ 1
Issuance of Common Stock
for trade name rights.. 66,667 -- -- -- -- --
Conversion of notes
payable into
Common Stock........... 500,000 1 499 -- -- 500
Issuance of Common Stock
for note receivable.... 533,333 1 1,999 (2,000) -- --
Collection of note
receivable............. -- -- -- 600 -- 600
Exercise of stock
options................ 281,000 -- 30 -- -- 30
Issuance of Affiliate
warrants............... -- -- 169 -- -- 169
Stock compensation
expense................ -- -- 16 -- -- 16
Net loss................ -- -- -- -- (13,808) (13,808)
---------- ----- -------- ------- -------- --------
Balance December 31,
1996................... 6,381,000 2 2,714 (1,400) (13,808) (12,492)
Exercise of stock
options................ 103,079 -- 500 -- -- 500
Common Stock issued for
acquired businesses.... 7,949,683 8 41,384 -- -- 41,392
Issuance of Common
Stock, net ............ 7,638,889 7 51,202 -- -- 51,209
Conversion of
Mandatorily Redeemable
Convertible Preferred
Stock.................. 12,094,359 12 32,478 -- -- 32,490
Repurchase of Common
Stock.................. (355,925) -- -- -- -- --
Issuance of Affiliate
warrants............... -- -- 150 -- -- 150
Collection of note
receivable............. -- -- -- 1,400 -- 1,400
Stock compensation
expense................ -- -- 10,376 -- -- 10,376
Net loss................ -- -- -- -- (58,336) (58,336)
---------- ----- -------- ------- -------- --------
Balance December 31,
1997................... 33,811,085 29 138,804 -- (72,144) 66,689
Common Stock issued for
acquired businesses
(Unaudited)............ 1,561,564 2 29,971 -- -- 29,973
Issuance of Common Stock
(Unaudited) ........... 42,237 -- 500 -- -- 500
Repurchase of Common
Stock (Unaudited)...... (19,440) -- (1) -- -- (1)
Issuance of Affiliate
warrants (Unaudited)... -- -- 42 -- -- 42
Stock compensation
expense (Unaudited).... -- -- 4,283 -- -- 4,283
Net loss (Unaudited).... -- -- -- -- (16,360) (16,360)
---------- ----- -------- ------- -------- --------
Balance March 31, 1998
(Unaudited)............ 35,395,446 $ 31 $173,599 $ -- $(88,504) $ 85,126
========== ===== ======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
USWEB CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE
YEAR ENDED MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------ -----------------
1996 1997 1997 1998
-------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................... $(13,808) $(58,336) $(5,843) $(16,360)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization............ 263 1,464 140 767
Provision for doubtful accounts.......... -- 819 95 76
Stock, option and warrant costs and
expenses................................ 185 10,376 36 4,284
Discounted sale of Common Stock.......... -- 1,250 -- --
Amortization of intangible assets........ -- 9,476 106 4,495
Acquired in-process technology........... -- 9,472 711 4,323
Impairment of investee carried at cost... -- 4,000 -- --
Changes in assets and liabilities:
Accounts receivable..................... (137) (4,080) (37) (2,465)
Other current assets.................... (54) (187) (206) 107
Other assets............................ (137) (690) 18 228
Accounts payable........................ 906 177 528 45
Accrued expenses........................ 2,190 2,194 927 (2,748)
Deferred revenues....................... -- 470 -- 234
-------- -------- ------- --------
Net cash used in operating activities.. (10,592) (23,595) (3,525) ( 7,014)
-------- -------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment...... (1,059) (3,335) (482) (1,236)
Cash received from acquisitions, net of
cash used................................. -- 1,129 -- 333
Purchase of investment in affiliate........ (2,850) (1,150) -- --
Purchase of short-term investments......... -- -- -- (24,094)
Proceeds from activities/sales of short-
term investments.......................... -- -- -- 1,478
-------- -------- ------- --------
Net cash used in investing activities.. (3,909) (3,356) (482) (23,519)
-------- -------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Mandatorily
Redeemable Convertible Preferred Stock.... 16,200 16,290 -- --
Proceeds from issuance of Common Stock..... 31 50,459 -- 40
Proceeds from bank borrowings.............. -- 2,000 -- --
Repayment of bank borrowings............... -- (2,000) -- --
Proceeds from issuance of notes payable.... 500 -- 1,400 --
Proceeds from collection of note
receivable................................ 600 1,400 -- --
Proceeds from capital lease financing...... 599 431 -- 888
Principal payments on capital lease........ (209) (704) (153) (354)
-------- -------- ------- --------
Net cash provided by financing
activities............................ 17,721 67,876 1,247 574
-------- -------- ------- --------
Increase in cash and cash equivalents....... 3,220 40,925 (2,760) (29,959)
Cash and cash equivalents, beginning of
period..................................... -- 3,220 3,220 44,145
-------- -------- ------- --------
Cash and cash equivalents, end of period.... $ 3,220 $ 44,145 $ 460 $ 14,186
======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1--THE COMPANY:
USWeb Corporation ("USWeb" or the "Company") was incorporated in Utah on
December 6, 1995 ("inception") and reincorporated in Delaware on December 2,
1997. Through a nationwide network of wholly-owned subsidiaries and franchised
Affiliates, the Company provides Internet professional services including
strategy consulting, analysis and design, technology development,
implementation and integration, audience development and maintenance.
During the year ended December 31, 1997, the Company recognized the
acquisition of all the outstanding stock of nineteen businesses, including
certain franchised Affiliates, ("Acquired Entities") in separate transactions
in exchange for shares of the Company's Common Stock. The Acquired Entities as
of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
COMMON RECOGNIZED
EFFECTIVE SHARES PURCHASE
ACQUIRED ENTITY DATE ISSUED PRICE
- --------------- ------------------ --------- ----------
<S> <C> <C> <C>
XCom Corporation..................................... March 16, 1997 383,209 $ 1,609
Cosmix Corporation................................... April 1, 1997 119,774 503
Fetch Interactive, Inc. ............................. April 1, 1997 464,838 1,397
NewLink Corporation.................................. April 1, 1997 425,700 1,537
InterNetOffice, LLC.................................. May 1, 1997 510,646 1,578
NetWORKERS Corporation............................... May 1, 1997 135,415 569
Infopreneurs Inc. ................................... June 1, 1997 1,008,169 3,173
Netphaz Corporation.................................. June 1, 1997 235,205 776
Electronic Images, Inc. ............................. July 1, 1997 1,665,525 6,205
Multimedia Marketing & Design Inc. .................. July 24, 1997 332,536 1,397
KandH, Inc. ......................................... August 29, 1997 151,624 1,023
DreamMedia, Inc. .................................... August 29, 1997 359,094 2,424
Internet Cybernautics, Inc .......................... September 29, 1997 447,183 4,025
Synergetix Systems Integration, Inc. ................ September 30, 1997 151,716 1,365
Online Marketing Company............................. September 30, 1997 95,730 861
Zendatta, Inc. ...................................... September 30, 1997 176,360 1,587
W3-design............................................ November 5, 1997 410,274 3,473
USWeb--Apex, Inc. ................................... November 5, 1997 365,029 3,285
Reach Networks, Inc. ................................ November 13, 1997 511,656 4,605
--------- -------
7,949,683 $41,392
========= =======
</TABLE>
The acquisitions have been accounted for using the purchase method of
accounting, and accordingly, the recognized purchase price has 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 $3,425 of the aggregate recognized 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 $9,472 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 $3,610 was allocated to existing technology and is being
amortized over its estimated useful life of six months. The purchase price in
excess of the fair value of identified tangible and intangible assets and
liabilities assumed in the amount of $24,885 was allocated to goodwill and is
being amortized over its estimated useful life of one to two years. See Note
2.
F-10
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The acquisitions of the Acquired Entities have been primarily structured as
tax free exchanges of stock, therefore, the differences between the recognized
fair values of the acquired assets, including intangible assets, and their
historical tax bases is not deductible for income tax purposes.
The fair value of the Company's Common Stock issued as consideration for the
acquisitions was determined, based upon a number of considerations. For
acquisitions recognized through July 24, 1997, the fair value of the Company's
Common Stock was estimated to be $4.20 per share, determined primarily by
reference to the $15,811 amount allocated to 2,818,193 shares of Series C
Mandatorily Redeemable Convertible Preferred Stock (excluding approximately
$1,690 allocated to detachable warrants to acquire 704,549 shares of Series C
Mandatorily Redeemable Convertible Preferred Stock). See Note 7. For
acquisitions recognized from August 29, 1997 through November 13, 1997, the
fair value of the Company's Common Stock was estimated to be $6.75 to $9.00
per share based upon a number of factors, including growth in the Company's
business and the private sale, in October, 1997, of 222,222 shares of Common
Stock to an independent third party at a price of $9.00 per share. See Note 8.
The various purchase agreements require that fifty percent of the shares
issuable at the acquisition dates be placed in escrow for a period of twelve
months. The shares placed in escrow will either be issued to the previous
owners of the acquired entities or returned to the Company based upon the
results of the purchase price adjustments, as defined for each Acquired
Entity. The Company has excluded from the recognized purchase price
calculations approximately 818,500 shares that it estimates are not probable
of issuance at the end of the respective escrow periods. Additionally, the
purchase price adjustment for each Acquired Entity allows for the issuance of
additional stock-based consideration in the event an Acquired Entity's
valuation calculated at the six and twelve month dates following the
acquisition increases. The number of additional shares that are potentially
issuable at the completion of the six and twelve month valuation periods is
not presently known, however, management estimates that approximately 418,000
additional shares are probable of issuance at the completion of the respective
valuation periods. Any purchase price changes resulting from such adjustments
will be recognized at the then fair value of the shares as adjustments to
goodwill and will be amortized over the remaining period of expected benefit.
As of December 31, 1997, no adjustments have been made to the escrow shares
for any acquisition.
The terms of the signed definitive agreements for each acquisition provide
for the transfer of effective control of the target entity on dates that
precede the legal consummation of the transaction and physical exchange of
consideration. On the designated effective dates, the Company (1) assumes
effective control and the risks and rewards of ownership including the rights
to all revenues and responsibility for all operating costs and expenses,
(2) the target company employees become employees of the Company and (3) the
terms of purchase price adjustment provisions become effective. For business
acquisitions recognized through December 31, 1997, the purchase accounting
effects and operating results of transactions occurring between the designated
effective dates and the legal closing dates were not material.
F-11
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following unaudited pro forma consolidated amounts give effect to (i)
those aquisitions with effective dates in 1997 as if they occurred on January
1, 1996, and on January 1, 1997, and (ii) those acquisitions with effective
dates in 1998 (see Note 12) as if they occurred on January 1, 1997, by
consolidating the results of operations of the Acquired Entities with the
results of USWeb for the years ended December 31, 1996 and 1997 and the three
months ended March 31, 1997 and 1998:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
----------------------- -----------------------
1996 1997 1997 1998
---------- ----------- ---------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues..................... $ 19,765 $ 55,584 $ 11,966 $ 19,106
Net loss..................... (57,069) (118,832) (37,958) (17,283)
Net loss per share:
Basic and diluted........... $ (9.24) $ (9.53) $ (4.32) $ (0.57)
Weighted average shares out-
standing................... 6,175,000 12,463,000 8,782,000 33,525,000
</TABLE>
Prior to June 30, 1997 the Company had invested $4,000 for less than 20%
investment in Utopia, Inc. ("Utopia") an Internet consulting company located
in Boston, Massachusetts. The Company's investment was accounted for on the
cost basis. Through June 30, 1997 Utopia had incurred significant losses, was
experiencing significant cash flow deficits and had a net asset deficiency.
During June 1997, the Company determined that it was unlikely that the Company
would recover any of its investment in Utopia and, accordingly, recorded an
impairment loss equal to the carrying amount of its investment.
On October 9, 1997, the Company entered into a non-binding term sheet to
purchase specified assets of Utopia. Under the preliminary terms of the
arrangement, the Company would acquire selected computer hardware and software
assets and would agree to enter at will employment agreements with most Utopia
employees. In addition, the Company would obtain all rights and
responsibilities relating to specified Utopia customer contracts effective
October 1, 1997. In consideration for the acquired net assets the Company
would agree to assume a note payable to Utopia's former majority shareholder
in the amount of $3,000. The Company has determined that the acquisition, if
consummated, will be accounted for as an acquisition of a business. The
Company will account for the acquisition using the purchase method of
accounting, and, accordingly, the purchase price will be allocated to the
various assets, including intangible assets acquired and liabilities assumed
on the basis of their fair values at the date of acquisition. Substantially
all of the purchase price is expected to be allocated to goodwill and will be
amortized over its estimated useful life of one year.
The note payable to be assumed by the Company would be payable in cash on
October 1, 1998 and would bear interest at a referenced prime rate plus 1%.
Beginning ninety days subsequent to the closing of the Company's public
offering, the note would be convertible, at the option of the holder, into
restricted shares of the Company's Common Stock based upon the fair value of
such stock at the conversion date.
The purchase price consideration would be subject to adjustment at six and
twelve month intervals subsequent to the closing, based upon the standard
valuation formula used in the Company's acquisition program. The increase in
value, if any, attributable to the period subsequent to the closing would be
payable in shares of and options to purchase shares of the Company's Common
Stock.
F-12
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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.
Principles of Consolidation
The accompanying financial statements, include the consolidated accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
The Company's financial statements as of December 31, 1995 and for the
period from December 6, 1995 ("Inception") through December 31, 1995 reflect
immaterial transactions; such activities have been included in the 1996
financial statements to facilitate presentation.
Cash, 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 issuers. All highly
liquid instruments with an original maturity of three months or less are
considered cash equivalents, those with original maturities greater than three
months and current maturities less than twelve months from the balance sheet
date are considered short-term investments.
At March 31, 1998, short-term investments in marketable securities were
classified as available-for-sale and consisted of 87% (unaudited) corporate
debt securities, 9% (unaudited) debt securities of the U.S. Government and its
agencies, and 4% (unaudited) foreign debt securities. At March 31, 1998, the
fair value of the investments approximated cost. Fair value is determined
based upon the quoted market prices of the securities as of the balance sheet
date.
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 assets,
generally three years. Leasehold improvements are amortized using the
straight-line method over the shorter of the estimated useful lives of the
assets or the remaining lease term, not to exceed five years.
Intangible Assets
Goodwill resulting from the acquisition of Internet technology businesses is
estimated by management to be primarily associated with the acquired workforce
and technological know how. As a result of the rapid technological changes
occurring in the Internet industry and the intense competition for qualified
Internet professionals, recorded goodwill is amortized on the straight-line
basis over the estimated periods of benefit, which range from one to two
years. For certain acquisitions where the Company expects to issue additional
shares at the end of the 12 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.
F-13
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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. Since inception, the Company has not recorded any provisions for
possible impairment of intangible assets.
Completed technologies obtained through acquisition or merger are
capitalized and amortized on the straight-line basis over the estimated period
of benefit of six 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.
Investments
Investments where the Company has an equity interest of less than 20% and
does not have the ability to exert significant influence are accounted for
using the cost method. At each balance sheet date, the Company assesses the
value recorded for cost-based investments and recognizes any identified
impairment.
Revenue Recognition
The Company derives its revenues from consulting service agreements
(including both fixed price and time and materials agreements), initial
franchise fees, monthly royalties from Affiliates and hosting service fees.
The initial franchise fee was waived for the first ten Affiliates and was set
at $25 for the next 40 Affiliates and $50 thereafter. The Company last entered
into a franchise agreement in March 1997 and does not expect to enter into any
additional franchise agreements.
Service 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.
Unearned revenues represent the amount of cash received in advance of services
being performed.
Revenues from Affiliates are included in Other Revenues and are recognized
in accordance with Statement of Financial Accounting Standards No. 45,
"Accounting for Franchise Fee Revenue." Initial franchise fees, including area
franchise sales which do not depend significantly on the number of individual
franchises to be established, are recognized when all obligations required by
the franchise agreement have been substantially performed and no other
material conditions or obligations exist. Initial franchise fees are
recognized as received because all obligations required by the franchise
agreement are substantially performed concurrently with the signing of the
franchise agreement. Monthly royalties are determined by aggregating a five
percent royalty and a two percent marketing promotion fee, each of which is
calculated based on each Affiliate's adjusted gross revenues, as defined, and
are recognized as the fees are earned and become receivable from the
Affiliate.
Revenues from web-site hosting services are included in Other Revenues, have
been insignificant to date and are recognized monthly as services are
provided.
Advertising Costs
Advertising costs are expensed as incurred in accordance with Statement of
Position 93-7, "Reporting on Advertising Costs." Advertising costs for the
years ended December 31, 1996 and 1997 totaled $3,223 and $4,060,
respectively.
F-14
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Affiliate Warrants
The fair value of warrants granted to Affiliates upon the execution of a
franchise agreement are measured at the grant date using the Black-Scholes
formula and are recognized when material, over the three year vesting period
as a cost of revenues. The fair value of warrants to be granted upon the
achievement of future Affiliate revenues (AGR Warrants) are measured on the
date such warrants are earned using the Black-Scholes formula. When material,
the fair value of AGR Warrants is charged to cost of revenues over the three
year vesting period beginning with the month such warrants are earned. The
exercise price of all warrants issued and issuable to an individual Affiliate
is fixed at the time of signing of the related franchise agreement. Warrant
costs in excess of the present value of expected future franchise fees and
royalties, less any direct costs, would be recognized immediately. See Note
10--Affiliate Warrant Program.
Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of APB No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of 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.
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.
Foreign Currency and International Operations
The functional currency of the Company's Germany subsidiary is the local
currency. The financial statements of this subsidiary are translated into
United States dollars using end-of-period rates of exchange for assets and
liabilities, and average rates for the period for revenues, costs, and
expenses. Translation losses, which are deferred and accumulated as a
component of shareholders' equity, were insignificant during the quarter ended
March 31, 1998 (unaudited). Net gains and losses resulting from foreign
exchange transactions are included in the consolidated statements of
operations during the period recognized and were not significant during the
quarter ended March 31, 1998 (unaudited). International assets and revenues
were not significant at March 31, 1998 (unaudited) and for the quarter ended
March 31, 1998 (unaudited).
Net Loss Per Share and Supplemental Pro Forma 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.
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
F-15
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
excludes (i) for the year ended December 31, 1997 and the three months ended
March 31, 1997 and 1998, 2,051,000, 34,000 (unaudited) and 4,010,000
(unaudited), respectively, equivalent acquisition-related shares held in
escrow ("Acquisition Shares"), (ii) for the years ended December 31, 1996 and
1997 and the three months ended March 31, 1997 and 1998, 4,286,000, 2,830,000,
3,505,000 (unaudited) and 1,912,000 (unaudited), respectively, of equivalent
shares of Common Stock subject to repurchase rights ("Restricted Shares") and
(iii) for the years ended December 31, 1996 and 1997 and the three months
ended March 31, 1997, 5,375,000, 10,278,000, and 9,276,000 (unaudited),
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.
In future periods, the weighted average shares used to compute basic and
diluted earnings per share are expected to include (i) Acquisition Shares as
they are released from escrow, generally 12 months from the date of
acquisition, and (ii) Restricted Shares as the repurchase rights lapse over
the remaining restriction period. In addition, the weighted average shares
used to compute diluted earnings per share will include the incremental shares
of Common Stock relating to outstanding options and warrants to the extent
such incremental shares are dilutive. The Company believes that the
Acquisition Shares are probable of issuance and that the remaining repurchase
rights on Restricted Shares will lapse upon the continued employment by the
owners of such shares. The following table presents the unaudited supplemental
pro forma net loss per share giving effect to the inclusion of the Acquisition
Shares and Restricted Shares in the determination of weighted average shares
outstanding. Such supplemental pro forma net loss per share should not be
considered in isolation or as a substitute for other information prepared in
accordance with generally accepted accounting principles:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------- ---------------------
SUPPLEMENTAL PRO FORMA NET LOSS 1996 1997 1997 1998
PER SHARE: --------- ---------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net loss........................ $ (13,808) $ (58,336) $ ( 5,843) $ (16,360)
Net loss per share:
Basic and diluted.............. $ (2.46) $ (4.78) $ (0.90) $ (0.47)
Weighted average shares out-
standing...................... 5,620,000 12,193,000 6,462,000 34,904,000
</TABLE>
Reverse Stock Split
In December 1997, the Board of Directors approved a one-for-three reverse
stock split of the outstanding shares of Common Stock. All share and per share
information have been retroactively adjusted to reflect the reverse stock
split.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. The Company limits its exposure to credit loss by
depositing its cash and cash equivalents with high credit quality financial
institutions. The Company believes the risk with respect to trade receivables
is mitigated, to some extent, by the fact that the Company's customer base is
geographically dispersed and is highly diversified. The Company has not
experienced any significant credit losses to date.
F-16
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Recent Accounting Pronouncements
The Company 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. Compensation expenses associated with
such non-employee stock options granted to date have not been significant.
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income" in the quarter
ended March 31, 1998. SFAS No. 130 requires the Company to report in their
financial statements, in addition to its net income (loss), comprehensive
income (loss), which includes all changes in equity during a period from non-
owner sources including, as applicable, foreign currency items, minimum
pension liability adjustments and unrealized gains and losses on certain
investments in debt and equity securities. During the quarter ended March 31,
1998, such items were not significant, and the Company's comprehensive loss
approximated its net loss.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance for determining whether computer software is internal-use software
and on accounting for the proceeds of computer software originally developed
or obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer
software developed or obtained for internal use. The Company has not yet
determined the impact, if any, of adopting SOP 98-1, which will be effective
for the Company's year ending December 31, 1999.
Interim Results (Unaudited)
The accompanying interim financial statements as of March 31, 1998 and for
the three months ended March 31, 1997 and 1998 are unaudited. In the opinion
of management, the unaudited interim financial statements have been prepared
on the same basis as the annual financial statements and reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly the financial position as of March 31, 1998 and the results of
the Company's operations and its cash flows for the three months ended March
31, 1997 and 1998. The financial data and other information disclosed in these
notes to condensed consolidated financial statements related to these periods
are unaudited. The results for the three months ended March 31, 1998 are not
necessarily indicative of the results to be expected for the year ending
December 31, 1998.
F-17
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 3--SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
-------------- ------------
1996 1997 1997 1998
------ ------- ----- ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Supplemental disclosures:
Cash paid for interest......................... $ 58 $ 76 $ 19 $ 20
Non-cash financing and investing activities:
Common Stock issued for note receivable........ 2,000 -- -- --
Notes payable converted into Common Stock...... 500 -- -- --
Equipment acquired through capital lease....... 288 578 -- --
Common Stock issued for acquisitions........... -- 40,263 1,609 30,668
Common stock issued for services............... -- 1,250 -- --
Assumption of liabilities for acquisition...... -- -- -- 4,976
</TABLE>
NOTE 4--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- MARCH 31,
1996 1997 1998
------ -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accounts receivable, net:
Accounts receivable......................... $ 137 $ 8,722 $ 15,698
Less: allowance for doubtful accounts....... -- (819) (1,011)
------ -------- --------
$ 137 $ 7,903 $ 14,687
====== ======== ========
Property and equipment, net:
Computers and equipment..................... $1,149 $ 6,490 $ 8,850
Furniture and fixtures...................... 124 834 1,135
Leasehold improvements...................... 74 605 723
------ -------- --------
1,347 7,929 10,708
Less: accumulated depreciation and amortiza-
tion....................................... (263) (1,727) (2,494)
------ -------- --------
$1,084 $ 6,202 $ 8,214
====== ======== ========
Intangible assets, net:
Goodwill.................................... $ -- $ 24,885 $ 52,479
Purchased technology........................ -- 3,610 4,705
------ -------- --------
-- 28,495 57,184
Less: accumulated amortization.............. -- (9,476) (13,971)
------ -------- --------
$ -- $ 19,019 $ 43,213
====== ======== ========
Accrued expenses:
Compensation and benefits................... $ 549 $ 1,900 $ 2,668
Accrued financing costs..................... -- 1,450 2,536
Marketing costs............................. 1,271 1,155 1,499
Legal costs................................. -- 466 767
Other....................................... 370 3,026 2,897
------ -------- --------
$2,190 $ 7,997 $ 10,367
====== ======== ========
</TABLE>
F-18
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 5--NOTES PAYABLE:
In January 1996, the Company received $500 in exchange for unsecured
convertible promissory notes. The notes were part of a bridge financing
arrangement associated with the Series A financing, were payable on demand and
bore interest at 6% per annum. The notes were repayable, at the option of the
holder, by the issuance of the Company's Common or Preferred Stock. In
February 1996 in connection with the Series A financing, the holder exercised
its conversion option and the notes were extinguished through the issuance of
500,000 shares of the Company's Common Stock.
On October 6, 1997, the Company entered into a credit facility with a bank
that allows the Company to borrow up to a maximum of $3,000 to finance various
equipment purchases. Advances accrue interest at the bank's prime lending rate
plus 1% (9.5% at December 31, 1997) and are repayable over a thirty-six month
period. As of December 31, 1997, borrowings outstanding under the credit
facility approximated $431. 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, 1997.
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 bank's prime rate plus 1%. On
December 10, 1997, the Company repaid the outstanding amount, plus interest of
$14.
NOTE 6--INCOME TAXES:
No provision for income taxes has been recognized for the years ended
December 31, 1997 and 1996, as the Company incurred net operating losses for
income tax purposes and has no carryback potential.
Deferred tax assets of approximately $17,000 at December 31, 1997, consist
primarily of federal and state net operating loss carryforwards. Based on 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 deferred tax assets such that a full
valuation allowance has been provided.
The Company's various acquisitions have been structured as tax free stock
exchanges, therefore, the differences between the historical bases and the
fair value recognized by the Company, including intangible assets, are not
deductible for income tax purposes.
At December 31, 1997, the Company had federal and state net operating loss
carryforwards of approximately $42,000 and $26,000, respectively, available to
reduce future taxable income, which expire in varying amounts through 2012.
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 stockholders
during any three-year period would result in certain limitations on the
Company's ability to utilize its net operating loss and credit carryforwards.
NOTE 7--MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
At December 31, 1996, a total of 9,329,500 shares of Mandatorily Redeemable
Convertible Preferred Stock were authorized for issuance, of which 6,226,167
and 3,103,333 shares were designated as Series A and Series B, respectively.
In 1996, the Company issued 6,172,833 shares of Series A and 3,103,333 shares
of
F-19
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Series B Mandatorily Redeemable Convertible Preferred Stock ("Series A" and
"Series B") for cash at $1.62 and $2.01 per share, respectively. In 1997, the
Company authorized an additional 3,400,000 shares of Mandatorily Redeemable
Convertible Preferred Stock designated as Series C and issued 2,818,193 shares
of Series C Mandatorily Redeemable Convertible Preferred Stock ("Series C")
for cash at $6.21 per share. Holders of Series A, Series B and Series C were
entitled to receive noncumulative dividends at the annual rate of $0.10, $0.12
and $0.37 per share, respectively, or, if greater (as determined on an as-
converted basis), an amount equal to that paid on the outstanding shares of
Common Stock, when, as and if declared by the Board of Directors. No such
dividends were declared. In the event of liquidation (but not upon a merger,
sale or acquisition of the Company), holders of Series A, Series B and Series
C were entitled to a per share distribution in preference to holders of Common
Stock equal to the original issue price of $1.62, $2.01, and $6.21,
respectively, plus any declared but unpaid dividends. On December 5, 1997, the
Company completed its initial public offering of its Common Stock. At that
time, all of the Company's Mandatorily Redeemable Convertible Preferred Stock
outstanding was converted into an aggregate of 12,094,359 shares of Common
Stock.
NOTE 8--STOCKHOLDERS' EQUITY:
Preferred Stock
The Company is authorized to issue 100,000,000 shares of $.001 par value
Common Stock and 1,000,000 shares of $.001 par value Preferred Stock, and 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 the
Company's five founders ("the Founders 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. During August 1997, a Company
Founder terminated his employment. In connection with the termination the
Company accelerated the vesting of 111,205 shares of Founder's Stock 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 $.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 Rights shall lapse.
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, the Company completed its initial public offering of
5,750,000 shares of its Common Stock. Net proceeds to the Company aggregated
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.
Warrants
In connection with the lease of its facility in January 1996, the Company
issued warrants to purchase 20,000 shares of Series A at $1.62 per share. Upon
completion of the Company's initial public offering, these
F-20
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
warrants were exchanged for warrants to purchase Common Stock. The fair value
of the warrants was not material on the date of grant. The warrants are
exercisable at any time prior to their expiration in February 2006. No
warrants had been exercised at December 31, 1997.
In connection with a master lease agreement in May 1996, the Company issued
warrants to purchase 33,333 shares of Series A at $1.62 per share. Upon
completion of the Company's initial public offering, these warrants were
exchanged for warrants to purchase Common Stock. The fair value of the
warrants was not material on the date of grant. The warrants are exercisable
at any time prior to their expiration in May 2001. No warrants had been
exercised at December 31, 1997.
In July 1996, the Company issued warrants to purchase 18,055 shares of
Common Stock at $0.90 per share to an individual employed as a consultant to
the Company. The fair value of the warrants was not material on the date of
grant. The warrants are exercisable at any time prior to their expiration in
July 2001. No warrants had been exercised at December 31, 1997.
In December 1996, the Company issued warrants to purchase 33,333 shares of
Common Stock at $3.75 per share to an individual employed as a consultant to
the Company. The fair value of the warrants was not material on the date of
grant. The warrants are exercisable at any time prior to their expiration in
December 2001. No warrants had been exercised at December 31, 1997.
In connection with the issuance of the Series C shares, the Company issued
warrants to purchase a total of 704,549 shares of Series C at $7.50 per share.
Upon completion of the Company's initial public offering, these warrants were
exchanged for warrants to purchase Common Stock. The warrants are exercisable
at any time prior to their expiration in May 2000. Approximately $1,690 of the
proceeds received from the issuance of Series C were allocated to the Series C
warrants. The accretion of the amount allocated to the Series C warrants for
the year ended December 31, 1997 was immaterial. No warrants had been
exercised at December 31, 1997.
NOTE 9--STOCK-BASED COMPENSATION:
At March 31, 1998, the Company has three 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. During the period from June through
October 1996, the Company granted options to purchase an aggregate of 98,667
shares of Common Stock at exercise prices ranging from $0.30 to $0.90 per
share and recorded $165 of unearned compensation relating to such options.
This amount is being amortized over the four-year vesting period of the
related options. Had compensation cost for the Company's three 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 THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------ -------------------
1996 1997 1997 1998
--------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net Loss:
As reported.......................... $(13,808) $(58,336) $ (5,843) $ (16,360)
Pro forma............................ (13,815) (59,281) (5,854) (17,721)
Net loss per share:
Basic and diluted, as reported....... $ (10.35) $ (7.98) $ (2.00) $ (0.56)
Basic and diluted, pro forma......... (10.36) (8.11) (2.01) (0.60)
</TABLE>
F-21
<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, its parent 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 capital stock must be equal to at 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, assuming continued service as an employee or consultant. 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
granting to employees and consultants of nonstatutory stock options and stock
purchase rights ("SPRs"). A total of 2,000,000 shares of Common Stock are
currently 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 or 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, assuming continued service as an employee or consultant. 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 purchaser's 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
F-22
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 may not exceed ten years. As of December 31, 1997, 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 10,000,000 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 purchaser's 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, 1997, no SPRs had been granted.
Fair Value Estimates
For purposes of complying with the disclosure provisions of SFAS No. 123,
prior to the Company's initial public offering in December 1997, the fair
value of each option grant 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, 1996 and 1997, and the three months ended March 31, 1997
and 1998:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
----------------- ---------------
1996 1997 1997 1998
------- --------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Dividend yield................................ 0.0% 0.0% 0.0% 0.0%
Volatility.................................... 0.0% 60.0% 0.0% 60.0%
Risk-free interest rate....................... 6.1% 6.0%-6.2% 6.1% 6.0%
Expected life................................. 4 years 4 years 4 years 4 years
</TABLE>
F-23
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
A summary of the status of the Company's three fixed stock option plans as
of December 31, 1996 and 1997, and changes during the years then ended is
presented below:
<TABLE>
<CAPTION>
1996 1997
------------------------ -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
FIXED STOCK OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------------------- -------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning
of period............... -- $ -- 234,833 1.84
Granted.................. 567,500 .83 9,559,746 8.11
Exercised................ (281,000) .10 (103,079) 4.85
Canceled................. (51,667) .22 (199,097) 6.21
-------- ---------
Outstanding at end of pe-
riod.................... 234,833 1.84 9,492,403 8.03
======== =========
Options exercisable at
end of period........... 234,833 2,698,610
======== =========
Weighted-average minimum
and fair values of
options granted during
the period.............. $ .07 $ 1.47
======== =========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- --------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$.03.................... 4,688 8.1 years $ .03 4,688 $ .03
$.30.................... 69,167 8.4 years .30 69,167 .30
$.90.................... 29,167 8.7 years .90 29,167 .90
$3.75................... 9,834 8.8 years 3.75 9,834 3.75
$6.75 to $9.75.......... 9,379,547 9.2 years 8.12 2,585,754 8.51
--------- ---------
9,492,403 2,698,610
========= =========
</TABLE>
Acquisition Stock Bonus Plan
During the year ended December 31, 1997, the Company agreed to issue bonuses
contingent on future employment that are payable only 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, 1997, totaled $62,118, 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.
Employee Stock Purchase Plan
In September 1997, the Board of Directors approved the 1997 Employee Stock
Purchase Plan (the "Purchase Plan"). A total of 1,000,000 shares of Common
Stock have been reserved for issuance under this
F-24
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
plan. Terms of the plan permit eligible employees to purchase Common Stock
through payroll deductions of up to 15% of the employee's 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 Stock at the beginning or the end of the offering period, as
defined. During the year ended December 31, 1997, the weighted average fair
value of rights granted under the Plan was $2.86 per share. There were no
shares issued under the Purchase Plan during 1997.
NOTE 10--AFFILIATE WARRANT PROGRAM:
In June 1996, the Company adopted the Affiliate Warrant Program (the
"Program") with the intent of attracting new Affiliates to the USWeb network
and to create performance incentives for such Affiliates. Under the Program,
each Affiliate was granted a warrant to purchase a fixed number of shares of
the Company's Common Stock upon execution of the franchise agreement (a
"Signing Warrant") and earns warrants ("AGR Warrants") to purchase additional
shares of Common Stock at the rate of one share of Common Stock per fifty
dollars of Affiliate adjusted gross revenue, as defined. The exercise price of
all warrants issued and issuable to an individual Affiliate was set at the
time of signing of the franchise agreement. Warrants vest 25% after one year
and then ratably each month over the remaining thirty-six month period.
Warrants are exercisable for a maximum period of five years from the effective
date of the Affiliate agreement. Warrants may not be exercised prior to the
earlier of the closing of an initial public offering of the Company's Common
Stock or an acquisition of the Company. A total of 333,333 shares of Common
Stock have been reserved for issuance under the Program. No Signing Warrants
are available for grant after March 31, 1997. However, all Affiliates entering
into an Affiliate agreement prior to of such date will continue to be entitled
to AGR Warrants upon generating qualifying revenues until such time when no
warrants remain available for grant.
During the years ended December 31, 1996 and 1997, the Company issued
Signing Warrants to purchase shares of Common Stock, AGR Warrants to purchase
shares of Common Stock and recognized costs estimated using the Black-Scholes
formula as follows:
<TABLE>
<CAPTION>
DESCRIPTION 1996 1997
----------- -------------- --------------
<S> <C> <C>
Signing Warrants............................... 106,834 shares 4,000 shares
AGR Warrants................................... 17,918 shares 138,532 shares
Estimated cost................................. $167 $150
</TABLE>
NOTE 11--COMMITMENTS AND CONTINGENCIES:
The Company and its subsidiaries lease facilities under non-cancelable
operating leases which expire through 2011. The leases provide for escalating
monthly payments which are being charged to operations ratably over the lease
terms. In addition to the minimum lease payments, the Company is responsible
for property taxes, insurance and certain other operating costs. The Company
also leases certain equipment under long-term lease agreements that are
classified as capital leases. These capital leases terminate at various dates
through January 2002.
Total equipment acquired under capitalized leases was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
----- ------
<S> <C> <C>
Computers and equipment....................................... $ 702 $1,234
Furniture and fixtures........................................ 108 154
----- ------
810 1,388
Less: accumulated depreciation................................ (214) (877)
----- ------
$ 596 $ 511
===== ======
</TABLE>
F-25
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The Company has a master lease agreement with a leasing company which
expires in 1999. The agreement provides a line of credit of $600 for capital
equipment purchases. At December 31, 1997, approximately $1 was available
under this agreement for equipment purchases.
Future minimum lease payments under all non-cancelable operating and capital
leases as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER OPERATING CAPITAL
31, LEASES LEASES
----------- --------- -------
<S> <C> <C>
1998..................................................... $ 2,556 $ 466
1999..................................................... 2,505 309
2000..................................................... 2,297 30
2001..................................................... 2,080 10
2002..................................................... 1,775 1
Thereafter............................................... 6,857 --
------- -----
Total minimum payments.................................... $18,070 816
=======
Less: amount representing interest........................ (76)
-----
Present value of capital lease obligations................ 740
Less: current portion..................................... (368)
-----
Lease obligations, long-term.............................. $ 372
=====
</TABLE>
Rent expense under operating leases totaled $278 and $1,429 for the years
ended December 31, 1996 and 1997, respectively.
NOTE 12--SUBSEQUENT EVENTS (UNAUDITED)
On April 7, 1998, the Company 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 $32,316, after deducting
underwriters' discount 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 56,547 common stock warrants. Net
proceeds to the Company from the exercise of stock options and common stock
warrants aggregated approximately $2,698.
During the period from January 1, 1998 to April 21, 1998, the Company
recognized the acquisition of all the outstanding stock of six businesses in
separate transactions in exchange for shares of the Company's Common Stock.
Additionally, the Company recognized the acquisition of Utopia (see Note 1)
whereby the Company acquired various assets in exchange for the assumption by
the Company of specified liabilities and payment of a promissory note for an
aggregate purchase price of $4,976. The Company also entered into a definitive
agreement for the acquisition of an additional entity in exchange for shares
of the Company's Common Stock. The Company believes that this definitive
agreement should be considered a probable acquisition. The Acquired Entities
as of April 21, 1998 are as follows:
F-26
<PAGE>
USWEB CORPORATION
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
OVERVIEW
<TABLE>
<CAPTION>
COMMON RECOGNIZED
EFFECTIVE SHARES PURCHASE
ACQUIRED ENTITY DATE ISSUABLE PRICE
- --------------- ----------------- --------- ----------
<S> <C> <C> <C>
Stock Purchase
InnoMate Online Marketing GmbH........... February 27, 1998 151,310 $1,030
Inter.logic.studios, inc................. March 31, 1998 294,495 6,152
Quest Interactive Media, Inc............. March 31, 1998 73,624 1,538
Ensemble Corporation..................... March 31, 1998 543,678 11,555
Ikonic Interactive, Inc.................. March 31, 1998 498,457 10,413
Xplora Limited........................... April 1, 1998 230,859 5,030
Asset Purchase
Utopia, Inc.............................. March 31, 1998 -- 4,976
Probable Stock Purchase
Kallista, Inc............................ Pending 121,784 3,736
--------- -------
1,914,207 $44,430
========= =======
</TABLE>
The acquisitions will be accounted for using the purchase method of
accounting, and accordingly, the purchase price will be allocated to the
tangible and identifiable intangible assets acquired liabilities assumed on
the basis of their fair values. Approximately $3,748 of the aggregate
recognized purchase price will be 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 approximate their
fair values. Approximately $5,126 will be allocated to in-process technology
and will be immediately charged to operations because such in-process
technology have not reached the stage of technological feasibility at the
acquisition dates and have no alternative future use. Approximately $1,403
will be allocated to existing technology and will be amortized over its
estimated useful life of six months. The purchase price in excess of
identified tangible and intangible assets and liabilities assumed in the
amount of $34,153 will be allocated to goodwill and will be amortized over its
estimated useful life of one to two years.
On April 20, 1998, the Company's Board of Directors authorized an additional
5,000,000, 10,000,000 and 2,000,000 shares of Common Stock for issuance under
the 1996 Equity Plan, 1997 Plan, and the Purchase Plan, respectively.
F-27
<PAGE>
USWEB CORPORATION
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
During the period from January 1, 1997 to April 21, 1998, the Company
recognized the acquisitions of twenty-five entities (the "Acquired Entities")
in separate transactions in exchange for shares of the Company's Common Stock.
Additionally, the Company recognized the acquisition of one business whereby
the Company acquired various assets in exchange for the assumption by the
Company of specified liabilities and payment of a promissory note. The Company
also entered into a definitive agreement for the acquisition of an additional
entity in exchange for shares of the Company's Common Stock. The Company
believes that this definitive agreement should be considered a probable
acquisition. The Acquired Entities are as follows:
<TABLE>
<CAPTION>
COMMON RECOGNIZED
EFFECTIVE SHARES PURCHASE
ACQUIRED ENTITY DATE ISSUED PRICE
- --------------- ------------------ --------- ----------
<S> <C> <C> <C>
XCom Corporation..................................... March 16, 1997 383,209 $ 1,609
Cosmix Corporation................................... April 1, 1997 119,774 503
Fetch Interactive, Inc. ............................. April 1, 1997 464,838 1,397
NewLink Corporation.................................. April 1, 1997 425,700 1,537
InterNetOffice, LLC.................................. May 1, 1997 510,646 1,578
NetWORKERS Corporation............................... May 1, 1997 135,415 569
Infopreneurs Inc. ................................... June 1, 1997 1,008,169 3,173
Netphaz Corporation.................................. June 1, 1997 235,205 776
Electronic Images, Inc. ............................. July 1, 1997 1,665,525 6,205
Multimedia Marketing & Design Inc. .................. July 24, 1997 332,536 1,397
KandH, Inc. ......................................... August 29, 1997 151,624 1,023
DreamMedia, Inc. .................................... August 29, 1997 359,094 2,424
Internet Cybernautics, Inc .......................... September 29, 1997 447,183 4,025
Synergetix Systems Integration, Inc. ................ September 30, 1997 151,716 1,365
Online Marketing Company............................. September 30, 1997 95,730 861
Zendatta, Inc. ...................................... September 30, 1997 176,360 1,587
W3-design............................................ November 5, 1997 410,274 3,473
USWeb--Apex, Inc. ................................... November 5, 1997 365,029 3,285
Reach Networks, Inc. ................................ November 13, 1997 511,656 4,605
InnoMate Online Marketing GmbH....................... February 27, 1998 151,310 1,030
Utopia Inc. ......................................... March 31, 1998 -- 4,976
Inter.logic.studios, inc............................. March 31, 1998 294,495 6,152
Quest Interactive Media, Inc......................... March 31, 1998 73,624 1,538
Ensemble Corporation................................. March 31, 1998 543,678 11,555
Ikonic Interactive, Inc. ............................ March 31, 1998 498,457 10,413
Xplora Limited....................................... April 1, 1998 230,859 5,030
Probable Acquisition
Kallista, Inc. ...................................... Pending 121,784 3,736
--------- -------
9,863,890 $85,822
========= =======
</TABLE>
The acquisitions have been and are expected to be accounted for using the
purchase method of accounting, and accordingly, each purchase price has been
or will be allocated to the tangible and identifiable intangible assets
acquired and liabilities assumed on the basis of their fair values on the
acquisition dates. Approximately $7,018 of the aggregate recognized 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.
Approximately $14,597 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 $5,014 was allocated to existing technology and is being
amortized over its estimated useful life of six months. The purchase price in
excess of identified tangible and intangible assets in the amount of $59,193
was allocated to goodwill and is being amortized on an entity by entity basis
over its estimated useful life of one to two years.
The fair value of the Company's Common Stock issued as consideration for the
acquisitions was determined based upon a number of considerations. For
acquisitions recognized through July 24, 1997, the
F-28
<PAGE>
USWEB CORPORATION
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
fair value of the Company's Common Stock was estimated to be $4.20 per share,
determined primarily by reference to the $15,811 amount allocated to 2,813,193
shares of Series C Mandatorily Redeemable Convertible Preferred Stock
(excluding approximately $1,690 allocated to detachable warrants to acquire
704,549 shares of Series C Mandatorily Redeemable Convertible Preferred
Stock). For acquisitions from August 29, 1997 through November 5, 1997, the
fair value of the Company's Common Stock was estimated to be $6.75 to $9.00
per share based upon a number of factors, including the private sale, in
October 1997, of 222,222 shares of Common Stock to an independent third party
for $2,000. For the acquisitions subsequent to December 5, 1997, the fair
value of the Company's Common Stock was determined based on the closing price
of the Company's Common Stock on the Nasdaq National Market on the date the
principle acquisition terms were established. The fair values of purchased
existing and in-process technologies were determined by management using a
risk-adjusted income valuation approach.
The various purchase agreements require that fifty percent of the shares
issuable at the acquisition date be placed in escrow for a period of twelve
months. The shares placed in escrow will either by issued to the pervious
owners of the acquired entities or returned to the Company based upon the
results of the purchase price adjustments, as defined for each Acquired
Entity. The Company has excluded from the recognized purchase price
calculations approximately 818,500 shares that it estimates are not probable
of issuance at the end of the respective escrow periods. Additionally, the
purchase price adjustment for each Acquired Entity allows for the issuance of
additional stock-based consideration in the event an Acquired Entity's
valuation calculated at the six and twelve month dates following the
acquisition increases. The number of additional shares that are potentially
issuable at the completion of the six and twelve month valuation periods is
not presently known; however, management estimates that approximately 358,000
additional shares are probable of issuance at the completion of the respective
valuation periods. Any purchase price changes resulting from such adjustments
will be recognized as adjustments to goodwill and will be amortized over the
remaining period of expected benefit.
The following unaudited pro forma consolidated statements of operations give
effect to these acquisitions as if they had occurred on January 1, 1997 (or
date of inception, if later) by consolidating the results of operations of the
Acquired Entitles with the results of operations of USWeb for the year ended
December 31, 1997 and the three months ended March 31, 1998. Certain of the
Acquired Entitles have fiscal year ends other than December 31. In such cases
the Company has converted the Controlled Entity's results of operations to a
December 31 year end or has concluded that converting such operations to a
calendar year basis would not have a material impact on the accompanying
consolidated pro forma results of operations. The pro forma adjustments
include the elimination of all intercompany transactions.
The unaudited pro forma consolidated statements of operations are not
necessarily indicative of the operating results that would have been achieved
had the transactions been in effect as of the beginning of the periods
presented and should not be construed as being representative of future
operating results.
The unaudited pro forma consolidated balance sheet gives effect to the
recognition of the acquisition of Xplora Limited and the probable acquisition
of Kallista, Inc., as if they had occurred on March 31, 1998, by consolidating
the balance sheets of Xplora Limited and Kallista, Inc. all as of March 31,
1998, with the historical consolidated balance sheet of the Company at March
31, 1998. See Notes 1 and 12 to the Consolidated Financial Statements.
The historical financial statements of the Company, XCom Corporation, Fetch
Interactive, Inc., NewLink Corporation, InterNetOffice, LLC, Infopreneurs
Inc., Electronic Images, Inc., Multimedia Marketing & Design Inc., KandH,
Inc., DreamMedia, Inc., Internet Cybernautics, Inc., Synergetix Systems
Integration, Inc., Online Marketing Company, Zendatta, Inc., W3-design, USWeb-
Apex, Inc., Reach Networks, Inc., Inter.logic.studies, inc., Quest Interactive
Media, Inc., Ensemble Corporation and Ikonic Interactive, Inc. are included
elsewhere in this Amendment to Form S-4 and the unaudited pro forma
consolidated financial information presented herein should be read in
conjunction with those financial statements and related notes.
F-29
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 THREE MONTHS ENDED MARCH 31, 1998
---------------------------------------------------- --------------------------------------------------
CONSOLI- CONSOLI-
DATED DATED
USWEB (A) USWEB (A)
CORPORA- ACQUIRED ELIMI- ADJUST- CORPORA- ACQUIRED ELIMI- ADJUST- PRO
TION COMPANIES NATION MENTS PRO FORMA TION COMPANIES NATIONS MENTS FORMA
-------- --------- -------- -------- --------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Services.......... $ 18,366 $59,700 $(18,366) $ (913)(B) $ 58,787 $ 13,455 $20,395 $(13,455) $ -- $ 20,395
Other............. 912 -- -- (509)(B) 403 196 -- - -- 196
-------- ------- -------- -------- --------- -------- ------- -------- -------- --------
Total revenues.. 19,278 59,700 (18,366) (1,422) 59,190 13,651 20,395 (13,455) -- 20,591
-------- ------- -------- -------- --------- -------- ------- -------- -------- --------
Cost of revenues:
Services.......... 13,468 40,032 (13,468) (1,050)(B) 38,982 8,835 11,530 (8,835) -- 11,530
Other............. 1,294 -- -- -- 1,294 209 -- -- -- 209
Stock compensation
(1) ............. 2,420 -- (2,420) 8,216 (E) 8,216 1,681 -- (1,681) 2,054(E) 2,054
-------- ------- -------- -------- --------- -------- ------- -------- -------- --------
Total cost of
revenues....... 17,182 40,032 (15,888) 7,166 48,492 10,725 11,530 (10,516) 2,054 13,793
-------- ------- -------- -------- --------- -------- ------- -------- -------- --------
Gross profit....... 2,096 19,668 (2,478) (8,588) 10,698 2,926 8,865 (2,939) (2,054) 6,798
-------- ------- -------- -------- --------- -------- ------- -------- -------- --------
Operating expenses:
Marketing, sales
and support...... 20,672 12,226 (2,261) -- 30,637 4,540 4,280 (2,298) -- 6,522
General and admin-
istrative........ 10,271 12,661 (3,291) -- 19,641 3,848 3,843 (1,620) -- 6,071
Acquired in-proc-
ess tech-
nology (1) ...... 9,472 -- (9,472) 14,597 (C) 14,597 4,323 -- (4,323) -- --
Stock compensation
(1) ............. 6,698 -- (6,698) 25,112 (E) 25,112 2,568 -- (2,568) 6,278(E) 6,278
Amortization of
intangible
assets (1) ...... 9,476 -- (9,476) 43,246 (D) 43,246 4,495 -- (4,495) 6,535(D) 6,535
-------- ------- -------- -------- --------- -------- ------- -------- -------- --------
Total operating
expenses....... 56,589 24,887 (31,198) 82,955 133,233 19,774 8,123 (15,304) 12,813 25,406
-------- ------- -------- -------- --------- -------- ------- -------- -------- --------
Loss from opera-
tions............. (54,493) (5,219) 28,720 (91,543) (122,535) (16,848) 742 12,365 (14,867) (18,608)
Interest and other
income............ 233 60 (1) -- 292 538 24 (22) -- 540
Interest and other
expense........... (76) (801) 40 -- (837) (50) (181) 16 -- (215)
Impairment of
investee carried
at cost........... (4,000) -- -- -- (4,000) -- -- -- -- --
-------- ------- -------- -------- --------- -------- ------- -------- -------- --------
Net loss........... $(58,336) $(5,960) $ 28,759 $(91,543) $(127,080) $(16,360) $ 585 $ 12,359 $(14,867) $(18,283)
======== ======= ======== ======== ========= ======== ======= ======== ======== ========
Pro forma net loss
per share:
Basic and diluted
(G).............. $ (7.98) $ (10.06) $ (0.56) $ (0.54)
======== ========= ======== ========
Weighted average
shares
outstanding (G).. 7,312 12,635 29,441 33,761
======== ========= ======== ========
</TABLE>
- -------------------
(1) Non-cash acquisition-related charges incurred as a result of the Company's
acquisition program. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 1 to Consolidated
Financial Statements.
See accompanying notes to Pro Forma Consolidated Financial Information
F-30
<PAGE>
PRO FORMA CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, 1998
------------------------------------------------
USWEB
CORPORATION ACQUISITIONS ADJUSTMENTS PRO FORMA
----------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents... $ 14,186 $ 296 $ -- $ 14,482
Short-term investments...... 22,616 -- -- 22,616
Accounts receivable, net.... 14,687 1,242 -- 15,929
Other current assets........ 2,614 56 -- 2,670
-------- ------ ------- --------
Total current assets...... 54,103 1,594 -- 55,697
Property and equipment, net. 8,214 301 8,515
Intangible assets, net...... 43,213 -- 6,821 (F) 50,034
Other assets................ 1,791 7 -- 1,798
-------- ------ ------- --------
$107,321 $1,902 $ 6,821 $116,044
======== ====== ======= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable............ $ 3,883 $ 297 $ -- $ 4,180
Accrued expenses............ 10,367 464 -- 10,831
Deferred revenue............ 957 -- -- 957
Current portion of debt and
lease obligations.......... 5,743 -- -- 5,743
-------- ------ ------- --------
Total Current Liabilities. 20,950 761 -- 21,711
Debt and lease obligations,
long-term portion............ 1,245 -- -- 1,245
-------- ------ ------- --------
22,195 761 -- 22,956
-------- ------ ------- --------
Commitments and contingencies
Stockholders' equity:
Common Stock................ 31 -- -- 31
Additional paid in capital.. 173,599 -- 8,766 (F) 182,365
Retained earnings (accumu-
lated deficit)............. (88,504) 1,141 (1,945)(F) (89,308)
-------- ------ ------- --------
Total stockholders' equity
......................... 85,126 1,141 6,821 93,088
-------- ------ ------- --------
$107,321 $1,902 $ 6,821 $116,044
======== ====== ======= ========
</TABLE>
See accompanying notes to Pro Forma Consolidated Financial Information
F-31
<PAGE>
USWEB CORPORATION
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following adjustments were applied to the Company's historical
consolidated financial statements and the Acquired Entities to arrive at the
pro forma consolidated financial information.
(A) To eliminate items of income and expense related to the Acquired
Entities which are included in the consolidated results of operations of
the Company from the date of the respective acquisition to December 31,
1997 and March 31, 1998.
(B) To eliminate intercompany revenues and related expenses associated
with the Acquired Entities which had previously been Affiliates of the
Company.
(C) To record acquired in-process technology associated with the
acquisitions and probable acquisition in the amount of $14,597 which has
been recognized on January 1, 1997.
(D) To record amortization expense related to (i) capitalized technology
in the amount of $5,013, which is amortized over its estimated useful life
of 6 months, and (ii) goodwill in the amount of $59,194, which is amortized
on an entity by entity basis over its estimated useful life of one to two
years.
(E) To record stock compensation expense related to stock bonus awards to
new employees in the amount of $99,986, which is recorded as expense over
the related service period of three years and is allocated between cost of
revenues and operating expenses based upon employee classification.
(F) To record identified intangible assets associated with the
acquisition of Xplora Limited and the probable acquisition of Kallista,
Inc. and to eliminate the historical stockholders' equity using the
purchase method of accounting.
(G) 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. 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 the three months ended March
31, 1998, 4,932,000 acquisition-related shares held in escrow ("Acquisition
Shares"), (ii) for the year ended December 31, 1997 and the three months
ended March 31, 1998, 2,830,000 and 1,914,000, respectively, equivalent
shares of Common Stock subject to repurchase rights ("Restricted Shares")
and (iii) for the year ended December 31, 1997, 16,278,000 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.
Pro forma net loss per share is computed on the basis described above and
giving effect to the common shares issued to the acquired companies and the
related amortization of deferred compensation expense as if acquired on
January 1, 1997.
In future periods, the weighted average shares used to compute basic and
diluted earnings per share are expected to include (i) Acquisition Shares
as they are released from escrow, generally 12 months from the date of
acquisition, and (ii) Restricted Shares as the repurchase rights lapse over
the remaining 24-month restriction period. In addition, the weighted
average shares used to compute diluted earnings per share will include the
incremental shares of Common Stock relating to outstanding options and
warrants to the extent such incremental shares are dilutive. The Company
believes that the Acquisition Shares are probable of issuance and that the
remaining repurchase rights on Restricted Shares will lapse upon the
continued employment by the owners of such shares. The following table
presents the unaudited supplemental pro forma net loss per share giving
effect to the inclusion of the Acquisition Shares and Restricted Shares in
the determination of weighted average shares outstanding. Such supplemental
pro forma net loss per share should not be considered in isolation or as a
substitute for other information prepared in accordance with generally
accepted accounting principles.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
1997 1998
------------ ------------------
<S> <C> <C>
Net loss....................................... $ (127,080) $ (18,263)
Net loss per share:
Basic and diluted............................ $ (6.41) $ (0.46)
Weighted average shares outstanding.......... 19,821,000 40,031,000
</TABLE>
F-32
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
USWeb San Francisco
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of USWeb San Francisco (formerly
XCom Corporation) at December 31, 1996 and the results of its operations and
its cash flows for the year ended December 31, 1996, 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 audit. We conducted our
audit 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 audit provides a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
San Jose, California
September 17, 1997
F-33
<PAGE>
USWEB SAN FRANCISCO
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $281,000
Accounts receivable.............................................. 194,000
Other current assets............................................. 41,000
--------
Total current assets........................................... 516,000
Property and equipment, net........................................ 37,000
--------
$553,000
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................. $ 62,000
Accrued expenses................................................. 118,000
Unearned revenues................................................ 63,000
Current portion of notes payable................................. 37,000
--------
Total current liabilities...................................... 280,000
Notes payable, long-term portion................................... 170,000
--------
450,000
--------
Commitments and contingencies (Note 5)
Shareholders' equity:
Preferred Stock: no par value, 1,000,000 shares authorized;
340,000 shares issued and outstanding........................... --
Common Stock: no par value, 500,000 shares authorized;
285,000 shares issued and outstanding........................... 26,000
Retained earnings................................................ 77,000
--------
Total shareholders' equity..................................... 103,000
--------
$553,000
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
USWEB SAN FRANCISCO
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Revenues........................................................... $1,042,000
Cost of revenues................................................... 502,000
----------
Gross profit..................................................... 540,000
----------
Operating expenses:
Marketing, sales and support..................................... 251,000
General and administrative....................................... 148,000
----------
Total operating expenses....................................... 399,000
----------
Income before income taxes......................................... 141,000
Provision for income taxes......................................... (64,000)
----------
Net income......................................................... $ 77,000
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
USWEB SAN FRANCISCO
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK TOTAL
----------------- --------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT EARNINGS EQUITY
--------- ------- ------- ------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... -- $ -- -- $ -- $ -- $ --
Issuance of Preferred
Stock to Founders...... 340,000 -- -- -- -- --
Issuance of Common Stock
to Founders............ -- -- 270,000 16,000 -- 16,000
Issuance of Common Stock
for cash and other net
assets................. -- -- 15,000 10,000 -- 10,000
Net Income.............. -- -- -- -- 77,000 77,000
--------- ----- ------- ------- ------- --------
Balance at December 31,
1996................... 340,000 $ -- 285,000 $26,000 $77,000 $103,000
========= ===== ======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
USWEB SAN FRANCISCO
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................ $ 77,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................................... 13,000
Changes in assets and liabilities:
Accounts receivable............................................ (156,000)
Other current assets........................................... (44,000)
Accounts payable............................................... 12,000
Accrued expenses............................................... 118,000
Unearned revenues.............................................. 63,000
---------
Net cash provided by operating activities..................... 83,000
---------
CASH FLOWS USED IN INVESTING ACTIVITIES FOR
THE ACQUISITION OF PROPERTY AND EQUIPMENT......................... (13,000)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock............................ 4,000
Proceeds from note payable........................................ 207,000
---------
Net cash provided by financing activities..................... 211,000
---------
Net increase in cash and cash equivalents.......................... 281,000
Cash and cash equivalents at beginning at period................... --
---------
Cash and cash equivalents at end of period......................... $ 281,000
=========
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITY:
Issuance of Common Stock for net assets........................... $ 22,000
=========
SUPPLEMENTAL INFORMATION:
Cash paid for income taxes........................................ $ 7,000
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE>
USWEB SAN FRANCISCO
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
USWeb San Francisco (the "Company"), formerly XCom Corporation, specializes
in electronic marketing on the Internet. The Company is a full service
developer of Internet and intranet sites, offering services in four areas:
website design, hosting, promotion and training. The Company was incorporated
in California on May 25, 1995 and recognized immaterial financing and
operating transactions from that date through December 31, 1995, which have
been included in the Company's financial statements for the year ended
December 31, 1996.
During June 1996, the Company entered into a franchise agreement with USWeb
Corporation ("USWeb") to be a part of USWeb's Affiliate network, which
included the San Francisco, CA and New York, NY locations. The relationship
with USWeb provided for increased marketing presence, technical support and
centralized hosting facilities.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenues from consulting service agreements and
hosting service fees.
Service revenues from fixed-price agreements are recognized over the period
of each engagement under the percentage of completion method using labor hours
incurred as a measure of progress towards completion. Provisions for contract
adjustments and losses are recorded in the period such items are identified.
Unearned revenues represent the amount of revenues received in advance of
services being performed. Revenues from time and materials agreements and
hosting services are recognized and billed as the services are provided.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Significant Customers
During the year ended December 31, 1996, sales to one customer accounted for
13% of revenue. Approximately 22% of accounts receivable at December 31, 1996
was due from two customers.
Other Assets
Franchise fees paid to USWeb are amortized to cost of revenues over two
years. Accumulated amortization as of December 31, 1996 totaled $3,000.
F-38
<PAGE>
USWEB SAN FRANCISCO
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 assets,
generally three years.
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.
Fair Value of Financial Instruments
The Company's financial instruments, including cash equivalents, notes and
accounts payable and accrued expenses, have carrying amounts which approximate
fair value due to the relatively short maturity of these instruments.
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Property and equipment, net:
Computers and equipment..................................... $ 45,000
Furniture and fixtures...................................... 2,000
--------
47,000
Less: Accumulated depreciation.............................. (10,000)
--------
$ 37,000
========
Accrued expenses:
Accrued income taxes........................................ $ 57,000
Accrued payroll............................................. 43,000
Other....................................................... 18,000
--------
$118,000
========
</TABLE>
NOTE 3--RELATED PARTY TRANSACTIONS:
At December 31, 1996, the Company had non-interest bearing notes payable to
three of its employees totaling $15,000. Additionally, notes payable to
relatives of the shareholders and employees of the Company totaled $42,000 at
December 31, 1996. On December 18, 1996, the Company signed a promissory note
from a private investor in the amount of $150,000. The note is payable no
later than one year from the date of execution. Interest accrues at a
specified interest rate (8.25% at December 31, 1996).
NOTE 4--INCOME TAXES:
Income tax expense for the year ended December 31, 1996 totaled $64,000 and
was composed of federal income taxes of $48,000 and various state and
municipal income taxes of $16,000. Taxes payable at
F-39
<PAGE>
USWEB SAN FRANCISCO
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1996 totaled $57,000. The Company had no significant deferred tax
assets or liabilities at December 31, 1996. The Company's effective tax rate
for the year ended December 31, 1996 differed from the expected federal tax
rate primarily as a result of state and local income taxes.
NOTE 5--COMMITMENTS AND CONTINGENCIES:
Royalties
Under the terms of its franchise agreement with USWeb, the Company is
required to pay royalties to USWeb based upon a stipulated percentage of
adjusted gross revenue, as defined. Royalties for the year ended December 31,
1996 totaled $45,000 and are included in cost of revenues.
Operating Leases
Rent expense under month-to-month rental agreements for the year ended
December 31, 1996 totaled $20,000. In March 1997, the Company entered into
noncancelable operating leases for new office facilities which expire in 2002,
require the payment of insurance and maintenance and have required rental
payments of approximately $120,000 per year.
Future minimum lease payments related to office facilities and equipment
under noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDED OPERATING
DECEMBER 31, LEASES
------------ ---------
<S> <C>
1997.......................................................... $151,000
1998.......................................................... 148,000
1999.......................................................... 139,000
2000.......................................................... 122,000
2001.......................................................... 121,000
--------
Total minimum lease payments.................................. $681,000
========
</TABLE>
NOTE 6--CONVERTIBLE PREFERRED STOCK:
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 1,000,000 shares of convertible Preferred Stock. During 1996 the
Company issued 340,000 shares to the Founders. Compensation expense related to
the issuance of the shares was not material.
NOTE 7--COMMON STOCK:
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 500,000 shares of Common Stock. During the year ended December 31,
1996, the Company issued 270,000 shares of Common Stock to the Founders and
sold 15,000 shares to a third party in exchange for cash and assets valued at
$10,000. Compensation expense related to the issuance of shares to the
Founders was not material.
NOTE 8--SUBSEQUENT EVENTS:
On March 16, 1997, USWeb reached an agreement to acquire all of the
Company's outstanding shares of Common Stock and Preferred Stock, at which
time the Company became a wholly owned subsidiary of USWeb.
F-40
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of USWeb Milwaukee
In our opinion, the accompanying balance sheet and the related statements of
operations, of stockholders' deficit and of cash flows present fairly, in all
material respects, the financial position of USWeb Milwaukee (formerly Fetch
Interactive, Inc.) at June 30, 1996, and the results of its operations and its
cash flows for the year ended June 30, 1996, 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 audit. We conducted our
audit 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 audit provides a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
San Jose, California
September 12, 1997
F-41
<PAGE>
USWEB MILWAUKEE
BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1996 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 7,000 $ 30,000
Accounts receivable................................ 139,000 271,000
Costs in excess of billings........................ 22,000 23,000
Other current assets............................... 20,000 138,000
----------- -----------
Total current assets............................. 188,000 462,000
Property and equipment, net.......................... 160,000 138,000
----------- -----------
$ 348,000 $ 600,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable................................... $ 96,000 $ 152,000
Accrued expenses................................... 23,000 281,000
Unearned revenue................................... 65,000 142,000
Notes payable...................................... 1,277,000 1,548,000
Current portion of capital lease obligations....... 79,000 86,000
----------- -----------
Total current liabilities........................ 1,540,000 2,209,000
Capital lease obligations, long-term portion......... 114,000 94,000
----------- -----------
1,654,000 2,303,000
----------- -----------
Commitments and contingencies (Note 6)
Stockholders' deficit:
Common Stock: no par value, 2,500 shares
authorized;
1,179 shares issued and outstanding...............
Additional paid-in capital......................... 218,000 218,000
Accumulated deficit................................ (1,524,000) (1,921,000)
----------- -----------
Total stockholders' deficit...................... (1,306,000) (1,703,000)
----------- -----------
$ 348,000 $ 600,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE>
USWEB MILWAUKEE
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED MARCH 31,
JUNE 30, ----------------------
1996 1996 1997
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Revenues................................... $1,745,000 $1,190,000 $1,927,000
Cost of revenues........................... 1,179,000 810,000 1,583,000
---------- ---------- ----------
Gross profit............................. 566,000 380,000 344,000
---------- ---------- ----------
Operating expenses:
Marketing, sales and support............. 292,000 173,000 355,000
General and administrative............... 359,000 242,000 282,000
---------- ---------- ----------
Total operating expenses............... 651,000 415,000 637,000
---------- ---------- ----------
Loss from operations....................... (85,000) (35,000) (293,000)
Interest expense-related party............. (132,000) (102,000) (104,000)
---------- ---------- ----------
Net loss................................... $ (217,000) $ (137,000) $ (397,000)
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE>
USWEB MILWAUKEE
STATEMENT OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
--------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT DEFICIT DEFICIT
------ -------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at June 30, 1995............ 1,179 $218,000 $(1,307,000) $(1,089,000)
Net loss............................ (217,000) (217,000)
----- -------- ----------- -----------
Balance at June 30, 1996............ 1,179 218,000 (1,524,000) (1,306,000)
Net loss (Unaudited)................ (397,000) (397,000)
----- -------- ----------- -----------
Balance at March 31, 1997
(Unaudited)........................ 1,179 $218,000 $(1,921,000) $(1,703,000)
===== ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE>
USWEB MILWAUKEE
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED MARCH 31,
JUNE 30, --------------------
1996 1996 1997
---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................... $(217,000) $(137,000) $(397,000)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization............... 68,000 47,000 50,000
Changes in assets and liabilities:
Accounts receivable......................... (103,000) (143,000) (132,000)
Costs in excess of billings................. (5,000) 17,000 (1,000)
Other current assets........................ 16,000 14,000 (118,000)
Accounts payable............................ 71,000 79,000 56,000
Accrued expenses............................ 8,000 7,000 258,000
Unearned revenue............................ 50,000 (15,000) 77,000
--------- --------- ---------
Net cash used in operating activities..... (112,000) (131,000) (207,000)
--------- --------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES FOR
THE ACQUISITION OF PROPERTY AND EQUIPMENT.... (52,000) (32,000) (28,000)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable...... 228,000 211,000 271,000
Repayment of notes payable................... (32,000) (32,000) --
Principal payments on capital leases......... (49,000) (30,000) (13,000)
--------- --------- ---------
Net cash provided by financing activities. 147,000 149,000 258,000
--------- --------- ---------
Net (decrease) increase in cash and cash
equivalents.................................. (17,000) (14,000) 23,000
Cash and cash equivalents at beginning of
period....................................... 24,000 24,000 7,000
--------- --------- ---------
Cash and cash equivalents at end of period.... $ 7,000 $ 10,000 $ 30,000
========= ========= =========
SUPPLEMENTAL NONCASH INVESTING AND FINANCING
ACTIVITY:
Property and equipment acquired under capital
leases...................................... $ 121,000 $ 34,000 $ --
========= ========= =========
SUPPLEMENTAL INFORMATION:
Cash paid for interest....................... $ 136,000 $ 102,000 $ 104,000
========= ========= =========
Cash paid for income taxes................... $ -- $ -- $ --
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE>
USWEB MILWAUKEE
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
USWeb Milwaukee (the "Company"), formerly Fetch Interactive, Inc., was
incorporated in Wisconsin on June 19, 1970 and is principally engaged in
providing computer consulting, multimedia and data processing services to
customers located throughout the United States.
During September 1996, the Company entered into a franchise agreement with
USWeb Corporation ("USWeb"), to become a part of USWeb's affiliate network.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenues from consulting service agreements, hosting
service fees and data processing.
Service revenues from fixed-price agreements are recognized over the period
of each engagement under the percentage of completion method using labor hours
incurred as a measure of progress towards completion. Provisions for contract
adjustments and losses are recorded in the period such items are identified.
Costs in excess of billings represents the costs of services performed in
advance of related billings. Unearned revenues represent the amount of
revenues received in advance of services being performed. Revenues from time
and materials agreements, hosting services and data processing are recognized
and billed as the services are provided.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Significant Customers
During the year ended June 30, 1996, sales to two customers accounted for
27% and 23% of revenues. Approximately 50% of accounts receivable at June 30,
1996 was due from three customers.
Other Assets
Franchise fees paid to USWeb are amortized to cost of revenues over two
years. Accumulated amortization as of March 31, 1997 totaled $2,000.
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 assets,
generally three years. Leasehold improvements are amortized using the
straight-line method over the shorter of the estimated useful lives of the
assets or the remaining lease term, not to exceed five years.
F-46
<PAGE>
USWEB MILWAUKEE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
The Company's financial instruments, including cash equivalents, accounts
receivable, accounts payable and accrued expenses, have carrying amounts which
approximate fair value due to the relatively short maturity of these
instruments.
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.
Interim Financial Information
The accompanying financial statements as of March 31, 1997 and for the nine
months ended March 31, 1996 and 1997 are unaudited. In the opinion of
management, the unaudited interim financial statements have been prepared on
the same basis as the annual financial statements and reflect all adjustments,
which include only normal recurring adjustments, necessary to present fairly
the financial position as of March 31, 1997, and the results of the Company's
operations and its cash flows for the nine months ended March 31, 1996 and
1997. The financial data and other information disclosed in these notes to
financial statements related to these periods are unaudited. The results for
the nine months ended March 31, 1997 are not necessarily indicative of the
results to be expected for the year ended June 30, 1997.
NOTE 2--PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1996 1997
--------- -----------
(UNAUDITED)
<S> <C> <C>
Computers and equipment............................... $ 521,000 $ 540,000
Furniture and fixtures................................ 219,000 228,000
Leasehold improvements................................ 110,000 110,000
--------- ---------
850,000 878,000
Less: Accumulated depreciation and amortization....... (690,000) (740,000)
--------- ---------
$ 160,000 $ 138,000
========= =========
</TABLE>
NOTE 3--NOTES PAYABLE:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1996 1997
---------- -----------
(UNAUDITED)
<S> <C> <C>
Demand note payable to the Company's majority
stockholder, bearing interest at 10%................ $ 702,000 $ 973,000
Demand note payable to a member of the immediate
family of the Company's majority stockholder,
bearing interest at 9.4%............................ 375,000 375,000
Demand note payable to a third party, bearing
interest at 9.5%.................................... 200,000 200,000
---------- ----------
$1,277,000 $1,548,000
========== ==========
</TABLE>
F-47
<PAGE>
USWEB MILWAUKEE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4--RELATED PARTY TRANSACTIONS:
During 1996, approximately 27% of the Company's revenues were derived from
services to one company that is owned by the Company's majority stockholder.
Additionally, at June 30, 1996, two notes payable were outstanding to related
parties (see Note 3). Interest expense to related parties during fiscal 1996
was approximately $101,000.
NOTE 5--INCOME TAXES:
No provision for federal and state income taxes has been recognized as the
Company has incurred a net operating loss for the year ended June 30, 1996. At
June 30, 1996, the Company had approximately $1,186,000 of federal net
operating loss carryforwards which expire in varying amounts through 2011
available to offset future taxable income. Under the Tax Reform Act of 1986,
the amounts of and benefits from net operating loss carryforwards may be
impaired or limited in certain circumstances. Events which may cause
limitations in the amount of net operating losses that the Company may utilize
in any one year include, but are not limited to, a cumulative ownership change
of more than 50%, as defined, over a three year period.
Deferred tax assets, aggregating approximately $403,000 at June 30, 1996,
consist primarily of net operating loss carryforwards and book reserves and
accrued expenses which are not currently deductible for tax purposes. The
Company has provided a full valuation allowance on recorded deferred tax
assets because of the uncertainty regarding realization based upon the weight
of currently available information.
NOTE 6--COMMITMENTS AND CONTINGENCIES:
Royalties
Under the terms of its franchise agreement with USWeb, the Company is
required to pay royalties to USWeb based upon a stipulated percentage of
adjusted gross revenue, as defined. Royalties for the nine months ended March
31, 1997 totaled $14,000 and are included in cost of revenues.
Operating Leases
The Company leases its office facilities under a noncancelable operating
lease which expires on April 30, 2007. The lease requires payment of property
taxes, insurance, maintenance and utilities. Rent expense for the year ended
June 30, 1996 totaled $74,000.
F-48
<PAGE>
USWEB MILWAUKEE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under capital and noncancelable operating
leases, as of June 30, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED CAPITAL OPERATING
JUNE 30, LEASES LEASES
---------- -------- ----------
<S> <C> <C>
1997.................................................. $ 98,000 $ 148,000
1998.................................................. 84,000 159,000
1999.................................................. 35,000 162,000
2000.................................................. 6,000 149,000
2001.................................................. -- 147,000
Thereafter............................................ -- 869,000
-------- ----------
Total minimum lease payments........................... 223,000 $1,634,000
==========
Less: amount representing interest..................... 30,000
--------
Present value of capitalized lease obligations......... 193,000
Less: current portion.................................. 79,000
--------
Long-term portion of capitalized lease obligations..... $114,000
========
</TABLE>
Property and equipment under capital lease is as follows:
<TABLE>
<CAPTION>
JUNE 30,
1996
---------
<S> <C>
Computer equipment................................................ $ 177,000
Furniture and fixtures............................................ 38,000
---------
215,000
Less: Accumulated depreciation.................................... (113,000)
---------
$ 102,000
=========
</TABLE>
NOTE 7--SUBSEQUENT EVENTS:
On April 1, 1997, USWeb reached an agreement to acquire all of the Company's
outstanding shares of Common Stock, at which time the Company became a wholly
owned subsidiary of USWeb.
Immediately prior to the agreement date, notes payable and related accrued
interest payable totaling $1,548,000 were converted into equity.
F-49
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
USWeb LA Metro
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of USWeb LA Metro (formerly NewLink
Corporation) at December 31, 1996 and the results of its operations and its
cash flows for the year ended December 31, 1996, 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 audit. We conducted our
audit 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 audit provides a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
San Jose, California
September 17, 1997
F-50
<PAGE>
USWEB LA METRO
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 60,000 $ 12,000
Accounts receivable................................. 95,000 110,000
Other current assets................................ 33,000 39,000
-------- --------
Total current assets.............................. 188,000 161,000
Property and equipment, net........................... 13,000 22,000
-------- --------
$201,000 $183,000
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 6,000 $ 6,000
Accrued expenses.................................... 51,000 10,000
Unearned revenue.................................... -- 6,000
-------- --------
Total current liabilities......................... 57,000 22,000
Notes payable......................................... 14,000 --
-------- --------
71,000 22,000
-------- --------
Commitments and contingencies (Note 3)
Shareholders' equity:
Common Stock: $1.00 par value, 10,000 shares
authorized;
10,000 shares issued and outstanding............... 10,000 10,000
Additional paid-in capital.......................... 80,000 80,000
Retained earnings................................... 40,000 71,000
-------- --------
Total shareholders' equity........................ 130,000 161,000
-------- --------
$201,000 $183,000
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE>
USWEB LA METRO
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED MARCH 31,
DECEMBER 31, -----------------
1996 1996 1997
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Revenues........................................ $560,000 $168,000 $203,000
Cost of revenues................................ 135,000 32,000 59,000
-------- -------- --------
Gross profit.................................. 425,000 136,000 144,000
-------- -------- --------
Operating expenses:
Marketing, sales and support.................. 38,000 7,000 14,000
General and administrative.................... 28,000 4,000 9,000
-------- -------- --------
Total operating expenses.................... 66,000 11,000 23,000
-------- -------- --------
Income from operations.......................... 359,000 125,000 121,000
Interest income, net............................ -- -- 1,000
-------- -------- --------
Income before income taxes...................... 359,000 125,000 122,000
Provision for income taxes...................... (1,000) -- (3,000)
-------- -------- --------
Net income...................................... $358,000 $125,000 $119,000
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE>
USWEB LA METRO
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1995....................... 1,000 $ 1,000 $ 8,000 $ 9,000 $ 18,000
Issuance of Common Stock to
Founders................... 9,000 9,000 72,000 -- 81,000
Shareholder distribution.... -- -- -- (327,000) (327,000)
Net income.................. -- -- -- 358,000 358,000
------ ------- ------- --------- ---------
Balance at December 31,
1996....................... 10,000 10,000 80,000 40,000 130,000
Shareholder distribution
(Unaudited)................ -- -- -- (88,000) (88,000)
Net income (Unaudited)...... -- -- -- 119,000 119,000
------ ------- ------- --------- ---------
Balance at March 31, 1997
(Unaudited)................ 10,000 $10,000 $80,000 $ 71,000 $ 161,000
====== ======= ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE>
USWEB LA METRO
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED MARCH 31,
DECEMBER 31, -------------------
1996 1996 1997
------------ -------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................. $ 358,000 $125,000 $ 119,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization.............. 7,000 -- 3,000
Changes in assets and liabilities:
Accounts receivable....................... (95,000) -- (15,000)
Other current assets...................... (24,000) (7,000) (8,000)
Accounts payable.......................... (3,000) (4,000) --
Accrued expenses.......................... 44,000 (4,000) (41,000)
Unearned revenue.......................... -- -- 6,000
--------- -------- ---------
Net cash provided by operating
activities............................. 287,000 110,000 64,000
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment....... (57,000) -- (10,000)
--------- -------- ---------
Net cash provided by (used in) investing
activities............................. 57,000 -- (10,000)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Shareholder distribution.................... (265,000) (14,000) (88,000)
Shareholder loan proceeds................... 11,000 -- --
Repayment of notes payable.................. -- -- (14,000)
Proceeds from issuance of Common Stock...... 81,000 -- --
--------- -------- ---------
Net cash used in financing activities... (173,000) (14,000) (102,000)
--------- -------- ---------
Net increase (decrease) in cash and cash
equivalents................................. 57,000 96,000 (48,000)
Cash and cash equivalents at beginning of
period...................................... 3,000 3,000 60,000
--------- -------- ---------
Cash and cash equivalents at end of period... $ 60,000 $ 99,000 $ 12,000
========= ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE>
USWEB LA METRO
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
USWeb LA Metro (the "Company"), formerly NewLink Corporation, was formed to
provide professional consulting services relating to Internet and intranet
technologies. The Company was incorporated in California on July 25, 1995 and
later elected an S Corporation tax status effective January 1, 1996.
During July, 1996, the Company entered into a franchise agreement with USWeb
Corporation ("USWeb") to become part of USWeb's Affiliate network.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenues from consulting service agreements and
hosting service fees.
Service revenues from fixed-price agreements are recognized over the period
of each engagement under the percentage of completion method using labor hours
incurred as a measure of progress towards completion. Provisions for contract
adjustments and losses are recorded in the period such items are identified.
Unearned revenues represent the amount of revenues received in advance of
services being performed. Revenues from time and materials agreements and
hosting services are recognized and billed as the services are provided.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Concentration of Credit Risk
The Company is potentially subject to a concentration of credit risk from
its trade receivables, as a significant portion is due from one major
customer. The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. As of December 31, 1996 and for the
year then ended, one customer accounted for 92% of the Company's accounts
receivable balance and 94% of the Company's total revenues, respectively.
Other Assets
Franchise fees paid to USWeb are amortized to cost of revenues over two
years. Accumulated amortization as of December 31, 1996 totaled $2,000.
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 assets,
generally three years.
F-55
<PAGE>
USWEB LA METRO
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company has elected to be taxed as an S Corporation, pursuant to the
Internal Revenue Code. This election provides for all profits or losses to be
recognized in the shareholders' personal income tax returns. The provision for
income taxes represents a 1.5% franchise tax imposed by the State of
California.
The December 31, 1996 current provision for income taxes represents
applicable state franchise taxes. The California S Corporation provisions
require the payment of a 1.5% franchise tax on taxable income for the year
ended December 31, 1996.
Fair Value of Financial Instruments
The Company's financial instruments, including cash equivalents, other
current assets, accounts payable, and accrued expenses, have carrying amounts
which approximate fair value due to the relatively short maturity of these
instruments.
Interim Financial Information
The accompanying financial statements as of March 31, 1997 and for the three
months ended March 31, 1996 and 1997 are unaudited. In the opinion of
management, the unaudited interim financial statements have been prepared on
the same basis as the annual financial statements and reflect all adjustments,
which include only normal recurring adjustments, necessary to present fairly
the financial position as of March 31, 1997, and the results of the Company's
operations and its cash flows for the three months ended March 31, 1997. The
financial data and other information disclosed in these notes to financial
statements at March 31, 1997 and for the period then ended are unaudited. The
results for the three months ended March 31, 1997 are not necessarily
indicative of the results to be expected for the year ending December 31,
1997.
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Property and equipment, net:
Computers and equipment........................... $13,000 $19,000
Furniture and fixtures............................ 1,000 5,000
------- -------
14,000 24,000
Less: Accumulated depreciation...................... (1,000) (2,000)
------- -------
$13,000 $22,000
======= =======
Accrued expenses:
Payroll........................................... $49,000 $ 5,000
Other............................................. 2,000 5,000
------- -------
$51,000 $10,000
======= =======
</TABLE>
F-56
<PAGE>
USWEB LA METRO
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3--COMMITMENTS AND CONTINGENCIES:
Royalties
Under the terms of its franchise agreement with USWeb, the Company is
required to pay royalties to USWeb based upon a stipulated percentage of
adjusted gross revenue, as defined. Royalties for the year ended December 31,
1996 totaled $10,000 and are included in cost of revenues.
Operating Leases
The Company leases its office facilities under noncancelable operating
leases which expire in 1997. Rent expense for the year ended December 31, 1996
and the three month period ended March 31, 1997 totaled $5,000 and $2,000,
respectively.
Future minimum lease payments under noncancelable operating as of December
31, 1996 total $6,000.
NOTE 4--COMMON STOCK:
The Company's Articles of Incorporation authorize the Company to issue
10,000 shares of $1 par value Common Stock. During the year ended December 31,
1996, the Company sold a total of 9,000 shares of Common Stock to the Founder
of the Company and two other current owners.
During 1996 the company made distributions to a shareholding, totaling
$327,000. This distribution included $62,000 of property and equipment.
NOTE 5--SUBSEQUENT EVENTS:
On April 1, 1997, USWeb reached an agreement to acquire all of the Company's
outstanding shares of Common Stock, at which time the Company became a wholly
owned subsidiary of USWeb.
F-57
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
USWeb Atlanta
In our opinion, the accompanying balance sheet and the related statements of
operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of USWeb Atlanta (formerly
InterNetOffice, LLC) at December 31, 1996 and the results of its operations
and its cash flows for the period from May 7, 1996 (inception) through
December 31, 1996, 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 audit. We conducted our audit 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 audit provides a reasonable basis
for the opinion expressed above.
Price Waterhouse LLP
San Jose, California
September 18, 1997
F-58
<PAGE>
USWEB ATLANTA
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 11,000 $ 48,000
Accounts receivable................................. 75,000 148,000
Other current assets................................ 7,000 18,000
-------- --------
Total current assets.............................. 93,000 214,000
Property and equipment, net........................... 10,000 18,000
-------- --------
$103,000 $232,000
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 26,000 $102,000
Related party payable............................... 76,000 52,000
Accrued expenses.................................... -- 17,000
-------- --------
Total current liabilities......................... 102,000 171,000
-------- --------
Commitments and contingencies (Note 4)
Stockholders' equity:
Common Stock: no par value, 841,507 shares
authorized; 525,000 and 841,507 shares issued and
outstanding........................................ 1,000 1,000
Retained earnings................................... -- 60,000
-------- --------
Total stockholders' equity........................ 1,000 61,000
-------- --------
$103,000 $232,000
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-59
<PAGE>
USWEB ATLANTA
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 7, 1996
(INCEPTION) THREE MONTHS
THROUGH ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
Revenues.............................................. $224,000 $276,000
Cost of revenues...................................... 198,000 167,000
-------- --------
Gross profit......................................... 26,000 109,000
-------- --------
Operating expenses:
Marketing, sales and support......................... 8,000 10,000
General and administrative........................... 18,000 39,000
-------- --------
Total operating expenses.......................... 26,000 49,000
-------- --------
Net income............................................ $ -- $ 60,000
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE>
USWEB ATLANTA
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
-------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------- ------ -------- -------------
<S> <C> <C> <C> <C>
Issuance of Common Stock.................. 525,000 $1,000 $ -- $ 1,000
------- ------ ------- -------
Balance at December 31, 1996.............. 525,000 1,000 -- 1,000
Issuance of Common Stock (Unaudited)...... 316,507 -- -- --
Net income (Unaudited).................... -- -- 60,000 60,000
------- ------ ------- -------
Balance at March 31, 1997 (Unaudited)..... 841,507 $1,000 $60,000 $61,000
======= ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-61
<PAGE>
USWEB ATLANTA
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 7, 1996
(INCEPTION) THREE MONTHS
THROUGH ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ -- $ 60,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization........................ 1,000 --
Changes in assets and liabilities:
Accounts receivable................................. (75,000) (73,000)
Other current assets................................ (7,000) (11,000)
Accounts payable.................................... 26,000 76,000
Related party payable............................... 76,000 (24,000)
Accrued expenses.................................... -- 17,000
-------- --------
Net cash provided by operating activities............. 21,000 45,000
-------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES FOR THE
ACQUISITION OF PROPERTY AND EQUIPMENT................ (11,000) (8,000)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES FROM THE
ISSUANCE OF COMMON STOCK............................. 1,000 --
-------- --------
Net increase in cash and cash equivalents............. 11,000 37,000
Cash and cash equivalents at beginning of period...... -- 11,000
-------- --------
Cash and cash equivalents at end of period............ $ 11,000 $ 48,000
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE>
USWEB ATLANTA
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
USWeb Atlanta (the "Company"), formerly InterNetOffice, LLC, was
incorporated in Georgia as a limited liability company on May 7, 1996 for the
purpose of providing Internet development and consulting services. Following
the Company's formation, the Company entered into a franchise agreement with
USWeb Corporation ("USWeb") and in June 1996 began operating as a franchisee
under that agreement.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenues from consulting service agreements and
hosting service fees.
Service revenues from fixed-price agreements are recognized over the period
of each engagement under the percentage of completion method using labor hours
incurred as a measure of progress towards completion. Provisions for contract
adjustments and losses are recorded in the period such items are identified.
Revenues from time and materials agreements and hosting services are
recognized and billed as the services are provided.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Significant Customers
During the year ended December 31, 1996, sales to one customer accounted for
64% of revenues. Approximately 77% of accounts receivable at December 31, 1996
were due from two customers.
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 assets,
generally three years. Leasehold improvements are amortized using the
straight-line method over the shorter of the estimated useful lives of the
assets or the remaining lease term, not to exceed five years.
Advertising Costs
Advertising costs are expensed as incurred in accordance with Statement of
Position 93-7, "Reporting on Advertising Costs." Advertising costs for the
period from May 7, 1996 (inception) through December 31, 1996 and the three
months ended March 31, 1997 totaled $3,000 and $1,000, respectively.
F-63
<PAGE>
USWEB ATLANTA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company has elected to be taxed as a limited liability company (LLC),
pursuant to the Internal Revenue Code. This election provides for all profits
and losses to be recognized in the shareholders' personal income tax returns.
Accordingly, no provision for income taxes has been recorded in the
accompanying financial statements.
Fair Value of Financial Instruments
The Company's financial instruments, including cash equivalents, related
party receivables and payables, accounts payable and accrued expenses, have
carrying amounts which approximate fair value due to the relatively short
maturity of these instruments.
Interim Financial Information
The accompanying financial statements as of March 31, 1997 and for the three
months ended March 31, 1997 are unaudited. In the opinion of management, the
unaudited interim financial statements have been prepared on the same basis as
the annual financial statements and reflect all adjustments, which include
only normal recurring adjustments, necessary to present fairly the financial
position as of March 31, 1997, and the results of the Company's operations and
its cash flows for the three months ended March 31, 1997. The financial data
and other information disclosed in these notes to financial statements at
March 31, 1997 and for the three months then ended are unaudited. The results
for the three months ended March 31, 1997 are not necessarily indicative of
the results to be expected for the year ending December 31, 1997.
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Property and equipment, net:
Computers and equipment........................... $ 4,000 $12,000
Furniture and fixtures............................ 7,000 6,000
Leasehold improvements............................ -- 1,000
------- -------
11,000 19,000
Less: Accumulated depreciation and amortization... (1,000) (1,000)
------- -------
$10,000 $18,000
======= =======
Accrued expenses:
Payroll and related expenses...................... $ -- $8,000
Other............................................. -- 9,000
------- -------
$ -- $17,000
======= =======
</TABLE>
NOTE 3--RELATED PARTY TRANSACTIONS:
During the period from May 7, 1996 (inception) through December 31, 1996,
the Company shared office space and had all personnel functions performed by a
related party, NetOffice, Inc. The office space and all related costs were
allocated between the companies based on a relative square-footage space
formula. In the opinion of management, the formula represents a reasonable
allocation of expenses to the Company.
At December 31, 1996, approximately $76,000 of the Company's trade payables
were payable to a related party, and less than $1,000 of receivables were due
from a related party.
F-64
<PAGE>
USWEB ATLANTA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of related party transactions for the period
December 31, 1996:
<TABLE>
<S> <C>
Personnel related expense........................................ $140,000
========
Rent expense..................................................... $ 27,000
========
Equipment and other facilities expense........................... $ 38,000
========
</TABLE>
NOTE 4--COMMITMENTS AND CONTINGENCIES:
Royalties
Under the terms of its franchise agreement with USWeb, the Company was
required to pay royalties to USWeb based upon a stipulated percentage of
adjusted gross revenue, as defined. Royalties for the year ended December 31,
1996 totaled $15,000 and are included in cost of revenues.
Operating Leases
The Company has no material operating leases at March 31, 1997. Rent expense
for the period from May 7, 1996 (inception) through December 31, 1996 and the
three months ended March 31, 1997 totaled $27,000 and $10,000, respectively.
NOTE 5--COMMON STOCK:
The Company's Articles of Incorporation, as amended, authorized the Company
to issue Common Stock, no par value. During the period from May 7, 1996
(inception) through December 31, 1996 and the three months ended March 31,
1997, the Company issued 525,000 and 316,507 shares, respectively, of Common
Stock to the founders of the Company, employees and other nonrelated parties.
A portion of the shares sold are subject to a right of repurchase by the
Company which lapses generally over a four year period from the earlier of
grant date or employee hire date, as applicable. At March 31, 1997, there were
316,507 shares subject to repurchase. Compensation expense related to share
issuances was not material for the year ended December 31, 1996 or for the
three months ended March 31, 1997.
NOTE 6--SUBSEQUENT EVENTS:
On May 1, 1997, USWeb reached an agreement to acquire all of the Company's
outstanding shares of Common Stock, at which time the Company became a wholly
owned subsidiary of USWeb.
F-65
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
USWeb DC
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' deficit and of cash
flows present fairly, in all material respects, the financial position of
USWeb DC (formerly Infopreneurs Inc.) and its subsidiary at December 31, 1996
and the results of their operations and their cash flows for the period from
June 30, 1996 (inception) through December 31, 1996, 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 audit. We conducted our
audit 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 audit provides a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
San Jose, California
September 18, 1997
F-66
<PAGE>
USWEB DC
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash................................................ $ 206,000 $ 3,000
Accounts receivable................................. -- 157,000
Other current assets................................ 24,000 57,000
--------- ---------
Total current assets.............................. 230,000 217,000
Property and equipment, net........................... 3,000 60,000
--------- ---------
$ 233,000 $ 277,000
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.................................... $ 16,000 $ 119,000
Accrued expenses.................................... -- 5,000
Customer deposits................................... -- 60,000
Line of credit...................................... 93,000 85,000
Notes payable....................................... 169,000 150,000
--------- ---------
Total current liabilities......................... 278,000 419,000
--------- ---------
Stockholders' deficit:
Common stock: no par value, 3,000 shares authorized;
2,060 and 2,076 shares issued and outstanding...... 150,000 165,000
Accumulated deficit................................. (195,000) (307,000)
--------- ---------
Total stockholders' deficit....................... (45,000) (142,000)
--------- ---------
$ 233,000 $ 277,000
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-67
<PAGE>
USWEB DC
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 3, 1996
(INCEPTION) THREE MONTHS
THROUGH ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
Revenues.............................................. $ 26,000 $ 184,000
Cost of revenues...................................... 45,000 160,000
--------- ---------
Gross profit (loss)................................. (19,000) 24,000
--------- ---------
Operating expenses:
Marketing, sales and support........................ 72,000 72,000
General and administrative.......................... 99,000 63,000
--------- ---------
Total operating expenses.......................... 171,000 135,000
--------- ---------
Loss from operations.................................. (190,000) (111,000)
Interest expense...................................... (5,000) (1,000)
--------- ---------
Net loss.............................................. $(195,000) $(112,000)
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-68
<PAGE>
USWEB DC
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
--------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT DEFICIT DEFICIT
------ -------- ----------- -------------
<S> <C> <C> <C> <C>
Common Stock issued to Founders...... 1,980 $ -- $ -- $ --
Common Stock issued for notes
payable............................. 20 -- -- --
Common Stock issued for cash......... 60 150,000 -- 150,000
Net loss............................. -- -- (195,000) (195,000)
----- -------- --------- ---------
Balance at December 31, 1996......... 2,060 150,000 (195,000) (45,000)
Conversion of debt to equity
(Unaudited)......................... 6 15,000 -- 15,000
Issuance of Restricted Stock
(Unaudited)......................... 10 -- -- --
Net loss (Unaudited)................. -- -- (112,000) (112,000)
----- -------- --------- ---------
Balance at March 31, 1997
(Unaudited)......................... 2,076 $165,000 $(307,000) $(142,000)
===== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-69
<PAGE>
USWEB DC
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 3, 1996
(INCEPTION) THREE MONTHS
THROUGH ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................ $(195,000) $(112,000)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization...................... 1,000 6,000
Changes in assets and liabilities:
Accounts receivable............................... -- (157,000)
Other current assets.............................. (25,000) (34,000)
Accounts payable.................................. 16,000 103,000
Accrued expenses.................................. -- 5,000
Customer deposits................................. -- 60,000
--------- ---------
Net cash used in operating activities........... (203,000) (129,000)
--------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES FOR THE
ACQUISITION OF PROPERTY AND EQUIPMENT............... (3,000) (62,000)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock.............. 150,000 --
Proceeds from note payable.......................... 213,000 --
Advances on line of credit.......................... 93,000 85,000
Repayment of notes payable.......................... (44,000) (4,000)
Repayment of advances on line of credit............. -- (93,000)
--------- ---------
Net cash provided by (used in) financing
activities..................................... 412,000 (12,000)
--------- ---------
Net increase (decrease) in cash...................... 206,000 (203,000)
Cash at beginning of period.......................... -- 206,000
--------- ---------
Cash at end of period................................ $ 206,000 $ 3,000
========= =========
NONCASH FINANCING ACTIVITIES:
Conversion of debt to equity........................ $ -- $ 15,000
========= =========
SUPPLEMENTAL INFORMATION:
Cash paid for interest.............................. $ 5,000 $ 1,000
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-70
<PAGE>
USWEB DC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
USWeb DC (the "Company"), formerly Infopreneurs Inc., and its subsidiary
USWeb DC, Inc., were incorporated in Delaware on June 3, 1996 and September
13, 1996, respectively. The Company provides Internet and intranet consulting,
web site development, and hosting services. The Company had two franchise
agreements with USWeb Corporation ("USWeb"): USWeb DC and USWeb Philadelphia.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenues from consulting service agreements and
hosting service fees.
Service revenues from fixed-price agreements are recognized over the period
of each engagement under the percentage of completion method using labor hours
incurred as a measure of progress towards completion. Provisions for contract
adjustments and losses are recorded in the period such items are identified.
Revenues from time and materials agreements and hosting services are
recognized and billed as the services are provided.
Significant Customers
During the period from June 3, 1996 (inception) through December 31, 1996,
sales to three customers accounted for 49%, 30%, and 21% of total revenues.
Other Assets
Franchise fees paid to USWeb are amortized to cost of revenues over two
years. Accumulated amortization as of December 31, 1996 totaled $1,000.
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 assets,
generally three years.
Advertising Costs
Advertising costs are expensed as incurred in accordance with Statement of
Position 93-7, "Reporting on Advertising Costs." Advertising costs for the
period from June 3, 1996 (inception) through December 31, 1996 and for the
three months ended March 31, 1997 totaled $8,000 and $19,000, respectively.
Principles of Consolidation
The accompanying consolidated financial statements include the consolidated
accounts of the Company and it wholly owned subsidiary. All significant
intercompany transactions and balances have been eliminated in consolidation.
F-71
<PAGE>
USWEB DC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
The Company's financial instruments, including notes payable and accounts
payable, have carrying amounts which approximate fair value due to the
relatively short maturity of these instruments.
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.
Interim Financial Information
The accompanying financial statements as of March 31, 1997 and for the three
months ended March 31, 1997 are unaudited. In the opinion of management, the
unaudited interim financial statements have been prepared on the same basis as
the annual financial statements and reflect all adjustments, which include
only normal recurring adjustments, necessary to present fairly the financial
position as of March 31, 1997, and the results of the Company's operations and
its cash flows for the three months ended March 31, 1997. The financial data
and other information disclosed in these notes to financial statements at
March 31, 1997 and for the period then ended are unaudited. The results for
the three months ended March 31, 1997 are not necessarily indicative of the
results to be expected for the year ending December 31, 1997.
NOTE 2--PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Computers and equipment............................. $3,000 $64,000
Furniture and fixtures.............................. -- 1,000
Leasehold improvements.............................. -- --
------ -------
3,000 65,000
Less: Accumulated depreciation and amortization..... -- (5,000)
------ -------
$3,000 $60,000
====== =======
</TABLE>
NOTE 3--DEBT:
During June 1996, the Company negotiated a line of credit with a bank in the
amount of $100,000 and a working capital loan in the amount of $48,000. Both
were personally guaranteed by the founders of the Company and were secured by
substantially all the assets of the Company. During the period from June 3,
1996 (inception) through December 31, 1996, the Company was advanced $93,000
on the line of credit. Interest on borrowings under the line of credit and
working capital loan accrue at 10% per annum. Prior to December 31, 1996, the
Company repaid $44,000 of principal on the working capital loan plus accrued
interest. During January 1997, the Company repaid the outstanding balance of
$93,000, plus accrued interest, upon the expiration of the line of credit.
During April 1997, the Company renegotiated its working capital loan in the
amount of $48,000 and expiring April 15, 2000. The loan is secured by the
fixed assets acquired with the proceeds of the loan funds and requires the
Company to maintain compliance with certain covenants. As of September 18,
1997, the Company had repaid $34,000 of the principal amount, plus accrued
interest.
F-72
<PAGE>
USWEB DC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During September 1996, the Company obtained a $15,000 demand loan used for
the acquisition of the Philadelphia franchise. In connection with the loan, 20
shares of no par value common stock were granted to the lender. The allocation
of proceeds to the shares of common stock and resulting non-cash interest
expense were not material to the period ended December 31, 1996 or the three
months ended March 31, 1997.
During December 1996, the Company obtained a loan from a related party in
the amount of $150,000, which is payable one year from the date of execution.
The loan was secured by the Company's outstanding common stock. Interest
accrues at a specified prime rate (8.25% at December 31, 1996). The note
payable plus accrued interest was paid by USWeb Corporation in August 1997.
NOTE 4--INCOME TAXES:
No provision for federal and state income taxes has been recognized as the
Company has incurred net operating losses from June 3, 1996 (inception)
through December 31, 1996. At December 31, 1996, the Company had approximately
$194,000 of federal net operating loss carryforwards which expire in 2011
available to offset future taxable income. Under the Tax Reform Act of 1986,
the amounts of and benefits from net operating loss carryforwards may be
impaired or limited in certain circumstances. Events which may cause
limitations in the amount of net operating losses that the Company may utilize
in any one year include, but are not limited to, a cumulative ownership change
of more than 50%, as defined, over a three year period.
Deferred tax assets, aggregating approximately $75,000 at December 31, 1996,
consist primarily of net operating loss carryforwards. The Company has
provided a full valuation allowance on the deferred tax assets because of the
uncertainty regarding realization based upon the weight of currently available
information.
NOTE 5--COMMON STOCK:
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 3,000 shares of no par value Common Stock. During the period from
June 3, 1996 (inception) through December 31, 1996, the Company issued a total
of 2,000 shares of Common Stock to the Founders and affiliates of the Company
and sold 60 shares of Common Stock to a related party. Compensation expense
related to share issuances for the period ended December 31, 1996 and the
three months ended March 31, 1997 was not material.
NOTE 6--SUBSEQUENT EVENTS:
Equity transactions
During February 1997, the following equity transactions occurred: ten shares
of restricted common stock were granted to an employee, which vest on the
earlier of a change in control in the Company or February 14, 1998, and the
outstanding debt of $15,000 incurred in connection with the acquisition of the
Philadelphia franchise from USWeb was converted into 6 shares of common stock.
During May 1997, the Company sold 24 shares of common stock for $156,000. In
connection with the sale of such shares, the Company agreed to repurchase the
shares at their original issue price if the Company had not completed its then
anticipated merger with USWeb on or prior to September 30, 1997.
Acquisition
On June 1, 1997, USWeb reached an agreement to acquire all of the Company's
outstanding shares of Common Stock, at which time the Company became a wholly
owned subsidiary of USWeb.
F-73
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
USWeb Pittsburgh
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of USWeb Pittsburgh (formerly
Electronic Images, Inc.) at January 31, 1996 and 1997, and the results of its
operations and its cash flows for the years ended January 31, 1996 and 1997,
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.
Price Waterhouse LLP
San Jose, California
September 18, 1997
F-74
<PAGE>
USWEB PITTSBURGH
BALANCE SHEET
<TABLE>
<CAPTION>
JANUARY 31,
--------------------- APRIL 30,
1996 1997 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 251,000 $ 578,000 $ 24,000
Accounts receivable, net.................. 712,000 662,000 1,232,000
Costs in excess of billings............... 84,000 76,000 151,000
Deferred income taxes..................... 51,000 42,000 42,000
Other current assets...................... 13,000 50,000 16,000
---------- ---------- ----------
Total current assets.................... 1,111,000 1,408,000 1,465,000
Note receivable--affiliate.................. 187,000 -- 134,000
Property and equipment, net................. 570,000 989,000 950,000
Other assets................................ -- 36,000 90,000
---------- ---------- ----------
$1,868,000 $2,433,000 $2,639,000
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................... $ 187,000 $ 160,000 $ 86,000
Accrued expenses.......................... 204,000 244,000 410,000
Current portion of note payable........... -- 85,000 85,000
---------- ---------- ----------
Total current liabilities............... 391,000 489,000 581,000
Note payable--long term portion............. -- 272,000 249,000
Note payable--affiliate..................... -- 17,000 --
---------- ---------- ----------
391,000 778,000 830,000
Commitments (Note 5)
Shareholders' equity:
Common Stock: $1.00 par value, 10,000
shares authorized; 5,000, 5,263 and 5,263
shares issued and outstanding............ 5,000 5,000 5,000
Additional paid-in capital................ 45,000 130,000 130,000
Note receivable from shareholder.......... -- (63,000) (62,000)
Retained earnings......................... 1,427,000 1,583,000 1,736,000
---------- ---------- ----------
Total shareholders' equity.............. 1,477,000 1,655,000 1,809,000
---------- ---------- ----------
$1,868,000 $2,433,000 $2,639,000
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-75
<PAGE>
USWEB PITTSBURGH
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
JANUARY 31, APRIL 30,
---------------------- ----------------------
1996 1997 1996 1997
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues.................... $5,664,000 $5,996,000 $1,822,000 $1,504,000
Cost of revenues............ 4,111,000 4,719,000 1,114,000 1,042,000
---------- ---------- ---------- ----------
Gross profit.............. 1,553,000 1,277,000 708,000 462,000
---------- ---------- ---------- ----------
Operating expenses:
Marketing, sales and sup-
port..................... 212,000 302,000 49,000 75,000
General and administra-
tive..................... 809,000 689,000 159,000 124,000
---------- ---------- ---------- ----------
Total operating ex-
penses................. 1,021,000 991,000 208,000 199,000
---------- ---------- ---------- ----------
Income from operations...... 532,000 286,000 500,000 263,000
Interest expense, net....... (1,000) (14,000) (4,000) (6,000)
Other income................ 5,000 -- -- --
---------- ---------- ---------- ----------
Income before income taxes.. 536,000 272,000 496,000 257,000
Income tax provision........ 218,000 116,000 211,000 104,000
---------- ---------- ---------- ----------
Net income.................. $ 318,000 $ 156,000 $ 285,000 $ 153,000
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-76
<PAGE>
USWEB PITTSBURGH
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTE
COMMON STOCK RECEIVABLE ADDITIONAL TOTAL
------------- FROM PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT SHAREHOLDER CAPITAL EARNINGS EQUITY
------ ------ ----------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 31,
1995................... 5,000 $5,000 $ -- $ 45,000 $1,109,000 $1,159,000
Net income.............. -- -- -- -- 318,000 318,000
----- ------ -------- -------- ---------- ----------
Balance at January 31,
1996................... 5,000 5,000 -- 45,000 1,427,000 1,477,000
----- ------ -------- -------- ---------- ----------
Issuance of Common Stock
for note receivable
from shareholder....... 263 -- (85,000) 85,000 -- --
Payment on note
receivable from
shareholder............ -- -- 22,000 -- -- 22,000
Net income.............. -- -- -- -- 156,000 156,000
----- ------ -------- -------- ---------- ----------
Balance at January 31,
1997................... 5,263 5,000 (63,000) 130,000 1,583,000 1,655,000
----- ------ -------- -------- ---------- ----------
Payment on note
receivable from
shareholder
(Unaudited)............ -- -- 1,000 -- -- 1,000
Net income (Unaudited).. -- -- -- -- 153,000 153,000
----- ------ -------- -------- ---------- ----------
Balance as of April 30,
1997 (Unaudited)....... 5,263 $5,000 $(62,000) $130,000 $1,736,000 $1,809,000
===== ====== ======== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-77
<PAGE>
USWEB PITTSBURGH
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JANUARY 31, APRIL 30,
------------------------ --------------------
1996 1997 1996 1997
----------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income..................... $ 318,000 $ 156,000 $ 285,000 $ 153,000
Adjustments to reconcile net
income to net cash provided by
(used in) operating
activities:
Depreciation and amortization. 223,000 414,000 87,000 123,000
Deferred income taxes......... -- 9,000 -- --
Changes in assets and
liabilities:
Accounts receivable.......... (198,000) 50,000 (265,000) (570,000)
Costs in excess of billings.. (4,000) 8,000 (54,000) (75,000)
Other current assets......... (12,000) (37,000) 2,000 34,000
Other assets................. -- (36,000) -- (54,000)
Accounts payable............. 83,000 (27,000) (106,000) (74,000)
Accrued expenses............. 36,000 40,000 284,000 166,000
----------- ----------- --------- ---------
Net cash provided by (used
in) operating activities... 446,000 577,000 233,000 (297,000)
----------- ----------- --------- ---------
CASH FLOWS USED IN INVESTING
ACTIVITIES FOR THE ACQUISITION
OF PROPERTY AND EQUIPMENT...... (480,000) (833,000) (170,000) (84,000)
----------- ----------- --------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments on note
payable....................... -- (43,000) -- (23,000)
Change in note
receivable/payable--affiliate. 281,000 204,000 (281,000) (151,000)
Proceeds from issuance of note
payable....................... -- 400,000 -- --
Payments received on note
receivable from shareholder... -- 22,000 -- 1,000
----------- ----------- --------- ---------
Net cash provided by (used
in) financing activities... 281,000 583,000 (281,000) (173,000)
----------- ----------- --------- ---------
Net increase (decrease) in cash
and cash equivalents........... 247,000 327,000 (218,000) (554,000)
Cash and cash equivalents at
beginning of period............ 4,000 251,000 251,000 578,000
----------- ----------- --------- ---------
Cash and cash equivalents at end
of period...................... $ 251,000 $ 578,000 $ 33,000 $ 24,000
=========== =========== ========= =========
SUPPLEMENTAL NONCASH INVESTING
AND FINANCING ACTIVITY:
Issuance of common stock for
shareholder
note receivable............... $ -- $ 85,000 $ -- $ --
=========== =========== ========= =========
CASH PAID DURING THE PERIOD FOR:
Interest....................... $ 1,000 $ 16,000 $ -- $ 7,000
=========== =========== ========= =========
Income taxes................... $ 171,000 $ 182,000 $ 75,000 $ 19,000
=========== =========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-78
<PAGE>
USWEB PITTSBURGH
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USWeb Pittsburgh (the "Company"), formerly Electronic Images, Inc., was
incorporated in Pennsylvania on December 24, 1987 and is engaged in full
service digital design and multi-media production specializing in digital
media communications. The Company, through June 30, 1997, was a majority owned
subsidiary of Unicorn Creative Services, Ltd. (the "Parent"). See Note 9.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenues from consulting service agreements.
Service revenues from fixed-price development agreements are recognized
under the completed-contract method whereby income is recognized only when the
contract is substantially completed and all costs and related revenues are
deferred in the balance sheet until that time. Provisions for agreement
adjustments and losses are recorded in the period such items are identified.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Significant Customers
During the year ended January 31, 1996, sales to two customers accounted for
56% and 22% of revenues. During the year ended January 31, 1997, sales to two
customers accounted for 58% and 15% of revenues. Approximately 85% and 71% of
accounts receivable at January 31, 1996 and 1997, respectively, was due from
one customer.
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 assets,
generally three years. Leasehold improvements are amortized using the
straight-line method over the shorter of the estimated useful lives of the
assets or the remaining lease term, not to exceed five years.
Fair Value of Financial Instruments
The Company's financial instruments, including cash equivalents, notes and
accounts payable and accrued expenses, have carrying amounts which approximate
fair value due to the relatively short maturity of these instruments.
F-79
<PAGE>
USWEB PITTSBURGH
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of APB No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of 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.
Interim Financial Information
The accompanying balance sheet as of April 30, 1997 and the statements of
operations and of cash flows for the three-month periods ended April 30, 1996
and 1997, are unaudited. In the opinion of management, these statements have
been prepared on the same basis as the audited financial statements and
include all adjustments, consisting only of normal recurring adjustments,
necessary for the fair presentation of the results of the interim periods. The
financial data and other information disclosed in these notes to financial
statements related to these periods are unaudited. The results for the three
months ended April 30, 1997 are not necessarily indicative of the results to
be expected for the year ending January 31, 1998.
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
JANUARY 31,
--------------------- APRIL 30,
1996 1997 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Property and equipment:
Computers and equipment.................. $1,222,000 $2,016,000 $2,095,000
Furniture and fixtures................... 166,000 204,000 204,000
Leasehold improvements................... 150,000 151,000 156,000
---------- ---------- ----------
1,538,000 2,371,000 2,455,000
Less: accumulated depreciation........... 968,000 1,382,000 1,505,000
---------- ---------- ----------
$ 570,000 $ 989,000 $ 950,000
========== ========== ==========
Accrued expenses:
Payroll and related expenses............. $ -- $ 30,000 $ 8,000
Income taxes............................. 128,000 22,000 103,000
Payables under customer rebate program... 70,000 190,000 297,000
Other.................................... 6,000 2,000 2,000
---------- ---------- ----------
$ 204,000 $ 244,000 $ 410,000
========== ========== ==========
</TABLE>
F-80
<PAGE>
USWEB PITTSBURGH
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3--RELATED PARTY TRANSACTIONS:
In July 1996, the Company issued 263 shares of Common Stock to an officer
upon exercise of stock options in exchange for two promissory notes. The first
note, for $60,000 is due on January 31, 1999 and accrues interest at the rate
of 5.88% per year. The second note, for $25,000 is due on June 30, 2001 and
accrues interest at the rate of 6.58% per year. The shares are subject to
repurchase by the Company, at the Company's then book value per share, if the
officer's employment is terminated.
The Company provides services to various customers who are members in the
parent consolidated group. Revenue from these companies totaled approximately
$1,263,000 and $1,441,000 for the years ended January 31, 1996 and 1997,
respectively. Revenue from these companies for the three months ended April
30, 1996 and 1997 totaled approximately $617,000 and $443,000, respectively.
The Parent provides services to its consolidated group and allocates
expenses incurred to its members. Expenses allocated to the Company during the
years ended January 31, 1996 and 1997 totaled $469,000 and $381,000,
respectively, and were included in general and administrative expenses.
NOTE 4--INCOME TAXES:
The Company files separate company tax returns. The provision for income
taxes consists of the following for the years ended January 31, 1996 and 1997
and the three months ended April 30, 1996 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
JANUARY 31, ENDED APRIL 30,
----------------- -----------------
1996 1997 1996 1997
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current:
Federal................................ $164,000 $ 81,000 $176,000 $ 87,000
State.................................. 54,000 26,000 35,000 17,000
-------- -------- -------- --------
218,000 107,000 211,000 104,000
-------- -------- -------- --------
Deferred:
Federal................................ -- 2,000 -- --
State.................................. -- 7,000 -- --
-------- -------- -------- --------
-- 9,000 -- --
-------- -------- -------- --------
Income Tax Provision..................... $218,000 $116,000 $211,000 $104,000
======== ======== ======== ========
</TABLE>
A reconciliation of the statutory federal income tax rate to the effective
income tax rate follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
JANUARY 31, APRIL 30,
------------- ---------------
1996 1997 1996 1997
----- ----- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Statutory rate............................ 34% 34% 34% 34%
State income taxes, net of federal bene-
fit...................................... 7% 7% 7% 7%
Nondeductible expense and other........... -- 2% -- --
----- ----- ------ ------
Effective income tax rate................. 41% 43% 41% 41%
===== ===== ====== ======
</TABLE>
F-81
<PAGE>
USWEB PITTSBURGH
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets consists of the following as of January 31, 1996 and
1997 and April 30, 1997:
<TABLE>
<CAPTION>
JANUARY 31,
--------------- APRIL 30,
1996 1997 1997
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Depreciation and amortization.................. $35,000 $25,000 $25,000
Reserves not currently deductible.............. 16,000 17,000 17,000
------- ------- -------
Total deferred tax assets........................ $51,000 $42,000 $42,000
======= ======= =======
</TABLE>
NOTE 5--COMMITMENTS:
Operating Leases
The Company leases its office facilities under noncancelable operating
leases which expire in 2001. The leases require payment of property taxes,
insurance, maintenance and utilities. The Company also has operating lease
agreements relating to certain equipment which expire at various dates. Rent
expense for the years ended January 31, 1996 and 1997 and the six month period
ended April 30, 1997 totaled $252,000, $192,000 and $41,000, respectively.
Future minimum lease payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED OPERATING
DECEMBER 31, LEASES
------------ ---------
<S> <C>
1998............................................................. $145,000
1999............................................................. 135,000
2000............................................................. 124,000
2001............................................................. 106,000
--------
Total minimum lease payments..................................... $510,000
========
</TABLE>
NOTE 6--NOTES PAYABLE:
Effective February 1, 1996, the Company entered into a bank loan which bears
interest at the prime interest rate, plus 0.25% per annum. The bank's prime
interest rate was 8.25% at January 31, 1997. There was $357,000 and $334,000
outstanding under the loan, at January 31, 1997 and April 30, 1997. In May
1997, the bank loan was converted into a five year term loan bearing interest
at the bank's prime interest rate, plus 2.25% per annum. The bank loan was
obtained as part of a credit facility of the Parent's consolidated group and
is secured by property and equipment. The term loan requires principal
payments of $85,000 per year with the balance due in 2002. The term loan was
repaid in full in September 1997.
NOTE 7--COMMON STOCK:
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 10,000 shares of $1 par value Common Stock. During the year ended
January 31, 1997, the Company sold 263 shares of Common Stock to an employee
of the Company. See Note 3.
NOTE 8--STOCK OPTION PLAN:
In June 1996, the Company adopted the Electronic Images, Inc. Corporate
Stock Purchase Plan (the "Plan"). The Plan provides for the granting of non-
qualified stock options to employees as determined by the Company's Board of
Directors.
F-82
<PAGE>
USWEB PITTSBURGH
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company made one grant of options under this Plan to a single employee
during the year ended January 31, 1997. The option was immediately exercised
as described in Note 3. There were no option grants under the Plan during the
three months ended April 30, 1997. Had compensation cost for the grant of
options been determined based on the fair value at the grant dates consistent
with the method prescribed by SFAS No. 123, the Company's net income would not
reflect a material change.
NOTE 9--SUBSEQUENT EVENTS:
On July 1, 1997, USWeb reached an agreement to acquire all of the Company's
outstanding shares of common stock, at which time the Company became a wholly
owned subsidiary of USWeb.
NOTE 10--RETIREMENT PLANS:
The Company has elected to contribute $34,000 and $1,000 to an Employee
Stock Ownership Plan ("ESOP") for the years ended January 31, 1996 and 1997,
respectively. The plan was established by the Parent in 1984 and includes the
stock of the Parent.
During the year ended January 31, 1997, the Company established a defined
contribution 401(k) plan (the "Plan") for substantially all of its employees.
Under the Plan, employees may contribute up to 10% of their gross wages. The
Company will, at its discretion, match a percentage of the employee
contribution. For the year ended January 31, 1997 the Company elected to
contribute $30,000 to the Plan.
F-83
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
USWeb Chicago Metro
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of USWeb Chicago Metro (formerly
Multimedia Marketing & Design Inc.) at December 31, 1996, and the results of
its operations and its cash flows for the year ended December 31, 1996, 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 audit. We conducted our audit 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 audit provides a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
San Jose, California
October 31, 1997
F-84
<PAGE>
USWEB CHICAGO METRO
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 36,000 $110,000
Accounts receivable ................................. 142,000 6,000
Other current assets................................. 5,000 --
-------- --------
Total current assets............................... 183,000 116,000
Property and equipment, net............................ 70,000 71,000
Other assets........................................... 1,000 --
-------- --------
$254,000 $187,000
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 24,000 $27,000
Payroll taxes payable................................ 19,000 3,000
Deferred revenue..................................... 9,000 22,000
-------- --------
Total current liabilities.......................... 52,000 52,000
Loan from shareholder.................................. -- 48,000
-------- --------
52,000 100,000
-------- --------
Commitments (Note 3)
Shareholders' equity:
Common Stock: no par value, 1,500 shares authorized;
1 share issued and outstanding....................... -- --
Retained earnings.................................... 202,000 87,000
-------- --------
Total shareholders' equity......................... 202,000 87,000
-------- --------
$254,000 $187,000
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-85
<PAGE>
USWEB CHICAGO METRO
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, ----------------
1996 1996 1997
------------ ------- --------
(UNAUDITED)
<S> <C> <C> <C>
Revenues......................................... $602,000 $98,000 $327,000
Cost of revenues................................. 256,000 47,000 226,000
-------- ------- --------
Gross profit................................... 346,000 51,000 101,000
-------- ------- --------
Operating expenses:
Marketing, sales and support................... 97,000 7,000 47,000
General and administrative..................... 70,000 18,000 25,000
-------- ------- --------
Total operating expenses..................... 167,000 25,000 72,000
-------- ------- --------
Income from operations........................... 179,000 26,000 29,000
Interest income ................................. -- -- 1,000
-------- ------- --------
Net income....................................... $179,000 $26,000 $ 30,000
======== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-86
<PAGE>
USWEB CHICAGO METRO
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ ------ --------- -------------
<S> <C> <C> <C> <C>
Balance at December 31,
1995................... 1 $-- $ 41,000 $ 41,000
Distribution to share-
holder................. -- -- (18,000) (18,000)
Net income.............. -- -- 179,000 179,000
--- --- --------- ---------
Balance at December 31,
1996................... 1 -- 202,000 202,000
--- --- --------- ---------
Distribution to
shareholder
(Unaudited)............ -- -- (145,000) (145,000)
Net income (Unaudited).. -- -- 30,000 30,000
--- --- --------- ---------
Balance as of June 30,
1997 (Unaudited)....... 1 $-- $ 87,000 $ 87,000
=== === ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-87
<PAGE>
USWEB CHICAGO METRO
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTH
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, -------------------
1996 1996 1997
------------ -------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income.................................. $ 179,000 $ 26,000 $ 30,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.............. 22,000 9,000 18,000
Changes in assets and liabilities:
Accounts receivable....................... (136,000) (6,000) 136,000
Other current assets...................... (5,000) -- 5,000
Other assets.............................. (2,000) -- 1,000
Accounts payable.......................... 22,000 7,000 3,000
Payroll taxes payable..................... 19,000 (1,000) (16,000)
Deferred revenue.......................... 9,000 13,000 13,000
--------- -------- ---------
Net cash provided by operating
activities.............................. 108,000 48,000 190,000
--------- -------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES FOR
THE ACQUISITION OF
PROPERTY AND EQUIPMENT...................... (62,000) (38,000) (19,000)
--------- -------- ---------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Payments on loan from shareholder........... (24,000) (15,000) --
Distribution to shareholder................. (18,000) -- (145,000)
Proceeds from issuance of note payable to
shareholder................................ -- -- 48,000
--------- -------- ---------
Net cash used in financing activities.... (42,000) (15,000) (97,000)
--------- -------- ---------
Net increase (decrease) in cash and cash
equivalents................................. 4,000 (5,000) 74,000
Cash and cash equivalents at beginning of
period...................................... 32,000 32,000 36,000
--------- -------- ---------
Cash and cash equivalents at end of period... $ 36,000 $ 27,000 $ 110,000
========= ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-88
<PAGE>
USWEB CHICAGO METRO
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USWeb Chicago Metro (the "Company"), formerly Multimedia Marketing & Design
Inc., was incorporated in Illinois on April 7, 1995, and is a professional
services firm providing companies with a single source for Internet and
Internet solutions. See Note 5.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenues from consulting service agreements and
hosting service fees.
Service revenues from fixed-price development agreements are recognized over
the period of each engagement under the percentage of completion method using
labor hours incurred as a measure of progress towards completion. Provisions
for agreement adjustments and losses are recorded in the period such items are
identified. Deferred revenue represents the amount of revenues received in
advance of services being performed. Revenues from time and materials
agreements and hosting services are recognized and billed as the services are
provided.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Significant Customers
During the year ended December 31, 1996, sales to three customers accounted
for 21%, 14% and 14% of revenues. Approximately 53%, 11% and 10% of accounts
receivable at December 31, 1996, was due from three customers.
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 assets,
generally three years.
Fair Value of Financial Instruments
The Company's financial instruments, including cash equivalents, accounts
receivable, accounts payable and loans from shareholder, have carrying amounts
which approximate fair value due to the relatively short maturity of these
instruments.
F-89
<PAGE>
USWEB CHICAGO METRO
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company elected to be taxed as on S Corporation pursuant to the Internal
Revenue Code. This election provides for all profits or losses to be
recognized in the tax returns of the shareholder.
Interim Financial Information
The accompanying balance sheet as of June 30, 1997 and the statements of
operations and of cash flows for the six-month periods ended June 30, 1996 and
1997, are unaudited. In the opinion of management, these statements have been
prepared on the same basis as the audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for
the fair presentation of the results of the interim periods. The financial
data and other information disclosed in these notes to financial statements
related to these periods are unaudited. The results for the six months ended
June 30, 1997 are not necessarily indicative of the results to be expected for
the year ending December 31, 1997.
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Property and equipment:
Computers and equipment........................... $90,000 $104,000
Furniture and fixtures............................ 7,000 12,000
------- --------
97,000 116,000
Less: accumulated depreciation.................... 27,000 45,000
------- --------
$70,000 $ 71,000
======= ========
</TABLE>
NOTE 3--COMMITMENTS:
Operating Leases
The Company leases its office facilities under noncancelable operating
leases which expire in 1999. Rent expense for the year ended December 31, 1996
and the six month periods ended June 30, 1996 and 1997 totaled $14,000,
$1,000, and $13,000, respectively.
Future minimum lease payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED OPERATING
DECEMBER 31, LEASES
------------ ---------
<S> <C>
1997............................................................. $26,000
1998............................................................. 26,000
1999............................................................. 13,000
-------
Total minimum lease payments..................................... $65,000
=======
</TABLE>
NOTE 4--COMMON STOCK:
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 1,500 shares of no par value Common Stock.
NOTE 5--SUBSEQUENT EVENTS:
On July 1, 1997, USWeb reached an agreement to acquire all of the Company's
outstanding shares of common stock, at which time the Company became a wholly
owned subsidiary of USWeb.
F-90
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
USWeb Hollywood
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of USWeb Hollywood (formerly KandH,
Inc.) at August 29, 1997 and the results of its operations and its cash flows
for the period from March 5, 1997 (Inception) to August 29, 1997, 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 audit. We conducted our audit 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 audit provides a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
San Jose, California
October 31, 1997
F-91
<PAGE>
USWEB HOLLYWOOD
(formerly KandH, Inc.)
BALANCE SHEET
<TABLE>
<CAPTION>
AUGUST 29,
1997
----------
<S> <C>
ASSETS
Current assets:
Cash............................................................ $ 11,000
Accounts receivable............................................. 123,000
--------
$134,000
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 21,000
Income tax payable.............................................. 2,000
--------
Total current liabilities..................................... 23,000
--------
Shareholders' equity:
Common Stock: $1.00 par value, 1,000 shares authorized,
issued and outstanding......................................... 1,000
Shareholder note receivable..................................... (1,000)
Retained earnings............................................... 111,000
--------
Total shareholders' equity.................................... 111,000
--------
$134,000
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-92
<PAGE>
USWEB HOLLYWOOD
(formerly KandH, Inc.)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 5, 1997
(INCEPTION)
THROUGH
AUGUST 29,
1997
-------------
<S> <C>
Revenues....................................................... $339,000
Cost of revenues............................................... 154,000
--------
Gross profit................................................. 185,000
--------
Operating expenses:
Marketing, sales and support................................. 64,000
General and administrative................................... 8,000
--------
Total operating expenses................................... 72,000
--------
Income from operations before taxes............................ 113,000
Provision for income taxes..................................... 2,000
--------
Net income..................................................... $111,000
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-93
<PAGE>
USWEB HOLLYWOOD
(formerly KandH, Inc.)
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTE
COMMON STOCK RECEIVABLE TOTAL
------------- FROM RETAINED SHAREHOLDERS'
SHARES AMOUNT SHAREHOLDER EARNINGS EQUITY
------ ------ ----------- -------- -------------
<S> <C> <C> <C> <C> <C>
Issuance of Common Stock....... 1,000 $1,000 $(1,000) $ -- $ --
Net income..................... -- -- -- 111,000 111,000
----- ------ ------- -------- --------
Balance at August 29, 1997..... 1,000 $1,000 $(1,000) $111,000 $111,000
===== ====== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-94
<PAGE>
USWEB HOLLYWOOD
(formerly KandH, Inc.)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 5, 1997
(INCEPTION)
THROUGH
AUGUST 29,
1997
-------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................... $ 111,000
Adjustments to reconcile net income to net cash
used in operating activities:
Changes in assets and liabilities:
Accounts receivable......................................... (123,000)
Accounts payable............................................ 21,000
Income tax payable.......................................... 2,000
---------
Net cash used in operating activities..................... (100,000)
---------
Net increase in cash........................................... 11,000
Cash at beginning of period.................................... --
---------
Cash at end of period.......................................... $ 11,000
=========
SUPPLEMENTAL NONCASH FINANCING ACTIVITY:
Issuance of Common Stock for shareholder note receivable...... $ 1,000
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-95
<PAGE>
USWEB HOLLYWOOD
(formerly KandH, Inc.)
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
USWeb Hollywood (the "Company"), formerly KandH, Inc., was formed to provide
professional consulting services relating to Internet and intranet
technologies. The Company was incorporated in Florida on March 5, 1997 and
elected an S Corporation tax status.
Revenue Recognition
The Company derives its revenues from consulting service agreements.
Service revenues from fixed-price development agreements are recognized
under the completed-contract method whereby income is recognized only when the
contract is substantially completed and all costs and related revenues are
deferred in the balance sheet until that time. Provisions for agreement
adjustments and losses are recorded in the period such items are identified.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
For certain of the Company's financial instruments, including accounts
receivable and accounts payable, the carrying amounts approximate fair value
due to the relatively short maturity of these instruments.
Concentration of Credit Risk
The Company is potentially subject to a concentration of credit risk from
its trade receivables, as a significant portion is due from one major
customer. The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. As of August 29, 1997, one customer
accounted for 91% of the Company's accounts receivable balance and 43% of
total revenues.
Income Taxes
The Company has elected to be taxed as an S Corporation, pursuant to the
Internal Revenue Code. This election provides for all profits or losses to be
recognized in the shareholders' personal income tax returns. The provision for
income taxes represents a 1.5% franchise tax imposed by the State of
California.
The August 29, 1997 current provision for income taxes represents applicable
state franchise taxes. The California S Corporation provisions require the
payment of a 1.5% franchise tax on taxable income for the period ended August
29, 1997.
NOTE 2--COMMON STOCK:
The Company's Articles of Incorporation authorize the Company to issue 1,000
shares of $1.00 par value Common Stock. During the period from March 5, 1997
(Inception) through August 29, 1997, the Company sold 1,000 shares of Common
Stock to the founders of the Company.
NOTE 3--SUBSEQUENT EVENTS:
On August 29, 1997, USWeb reached an agreement to acquire all of the
Company's outstanding shares of Common Stock, at which time the Company became
a wholly owned subsidiary of USWeb.
F-96
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
USWeb Hollywood
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of USWeb Hollywood (formerly
DreamMedia, Inc.) at December 31, 1996 and the results of its operations and
its cash flows from April 3, 1996 (Inception) to December 31, 1996, 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 audit. We conducted our audit 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 audit provides a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
San Jose, California
October 29, 1997
F-97
<PAGE>
USWEB HOLLYWOOD
(formerly DreamMedia, Inc.)
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash................................................ $ 21,000 $ 12,000
Accounts receivable................................. 36,000 63,000
Inventory........................................... -- 55,000
Other assets........................................ 12,000 36,000
-------- --------
Total current assets.............................. 69,000 166,000
Property and equipment, net........................... 163,000 158,000
-------- --------
$232,000 $324,000
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 6,000 $ 61,000
Accrued expenses.................................... 2,000 31,000
Amounts due to related party (Note 3)............... 129,000 91,000
-------- --------
Total current liabilities......................... 137,000 183,000
-------- --------
Commitments (Note 4)
Shareholders' equity:
Common Stock: $1.00 par value, 1,000 shares
authorized,
issued and outstanding ............................ 1,000 1,000
Retained earnings................................... 94,000 140,000
-------- --------
Total shareholders' equity.......................... 95,000 141,000
-------- --------
$232,000 $324,000
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-98
<PAGE>
USWEB HOLLYWOOD
(formerly DreamMedia, Inc.)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 3,
1996
(INCEPTION) SIX MONTHS
THROUGH ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Revenues.......................................... $204,000 $380,000
Cost of revenues.................................. 72,000 257,000
-------- --------
Gross profit.................................... 132,000 123,000
-------- --------
Operating expenses:
Marketing, sales and support.................... -- 35,000
General and administrative...................... 37,000 41,000
-------- --------
Total operating expenses...................... 37,000 76,000
-------- --------
Income from operations............................ 95,000 47,000
Provision for income taxes........................ 1,000 1,000
-------- --------
Net income........................................ $ 94,000 $ 46,000
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-99
<PAGE>
USWEB HOLLYWOOD
(formerly DreamMedia, Inc.)
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ ------ -------- -------------
<S> <C> <C> <C> <C>
Issuance of Common Stock for cash.......... 1,000 $1,000 $ -- $ 1,000
Net income................................. -- -- 94,000 94,000
----- ------ -------- --------
Balance at December 31, 1996............... 1,000 $1,000 94,000 95,000
Net income (Unaudited)..................... -- -- 46,000 46,000
----- ------ -------- --------
Balance at June 30, 1997 (Unaudited)....... 1,000 $1,000 $140,000 $141,000
===== ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-100
<PAGE>
USWEB HOLLYWOOD
(formerly DreamMedia, Inc.)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 3, 1996
(INCEPTION) SIX MONTHS
THROUGH ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------- -----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................... $ 94,000 $ 46,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation....................................... 33,000 34,000
Changes in assets and liabilities:
Accounts receivable............................... (36,000) (27,000)
Inventory......................................... -- (55,000)
Other assets...................................... (11,000) (24,000)
Accounts payable.................................. 6,000 55,000
Accrued expenses.................................. 2,000 29,000
--------- --------
Net cash provided by (used in) operating activi-
ties........................................... 88,000 58,000
--------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES FOR
ACQUISITION OF PROPERTY AND EQUIPMENT PURCHASES..... (196,000) (29,000)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock.............. 1,000 --
Due to related party................................ 128,000 (38,000)
--------- --------
Net cash provided by (used in) financing
activities..................................... 129,000 (38,000)
--------- --------
Net increase in cash................................. 21,000 (9,000)
Cash at beginning of period.......................... -- 21,000
--------- --------
Cash at end of period................................ $ 21,000 $ 12,000
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-101
<PAGE>
USWEB HOLLYWOOD
(formerly DreamMedia, Inc.)
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
USWeb Hollywood (the "Company"), formerly DreamMedia, Inc., was formed to
provide professional consulting services relating to Internet and intranet
technologies. The Company was incorporated in California on April 3, 1996 and
elected an S Corporation tax status. See Note 6.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenues from consulting service agreements.
Service revenues from fixed-price development agreements are recognized
under the completed-contract method whereby income is recognized only when the
contract is substantially completed and all costs and related revenues are
deferred in the balance sheet until that time. Provisions for agreement
adjustments and losses are recorded in the period such items are identified.
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 assets,
generally three years.
Fair Value of Financial Instruments
For certain of the Company's financial instruments, including accounts
receivable, inventory, other assets, accounts payable, accrued expenses and
due to related party, the carrying amounts approximate fair value due to the
relatively short maturity of these instruments.
Concentration of Credit Risk
The Company is potentially subject to a concentration of credit risk from
its trade receivables, as a significant portion is due from two major
customers. The Company performs ongoing credit evaluations of its customers
and generally does not require collateral. As of December 31, 1996 two
customers accounted for 99% of the Company's accounts receivable balance, and
79% of the Company's total revenues.
Income Taxes
The Company has been elected to be taxed as an S Corporation pursuant to the
Internal Revenue Code. This election provides for all profits or losses to be
recognized in the shareholders' personal income tax returns. The provision for
income taxes represents a 1.5% franchise tax imposed by the State of
California.
The December 31, 1996 current provision for income tax represents applicable
state franchise taxes. The California S Corporation provisions require the
payment of a 1.5% franchise tax on taxable income for the year ended December
31, 1996.
F-102
<PAGE>
USWEB HOLLYWOOD
(formerly DreamMedia, Inc.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Interim Financial Information
The accompanying financial statements as of June 30, 1997 and for the period
from April 3, 1996 (Inception) through June 30, 1996 and the six months ended
June 30, 1997 are unaudited. In the opinion of management, the unaudited
interim financial statements have been prepared on the same basis as the
annual financial statements and reflect all adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of the
results of the interim periods. The financial data and other information
disclosed in these notes to financial statements related to these periods are
unaudited. The results for the six months ended June 30, 1997 are not
necessarily indicative of the results to be expected for the year ending
December 31, 1997.
NOTE 2--PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Computer equipment................................ $174,000 $203,000
Furniture and fixtures............................ 22,000 22,000
-------- --------
Less: accumulated depreciation.................... (33,000) (67,000)
-------- --------
$163,000 $158,000
======== ========
</TABLE>
NOTE 3--RELATED PARTY TRANSACTIONS:
Shareholder Note Payable
In July 1996, the Company purchased furniture and equipment valued at
$196,000 from an affiliate in exchange for a note payable. The note accrued
interest at the rate of 6.5% per annum payable upon maturity. The balance plus
accrued interest was repaid in October 1997.
NOTE 4--COMMITMENTS:
Operating Leases
The Company leases its office facilities under month-to-month operating
leases. Rent paid for the year ended December 31, 1996 and for the six months
ended June 30, 1997 totaled $7,333 and $8,000, respectively.
NOTE 5--COMMON STOCK:
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 1,000 shares of $1.00 par value Common Stock. During the period from
April 3, 1996 (Inception) through December 31, 1996, the Company sold 1,000
shares of Common Stock to the founders of the Company.
NOTE 6--SUBSEQUENT EVENTS:
On August 29, 1997 USWeb reached an agreement to acquire all of the
Company's outstanding shares of Common Stock, at which time the Company became
a wholly owned subsidiary of USWeb.
F-103
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
USWeb Marin
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of USWeb Marin
(formerly Internet Cybernautics, Inc.) at December 31, 1995 and 1996, and the
results of its operations and its cash flows for the years ended December 31,
1995 and 1996, 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.
Price Waterhouse LLP
San Jose, California
October 17, 1997
F-104
<PAGE>
USWEB MARIN
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1995 1996 1997
-------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 1,000 $ 170,000 $ 122,000
Accounts receivable, net.................... 24,000 405,000 404,000
Costs in excess of billings................. -- -- 57,000
Other current assets........................ 5,000 14,000 17,000
-------- --------- ---------
Total current assets...................... 30,000 589,000 600,000
Property and equipment, net................... 7,000 49,000 331,000
Other assets.................................. -- -- 44,000
-------- --------- ---------
$ 37,000 $ 638,000 $ 975,000
======== ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................ $ 12,000 $ 40,000 $ 167,000
Accrued expenses............................ 34,000 309,000 595,000
Deferred revenues........................... -- 120,000 --
Short-term borrowings....................... -- -- 350,000
-------- --------- ---------
Total current liabilities................. 46,000 469,000 1,112,000
-------- --------- ---------
Commitments (Note 5)
Shareholders' equity:
Series A Preferred Stock: no par value,
5,500,00 shares
authorized; no shares issued or outstand-
ing........................................ -- -- --
Common Stock: No par value, 18,500,000
shares authorized; 1,169,632, 1,601,818 and
1,930,239 shares issued and
outstanding................................ 56,000 395,000 707,000
Additional paid-in capital.................. -- 471,000 471,000
Note receivable from shareholder............ -- (25,000) --
Deferred stock compensation................. -- (438,000) (390,000)
Accumulated deficit......................... (65,000) (234,000) (925,000)
-------- --------- ---------
Total shareholders' equity (deficit)...... (9,000) 169,000 (137,000)
-------- --------- ---------
$ 37,000 $ 638,000 $ 975,000
======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-105
<PAGE>
USWEB MARIN
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------- -------------------
1995 1996 1996 1997
-------- --------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues............................. $ 55,000 $ 970,000 $279,000 $1,591,000
Cost of revenues..................... 42,000 418,000 69,000 1,183,000
-------- --------- -------- ----------
Gross profit....................... 13,000 552,000 210,000 408,000
-------- --------- -------- ----------
Operating expenses:
Marketing, sales and support....... 27,000 180,000 92,000 373,000
General and administrative......... 51,000 541,000 61,000 726,000
-------- --------- -------- ----------
Total operating expenses......... 78,000 721,000 153,000 1,099,000
-------- --------- -------- ----------
Net income (loss).................... $(65,000) $(169,000) $ 57,000 $ (691,000)
======== ========= ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-106
<PAGE>
USWEB MARIN
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
NOTE TOTAL
COMMON STOCK ADDITIONAL RECEIVABLE DEFERRED SHAREHOLDERS'
------------------ PAID-IN FROM STOCK ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL SHAREHOLDER COMPENSATION DEFICIT (DEFICIT)
--------- -------- ---------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994................... -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of Common Stock
for cash............... 1,169,632 56,000 -- -- -- -- 56,000
Net loss................ -- -- -- -- -- (65,000) (65,000)
--------- -------- -------- -------- --------- --------- ---------
Balance at December 31,
1995................... 1,169,632 56,000 -- -- -- (65,000) (9,000)
Issuance of Common Stock
for cash............... 369,326 292,000 -- -- -- -- 292,000
Issuance of Common Stock
for services........... 30,552 22,000 -- -- -- -- 22,000
Issuance of Common Stock
for note receivable
from shareholder....... 32,308 25,000 -- (25,000) -- -- --
Deferred stock
compensation........... -- -- 471,000 -- (471,000) -- --
Amortization of deferred
stock compensation -- -- -- -- 33,000 -- 33,000
Net loss................ -- -- -- -- -- (169,000) (169,000)
--------- -------- -------- -------- --------- --------- ---------
Balance at December 31,
1996................... 1,601,818 395,000 471,000 (25,000) (438,000) (234,000) 169,000
Issuance of Common Stock
for cash (Unaudited)... 328,421 312,000 -- -- -- -- 312,000
Amortization of deferred
stock compensation
(Unaudited)............ -- -- -- -- 48,000 -- 48,000
Payment on note
receivable from
shareholder
(Unaudited)............ -- -- -- 25,000 -- -- 25,000
Net loss (Unaudited).... -- -- -- -- -- (691,000) (691,000)
--------- -------- -------- -------- --------- --------- ---------
Balance as of June 30,
1997 (Unaudited)....... 1,930,239 $707,000 $471,000 $ -- $(390,000) $(925,000) $(137,000)
========= ======== ======== ======== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-107
<PAGE>
USWEB MARIN
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------- -------------------
1995 1996 1996 1997
-------- --------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS USED IN OPERATING
ACTIVITIES:
Net income.......................... $(65,000) $(169,000) $ 57,000 $(691,000)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Stock Compensation................. -- 33,000 -- 48,000
Depreciation and amortization...... -- 6,000 2,000 38,000
Provision for doubtful accounts.... -- 30,000 -- 15,000
Noncash exchange for services...... -- 22,000 -- --
Changes in assets and liabilities:
Accounts receivable............... (24,000) (411,000) (76,000) (14,000)
Costs in excess of billings....... -- -- -- (57,000)
Other current assets.............. (5,000) (9,000) (5,000) (3,000)
Other assets...................... -- -- -- (44,000)
Accounts payable.................. 12,000 28,000 20,000 127,000
Accrued expenses.................. 34,000 275,000 (8,000) 286,000
Deferred revenues................. -- 120,000 -- (120,000)
-------- --------- -------- ---------
Net cash used in operating
activities...................... (48,000) (75,000) (10,000) (415,000)
-------- --------- -------- ---------
CASH FLOWS USED IN INVESTING
ACTIVITIES FOR THE ACQUISITION OF
PROPERTY AND EQUIPMENT.............. (7,000) (48,000) (12,000) (320,000)
-------- --------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Common Stock............ 56,000 292,000 64,000 312,000
Proceeds from short-term borrowing.. -- -- -- 350,000
Collection of note receivable from
shareholder........................ -- -- -- 25,000
-------- --------- -------- ---------
Net cash provided by financing
activities...................... 56,000 292,000 64,000 687,000
-------- --------- -------- ---------
Net increase (decrease) in cash and
cash equivalents.................... 1,000 169,000 42,000 (48,000)
Cash and cash equivalents at
beginning of period................. -- 1,000 1,000 170,000
-------- --------- -------- ---------
Cash and cash equivalents at end of
period.............................. $ 1,000 $ 170,000 43,000 122,000
======== ========= ======== =========
SUPPLEMENTAL NONCASH ACTIVITY:
Issuance of common stock for
shareholder
note receivable.................... $ -- $ 25,000 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-108
<PAGE>
USWEB MARIN
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USWeb Marin (the "Company"), formerly Internet Cybernautics, Inc., was
incorporated in Wyoming on August 17, 1995 and is engaged in full service
digital design and multi-media production specializing in digital media
communications. On July 9, 1997, the Company amended its articles of
incorporation and filed as a Delaware corporation. See Note 8.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenues from consulting service agreements.
Service revenues from fixed-price agreements are recognized over the period
of each engagement under the percentage of completion method using labor hours
incurred as a measure of progress towards completion. Provisions for agreement
adjustments and losses are recorded in the period such items are identified.
Deferred revenues represent the amount of revenues received in advance of
services being performed.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Significant Customers
During the year ended December 31, 1995, sales to four customers accounted
for 23%, 14%, 14% and 13%of revenues. During the year ended December 31, 1996,
sales to two customers accounted for 25% and 10% of revenues. Approximately
48% of accounts receivable at December 31, 1996 was due from one customer.
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 assets,
generally three years.
Fair Value of Financial Instruments
The Company's financial instruments, including cash equivalents, accounts
receivable, accounts payable, accrued expenses and short term borrowings, have
carrying amounts which approximate fair value due to the relatively short
maturity of these instruments.
F-109
<PAGE>
USWEB MARIN
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of APB No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of 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.
Interim Financial Information
The accompanying balance sheet as of June 30, 1997 and the statements of
operations and of cash flows for the six-month periods ended June 30, 1996 and
1997, are unaudited. In the opinion of management, these statements have been
prepared on the same basis as the audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for
the fair presentation of the results of the interim periods. The financial
data and other information disclosed in these notes to financial statements
related to these periods are unaudited. The results for the six months ended
June 30, 1997 are not necessarily indicative of the results to be expected for
the year ending December 31,1997.
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 30,
1995 1996 1997
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accounts receivable, net:
Accounts Receivable.......................... $24,000 $435,000 $449,000
Less: allowance for bad debt................. -- (30,000) (45,000)
------- -------- --------
$24,000 $405,000 $404,000
======= ======== ========
Property and equipment:
Equipment.................................... $ 6,000 $ 51,000 $352,000
Furniture and fixtures....................... 1,000 4,000 17,000
------- -------- --------
7,000 55,000 369,000
Less: accumulated depreciation............... -- (6,000) (38,000)
------- -------- --------
$ 7,000 $ 49,000 $331,000
======= ======== ========
Accrued expenses:
Payroll and related expenses................. $21,000 $142,000 $469,000
Customer Deposits............................ -- 99,000 --
Other........................................ 13,000 68,000 126,000
------- -------- --------
$34,000 $309,000 $595,000
======= ======== ========
</TABLE>
F-110
<PAGE>
USWEB MARIN
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3--SHORT-TERM BORROWINGS AND CREDIT FACILITY:
The Company maintains a working capital line of credit with a bank that
allows borrowings of up to 80 percent of eligible accounts receivable with a
maximum borrowing of $500,000. Borrowings under the line bear interest at 1.5
percent above the bank's prime rate (8.0 percent at June 30, 1997). At June
30, 1997, there was $350,000 of borrowings outstanding.
NOTE 4--INCOME TAXES:
The Company files separate company tax returns. For the years ended December
31, 1995 and 1996 and the six months ended June 30, 1996 and 1997 there was no
provision for income taxes recorded.
Deferred tax assets consist of the following as of December 31, 1995 and
1996 and June 30, 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1995 1996 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Depreciation and amortization............. $ -- $ 10,000 $ 15,000
Reserves not currently deductible......... -- 10,000 10,000
Loss carryforwards........................ 26,000 48,000 275,000
-------- -------- ---------
Gross deferred tax assets................. 26,000 68,000 300,000
Valuation allowance....................... (26,000) (68,000) (300,000)
-------- -------- ---------
$ -- $ -- $ --
======== ======== =========
</TABLE>
No deferred provision or benefit for income taxes has been recorded as the
Company is in a net deferred tax asset position for which a full valuation has
been provided as management believes that it is more likely than not, based on
available evidence, that the deferred tax assets will not be realized.
At June 30, 1997, the Company has federal net operating loss carryforwards
of approximately $925,000, which expire in 2010. The income tax benefit from
the utilization of net operating loss carryforwards may be limited in certain
circumstances including, but not limited to, cumulative stock ownership
changes of more than 50% over a three year period.
NOTE 5--COMMITMENTS:
Operating Leases
The Company leases its office facilities under noncancelable operating
leases which expire in 2000. The leases require payment of property taxes,
insurance, maintenance and utilities. The Company also has operating lease
agreements relating to certain equipment which expire at various dates. Rent
expense for the years ended December 31, 1995 and 1996 and the six month
periods ended June 30, 1996 and 1997 totaled $4,000, $27,000, $5,000 and
$46,000, respectively.
F-111
<PAGE>
USWEB MARIN
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED OPERATING
DECEMBER 31, LEASES
------------ ---------
<S> <C>
1997............................................................. $ 93,000
1998............................................................. 79,000
1999............................................................. 79,000
2000............................................................. 13,000
--------
Total minimum lease payments..................................... $264,000
========
</TABLE>
NOTE 6--COMMON STOCK AND CONVERTIBLE PREFERRED STOCK:
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 18,500,000 shares of no par value Common Stock and 5,500,000 shares
of Convertible Preferred Stock.
NOTE 7--STOCK OPTION PLAN:
In August 1995, the Company adopted the Combined Incentive and Nonstatutory
Stock Option Plan (the "Plan"). The Plan provides for the granting of non-
qualified stock options to employees as determined by the Company's Board of
Directors. Under the plan, options vest at a rate of 20% at the end of the
first year after grant and one forty-eighth ( 1/48th) percent each month
thereafter. Options expire seven years from the date granted.
During the year ended December 31, 1995 and the six month period ended June
30, 1996, respectively, no compensation costs were recognized in connection
with option grants. During the year ended December 31, 1996 the Company
granted options to certain employees with exercise prices below fair value, as
a result, compensation costs of $33,000 and $48,000 were recorded for the year
ended December 31, 1996 and the six month period ended June 30, 1997,
respectively. Had compensation cost for the Company's option plan been
determined based on the fair value at the grant dates, as described in SFAS
123, the Company's net income (loss) would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------- -----------------
1995 1996 1996 1997
-------- --------- ------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net income (loss):
As reported...................... $(65,000) $(169,000) $57,000 $(691,000)
======== ========= ======= =========
Pro forma........................ $(78,000) $(199,000) $42,000 $(704,000)
======== ========= ======= =========
</TABLE>
Under SFAS 123, the fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted average assumption used for grants:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------- -------------------
1995 1996 1996 1997
------ ------ ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Expected lives, in years........... 5.0 5.0 5.0 5.0
Risk free interest rates........... 6.0% 6.2% 6.1% 6.4%
Dividend yield..................... 0.0% 0.0% 0.0% 0.0%
Stock price volatility............. 0.0% 0.0% 0.0% 0.0%
</TABLE>
F-112
<PAGE>
USWEB MARIN
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE FAIR
SHARES PRICE VALUE
--------- --------- ---------
<S> <C> <C> <C>
Outstanding at December 31, 1994............. -- $ --
Granted.................................... 3,000,000 0.15 $0.02
--------- -----
Outstanding at December 31, 1995............. 3,000,000 0.15
Granted.................................... 1,180,173 0.21 0.05
--------- -----
Outstanding at December 31, 1996............. 4,180,173 0.17
Granted (Unaudited)........................ 40,000 0.95 0.26
--------- -----
Outstanding at June 30, 1997 (Unaudited)..... 4,220,173 $0.18
========= =====
</TABLE>
At June 30, 1997, 1,592,792 shares were exercisable and the options
outstanding had a weighted-average remaining contractual life of 5.5 years.
NOTE 8--SUBSEQUENT EVENTS:
In June 1997, the Company entered into a Common Stock Option Repurchase
Agreement with one of its former employees whereby the Company will pay
$150,000 for the purchase of all of the employee's vested options.
On July 9, 1997, the Company amended its articles of incorporation and filed
as Delaware corporation. Subsequent to this reincorporation, all issued and
outstanding shares of the Company's Common Stock were exchanged for an
equivalent number of Series A Preferred Stock in August 1997.
In July, 1997, the Company established a defined contribution 401(k) plan
(the "Plan") for substantially all of its employees. Under the Plan, employees
may contribute up to 10% of their gross wages. The Company will, at its
discretion, match a percentage of the employee contribution. To date the
Company has not declared a matching contribution.
On September 30, 1997, USWeb reached an agreement to acquire all of the
Company's outstanding shares of common stock, at which time the Company became
a wholly owned subsidiary of USWeb.
F-113
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
USWeb Long Island
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of USWeb Long Island (formerly
Synergetix Systems Integration, Inc.) at December 31, 1996, and the results of
its operations and its cash flows for the year ended December 31, 1996, 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 audit. We conducted our audit 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 audit provides a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
San Jose, California
October 31, 1997
F-114
<PAGE>
USWEB LONG ISLAND
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash................................................ $ 42,000 $ 57,000
Accounts receivable, net............................ 178,000 190,000
Inventory........................................... 10,000 --
-------- --------
Total current assets.............................. 230,000 247,000
Property and equipment, net .......................... 15,000 12,000
Other assets, net..................................... 28,000 21,000
-------- --------
$273,000 $280,000
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 46,000 $124,000
Accrued expenses.................................... 61,000 98,000
Unearned revenue.................................... 17,000 9,000
Note payable ....................................... 98,000 --
Note payable--related party ........................ -- 23,000
-------- --------
Total liabilities................................. 222,000 254,000
-------- --------
Commitments (Note 6)
Shareholders' equity:
Common Stock: no par value, 200 shares authorized;
150 and 100 shares issued and outstanding at
December 31, 1996 and June 30, 1997, respectively.. 9,000 9,000
Treasury stock, at cost............................. -- (51,000)
Retained earnings................................... 42,000 68,000
-------- --------
Total shareholders' equity ....................... 51,000 26,000
-------- --------
$273,000 $280,000
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-115
<PAGE>
USWEB LONG ISLAND
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, ------------------
1996 1996 1997
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Revenues....................................... $818,000 $472,000 $431,000
Cost of revenues............................... 781,000 432,000 328,000
-------- -------- --------
Gross profit................................. 37,000 40,000 103,000
-------- -------- --------
Operating expenses:
Marketing, sales and support................. 43,000 21,000 27,000
General and administrative................... 49,000 21,000 39,000
-------- -------- --------
Total operating expenses................... 92,000 42,000 66,000
-------- -------- --------
Income (loss) from operations.................. (55,000) (2,000) 37,000
Interest expense, net.......................... 11,000 4,000 11,000
-------- -------- --------
Net income (loss).............................. $(66,000) $ (6,000) $ 26,000
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-116
<PAGE>
USWEB LONG ISLAND
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK TOTAL
------------- --------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT EARNINGS EQUITY
------ ------ ------ -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1996................... 150 $9,000 -- $ -- $108,000 $117,000
Net loss................ -- -- -- -- (66,000) (66,000)
--- ------ --- -------- -------- --------
Balance at December 31,
1996................... 150 9,000 -- -- 42,000 51,000
Purchase of treasury
stock (Unaudited)...... (50) -- 50 (51,000) -- (51,000)
Net income (Unaudited).. -- -- -- -- 26,000 26,000
--- ------ --- -------- -------- --------
Balance at June 30, 1997
(Unaudited)............ 100 $9,000 50 $(51,000) $ 68,000 $ 26,000
=== ====== === ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-117
<PAGE>
USWEB LONG ISLAND
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -------------------
1996 1996 1997
------------ -------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................... $(66,000) $ (6,000) $ 26,000
Adjustments to reconcile net income (loss)
to cash provided by (used in) operating
activities:
Depreciation and amortization.............. 13,000 5,000 11,000
Changes in operating assets and
liabilities:
Accounts receivable....................... 12,000 10,000 (12,000)
Inventory................................. (10,000) -- 10,000
Other assets.............................. (25,000) -- --
Accounts payable.......................... 46,000 27,000 78,000
Accrued expenses.......................... 24,000 22,000 37,000
Unearned revenue.......................... (22,000) (20,000) (8,000)
-------- -------- ---------
Net cash provided by (used in) operating
activities................................. (28,000) 38,000 142,000
-------- -------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES FOR
THE
ACQUISITION OF PROPERTY AND EQUIPMENT....... (13,000) (12,000) (1,000)
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable.................. 75,000 25,000 --
Repayment of note payable................... (8,000) (5,000) (98,000)
Repayment of note payable to related party.. -- -- (2,000)
Purchase of treasury stock from former
shareholder................................ -- -- (26,000)
-------- -------- ---------
Net cash provided (used in) by financing
activities................................ 67,000 20,000 (126,000)
-------- -------- ---------
Net increase in cash......................... 26,000 46,000 15,000
Cash at beginning of period.................. 16,000 16,000 42,000
-------- -------- ---------
Cash at end of period........................ $ 42,000 $ 62,000 $ 57,000
======== ======== =========
SUPPLEMENTAL NONCASH FINANCING ACTIVITY:
Issuance of note payable to former
shareholder................................ $ -- $ -- $ 25,000
======== ======== =========
CASH PAID DURING THE PERIOD FOR:
Interest.................................... $ 10,000 $ 4,000 $ 10,000
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-118
<PAGE>
USWEB LONG ISLAND
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT POLICIES:
The Company
USWeb Long Island (the "Company"), formerly Synergetix Systems Integration,
Inc., was incorporated in the state of New York on November 3, 1989. The
Company provides professional consulting services relating to software design
and integration and document imaging.
During September 1996, the Company entered into a franchise agreement with
USWeb Corporation ("USWeb") to become part of USWeb's affiliate network.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenues from consulting service agreements. Service
revenues from fixed-price agreements are recognized over the period of each
engagement under the percentage of completion method using labor hours
incurred as a measure of progress towards completion. Provisions for contract
adjustments and losses are recognized in the period such items are identified.
Unearned revenues represent the amount of revenues received in advance of
services being performed. Revenue from time and materials agreements are
recognized and billed as the services are rendered.
Inventory
Inventory, which consists principally of purchased computer hardware, is
stated at the lower of cost or market value, cost being determined on the
first-in, first-out method.
Other Assets
Franchise fees paid to USWeb are amortized to cost of revenues over two
years. Accumulated amortization totaled $3,000 and $10,000 as of December 31,
1996 and June 30, 1997, respectively.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated on a
straight-line basis over the estimated useful lives of three years for
computer equipment and seven years for office equipment.
Concentration of Credit Risk and Significant Customers
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash and trade receivables.
The Company places its cash with high quality financial institutions and, by
policy, limits the amount of credit exposure to any one institution.
Concentrations of credit risk exist with respect to trade receivables. The
Company performs periodic credit evaluations of its customers' financial
condition and does not require collateral or other security.
F-119
<PAGE>
USWEB LONG ISLAND
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The portion of total revenue that was derived from major customers was as
follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Customer A....................................... 17% --
Customer B....................................... 14% --
Customer C....................................... 12% --
Customer D....................................... -- 35%
Customer E....................................... -- 19%
Customer F....................................... -- 12%
</TABLE>
At December 31, 1996, Customer A represented 44% of net accounts receivable.
At June 30, 1997, Customers D and E represented 42% and 19%, respectively, of
net accounts receivable.
Fair Value of Financial Instruments
The Company's financial instruments, including cash, accounts receivable,
notes and accounts payable and accrued expenses, have carrying amounts which
approximate fair value due to the relatively short maturity of these
instruments.
Income Taxes
The Company has elected to be taxed as an S Corporation, pursuant to the
Internal Revenue Code. This election provides for all profits or losses to be
recognized in the shareholders' personal income tax returns.
Interim Financial Information
The accompanying balance sheet as of June 30, 1997 and the statements of
operations and of cash flows for the six-month periods ended June 30, 1996 and
1997, are unaudited. In the opinion of management, these statements have been
prepared on the same basis as the audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for
the fair presentation of the results of the interim periods. The financial
data and other information disclosed in these notes to financial statements
related to these periods are unaudited. The results for the six months ended
June 30, 1997 are not necessarily indicative of the results to be expected for
the year ending December 31, 1997.
NOTE 2--PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Computers and equipment.......................... $26,000 $27,000
Furniture and fixtures........................... 12,000 12,000
------- -------
38,000 39,000
Less: accumulated depreciation................... (23,000) (27,000)
------- -------
$15,000 $12,000
======= =======
</TABLE>
Depreciation expense was $10,000 for the year ended December 31, 1996 and
$4,000 for the six months ended June 30, 1997, respectively.
F-120
<PAGE>
USWEB LONG ISLAND
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3--ACCRUED EXPENSES:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Payroll and related taxes........................ $17,000 $23,000
Other............................................ 44,000 75,000
------- -------
Total........................................ $61,000 $98,000
======= =======
</TABLE>
Included in other accrued expenses are credit card liabilities of $29,000
and $61,000 at December 31, 1996 and June 30, 1997, respectively. Interest on
these liabilities accrue at an annual rate ranging from 6% to 18%.
NOTE 4--NOTE PAYABLE:
The Company has a line of credit with its lender for $100,000. Borrowings
under this line bear interest at prime plus 3.75% and are collateralized by
the personal assets of a shareholder. Interest expense for the year ended
December 31, 1996 and for the six months ended June 30, 1997 totaled $3,000
and $4,000, respectively.
In May 1997, the Company repaid and closed its $100,000 line of credit with
its lender.
NOTE 5--NOTE PAYABLE - RELATED PARTY:
In May 1997, the Company repurchased 50 shares of common stock from a
stockholder for $51,000, consisting of $26,000 in cash and a promissory note
of $25,000. The promissory note is payable in twelve equal monthly
installments of approximately $2,000 commencing June 1997. Interest accrues at
an annual rate of 8.5%. This note was repaid in September 1997.
NOTE 6--COMMITMENTS:
Royalties
Under the terms of its franchise agreement with USWeb, the Company is
required to pay royalties to USWeb based upon a stipulated percentage of
adjusted gross revenue, as defined. Royalty expense for the six months ended
June 30, 1997 totaled $24,000 and is included in cost of revenues. There was
no royalty expense for the year ended December 31, 1996.
Operating Leases
The Company leases a car and an office facility under noncancelable
operating leases which expire in January 1998 and November 1999, respectively.
Future minimum lease payments under these leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1997........................................................... $ 42,000
1998........................................................... 39,000
1999........................................................... 36,000
--------
$117,000
========
</TABLE>
F-121
<PAGE>
USWEB LONG ISLAND
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Rent expense for the year ended December 31, 1996 and the for six month
period ended June 30, 1997 totaled $36,000, and $18,000, respectively.
NOTE 7--SUBSEQUENT EVENTS:
On September 30, 1997, the Company and US Web reached an agreement whereby
USWeb agreed to acquire all of outstanding shares of the Company's common
stock, at which time the Company became a wholly owned subsidiary of US Web.
In September 1997, the Company issued two unsecured promissory notes of
$99,000 and $26,000 respectively, in exchange for accounts payable, to
investors who are related to a stockholder of the Company. These notes are
non-interest bearing and are due in December 1997.
F-122
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
USWeb Detroit
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of USWeb Detroit
(formerly Online Marketing Company, Inc.) at December 31, 1996, and the
results of its operations and its cash flows for the year ended December 31,
1996, 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 audit. We conducted our audit 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 audit provides a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
San Jose, California
October 24, 1997
F-123
<PAGE>
USWEB DETROIT
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $16,000 $ --
Accounts receivable, net............................ 38,000 77,000
------- --------
Total current assets.............................. 54,000 77,000
Property and equipment, net........................... 36,000 37,000
Other assets.......................................... 1,000 4,000
------- --------
$91,000 $118,000
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................... $33,000 $ 79,000
Accrued expenses.................................... 9,000 16,000
Note payable--affiliates............................ 10,000 10,000
Current portion of capital lease obligation ........ 7,000 7,000
------- --------
Total current liabilities......................... 59,000 112,000
Capital lease obligation, net of current portion...... 12,000 8,000
------- --------
71,000 120,000
------- --------
Commitments (Note 4)
Shareholders' equity (deficit):
Common Stock: $1.00 par value, 60,000 shares
authorized; 3,000 shares issued and outstanding.... 3,000 3,000
Retained earnings (accumulated deficit)............. 17,000 (5,000)
------- --------
Total shareholders' equity (deficit) ............. 20,000 (2,000)
------- --------
$91,000 $118,000
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-124
<PAGE>
USWEB DETROIT
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, -----------------
1996 1996 1997
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Revenues....................................... $476,000 $218,000 $306,000
Cost of revenues............................... 264,000 100,000 230,000
-------- -------- --------
Gross profit................................. 212,000 118,000 76,000
-------- -------- --------
Operating expenses:
Marketing, sales and support................. 96,000 43,000 40,000
General and administrative................... 113,000 35,000 57,000
-------- -------- --------
Total operating expenses................... 209,000 78,000 97,000
-------- -------- --------
Income (loss) from operations.................. 3,000 40,000 (21,000)
Interest expense, net.......................... (2,000) -- (1,000)
-------- -------- --------
Net income (loss).............................. $ 1,000 $ 40,000 $(22,000)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-125
<PAGE>
USWEB DETROIT
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
RETAINED TOTAL
COMMON STOCK EARNINGS SHAREHOLDERS'
------------- (ACCUMULATED EQUITY
SHARES AMOUNT DEFICIT) (DEFICIT)
------ ------ ------------ -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995.......... 3,000 $3,000 $ 16,000 $ 19,000
Net income............................ -- -- 1,000 1,000
----- ------ -------- --------
Balance at December 31, 1996.......... 3,000 3,000 17,000 20,000
Net loss (Unaudited).................. -- -- (22,000) (22,000)
----- ------ -------- --------
Balance as of June 30, 1997 (Unau-
dited)............................... 3,000 $3,000 $ (5,000) $ (2,000)
===== ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-126
<PAGE>
USWEB DETROIT
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, ------------------
1996 1996 1997
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 1,000 $ 40,000 $(22,000)
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization................ 8,000 3,000 8,000
Provision for doubtful accounts.............. 8,000 -- --
Changes in assets and liabilities:
Accounts receivable......................... (26,000) (41,000) (39,000)
Other current assets........................ (1,000) -- --
Other assets................................ 1,000 (2,000) (3,000)
Accounts payable............................ 28,000 12,000 46,000
Accrued expenses............................ 9,000 6,000 7,000
-------- -------- --------
Net cash provided by (used in) operating
activities................................ 28,000 18,000 (3,000)
-------- -------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES FOR THE
ACQUISITION OF PROPERTY AND EQUIPMENT......... (22,000) (15,000) (9,000)
-------- -------- --------
CASH FLOWS USED IN FINANCING ACTIVITIES FOR THE
PRINCIPAL PAYMENTS ON CAPITAL LEASE OBLIGATION
.............................................. (4,000) -- (4,000)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents................................... 2,000 3,000 (16,000)
Cash and cash equivalents at beginning of
period........................................ 14,000 14,000 16,000
-------- -------- --------
Cash and cash equivalents at end of period..... $ 16,000 $ 17,000 $ --
======== ======== ========
SUPPLEMENTAL NONCASH INVESTING AND FINANCING
ACTIVITY:
Acquisition of property and equipment under
capital lease obligation..................... $ 23,000 $ 23,000 $ --
======== ======== ========
CASH PAID DURING THE PERIOD FOR:
Interest...................................... $ 1,000 $ -- $ 1,000
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-127
<PAGE>
USWEB DETROIT
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USWeb Detroit (the "Company"), formerly Online Marketing Company, Inc., was
incorporated in Michigan on June 9, 1995, and is engaged in full service
internet technology integration specializing in web page and intranet design,
production and maintenance, primarily in the Metro-Detroit area. The Company,
through September 30, 1997, was wholly owned by three shareholders. See Note
6.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenues from consulting service agreements and
hosting service fees.
Service revenues from fixed-price agreements are recognized over the period
of each engagement under the percentage of completion method using labor hours
incurred as a measure of progress towards completion. Provisions for contract
adjustments and losses are recorded in the period such items are identified.
Revenues from time and materials agreements and hosting services are
recognized and billed as the services are provided.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Significant Customers
During the year ended December 31, 1996, sales to one customer accounted for
10% of revenues. Approximately 10% of accounts receivable at December 31,
1996, was due from one customer.
Property and Equipment
Property and equipment are stated at cost. Assets held under capital leases
are recorded at the present value of the minimum lease payments at lease
inception. Depreciation and amortization is computed using the straight-line
method over the estimated useful lives of the assets, generally three years.
Fair Value of Financial Instruments
The Company's financial instruments, including cash equivalents, accounts
receivable, accounts payable, notes and lease obligations payable and accrued
expenses, have carrying amounts which approximate fair value due to the
relatively short maturity of these instruments.
F-128
<PAGE>
USWEB DETROIT
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company has elected to be taxed as an S Corporation, pursuant to the
Internal Revenue Code. This election provides for all profits or losses to be
recognized in the tax returns of its shareholders. Accordingly, no provision
for income tax is made in these financial statements.
Interim Financial Information
The accompanying balance sheet as of June 30, 1997 and the statements of
operations and of cash flows for the six-month periods ended June 30, 1996 and
1997, are unaudited. In the opinion of management, these statements have been
prepared on the same basis as the audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for
the fair presentation of the results of the interim periods. The financial
data and other information disclosed in these notes to financial statements
related to these periods are unaudited. The results for the six months ended
June 30, 1997 are not necessarily indicative of the results to be expected for
the year ending December 31, 1997.
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Accounts receivable, net:
Accounts receivable............................... $ 46,000 $ 77,000
Less: allowance for doubtful accounts............. (8,000) --
-------- --------
$ 38,000 $ 77,000
======== ========
Property and equipment, net:
Computers and equipment........................... $ 41,000 $ 47,000
Furniture and fixtures............................ 5,000 8,000
-------- --------
46,000 55,000
Less: accumulated depreciation.................... (10,000) (18,000)
-------- --------
$ 36,000 $ 37,000
======== ========
</TABLE>
NOTE 3--RELATED PARTY TRANSACTIONS:
In 1995, the Company borrowed $5,000 under a note payable to a shareholder
of the Company. The note was non-interest bearing, unsecured and payable upon
demand. Subsequent to year-end and concurrent with the US Web transaction in
September 1997, this note was converted to equity.
In 1995, the Company borrowed $5,000 under a note payable to a party related
to a shareholder of the Company. The note is non-interest bearing, unsecured
and payable on December 31, 1997.
NOTE 4--COMMITMENTS:
Operating Leases
The Company leases its office facilities and certain equipment under
noncancelable operating leases which expire in 1998 and 1999, respectively.
The leases require payment of property taxes, insurance, maintenance and
utilities. The Company also has operating lease agreements relating to certain
equipment which expire at various dates. Rent expense for the year ended
December 31, 1996 and the six month periods ended June 30, 1996 and 1997
totaled $32,000, $15,000, and $19,000, respectively.
F-129
<PAGE>
USWEB DETROIT
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED OPERATING
DECEMBER 31, LEASES
------------ ---------
<S> <C>
1997............................................................. $45,000
1998............................................................. 22,000
1999............................................................. 4,000
-------
Total minimum lease payments..................................... $71,000
=======
</TABLE>
Capital leases
In 1996, the Company leased certain computer equipment under a non-
cancelable capital lease with a remaining term in excess of one year. The
lease is personally guaranteed by an officer of the Company. Future minimum
lease commitments under the capital lease are as follows for years ending
December 31:
<TABLE>
<CAPTION>
YEAR ENDED CAPITAL
DECEMBER 31, LEASES
------------ -------
<S> <C>
1997.............................................................. $ 9,000
1998.............................................................. 8,000
1999.............................................................. 4,000
-------
Total minimum lease payments...................................... 21,000
Less: amount representing interest................................ (2,000)
-------
Present value of capital lease obligation......................... 19,000
Less: current portion............................................. (7,000)
-------
Long-term obligation at December 31, 1996......................... $12,000
=======
</TABLE>
The cost and related accumulated depreciation of assets under capital lease
was $23,000 and $5,000, respectively, at December 31, 1996.
NOTE 5--COMMON STOCK:
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 60,000 shares of $1 par value Common Stock.
NOTE 6--SUBSEQUENT EVENTS:
Subsequent events
In August 1997, the Company borrowed $55,000 under a note payable to a
shareholder of the Company. The note was non-interest bearing, unsecured and
payable on demand. Concurrent with the USWeb transaction on September 30,
1997, this note was converted to equity.
On September 30, 1997, USWeb reached an agreement to acquire all of the
Company's outstanding shares of common stock, at which time the Company became
a wholly owned subsidiary of USWeb.
F-130
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
USWeb San Mateo
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of USWeb San Mateo (formerly
Zendatta, Inc.) at December 31, 1996, and the results of its operations and
its cash flows for the year ended December 31, 1996, 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 audit. We conducted our
audit 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 audit provides a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
San Jose, California
October 15, 1997
F-131
<PAGE>
USWEB SAN MATEO
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $107,000 $ 60,000
Accounts receivable, net............................ 157,000 153,000
Costs in excess of billings......................... 19,000 36,000
-------- --------
Total current assets.............................. 283,000 249,000
Property and equipment, net........................... 74,000 65,000
Other assets.......................................... 6,000 32,000
-------- --------
$363,000 $346,000
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 21,000 $ 94,000
Accrued expenses.................................... 47,000 9,000
-------- --------
Total current liabilities......................... 68,000 103,000
-------- --------
Commitments (Note 3)
Shareholders' equity:
Common Stock: no par value, 1,000,000 shares autho-
rized; 2,000 shares issued and outstanding......... 20,000 20,000
Additional paid-in capital.......................... 14,000 --
Retained earnings................................... 261,000 223,000
-------- --------
Total shareholders' equity........................ 295,000 243,000
-------- --------
$363,000 $346,000
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-132
<PAGE>
USWEB SAN MATEO
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -----------------
1996 1996 1997
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Revenues........................................ $1,010,000 $367,000 $695,000
Cost of revenues................................ 663,000 166,000 513,000
---------- -------- --------
Gross profit.................................. 347,000 201,000 182,000
---------- -------- --------
Operating expenses:
Marketing, sales and support.................. 16,000 15,000 32,000
General and administrative.................... 74,000 23,000 138,000
---------- -------- --------
Total operating expenses.................... 90,000 38,000 170,000
---------- -------- --------
Income from operations.......................... 257,000 163,000 12,000
Income tax provision............................ 6,000 2,000 --
---------- -------- --------
Net income...................................... $ 251,000 $161,000 $ 12,000
========== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-133
<PAGE>
USWEB SAN MATEO
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995. 2,000 $20,000 $ 14,000 $ 10,000 $ 44,000
Net income................... -- -- -- 251,000 251,000
----- ------- -------- -------- --------
Balance at December 31, 1996. 2,000 20,000 14,000 261,000 295,000
----- ------- -------- -------- --------
Distribution to shareholders
(Unaudited)................. -- -- (14,000) (50,000) (64,000)
Net income (Unaudited)....... -- -- -- 12,000 12,000
----- ------- -------- -------- --------
Balance as of June 30, 1997
(Unaudited)................. 2,000 $20,000 $ -- $223,000 $243,000
===== ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-134
<PAGE>
USWEB SAN MATEO
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -------------------
1996 1996 1997
------------ --------- --------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income.................................. $ 251,000 $ 161,000 $ 12,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.............. 16,000 3,000 16,000
Changes in assets and liabilities:
Accounts receivable....................... (157,000) (174,000) 4,000
Costs in excess of billings............... (19,000) -- (17,000)
Other assets.............................. (5,000) -- (26,000)
Accounts payable.......................... 20,000 42,000 73,000
Accrued expenses.......................... 47,000 14,000 (38,000)
--------- --------- --------
Net cash provided by operating
activities.............................. 153,000 46,000 24,000
--------- --------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES FOR
THE ACQUISITION OF PROPERTY AND EQUIPMENT... (74,000) (31,000) (7,000)
--------- --------- --------
CASH FLOWS USED IN FINANCING ACTIVITIES FOR
THE DISTRIBUTION TO SHAREHOLDERS............ -- -- (64,000)
--------- --------- --------
Net increase (decrease) in cash and cash
equivalents................................. 79,000 15,000 (47,000)
Cash and cash equivalents at beginning of
period...................................... 28,000 28,000 107,000
--------- --------- --------
Cash and cash equivalents at end of period... $ 107,000 $ 43,000 $ 60,000
========= ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-135
<PAGE>
USWEB SAN MATEO
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USWeb San Mateo (the "Company"), formerly Zendatta, Inc., was incorporated
in California on October 30, 1995 and is engaged in software development and
consulting, specializing in enterprise applications for internet, intranet and
extranet environments. See Note 5.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenues from consulting service agreements.
Service revenues from fixed-price agreements are recognized over the period
of each engagement under the percentage of completion method using labor hours
incurred as a measure of progress towards completion. Provisions for contract
adjustments and losses are recorded in the period such items are identified.
Revenues from time and materials agreements and hosting services are
recognized and billed as the services are provided.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Significant Customers
During the year ended December 31, 1996, sales to four customers accounted
for 33%, 19%, 18% and 12% of revenues. Approximately 38%, 27% and 24% of
accounts receivable at December 31, 1996 was due from three customer.
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 assets,
generally three years.
Fair Value of Financial Instruments
The Company's financial instruments, including cash equivalents, accounts
receivable, accounts payable and accrued expenses, have carrying amounts which
approximate fair value due to the relatively short maturity of these
instruments.
Income Taxes
The Company has elected to be taxed as an S Corporation, pursuant to the
Internal Revenue Code. This election provides for all profits or losses to be
recognized in the shareholders' personal income tax returns. The provision for
income taxes represents 1.5% franchise tax imposed by the State of California.
F-136
<PAGE>
USWEB SAN MATEO
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Interim Financial Information
The accompanying balance sheet as of June 30, 1997 and the statements of
operations and of cash flows for the six-month periods ended June 30, 1996 and
1997, are unaudited. In the opinion of management, these statements have been
prepared on the same basis as the audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for
the fair presentation of the results of the interim periods. The financial
data and other information disclosed in these notes to financial statements
related to these periods are unaudited. The results for the six months ended
June 30, 1997 are not necessarily indicative of the results to be expected for
the year ending December 31, 1997.
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Property and equipment:
Computers and equipment........................... $ 90,000 $ 92,000
Furniture and fixtures............................ -- 5,000
-------- --------
90,000 97,000
Less: accumulated depreciation.................... (16,000) (32,000)
-------- --------
$ 74,000 $ 65,000
======== ========
Accrued expenses:
Payroll and related expenses...................... $ 41,000 $ 9,000
Income taxes...................................... 6,000 --
-------- --------
$ 47,000 $ 9,000
======== ========
</TABLE>
NOTE 3--COMMITMENTS:
Operating Leases
The Company leases its office facilities under noncancelable operating
leases which expire in 1997. The leases require payment of property taxes,
insurance, maintenance and utilities. Rent expense for the year ended December
31, 1996 and the six month periods ended June 30, 1996 and 1997 totaled
$33,000, $6,000 and $33,000, respectively.
Future minimum lease payments under noncancelable operating leases are
$64,000 for the year ended December 31, 1997.
NOTE 4--COMMON STOCK:
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 1,000,000 shares of no par value Common Stock.
NOTE 5--SUBSEQUENT EVENTS:
On September 30, 1997, USWeb reached an agreement to acquire all of the
Company's outstanding shares of common stock, at which time the Company became
a wholly owned subsidiary of USWeb.
F-137
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
USWeb LA Central
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of USWeb LA Central (formerly W3-
design) at March 31, 1996 and 1997 and the results of its operations and its
cash flows for the period from April 7, 1995 (Inception) to March 31, 1996 and
for the year ended March 31, 1997, 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.
Price Waterhouse LLP
San Jose, California
October 31, 1997
F-138
<PAGE>
USWEB LA CENTRAL
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31,
----------------- SEPTEMBER 30,
1996 1997 1997
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash......................................... $ 2,000 $ 9,000 $186,000
Accounts receivable.......................... 173,000 462,000 347,000
-------- -------- --------
Total current assets....................... 175,000 471,000 533,000
Property and equipment, net.................... 45,000 139,000 150,000
-------- -------- --------
$220,000 $610,000 $683,000
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................. $ 19,000 $ 15,000 $177,000
Accrued expenses............................. 9,000 17,000 3,000
Unearned revenue............................. -- 146,000 --
Loan from officer............................ -- 12,000 --
Income taxes payable......................... 9,000 49,000 83,000
-------- -------- --------
Total current liabilities.................. 37,000 239,000 263,000
Deferred income taxes.......................... 75,000 114,000 114,000
-------- -------- --------
112,000 353,000 377,000
-------- -------- --------
Commitments (Note 4)
Shareholders' equity:
Common stock; 10,000 shares authorized; 1,000
shares issued and outstanding............... 1,000 1,000 1,000
Additional paid-in capital................... 3,000 3,000 3,000
Retained earnings............................ 104,000 253,000 302,000
-------- -------- --------
Total shareholders' equity................. 108,000 257,000 306,000
-------- -------- --------
$220,000 $610,000 $683,000
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-139
<PAGE>
USWEB LA CENTRAL
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 7, 1995
(INCEPTION) SIX MONTHS ENDED
THROUGH MARCH YEAR ENDED SEPTEMBER 30,
31, MARCH 31, -------------------
1996 1997 1996 1997
------------- ---------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues.......................... $537,000 $1,438,000 $631,000 $1,282,000
Cost of revenues.................. 169,000 566,000 221,000 574,000
-------- ---------- -------- ----------
Gross profit.................... 368,000 872,000 410,000 708,000
Operating expenses:
Marketing, sales and support.... 76,000 311,000 138,000 263,000
General and administrative ex-
penses......................... 104,000 322,000 141,000 364,000
-------- ---------- -------- ----------
Total operating expenses...... 180,000 633,000 279,000 627,000
-------- ---------- -------- ----------
Income from operations............ 188,000 239,000 131,000 81,000
Interest income................... -- 3,000 1,000 1,000
-------- ---------- -------- ----------
Income before income taxes........ 188,000 242,000 132,000 82,000
Provision for income taxes........ 84,000 93,000 53,000 33,000
-------- ---------- -------- ----------
Net income........................ $104,000 $ 149,000 $ 79,000 $ 49,000
======== ========== ======== ==========
</TABLE>
See accompanying notes to financial statements.
F-140
<PAGE>
USWEB LA CENTRAL
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNTS CAPITAL EARNINGS EQUITY
------ ------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Issuance of Common Stock...... 1,000 $1,000 $3,000 $ -- $ 4,000
Net income.................... -- -- -- 104,000 104,000
----- ------ ------ -------- --------
Balance at March 31, 1996..... 1,000 1,000 3,000 104,000 108,000
Net income.................... -- -- -- 149,000 149,000
----- ------ ------ -------- --------
Balance at March 31, 1997..... 1,000 1,000 3,000 253,000 257,000
Net income (Unaudited)........ -- -- -- 49,000 49,000
----- ------ ------ -------- --------
Balance at September 30, 1997
(Unaudited).................. 1,000 $1,000 $3,000 $302,000 $306,000
===== ====== ====== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-141
<PAGE>
USWEB LA CENTRAL
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 7, 1995
(INCEPTION) SIX MONTHS ENDED
THROUGH YEAR ENDED SEPTEMBER 30,
MARCH 31, MARCH 31, -------------------
1996 1997 1996 1997
------------- ---------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVI-
TIES:
Net income....................... $ 104,000 $ 149,000 $ 79,000 $ 49,000
Adjustments to reconcile net
income to net cash provided by
operating activities:
Deferred income taxes.......... 75,000 39,000 -- --
Depreciation................... 8,000 37,000 17,000 25,000
Changes in operating assets and
liabilities:
Accounts receivable.......... (173,000) (289,000) (28,000) 115,000
Accounts payable............. 19,000 (4,000) 47,000 163,000
Accrued expenses............. 9,000 7,000 16,000 (14,000)
Billings in excess of fees
and expenditures............ -- 146,000 -- (146,000)
Income taxes payable......... 9,000 40,000 53,000 34,000
--------- --------- -------- ---------
Net cash provided by operating
activities.................... 51,000 125,000 184,000 226,000
--------- --------- -------- ---------
CASH FLOWS USED IN INVESTING
ACTIVITIES FOR THE ACQUISITION
OF PROPERTY AND EQUIPMENT....... (53,000) (130,000) (37,000) (37,000)
--------- --------- -------- ---------
CASH FLOWS PROVIDED BY FINANCING
ACTIVITIES:
Proceeds from issuance of common
stock........................... 1,000 -- -- --
Additional paid-in capital....... 3,000 -- -- --
Proceeds from officer loan....... -- 12,000 -- (12,000)
--------- --------- -------- ---------
Net cash provided by financing
activities.................... 4,000 12,000 -- (12,000)
--------- --------- -------- ---------
Net increase (decrease) in cash.. 2,000 7,000 147,000 177,000
Cash at beginning of period...... -- 2,000 2,000 9,000
--------- --------- -------- ---------
Cash at end of period............ $ 2,000 $ 9,000 $149,000 $ 186,000
========= ========= ======== =========
CASH PAID DURING THE PERIOD FOR:
Income taxes................... $ $ -- $ $
========= ========= ======== =========
</TABLE>
See accompanying notes to financial statements.
F-142
<PAGE>
USWEB LA CENTRAL
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY AND SIGNIFICANT ACCOUNTING POLICIES:
USWeb LA Central (the "Company"), formerly W3-design, was incorporated in
California on April 7, 1995 as a dedicated group of information architects who
build Web-based communities for major corporations in North America.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Concentration of Credit Risk
The Company is potentially subject to a concentration of credit risk from
its trade receivables, as a significant portion is due from two customers
totaling 85% and 28% at March 31, 1996 and 1997, respectively. The Company
performs ongoing credit evaluation of its customers and generally does not
require collateral. For the period from April 7, 1995 (Inception) through
March 31, 1996 and for the year ended March 31, 1997, five customers accounted
for 41% and 27% of the Company's total revenues, respectively.
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 assets,
generally three years.
Revenue Recognition
The Company derives its revenues from consulting service agreements.
Service revenues from fixed-price development agreements are recognized
under the completed-contract method whereby income is recognized only when the
contract is substantially completed and all costs and related revenues are
deferred in the balance sheet until that time. Provisions for agreement
adjustments and losses are recorded in the period such items are identified.
Unearned revenues represents the amount of revenues received in advance of
services being performed.
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 laws; 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.
Fair Value of Financial Instruments
The Company's financial instruments, including accounts receivable, notes
and accounts payable, accrued expenses and billings in excess of fees and
expenditures have carrying amounts which approximate fair value due to the
relatively short maturity of these instruments.
F-143
<PAGE>
USWEB LA CENTRAL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Interim Financial Information
The accompanying balance sheet as of September 30, 1997 and the statements
of operations and of cash flows for the six-month periods ended September 30,
1996 and 1997, are unaudited. In the opinion of management, these statements
have been prepared on the same basis as the audited financial statements and
include all adjustments, consisting only of normal recurring adjustments,
necessary for the fair presentation of the results of the interim periods. The
financial data and other information disclosed in these notes to financial
statements related to these periods are unaudited. The results for the six
months ended September 30, 1997 are not necessarily indicative of the results
to be expected for the year ending March 31, 1998.
NOTE 2--PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
MARCH 31,
----------------- SEPTEMBER 30,
1996 1997 1997
------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Computers and equipment..................... $47,000 $152,000 $177,000
Furniture and fixtures...................... 6,000 32,000 43,000
------- -------- --------
53,000 184,000 220,000
Less: accumulated depreciation.............. (8,000) (45,000) (70,000)
------- -------- --------
$45,000 $139,000 $150,000
======= ======== ========
</TABLE>
NOTE 3--INCOME TAXES:
The Company files separate company tax returns. The provision for income
taxes consists of the following for the years ended March 31, 1996 and 1997
and the six months ended September 30, 1996 and 1997:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED SEPTEMBER
MARCH 31, 30,
--------------- ---------------
1996 1997 1996 1997
------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current:
Federal.................................... $ 8,000 $46,000 $45,000 $28,000
State...................................... 1,000 8,000 8,000 5,000
------- ------- ------- -------
9,000 54,000 53,000 33,000
------- ------- ------- -------
Deferred:
Federal.................................... 64,000 35,000 -- --
State...................................... 11,000 4,000 -- --
------- ------- ------- -------
75,000 39,000 -- --
------- ------- ------- -------
Income tax provision......................... $84,000 93,000 $53,000 $33,000
======= ======= ======= =======
</TABLE>
A reconciliation of the federal income tax rate to the effective tax rate
follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
MARCH 31, SEPTEMBER 30,
------------- ---------------
1996 1997 1996 1997
----- ----- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Statutory rate............................ 34% 34% 34% 34%
State income tax, net of federal benefit.. 7% 4% 6% 6%
Nondeductable expenses and other.......... 3% -- -- --
----- ----- ------ ------
Effective income tax rate................. 44% 38% 40% 40%
===== ===== ====== ======
</TABLE>
F-144
<PAGE>
USWEB LA CENTRAL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As of March 31, 1996 and 1997, the Company had total deferred tax
liabilities of $75,000 and $114,000, respectively, consisting primarily of a
conversion from the cash to accrual method of accounting.
NOTE 4--COMMITMENTS:
The Company maintains an executive office and an operating office in Culver
City, California and New York, New York, respectively, under month-to-month
operating leases. The Company is generally responsible for maintaining public
liability and property damage insurance on the leased property and is also
responsible for certain operating expenses and property taxes.
Rent expense for the period from April 7, 1995 (Inception) through March 31,
1996 and for the year ended March 31, 1997 and the six month period ended
September 30, 1997 totaled $15,000, $37,000, and $42,000, respectively.
NOTE 5--COMMON STOCK:
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 10,000 shares of $1 par value Common Stock. For the period from April
7, 1995 (Inception) through March 31, 1996, the Company sold 1,000 shares of
Common Stock to the founders of the Company.
NOTE 6--SUBSEQUENT EVENTS:
On October 1, 1997, USWeb reached an agreement to acquire all of the
Company's outstanding shares of Common Stock, at which time the Company became
a wholly owned subsidiary of USWeb.
F-145
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
USWeb Houston
In our opinion, the accompanying combined balance sheet and the related
combined statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of USWeb
Houston (formerly USWeb-Apex, Inc. and Apex Business Solutions, a sole
proprietorship) at September 30, 1997 and the results of their operations and
their cash flows from December 5, 1996 (Inception) to September 30, 1997, 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 audit. We conducted our audit 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 audit provides a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
San Jose, California
November 4, 1997
F-146
<PAGE>
USWEB HOUSTON
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 19,000
Accounts receivable............................................. 175,000
Other current assets............................................ 3,000
--------
Total current assets.......................................... 197,000
Property and equipment, net....................................... 40,000
--------
$237,000
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 36,000
Accrued expenses................................................ 49,000
--------
Total current liabilities..................................... 85,000
--------
Commitments (Note 3)
Shareholders' equity:
Common Stock: $1.00 par value, 1,000 shares authorized,
issued and outstanding......................................... 1,000
Additional paid in capital...................................... 6,000
Retained earnings............................................... 145,000
--------
Total shareholders' equity.................................... 152,000
--------
$237,000
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-147
<PAGE>
USWEB HOUSTON
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 5, 1996
(INCEPTION) TO
SEPTEMBER 30,
1997
----------------
<S> <C>
Revenues....................................................... $820,000
Cost of revenues............................................... 407,000
--------
Gross profit................................................. 413,000
--------
Operating expenses:
Marketing, sales and support................................. 76,000
General and administrative................................... 192,000
--------
Total operating expenses................................... 268,000
--------
Net income..................................................... $145,000
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-148
<PAGE>
USWEB HOUSTON
COMBINED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Issuance of Common Stock to
Founders...................... 1,000 $1,000 $ -- $ -- $ 1,000
Contribution from shareholder.. -- -- 6,000 -- 6,000
Net income..................... -- -- 145,000 145,000
----- ------ ------ -------- --------
Balance at September 30, 1997.. 1,000 $1,000 $6,000 $145,000 $152,000
===== ====== ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-149
<PAGE>
USWEB HOUSTON
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 5, 1996
(INCEPTION) TO
SEPTEMBER 30,
1997
----------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................... $ 145,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization................................ 29,000
Changes in assets and liabilities:
Accounts receivable......................................... (175,000)
Other current assets........................................ (3,000)
Accounts payable............................................ 36,000
Accrued expenses............................................ 49,000
---------
Net cash provided by operating activities................. 81,000
---------
CASH FLOWS USED IN INVESTING ACTIVITIES FOR THE
ACQUISITION OF PROPERTY AND EQUIPMENT......................... (69,000)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock........................ 1,000
Proceeds from shareholder contribution........................ 6,000
---------
Net cash used in financing activities..................... 7,000
---------
Net increase in cash and cash equivalents...................... 19,000
Cash and cash equivalents at beginning of period............... --
---------
Cash and cash equivalents at end of period..................... $ 19,000
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-150
<PAGE>
USWEB HOUSTON
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
USWeb Houston (the "Company") is principally engaged in providing Internet
technology integration services.
Principles of Consolidation
USWeb Houston is comprised of the combined accounts of USWeb-Apex, Inc.
which was incorporated on December 15, 1996 and Apex Business Solutions, a
sole proprietorship. The sole shareholder of USWeb-Apex, Inc. also owns Apex
Business Solutions. (Note 6)
During December, 1996, the Company entered into a franchise agreement with
USWeb Corporation ("USWeb") to become part of USWeb's Affiliate network.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenues from consulting service agreements, web
development, and computer hardware and software sales.
Consulting service revenues are recognized and billed as services are
provided. Web development revenues are recognized upon contract completion
whereby income is recognized only when the contract is substantially completed
and all costs and related revenues are deferred in the balance sheet until
that time. Computer hardware and software sales revenues are recognized upon
delivery of goods. Provisions for agreement adjustments and losses are
recorded in the period such items are identified.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Concentration of Credit Risk
The Company is potentially subject to a concentration of credit risk from
its trade receivables, as a significant portion is due from three major
customers. The Company performs ongoing credit evaluations of its customers
and generally does not require collateral. As of September 30, 1997, these
customers accounted for 64% of the Company's accounts receivable balance and
14% of the Company's total revenues.
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 assets,
generally three years.
Income Taxes
USWeb-Apex, Inc. has elected to be taxed as an S Corporation, pursuant to
the Internal Revenue Code. This election provides for all profits or losses to
be recognized in the shareholders' personal income tax returns. Apex Business
Solutions is a sole proprietorship with all profits or losses recognized in
the owner's personal income tax returns.
F-151
<PAGE>
USWEB HOUSTON
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
Property and equipment, net:
Computers and equipment ..................................... $ 51,000
Furniture and fixtures....................................... 18,000
--------
69,000
Less: accumulated depreciation............................... (29,000)
--------
$ 40,000
========
Accrued expenses:
Payroll and related taxes.................................... $ 35,000
Franchise Fees............................................... 7,000
Sales Taxes.................................................. 7,000
--------
$ 49,000
========
</TABLE>
NOTE 3--COMMITMENTS:
Royalties
Under the terms of its franchise agreement with USWeb, the Company is
required to pay royalties to USWeb based upon a stipulated percentage of
adjusted gross revenue, as defined. Royalties from Inception to September 30,
1997 totaled $19,000 and are included in cost of revenues.
Operating Leases
The Company leases its office facilities under a noncancelable operating
lease which expires in November, 1997. Rent expense from Inception to
September 30, 1997 totaled $18,000. Future minimum lease payments under this
noncancelable operating lease as of September 30, 1997 total $4,000.
NOTE 4--COMMON STOCK:
The Company's Articles of Incorporation authorized the Company to issue
1,000 shares of $1 par value Common Stock. At Inception the Company sold a
total of 1,000 shares of Common Stock to the Founder of the Company.
NOTE 5--RELATED PARTY TRANSACTIONS:
The Company has performed services on behalf of another USWeb affiliate. The
transaction totaling $25,000 was accounted for at arms length with no special
terms.
NOTE 6--SUBSEQUENT EVENTS:
On October 29, 1997, USWeb reached an agreement to acquire all of the
Company's outstanding shares of Common Stock, at which time the Company became
a wholly owned subsidiary of USWeb.
F-152
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of USWeb New York Central
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of USWeb New York Central (formerly Reach Networks, Inc.)
and its subsidiaries at April 30, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended, 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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from
operations and has a net capital deficiency that raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 1. The financial statements do not
include any adjustments that might result for the outcome of this uncertainty.
Price Waterhouse LLP
New York, New York
November 4, 1997
F-153
<PAGE>
USWEB NEW YORK CENTRAL
(FORMERLY REACH NETWORKS, INC.)
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
APRIL 30,
---------------------- JULY 31,
1996 1997 1997
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................ $ 40,160 $ 3,331 $ 8,896
Accounts receivable, net of allowance for
doubtful accounts of $92,336, $35,723
and $21,812, respectively............... 852,192 116,267 93,686
Unbilled costs and accrued earnings...... -- 38,000 111,704
Other receivables and prepayments ....... 90,979 21,954 42,204
---------- ----------- -----------
Total current assets.................. 983,331 179,552 256,490
Equipment, net............................ 964,864 425,843 394,973
Investment................................ 25,000 25,000 25,000
Other assets.............................. 16,997 16,559 17,560
---------- ----------- -----------
Total assets.......................... $1,990,192 $ 646,954 $ 694,023
========== =========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable......................... 1,593,559 1,703,334 1,823,830
Accrued expenses......................... 63,194 202,301 215,109
Deferred revenue......................... 25,000 51,667 122,723
Loans payable to stockholders............ 192,499 192,890 214,710
---------- ----------- -----------
Total current liabilities............. 1,874,252 2,150,192 2,376,372
Deferred tax liability.................... 1,460 -- --
Commitments (Note 9)
Stockholders' equity:
Preferred stock ($0.01 par value; 1,000
shares authorized, none issued and
outstanding)............................ -- -- --
Common stock ($0.01 par value; 20,000
shares authorized; 1,500 shares issued
and outstanding, respectively).......... 15 15 15
Additional paid-in capital............... 70,567 70,567 70,567
Retained earnings (accumulated deficit).. 43,898 (1,573,820) (1,752,931)
---------- ----------- -----------
Total stockholders' equity (deficit).. 114,480 (1,503,238) (1,682,349)
---------- ----------- -----------
Total liabilities and stockholders'
equity (deficit)..................... $1,990,192 $ 646,954 $ 694,023
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-154
<PAGE>
USWEB NEW YORK CENTRAL
(FORMERLY REACH NETWORKS, INC.)
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED APRIL 30, JULY 31,
----------------------- ---------------------
1996 1997 1996 1997
---------- ----------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues....................... $7,440,453 $ 6,465,099 $1,635,943 $ 567,583
Cost of revenues............... 5,024,629 4,683,703 1,178,556 431,910
---------- ----------- ---------- ---------
Gross Profit................. 2,415,824 1,781,396 457,387 135,673
---------- ----------- ---------- ---------
Operating expenses:
General and administrative... 1,662,554 1,779,733 342,481 203,590
Product development.......... 542,001 732,276 99,883 21,511
Selling and marketing........ 451,328 423,328 92,587 84,155
Product line discontinuance.. -- 454,654 -- --
---------- ----------- ---------- ---------
Total operating expenses... 2,655,883 3,389,991 534,951 309,256
---------- ----------- ---------- ---------
Loss from operations....... (240,059) (1,608,595) (77,564) (173,583)
---------- ----------- ---------- ---------
Other income (expense):
Interest income.............. 2,678 3,031 1,212 --
Interest expense............. (1,200) (10,694) (1,330) (5,528)
---------- ----------- ---------- ---------
Total other income (ex-
pense).................... 1,478 (7,663) (118) (5,528)
Loss before income taxes... (238,581) (1,616,258) (77,682) (179,111)
Provision (benefit) for income
taxes......................... (52,344) 1,460 -- --
---------- ----------- ---------- ---------
Net loss................... $ (186,237) $(1,617,718) $ (77,682) $(179,111)
========== =========== ========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-155
<PAGE>
USWEB NEW YORK CENTRAL
(FORMERLY REACH NETWORKS, INC.)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
AMOUNT
OUTSTANDING
ON RETAINED TOTAL
COMMON STOCK ADDITIONAL OFFICER STOCK EARNINGS SHAREHOLDERS'
------------- PAID PURCHASE (ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL AGREEMENT DEFICIT) (DEFICIT)
------ ------ ---------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 30,
1995................... 1,500 $15 $70,567 $(10,378) $ 230,135 $ 290,339
Forgiveness of amount
outstanding on officer
stock purchase
agreement.............. -- -- -- 10,378 -- 10,378
Net loss................ -- -- -- -- (186,237) (186,237)
----- --- ------- -------- ----------- -----------
Balance at April 30,
1996................... 1,500 15 70,567 -- 43,898 114,480
Net loss................ -- -- -- -- (1,617,718) (1,617,718)
----- --- ------- -------- ----------- -----------
Balance at April 30,
1997................... 1,500 15 70,567 -- (1,573,820) (1,503,238)
Net loss................ -- -- -- -- (179,111) (179,111)
----- --- ------- -------- ----------- -----------
Balance at July 31, 1997
(Unaudited)............ 1,500 $15 $70,567 $ -- $(1,752,931) $(1,682,349)
===== === ======= ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-156
<PAGE>
USWEB NEW YORK CENTRAL
(FORMERLY REACH NETWORKS, INC.)
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED APRIL 30, JULY 31,
---------------------- -------------------
1996 1997 1996 1997
--------- ----------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net cash flows from operating ac-
tivities
Net loss........................ $(186,237) $(1,617,718) $(77,682) $(179,111)
Adjustments to reconcile net
loss to net cash provided by
operating activities
Product line discontinuance... -- 360,154 -- --
Depreciation and amortization. 254,701 288,077 70,187 29,178
Provision for doubtful ac-
counts....................... 81,036 193,773 -- --
Stock grant compensation...... 10,378 -- -- --
Changes in operating assets
and liabilities
Accounts receivable......... (248,731) 542,152 (224,280) 22,581
Unbilled costs and accrued
earnings................... -- (38,000) -- (73,704)
Deferred taxes.............. 68,756 (1,460) (1,460) --
Other receivables and pre-
payments................... (4,075) 69,025 11,678 (20,250)
Accounts payable............ 610,082 109,775 231,233 120,496
Accrued expenses............ (210,000) 139,107 87,122 12,808
Deferred revenue............ (211,576) 26,667 -- 71,056
Income taxes................ (143,062) -- -- --
Other assets................ 861 438 -- (1,001)
--------- ----------- -------- ---------
Net cash provided by (used in)
operating activities........... 22,133 71,990 96,798 (17,947)
--------- ----------- -------- ---------
Cash flows from investing activi-
ties
Capital expenditures............ (406,915) (109,210) (19,174) 1,692
Purchase of investment.......... (25,000) -- -- --
--------- ----------- -------- ---------
Net cash used in investing ac-
tivities....................... (431,915) (109,210) (19,174) 1,692
--------- ----------- -------- ---------
Cash flows from financing activi-
ties
Net increase (decrease) in
borrowings from stockholders... 170,109 391 (42,165) 21,820
--------- ----------- -------- ---------
Net cash provided by (used in)
financing activities........... 170,109 391 (42,165) 21,820
--------- ----------- -------- ---------
Net increase (decrease) in cash
and cash equivalents............. (239,673) (36,829) 35,459 5,565
Cash and cash equivalents, begin-
ning of period................... 279,833 40,160 40,160 3,331
--------- ----------- -------- ---------
Cash and cash equivalents, end of
period........................... $ 40,160 $ 3,331 $ 75,619 $ 8,896
========= =========== ======== =========
Cash paid during the period for:
Interest........................ $ -- $ 6,394 $ -- $ --
========= =========== ======== =========
Income taxes.................... $ 33,240 $ 267 $ 267 $ --
========= =========== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-157
<PAGE>
USWEB NEW YORK CENTRAL
(FORMERLY REACH NETWORKS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, BUSINESS OF THE COMPANY AND BASIS OF PRESENTATION
USWeb New York Central (the "Company"), formerly Reach Networks, Inc., was
incorporated in 1993 under the laws of the State of Delaware and during 1993
merged with its predecessor, Reach Networks, Inc., a New York Corporation,
incorporated in 1988. The Company, a provider of communications software and
services, was primarily engaged in the development, marketing, licensing and
maintenance of private on-line networks based on Internet standards that were
targeted towards business organizations and associations. The Company
developed and maintained private on-line networks for customers in the United
States, Europe and Asia.
During 1997, the Company's management shifted the Company's product focus to
provide solutions to complex information flows through the use of Internet
technologies. During 1997 the Company began to derive significant revenues
from custom application and website development and design, systems
integration and support services including web/server hosting and management.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company has incurred significant
operating losses for the years ended April 30, 1996 and 1997. At April 30,
1997 the Company had an accumulated deficit of $1,573,820 and a working
capital deficit of $1,970,640. Such losses have primarily resulted from the
decreasing demand for private on-line networks and the transition by the
Company to becoming a provider of Internet solutions. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The Company's ability to continue as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations as they come
due. The Company has a pending merger agreement with USWeb Corporation
("USWeb") and a pending stock purchase agreement with unaffiliated parties and
it believes that when and if such arrangements are consummated will provide
sufficient funding to meet its planned business objectives (Note 11). These
financial statements do not include any adjustments relating to the
recoverability of the carrying amount of recorded assets or the amount of
liabilities that might result from the outcome of these uncertainties.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation
The consolidated financial statements include the accounts of Reach
Networks, Inc. and its wholly owned and majority-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated.
Losses of majority-owned subsidiaries are not allocated to minority interests
if such allocation results in the minority interest becoming negative. To
date, the Company's majority-owned subsidiaries have incurred cumulative
operating losses and no allocation of losses has been made in excess of the
original capital contributions of the minority interests.
Revenue recognition
License fees are recognized upon delivery of the Company's online network
products and the completion of all significant vendor obligations. Network
management and website hosting fees are recognized as services are performed.
Fees derived from long-term network or website management contracts are
recognized ratably over the life of the underlying contracts.
Communication fees received by the Company for providing network access as
well as incremental charges, which generally consist of faxing and mailing
services, are recognized upon performance of the service.
F-158
<PAGE>
USWEB NEW YORK CENTRAL
(FORMERLY REACH NETWORKS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Development fees from short-term projects to customize the Company's
proprietary software, custom software development on behalf of customers and
website development are recognized using the completed contract method. These
short-term projects were generally less than nine months in duration. The
Company records a current asset for network development projects in process on
the reporting date when the accumulated costs exceed related billings or a
current liability when the excess accumulated billings exceed related costs.
Unbilled costs and accrued earnings consist primarily of services performed
which were not billed at the end of the period.
Product development expenses
Software development costs are accounted for in accordance with Statement of
Financial Accounting Standards No. 86, ("SFAS No. 86"), "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed."
Software development costs incurred after the establishment of technological
feasibility are capitalized and amortized to cost of revenues on a straight-
line basis over the expected useful life of the software. Product development
costs incurred prior to the attainment of technological feasibility are
expensed as incurred. As of April 30, 1996 and 1997, the Company had no
capitalized software development costs.
Advertising costs
Advertising costs are expensed as incurred. Advertising costs included in
selling and marketing expenses were $90,498 for the year ended April 30, 1996.
No significant advertising costs were incurred subsequent to fiscal 1996.
Cash and cash equivalents
Cash equivalents consist of short-term, highly liquid investments, with
original maturities of less than three months when purchased and are stated at
cost. Interest is accrued as earned.
Equipment
Equipment is stated at cost. Depreciation and amortization are provided on
the straight-line method over the estimated useful lives of the respective
assets. Amortization of leasehold improvements is provided on the shorter of
the useful life of the improvement or the remaining lease term.
Income taxes
Income taxes are accounted for under the asset and liability method.
Deferred income taxes are recorded for temporary differences between financial
statement carrying amounts and the tax basis of assets and liabilities.
Deferred tax assets and liabilities reflect the tax rates expected to be in
effect for the years in which the differences are expected to reverse. A
valuation allowance is provided if it is more likely than not that some or all
of the deferred tax asset will not be realized.
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses, and loans payable to stockholders
approximate their fair values due to the relatively short maturity of these
investments.
F-159
<PAGE>
USWEB NEW YORK CENTRAL
(FORMERLY REACH NETWORKS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accounting estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
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 those estimates.
Interim Financial Data
The unaudited financial data at July 31, 1997 and for the three months ended
July 31, 1996 and 1997 have been prepared by management and include all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the results of operations and cash flows. The results of
operations for the three months ended July 31, 1997 are not necessarily
indicative of the operating results to be expected for the entire year ending
April 30, 1998.
3. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF RISKS
The Company is dependent on a limited number of customers for a substantial
portion of its revenues. One customer accounted for approximately 39% and 34%
of revenues in 1996 and 1997, respectively and approximately 25% and 20% of
accounts receivable as of April 30, 1996 and 1997, respectively. In connection
with the discontinuation of its private on-line network products the Company
terminated service to such customer in 1998. A second customer, which
accounted for 29% and 14% of revenues in 1996 and 1997, respectively, and 24%
of accounts receivable as of April 30, 1996 did not renew its contract that
expired in March 1997. A third customer accounted for 10% of revenues in 1996
none of which was outstanding as of April 30, 1996. A fourth customer
accounted for 22% of revenues in 1997 and 28% of accounts receivable as of
April 30, 1997.
Financial instruments which potentially subject the Company concentrations
of credit risk are primarily cash, accounts receivable, accounts payable and
loans payable to stockholders. The Company generally does not require
collateral and its trade receivables are unsecured.
4. EQUIPMENT
Equipment is comprised of:
<TABLE>
<CAPTION>
ESTIMATED APRIL 30,
USEFUL LIFE --------------------- JULY 31,
(YEARS) 1996 1997 1997
----------- ---------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Network equipment and computers. 5 $1,144,965 $ 519,620 $ 517,928
Furniture and fixtures.......... 10 145,490 146,037 146,037
Software licenses............... 3 175,245 62,323 62,323
Leasehold improvements.......... 52,127 52,127 52,127
---------- --------- ---------
Total equipment............... 1,517,827 780,107 778,415
Less--accumulated depreciation
and amortization............... (552,963) (354,264) (383,442)
---------- --------- ---------
Net equipment................. $ 964,864 $ 425,843 $ 394,973
========== ========= =========
</TABLE>
F-160
<PAGE>
USWEB NEW YORK CENTRAL
(FORMERLY REACH NETWORKS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LOANS PAYABLE TO STOCKHOLDERS
The Company has loans payable to stockholders, who are also employees of the
Company, which represent amounts owed for funds loaned to the Company and
deferred salaries. Loans payable to stockholders are comprised as follows:
<TABLE>
<CAPTION>
APRIL 30,
----------------- JULY 31,
1996 1997 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Borrowings from stockholders...................... $168,298 $167,390 $180,390
Deferred salary................................... 23,001 20,000 28,792
Accrued interest.................................. 1,200 5,500 5,528
-------- -------- --------
$192,499 $192,890 $214,710
======== ======== ========
</TABLE>
During 1996 and 1997, the interest rate on loans from stockholders averaged
9% and 10%, respectively. Interest expense on loans payable to stockholders
amounted to $1,200 and $10,694 in 1996 and 1997, respectively.
6. INCOME TAXES
The (benefit) provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
APRIL 30, JULY 31,
----------------- ------------
1996 1997 1996 1997
--------- ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current
Federal....................................... $ (75,320) $ -- $ -- $ --
State and local............................... (45,780) -- -- --
--------- ------ ------ ------
(121,100) -- -- --
Deferred
Federal....................................... 68,756 1,460 -- --
State and local............................... -- -- -- --
--------- ------ ------ ------
(Benefit) provision for income taxes........ $ (52,344) $1,460 -- --
========= ====== ====== ======
</TABLE>
A reconciliation of the statutory federal income tax rate to the effective
income tax rate follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
APRIL 30, JULY 31,
-------------- ----------------
1996 1997 1996 1997
----- ----- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Statutory rate............................ (34)% (34)% (34)% (34)%
State income taxes, net of federal bene-
fit...................................... (13)% (13)% (13)% (13)%
Nondeductible expense and other........... 2 % (3)% -- --
Valuation Allowance....................... 24 % 50 % 47 % 47 %
----- ----- ------ ------
Effective income tax rate................. 21 % -- -- --
===== ===== ====== ======
</TABLE>
F-161
<PAGE>
USWEB NEW YORK CENTRAL
(FORMERLY REACH NETWORKS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes at April 30, 1996 and 1997 and July 31, 1997 consisted
of the following:
<TABLE>
<CAPTION>
APRIL 30,
------------------ JULY 31,
1996 1997 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current deferred tax assets
Allowance for doubtful accounts............... $31,544 $ 16,794 $ 10,251
Accrued expenses............................... -- 44,415 44,415
-------- -------- --------
31,544 61,209 54,666
Noncurrent deferred tax assets
Equipment write-off........................... -- 169,272 169,272
Net operating loss............................. 81,118 611,000 705,000
-------- -------- --------
81,118 780,272 874,272
-------- -------- --------
Noncurrent deferred tax liabilities.............. 57,460 125,490 130,396
-------- -------- --------
Net deferred tax asset........................... 55,202 715,991 798,542
Less: valuation allowance........................ 56,662 715,991 798,542
-------- -------- --------
Net deferred tax asset (liability)............. $ (1,460) $ -- $ --
======== ======== ========
</TABLE>
In consideration of the Company's losses during 1996 and 1997 and the
uncertainty of its ability to utilize deferred tax benefits in the future, the
Company has recorded a valuation allowance for deferred tax benefits in excess
of net operating loss amounts that can be carried back to prior years for
federal and state income tax purposes. The Company has net operating loss
carryforwards of approximately $1,300,000 and $1,500,000 at April 30, 1997 and
July 31, 1997, which begin to expire in 2011. These losses are subject to
limitation on future years utilization should certain ownership changes occur
(Note 11).
7. EMPLOYEE STOCK GRANTS AND ISSUANCES
In October 1993, the Company issued 150 shares of common stock to an officer
of the Company in return for a non-recourse promissory note in the principal
amount of $20,756. One-half the principal amount of the note was to be
automatically forgiven on each of the first and second anniversary dates of
the issuance date of the note, provided the officer continued to be an
employee. As of April 30, 1996, the note has been forgiven in its entirety and
the Company has recorded compensation expense of $10,378 in the year ending
April 30, 1996.
8. STOCK OPTION PLAN AND DEFINED CONTRIBUTION PLAN
Stock option plan
During 1995, the Company implemented an employee stock option plan whereby
options to purchase up to 100 shares of common stock may be granted to key
employees, directors and consultants. As of April 30, 1997 there have been no
options granted under the plan.
Defined contribution plan
Company employees may participate in an employee savings plan maintained by
the Company pursuant to Section 401(k) of the Internal Revenue Code ("IRC").
Eligible participants may contribute a percentage of their pretax salaries,
subject to certain IRC limitations. The plan provides for employer matching
contributions to be made at the discretion of the Company. There were no
discretionary amounts contributed to the plan during the years ended April 30,
1996 and 1997 and three months ended July 31, 1997.
F-162
<PAGE>
USWEB NEW YORK CENTRAL
(FORMERLY REACH NETWORKS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS
Network access agreement
Pursuant to a non-cancelable agreement expiring in fiscal 1998, the Company
committed to monthly minimum usage levels with its network access provider.
The annual minimum usage commitments amount to $600,000 and $150,000 in 1997
and 1998, respectively. The Company's actual network access usage
significantly exceeded the contractually required minimums for each of the
years ended April 30, 1996 and 1997. In May 1997, the Company and the network
access provider mutually agreed to terminate the agreement.
Leases
The Company leases its facilities and certain office equipment under non-
cancelable operating leases. Future rental payments on a fiscal year basis
under operating leases with initial terms in excess of one year are as
follows:
<TABLE>
<S> <C>
1998............................................................ $133,056
1999............................................................ 132,944
2000............................................................ 131,712
2001............................................................ 89,633
2002............................................................ --
--------
$487,345
========
</TABLE>
Rent expense approximated $157,900 and $189,000, for the years ended April
30, 1996 and 1997, respectively.
Employment contracts
The Company has entered into employment agreements with certain employees
and officers, who are also stockholders of the Company. The agreements provide
for payments, upon termination of the employee, of an amount equal to 50% of
the employee's annual base salary.
10. DISCONTINUED PRODUCT LINES
During 1997 the Company discontinued its private on-line network products
and services and abandoned the related network computer equipment and software
licenses having a net book value of $360,154. Approximately $7,361,000 and
$4,365,000 of the Company's revenues in 1996 and 1997 were generated from
private on-line network products and services.
The Company also terminated one of its employees, who instituted litigation
against the Company claiming breach of contract. In October of 1997 the
Company and the employee, who is a stockholder, entered into a settlement
agreement, which is contingent upon completion of the USWeb share exchange
(Note 11). The Company has accrued the costs associated with the pending
settlement as of April 30, 1997, which are expected to be less than $100,000.
Additionally, the Company discontinued development of a private on-line
network for the architectural industry in which the Company incurred
development and administrative expenses which are included in product
development and general and administration expenses, in the amount of $572,000
during the year ended April 30, 1997.
F-163
<PAGE>
USWEB NEW YORK CENTRAL
(FORMERLY REACH NETWORKS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. SUBSEQUENT EVENTS
In October 1997, the Company issued 265 shares of its common stock to
certain employees and consultants with immediate vesting in consideration of
current services being performed.
In October of 1997 the Company entered into a merger agreement with USWeb
whereby the stockholders of the Company will exchange their shares of common
stock for shares of USWeb and the Company will become a wholly-owned
subsidiary of USWeb. The closing of the share exchange is subject to certain
conditions, which can be waived by USWeb, including the attainment of a
specified working capital level. As of November 3, 1997 the Company has not
met the working capital requirement. The number of shares to be issued by
USWeb is subject to adjustment during the first year subsequent to the
completion of the share exchange based on the Company's performance. The
Company also entered into a stock purchase agreement during October 1997 with
unaffiliated third parties whereby the Company will issue and sell 793.82
shares of its common stock at a price of $1,259.73 per share, providing gross
proceeds of $1,000,000. The issuance and sale will be executed
contemporaneously with the closing of the USWeb share exchange.
During September of 1997, the Company entered into an agreement to sell a
subsidiary to a former employee which had developed a product for the digital
delivery of information over the Internet using a "push" technology. The
subsidiary had ceased operations in February 1997 and had generated minimal
revenue. The Company received a note, secured by the stock of the subsidiary,
in the principal amount of $500,000. The note is payable in four equal
quarterly installments commencing September 30, 1998.
F-164
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Inter.logic.studios, inc.
In our opinion, the accompanying balance sheet and the related statement of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Inter.logic.studios, inc. at
December 31, 1997, and the results of its operations and its cash flows for
the year 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 audit. We conducted our audit 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 audit provides a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
San Jose, California
March 24, 1998
F-165
<PAGE>
INTER.LOGIC.STUDIOS, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 87,000
Accounts receivable.............................................. 531,000
Deferred contract costs.......................................... 60,000
Prepaid expenses and other current assets........................ 13,000
Loan to employees................................................ 8,000
--------
Total current assets........................................... 699,000
Property and equipment, net........................................ 154,000
--------
$853,000
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................. $ 41,000
Deferred revenue................................................. 110,000
Notes payable, current portion................................... 36,000
Accrued expenses................................................. 2,000
--------
Total current liabilities...................................... 189,000
--------
Note payable, less current portion................................. 42,000
--------
Commitments (Note 4)
Shareholders' equity:
Common Stock, $0.01 par value, 6,000,000 shares authorized;
3,900,000 shares issued and outstanding......................... 2,000
Retained earnings................................................ 620,000
--------
Total shareholders' equity..................................... 622,000
--------
$853,000
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-166
<PAGE>
INTER.LOGIC.STUDIOS, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Revenues........................................................... $1,712,000
Cost of revenues................................................... 808,000
----------
Gross profit..................................................... 904,000
----------
Operating expenses:
Sales, general and administrative................................ 336,000
----------
Net income from operations 568,000
Interest expense, net.............................................. (3,000)
----------
Net income......................................................... $ 565,000
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-167
<PAGE>
INTER.LOGIC.STUDIOS, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
--------- ------ -------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996........... 3,900,000 $2,000 $226,000 $228,000
Distribution to shareholders........... -- -- (171,000) (171,000)
Net income............................. -- -- 565,000 565,000
--------- ------ -------- --------
Balance at December 31, 1997........... 3,900,000 $2,000 $620,000 $622,000
========= ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-168
<PAGE>
INTER.LOGIC.STUDIOS, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $ 565,000
Adjustments to reconcile net income to net cash provided by oper-
ating activities:
Loss on disposal of property and equipment...................... 4,000
Depreciation and amortization................................... 26,000
Changes in current assets and liabilities:
Accounts receivable............................................ (407,000)
Prepaid expenses and other current assets...................... (68,000)
Accounts payable............................................... 32,000
Deferred revenue............................................... 110,000
Accrued expenses............................................... 16,000
---------
Net cash provided by operating activities..................... 278,000
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans to employees (7,000)
Purchase of property and equipment............................... (98,000)
---------
Net cash used in investing activities......................... (105,000)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable...................................... 132,000
Repayment of notes payable....................................... (54,000)
Distributions to shareholders.................................... (171,000)
---------
Net cash used in financing activities......................... (93,000)
---------
Net increase in cash and cash equivalents......................... 80,000
Cash and cash equivalents at beginning of year.................... 7,000
---------
Cash and cash equivalents at end of year.......................... $ 87,000
=========
SUPPLEMENTAL DISCLOSURES:
Interest paid.................................................... $ 4,000
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-169
<PAGE>
INTER.LOGIC.STUDIOS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
Inter.logic.studios, inc., (the "Company"), was incorporated in Georgia on
September 5, 1995 and provides professional consulting services including
internet technology integration, web page and intranet design, production and
maintenance.
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 reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue recognition
Service revenues from fixed-price development agreements are recognized
under the completed- contract method whereby income is recognized only when
the contract is substantially competed and all costs and related revenues are
deferred in the balance sheet until that time. Provisions for agreement
adjustments and losses are recorded in the period such items are identified.
Significant customers
At December 31, 1997, two customers accounted for 25% and 63% of total
accounts receivable, respectively, and 43% and 28% of revenue, respectively,
for the year ended December 31, 1997.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line basis over the estimated useful lives of the assets
respective assets, which range from five to seven years.
Income taxes
The Company has elected to be taxed as an S Corporation, pursuant to the
Internal Revenue Code. This election provides for all profits or losses to be
recognized in the shareholders' personal income tax returns.
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Property and equipment:
Computer equipment............................................ $181,000
Furniture and fixtures........................................ 24,000
Office equipment.............................................. 8,000
--------
213,000
Less: Accumulated depreciation and amortization............... (59,000)
--------
$154,000
========
</TABLE>
NOTE 3--NOTES PAYABLE:
During the year ended December 31, 1998, the Company borrowed $132,000 under
notes payable which bear interest at 10.5% and are secured by computer
equipment. The outstanding note payable balance of
F-170
<PAGE>
INTER.LOGIC.STUDIOS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
$78,000 at December 31, 1997 is due in monthly installments of principal and
interest of $3,000 through February 2000.
Principal and interest payments under this note payable are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1998.............................................................. $36,000
1999.............................................................. 36,000
2000.............................................................. 6,000
-------
$78,000
=======
</TABLE>
NOTE 4--COMMITMENTS:
Leases
The Company leases office space and equipment under noncancelable operating
leases with various expiration dates through 2003. Rent expense for the year
ended December 31, 1997 was $53,000. Future minimum lease payments under
noncancelable operating at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING OPERATING
DECEMBER 31, LEASES
------------ ---------
<S> <C>
1998............................................................ $105,000
1999............................................................ 36,000
2000............................................................ 4,000
2001............................................................ 4,000
2002............................................................ 4,000
Thereafter...................................................... 1,000
--------
Total minimum lease payments.................................... $154,000
========
</TABLE>
NOTE 5--SUBSEQUENT EVENTS:
Equity Transactions
On January 1, 1998 the Company amended its Articles of Incorporation to
increase the number of shares of Common Stock which the Company is authorized
to issue to 6,000,000 and decrease the par value of the Company's stock to
$0.01 per share. The Company declared a 2,600-for-one Common Stock dividend to
its shareholders. The financial statements have been retroactively restated to
reflect this stock dividend.
On January 31, 1998, the Company declared a dividend in the amount of
$124,000, which was paid during February 1998 and March 1998. The financial
statements have been retroactively restated to reflect this stock dividend.
Stock Option Plan
On January 1, 1998, the Company adopted a Stock Option Plan (the "Plan").
The Plan provides for the granting of stock options to employees and
consultants of the Company. The Company has reserved 400,000 shares of Common
Stock for issuance under the Plan.
F-171
<PAGE>
INTER.LOGIC.STUDIOS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The exercise price of options granted under the Plan is determined by the
Plan Administrator, as defined. With respect to incentive stock options
granted under the 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 the Company's outstanding capital stock
must be equal to at least 110% of fair market value of the Common Stock on the
date of grant.
Options outstanding under the Plan have a term of ten years, except for
those issued to participants who own more than 10% of the voting power of the
Company's outstanding capital stock, which have a term of five years.
During February and March 1998, the Company granted 219,600 stock options
with exercise prices of $0.30 per share. These options automatically vested
upon completion of the Acquisition (see Acquisition below).
Note Payable
On March 19, 1998, the Company borrowed $25,000 under a bank loan which
bears interest at 10.5%. Principal and accrued interest on this loan are due
on April 20, 1998.
Acquisition
On March 24, 1998, the Company was acquired by USWeb Corporation ("USWeb")
whereby all of the Company's outstanding shares of Common Stock were exchanged
for 294,495 shares of USWeb Common Stock, at which time the Company became a
wholly owned subsidiary of USWeb.
F-172
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Quest Interactive Media, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' deficit and of cash flows present fairly, in all
material respects, the financial position of Quest Interactive Media, Inc. at
March 31, 1997 and January 31, 1998, and the results of its operations and its
cash flows for the year ended March 31, 1997 and the ten months ended January
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.
Price Waterhouse LLP
San Jose, California
March 27, 1998
F-173
<PAGE>
QUEST INTERACTIVE MEDIA, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, JANUARY 31,
1997 1998
--------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 3,000 $ --
Accounts receivable, net.............................. 65,000 123,000
--------- ---------
Total current assets................................ 68,000 123,000
Property and equipment, net............................. 15,000 32,000
--------- ---------
$ 83,000 $ 155,000
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable...................................... $ 49,000 $ 70,000
Accrued liabilities................................... 189,000 283,000
Current portion of notes payable...................... 5,000 5,000
Unearned revenue...................................... -- 42,000
Other current liabilities............................. 9,000 --
--------- ---------
Total current liabilities........................... 252,000 400,000
Notes payable........................................... 20,000 15,000
--------- ---------
272,000 415,000
--------- ---------
Shareholders' deficit:
Common Stock, no par value, 10,000 shares authorized;
5,600 shares issued and outstanding.................. -- --
Accumulated deficit................................... (189,000) (260,000)
--------- ---------
Total shareholders' deficit......................... (189,000) (260,000)
--------- ---------
$ 83,000 $ 155,000
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-174
<PAGE>
QUEST INTERACTIVE MEDIA, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
TEN MONTHS ENDED
YEAR ENDED JANUARY 31,
MARCH 31, ------------------
1997 1997 1998
---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Net revenues.................................... $286,000 $198,000 $481,000
Cost of net revenues............................ 154,000 112,000 236,000
-------- -------- --------
Gross profit.................................. 132,000 86,000 245,000
-------- -------- --------
Operating expenses:
General and administrative.................... 163,000 135,000 264,000
Marketing, sales and support.................. 17,000 15,000 51,000
-------- -------- --------
Total operating expenses.................... 180,000 150,000 315,000
-------- -------- --------
Loss from operations............................ (48,000) (64,000) (70,000)
Interest expense................................ 2,000 1,000 1,000
-------- -------- --------
Net loss........................................ $(50,000) $(65,000) $(71,000)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-175
<PAGE>
QUEST INTERACTIVE MEDIA, INC.
STATEMENT OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------- ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT DEFICIT DEFICIT
------ ------ ----------- -------------
<S> <C> <C> <C> <C>
Balance at March 31, 1996............... 5,600 $-- $(139,000) $(139,000)
Net loss................................ -- -- (50,000) (50,000)
----- --- --------- ---------
Balance at March 31, 1997............... 5,600 -- (189,000) (189,000)
Net loss................................ -- (71,000) (71,000)
----- --- --------- ---------
Balance at January 31, 1998............. 5,600 $-- $(260,000) $(260,000)
===== === ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-176
<PAGE>
QUEST INTERACTIVE MEDIA, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
TEN MONTHS ENDED
YEAR ENDED JANUARY 31,
MARCH 31, ------------------
1997 1997 1998
---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................... $(50,000) $(65,000) $(71,000)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization................. 5,000 5,000 8,000
Changes in current assets and liabilities:
Accounts receivable, net..................... (36,000) 8,000 (58,000)
Accounts payable............................. 30,000 20,000 21,000
Accrued liabilities.......................... 65,000 44,000 94,000
Unearned revenue............................. -- -- 42,000
Other current liabilities.................... -- -- (9,000)
-------- -------- --------
Net cash provided by operating activities... 14,000 12,000 27,000
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............. (18,000) (20,000) (25,000)
-------- -------- --------
Net cash used in investing activities....... (18,000) (20,000) (25,000)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of) note payable...... 7,000 10,000 (5,000)
-------- -------- --------
Net cash provided by (used in) financing ac-
tivities................................... 7,000 10,000 (5,000)
-------- -------- --------
Net increase (decrease) in cash and cash equiva-
lents.......................................... 3,000 2,000 (3,000)
Cash and cash equivalents at beginning of peri-
od............................................. -- -- 3,000
-------- -------- --------
Cash and cash equivalents at end of period...... $ 3,000 $ 2,000 $ --
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMA-
TION:
Interest paid.................................. $ 2,000 $ 1,000 $ 1,000
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-177
<PAGE>
QUEST INTERACTIVE MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
Quest Interactive Media, Inc., (the "Company") provides web site design and
maintenance, database design and management and software customization
services to clients in the United States, primarily in the Southeast. The
Company was incorporated in Tennessee on March 27, 1995.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue recognition
Service 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.
Unearned revenues represent the amount of cash received in advance of services
being performed.
Interim financial information
The accompanying interim financial statements for the ten months ended
January 31, 1997 are unaudited. In the opinion of management, the unaudited
interim financial statements have been prepared on the same basis as the
annual financial statements, and reflect all adjustments which, include only
normal recurring adjustments, necessary to present fairly the results of the
Company's operations and its cash flows for the ten months ended January 31,
1997. The financial data and other information disclosed in these notes to
financial statements related to this period are unaudited.
Concentration of credit risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist principally of cash and accounts
receivable. The Company places its cash in a checking account with a high
quality financial institution. The Company performs ongoing credit evaluations
of its customers' financial condition and, generally, requires no collateral
from its customers. The Company maintains an allowance for doubtful accounts
receivable based upon the expected collectibility of accounts receivable.
The following table summarizes the revenues from customers in excess of 10%
of the total revenues:
<TABLE>
<CAPTION>
TEN MONTHS
ENDED
YEAR ENDED JANUARY 31,
MARCH 31, -------------
1997 1997 1998
---------- ----- -----
(UNAUDITED)
<S> <C> <C> <C>
Customer A........................................ 28% 26% 38%
Customer B........................................ 26% 28% --
Customer C........................................ 10% 14% --
Customer D........................................ 11% -- --
</TABLE>
F-178
<PAGE>
QUEST INTERACTIVE MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the receivable balances as a percentage of
total accounts receivable for the customers presented above:
<TABLE>
<CAPTION>
TEN MONTHS ENDED
YEAR ENDED JANUARY 31,
MARCH 31, ------------------
1997 1997 1998
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Customer A.................................. 44% -- 5%
Customer D.................................. 14% -- --
</TABLE>
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 assets,
generally 4 to 8 years.
Advertising
Advertising costs are expensed as incurred, in accordance with Statement of
Position 93-7, "Reporting on Advertising Costs." Advertising expense was
$43,000, $3,000 (unaudited) and $3,000 for the ten months ended January 31,
1998 and 1997, and the year ended March 31, 1997, respectively.
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
MARCH 31, JANUARY 31,
1997 1998
--------- -----------
<S> <C> <C>
Accounts receivable, net:
Accounts receivable................................. $ 67,000 $130,000
Less: Allowance for doubtful accounts............... (2,000) (7,000)
-------- --------
$ 65,000 $123,000
======== ========
Property and equipment, net:
Office equipment.................................... $ 25,000 $ 50,000
Less: Accumulated depreciation...................... (10,000) (18,000)
-------- --------
$ 15,000 $ 32,000
======== ========
Accrued liabilities:
Payroll and related expenses........................ $179,000 $273,000
Taxes payable....................................... 10,000 10,000
-------- --------
$189,000 $283,000
======== ========
</TABLE>
NOTE 3--RELATED PARTY TRANSACTIONS:
On May 1, 1995, the Company entered into a loan agreement with a related
party shareholder to raise capital in the amount of $25,000. The principal
amount plus accrued interest is due in five annual installments of $5,000
each, commencing April 30, 1997, with the final payment due on April 30, 2001.
Interest accrues at a rate of 6% per annum. The note is secured by 5,600
shares of the Company's Common Stock.
NOTE 4--INCOME TAXES:
No provision for income taxes has been recognized for the ten months ended
January 31, 1998 and 1997 (unaudited) or the year ended March 31, 1997, as the
Company incurred net operating losses for income tax purposes and has no
carryback ability. Deferred income taxes were not significant at January 31,
1998 or March 31, 1997.
F-179
<PAGE>
QUEST INTERACTIVE MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5--BORROWINGS:
Notes payable consists of amounts payable to a related party shareholder
which are secured by 5,000 shares of Common Stock as follows:
<TABLE>
<CAPTION>
MARCH 31, JANUARY 31,
1997 1998
--------- -----------
<S> <C> <C>
6% note; principal and interest payable annually; ma-
tures April 30, 2001................................ $25,000 $20,000
Less: current portion................................ 5,000 5,000
------- -------
$20,000 $15,000
======= =======
</TABLE>
Principal payments under notes payable are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
MARCH 31,
-----------
<S> <C>
1998.............................................................. $ 5,000
1999.............................................................. 5,000
2000.............................................................. 5,000
2001.............................................................. 5,000
-------
Total........................................................... $20,000
=======
</TABLE>
NOTE 6--COMMITMENTS:
Leases
The Company leases office space and equipment under noncancelable operating
and capital leases with various expiration dates through April 30, 2000. Rent
expense for the ten months ended January 31, 1998 and 1997, and March 31, 1997
was $18,000, $9,000 (unaudited) and $10,000, respectively. The terms of the
facility lease provide for rental payments on a graduated scale. The Company
recognizes rent expense on a straight-line basis over the lease period, and
has accrued for rent expense incurred but not paid.
Future minimum lease payments under noncancelable operating leases as of
January 31, 1998, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED OPERATING
MARCH 31, LEASES
---------- ---------
<S> <C>
1998............................................................ $ 7,000
1999............................................................ 42,000
2000............................................................ 41,000
2001............................................................ 10,000
--------
Total minimum lease payments.................................. $100,000
========
</TABLE>
NOTE 7--COMMON STOCK:
The Company's Articles of Incorporation authorize the Company to issue
10,000 shares of no par value Common Stock. At January 31, 1998 and March 31,
1997, 5,600 shares were outstanding. All outstanding shares are held by an
officer of the Company.
NOTE 8--SUBSEQUENT EVENTS:
On March 27, 1998 the Company was acquired by USWeb Corporation ("USWeb")
whereby all of the Company's outstanding shares of Common Stock were exchanged
for 73,624 shares of USWeb Common Stock, at which time the Company became a
wholly owned subsidiary of USWeb.
F-180
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Ensemble Corporation
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Ensemble Corporation at December
31, 1997, and the results of its operations and its cash flows for the year 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 audit. We conducted our audit 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 audit provides a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
San Jose, California
March 27, 1998
F-181
<PAGE>
ENSEMBLE CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 536,000
Accounts receivable, net......................................... 1,291,000
Inventory........................................................ 17,000
Shareholder loan................................................. 58,000
Prepaid expenses and other current assets........................ 9,000
----------
Total current assets........................................... 1,911,000
Property and equipment, net........................................ 549,000
Other assets....................................................... 20,000
----------
$2,480,000
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable..................................................... $ 10,000
Accounts payable................................................. 133,000
Accrued liabilities and taxes payable............................ 245,000
Unearned revenues................................................ 73,000
Capital lease obligations, current portion....................... 171,000
----------
Total current liabilities...................................... 632,000
Long-term liabilities:
Deferred taxes liabilities....................................... 332,000
Capital lease obligation, non-current............................ 223,000
----------
Total liabilities.............................................. 1,187,000
----------
Shareholders' equity:
Common Stock: $.001 par value, 10,000,000 shares authorized,
2,625,000 shares issued and outstanding at December 31, 1997 3,000
Additional paid-in-capital....................................... 72,000
Retained earnings................................................ 1,218,000
----------
Total shareholders' equity..................................... 1,293,000
----------
$2,480,000
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-182
<PAGE>
ENSEMBLE CORPORATION
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Net revenues....................................................... $6,745,000
Cost of net revenues............................................... 4,408,000
----------
Gross profit..................................................... 2,337,000
----------
Operating expenses:
Marketing, sales and support..................................... 590,000
General and administrative....................................... 951,000
----------
Total operating expenses....................................... 1,541,000
----------
Income from operations............................................. 796,000
Interest income.................................................... 12,000
Interest expense................................................... (28,000)
----------
Income before income taxes......................................... 780,000
Provision for income taxes......................................... (298,000)
----------
Net income......................................................... $ 482,000
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-183
<PAGE>
ENSEMBLE CORPORATION
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ------ ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1996..................... 2,625,000 $3,000 $72,000 $ 736,000 $ 811,000
Net income................ 482,000 482,000
--------- ------ ------- ---------- ----------
Balance at December 31,
1997..................... 2,625,000 $3,000 $72,000 $1,218,000 $1,293,000
========= ====== ======= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-184
<PAGE>
ENSEMBLE CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $ 482,000
Adjustments to reconcile net loss to net cash provided by operat-
ing activities:
Depreciation and amortization................................... 204,000
Changes in assets and liabilities:
Accounts receivable............................................ (714,000)
Inventory...................................................... (9,000)
Prepaid expenses and other current assets...................... 78,000
Other assets................................................... (2,000)
Accounts payable............................................... (32,000)
Accrued liabilities and other payables......................... (53,000)
Unearned revenues.............................................. 73,000
Deferred tax liabilities....................................... 215,000
---------
Net cash provided by operating activities..................... 242,000
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............................... (128,000)
---------
Net cash used in investing activities......................... (128,000)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of note payable........................................ (11,000)
Repayment of shareholder......................................... 2,000
Principal payment on capital lease obligation.................... (134,000)
---------
Net cash used in financing activities......................... (143,000)
---------
Net decrease in cash and cash equivalents......................... (29,000)
Cash and cash equivalents at beginning of year.................... 564,000
---------
Cash and cash equivalents at end of year.......................... $ 535,000
=========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest........................................... $ 24,000
=========
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING ACTIVITIES:
Acquisition of equipment under capitalized leases................ $ 246,000
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-185
<PAGE>
ENSEMBLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
Ensemble Corporation (the "Company") was incorporated in 1991 in Texas. The
Company provides technology services in the South Central United States in the
areas of client/server applications, Internet/Intranet design and
implementations, back-office network and infrastructure implementations and
business technology planning.
The Company also recognizes revenues from Internet access, third-parties
software and hardware purchased and resold to clients. However, revenues from
such activities have been immaterial to date.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue recognition
The Company derives most of its revenues from consulting agreements. Service
revenues from fixed-price agreements are recognized over the period of each
engagement under the percentage-of-completion method using labor hours
incurred as a measure of progress towards completion. Provisions for contract
adjustments and losses are recorded in the period such items are identified.
Revenues from time-and-materials agreements are recognized and billed as the
services are provided. Unearned revenues represent the amount of revenues
received in advance of services being performed.
Cash equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The Company
deposits cash and cash equivalents with high credit quality financial
institutions.
Concentration of credit risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, cash equivalents and accounts
receivable. The Company limits its exposure to credit loss by depositing its
cash and cash equivalents with high credit quality financial institutions. The
Company's accounts receivable are derived from revenue earned from customers
located in the U.S. The Company performs ongoing credit evaluations of its
customers' financial condition and, generally, requires no collateral. The
Company maintains an allowance for doubtful accounts receivable based upon
their expected collectibility. The following customers accounted for more than
10% of total accounts receivable at December 31, 1997:
<TABLE>
<S> <C>
Company A................................................................ 19%
Company B................................................................ 13%
Company C................................................................ 11%
</TABLE>
Customer D accounted for 17% of total net revenues for the year ended
December 31, 1997.
The Company has also established a number of strategic relationships with
leading software companies including Microsoft and Borland. The loss of any of
these strategic relationships would deprive the Company of the opportunity to
gain early access to leading-edge technology and to cross-sell additional
services.
F-186
<PAGE>
ENSEMBLE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Inventory
Inventory includes hardware and software to be resold and is stated at the
lower of cost or market, cost being determined using the first-in, first-out
(FIFO) method. A reserve for excess or obsolete inventory is recorded when
quantities on hand exceed customer's requirements.
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB No. 25") and complies with
the disclosure provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation ("SFAS No. 123").
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 assets,
generally three years.
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 is
based on provisions of the enacted tax law; the effects of future changes in
tax laws or rate 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.
Fair value of financial instruments
The Company's financial instruments, including accounts receivable,
shareholder loan, notes and accounts payable, and capital lease obligations
have carrying amounts which approximate fair value due to the relatively short
maturity of these instruments.
NOTE 2--PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
PROPERTY AND EQUIPMENT, NET:
Computer equipment............................................ $ 157,000
Furniture and fixtures........................................ 177,000
Property and equipment acquired under capital leases.......... 607,000
Leasehold improvements........................................ 38,000
---------
979,000
Less: Accumulated depreciation and amortization............... (430,000)
---------
$ 549,000
=========
</TABLE>
F-187
<PAGE>
ENSEMBLE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3--RELATED PARTY TRANSACTIONS:
The Company internally developed certain computer game software beginning in
1994 through April 1996. In February 1996, a license agreement was executed
between the Company and Ensemble Studios Corporation, an affiliate of the
Company, for the exclusive use of the subject software by Ensemble Studios
Corporation. The entire fee of $265,000 received under this agreement was
recorded as revenue in 1996. In addition, during the year ended December 31,
1997, there were employees of Ensemble Studios Corporation who were on the
Company's payroll. The related expenses for these employees were reimbursed by
Ensemble Studios Corporation. Effective September 1997, these employees were
transferred to the payroll of Ensemble Studios Corporation.
In August 1996, the Company issued loans to two shareholders for $29,000
each. Interest is charged on the outstanding balance at 8% per annum and total
accrued interest for the year ended December 31, 1997 was $3,000. The maturity
date for these loans is August 1998. Under the Stock Purchase Agreement, dated
August 1996, both shareholders were issued 162,500 shares of Common Stock in
lieu of cash.
NOTE 4--INCOME TAXES:
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Current tax expense:
Federal....................................................... $ 73,000
State......................................................... 10,000
--------
83,000
--------
Deferred tax expense:
Federal....................................................... 189,000
State......................................................... 26,000
--------
215,000
--------
$298,000
========
</TABLE>
Deferred tax liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Depreciation.................................................... $ 3,000
Reserves and accruals........................................... 299,000
--------
$302,000
========
</TABLE>
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory income tax rate to pre-
tax income as follows:
<TABLE>
<S> <C>
Federal statutory rate................................................. 34.0%
State tax, net of federal impact....................................... 3.0%
Other.................................................................. 1.2%
-----
38.2%
=====
</TABLE>
F-188
<PAGE>
ENSEMBLE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5--BORROWINGS:
Line of credit
In January 1997, the Company entered into a line-of-credit agreement with a
bank, under which the bank committed to loan the Company up to $500,000.
Borrowings under the line bear interest at 1.5% over the bank's prime rate,
and are secured by eligible accounts receivable, as defined in the agreement.
The line of credit expired on January 6, 1998. As of December 31, 1997, there
is no balance outstanding under the line of credit.
Note payable
At December 31, 1997, the Company has a note payable to a bank which is
secured by computer equipment. The note bears interest at 2.0% over the bank's
prime rate and matures on January 2, 1999.
NOTE 6--COMMITMENTS:
Leases
The Company leases office space and equipment under noncancelable operating
and capital leases with various expiration dates through 2005. Rent expense
for the year ended December 31, 1997 was $325,000. The terms of the facility
lease provide for rental payments on a graduated scale. The Company recognizes
rent expense on a straight-line basis over the lease period, and has accrued
for rent expense incurred but not paid.
Future minimum lease payments under noncancelable operating and capital
leases, including lease commitments entered into subsequent to December 31,
1997, are as follows:
<TABLE>
<CAPTION>
YEARS ENDED CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
------------ -------- ----------
<S> <C> <C>
1998.................................................... $239,000 $ 331,000
1999.................................................... 150,000 458,000
2000.................................................... 59,000 532,000
2001.................................................... 23,000 578,000
2002.................................................... 7,000 605,000
Thereafter.............................................. -- 1,419,000
-------- ----------
Total minimum lease payments............................ 478,000 $3,923,000
==========
Less amount representing interest....................... (84,000)
--------
Present value of capitalized lease obligations.......... 394,000
Less current portion.................................... (171,000)
--------
Long term portion of capitalized lease obligations...... $223,000
========
</TABLE>
NOTE 7--STOCK OPTIONS:
In 1996, the Company adopted the Ensemble Corporation, Inc. Stock Option
Plan (the "Plan"). The Plan provides for the granting of stock options to
employees and consultants of the Company. Options granted under the Plan are
nonqualified stock options.
The plan is administered by the Board of Directors of the Company. Options
are granted at the discretion of the Board of Directors at option prices not
less than fair market value, as determined by the Board of Directors, at the
date of grant.
F-189
<PAGE>
ENSEMBLE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation." The information set forth below represents pro
forma net income as if the Company had accounted for its employee stock
options under the fair value method as prescribed by SFAS No. 123.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1997: no dividend yield, expected volatility of
0%, a risk-free interest rate of 6% and an expected life of five years for
each nonqualified stock option.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The pro
forma information for the Company is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Net income:
As reported................................................... $482,149
========
Pro forma..................................................... $463,319
========
</TABLE>
Stock options activity is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------- --------
<S> <C> <C>
Outstanding at December 31, 1996............................ -- --
Granted................................................... 185,446 $1.56
Exercised................................................. -- --
Canceled.................................................. -- --
-------
Outstanding at December 31, 1997............................ 185,446 $1.56
=======
</TABLE>
The following table summarizes information about stock options outstanding
and exercisable under the Plan as of December 31, 1997.
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
----------- -----------
<S> <C> <C>
Number of options................................... 185,446 46,362
Exercise price...................................... $ 1.56 $ 1.56
Weighted average continuing contractual life in
years.............................................. 4 4
Weighted average exercise price..................... $ 1.56 $ 1.56
</TABLE>
NOTE 8--EMPLOYEE BENEFIT PLANS:
The Company sponsors a 401(k) defined contribution plan covering all
employees. Contributions made by the Company are determined annually by the
Board of Directors. No employer contributions were made under this plan as of
December 31, 1997.
NOTE 9--SUBSEQUENT EVENTS:
The Company has renegotiated its lease agreements for office space effective
March 31, 1998. The future minimum lease payments under these agreements are
included in Note 6.
On March 27, 1998, the Company was acquired by USWeb Corporation ("USWeb")
whereby all of the Company's outstanding shares of Common Stock were exchanged
for 543,678 shares of USWeb Common Stock, at which time the Company became a
wholly owned subsidiary of USWeb.
F-190
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Ikonic Interactive, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' deficit and of cash flows present fairly, in all
material respects, the financial position of Ikonic Interactive, Inc. at
October 31, 1997 and January 31, 1998 and the results of their operations and
their cash flows for the year ended October 31, 1997 and the three months
ended January 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 audit 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 audit provides a reasonable basis
for the opinion expressed above.
Price Waterhouse LLP
San Jose, California
April 15, 1998
F-191
<PAGE>
IKONIC INTERACTIVE, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1997 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 454,000 $ 97,000
Accounts receivable................................ 521,000 1,078,000
Costs in excess of billings........................ 168,000 267,000
Other current assets............................... 12,000 19,000
----------- -----------
Total current assets............................. 1,155,000 1,461,000
Property and equipment, net.......................... 829,000 736,000
Other assets......................................... 94,000 94,000
----------- -----------
$ 2,078,000 $ 2,291,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable................................... $ 273,000 $ 195,000
Accrued expenses................................... 385,000 256,000
Deferred revenue................................... 96,000 521,000
Capital lease obligations, current portion......... 273,000 269,000
Loans payable...................................... 575,000 575,000
----------- -----------
Total current liabilities........................ 1,602,000 1,816,000
Capital lease obligations, long-term portion......... 206,000 148,000
Other liabilities.................................... 88,000 88,000
----------- -----------
1,896,000 2,052,000
----------- -----------
Commitments (Note 5)
Mandatorily Redeemable Convertible Preferred Stock... 3,517,000 3,587,000
----------- -----------
Shareholders' deficit:
Common stock, no par value; 50,000,000 shares au-
thorized; 10,917,800 and 10,922,800 shares issued
and outstanding................................... 257,000 258,000
Accretion of Preferred Stock to redemption value... (528,000) (598,000)
Accumulated deficit................................ (3,064,000) (3,008,000)
----------- -----------
Total shareholders' deficit...................... (3,335,000) (3,348,000)
----------- -----------
$ 2,078,000 $ 2,291,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-192
<PAGE>
IKONIC INTERACTIVE, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JANUARY 31,
OCTOBER 31, ----------------------
1997 1997 1998
----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Revenues................................... $10,236,000 $2,283,000 $1,942,000
Cost of revenues........................... 5,915,000 1,257,000 942,000
----------- ---------- ----------
Gross profit............................. 4,321,000 1,026,000 1,000,000
----------- ---------- ----------
Operating expenses:
General and administrative............... 2,588,000 538,000 507,000
Marketing, sales and support............. 1,989,000 400,000 359,000
Research and development................. 149,000 21,000 45,000
----------- ---------- ----------
Total operating expenses............... 4,726,000 959,000 911,000
----------- ---------- ----------
Net income (loss) from operations.......... (405,000) 67,000 89,000
Interest expense, net...................... 132,000 34,000 33,000
----------- ---------- ----------
Net income (loss).......................... $ (537,000) $ 33,000 $ 56,000
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-193
<PAGE>
IKONIC INTERACTIVE, INC.
STATEMENT OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
ACCRETION OF
PREFERRED
COMMON STOCK STOCK TO TOTAL
------------------- REDEMPTION ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT VALUE DEFICIT DEFICIT
---------- -------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at October 31,
1996................... 10,908,250 $254,000 $(267,000) $(2,527,000) $(2,540,000)
Accretion of Preferred
Stock to redemption
value.................. -- -- (261,000) -- (261,000)
Issuance of Common
Stock.................. 9,550 3,000 -- -- 3,000
Net loss................ -- -- -- (537,000) (537,000)
---------- -------- --------- ----------- -----------
Balance at October 31,
1997................... 10,917,800 257,000 (528,000) (3,064,000) (3,335,000)
Accretion of Preferred
Stock to redemption
value.................. -- -- (70,000) -- (70,000)
Issuance of Common
Stock.................. 5,000 1,000 -- -- 1,000
Net income.............. -- -- -- 56,000 56,000
---------- -------- --------- ----------- -----------
Balance at January 31,
1998................... 10,922,800 $258,000 $(598,000) $(3,008,000) $(3,348,000)
========== ======== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-194
<PAGE>
IKONIC INTERACTIVE, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JANUARY 31,
OCTOBER 31, ---------------------
1997 1997 1998
----------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................... $(537,000) $ 33,000 $ 56,000
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operat-
ing activities:
Depreciation.............................. 476,000 123,000 112,000
Changes in assets and liabilities:
Accounts receivable...................... 608,000 310,000 (557,000)
Costs in excess of billings.............. 63,000 122,000 (99,000)
Other current assets..................... 32,000 (70,000) (7,000)
Accounts payable......................... (319,000) (255,000) (78,000)
Accrued expenses......................... 342,000 (52,000) (129,000)
Deferred revenue......................... (198,000) 168,000 425,000
Other assets............................. (15,000) (33,000) --
Other liabilities........................ 32,000 -- --
--------- --------- ---------
Net cash provided by (used in) operating
activities............................. 484,000 346,000 (277,000)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment...... (203,000) (6,000) (19,000)
--------- --------- ---------
Net cash used in investing activities... (203,000) (6,000) (19,000)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obliga-
tions..................................... (178,000) (60,000) (62,000)
Borrowings under line of credit............ 309,000 14,000 --
Proceeds from issuance of Common Stock..... 3,000 -- 1,000
--------- --------- ---------
Net cash provided by (used in) financing
activities............................. 134,000 (46,000) (61,000)
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents................................ 415,000 294,000 (357,000)
Cash and cash equivalents, beginning of pe-
riod....................................... 39,000 39,000 454,000
--------- --------- ---------
Cash and cash equivalents, end of period.... $ 454,000 $ 333,000 $ 97,000
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFOR-
MATION:
Interest paid.............................. $ 142,000 $ 37,000 $ 35,000
========= ========= =========
Accretion of Preferred Stock to redemption
value..................................... $ 261,000 $ 65,000 $ 70,000
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-195
<PAGE>
IKONIC INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
Ikonic Interactive, Inc. (the "Company"), was incorporated in California as
Destinations Video, Inc. in September 1985 and was renamed Ikonic Interactive,
Inc. in May 1994. The Company provides Internet development services. The
Company's activities to date have consisted of user interface design, content
creation, software development and business/technical consulting to customers
located in North America.
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, as well as revenues and expenses reported for the periods
presented. The Company regularly evaluates these estimates, and while actual
results may differ, management believes that these estimates are reasonable.
Revenue recognition
Revenue on long-term fixed-price contracts is generally recorded using the
percentage-of-completion method. Under the percentage-of-completion method,
revenue on contracts is recognized based on labor hours incurred as the
measure towards completion. Earned but unbilled revenues are classified under
current assets as costs in excess of billings. Billings in excess of revenues
recognized are classified under current liabilities as deferred revenue.
Provisions for losses are recognized on uncompleted contracts when they become
known. Revisions in costs and profit estimates are reflected in the accounting
period in which the facts which require the revisions become known. Under the
time-and-materials contracts, revenue is recognized based on agreed-upon
individual hourly rates for time incurred on the project during the period
plus any materials used and charged against the project. Sales of other
services are recorded as revenue when such services are rendered.
Cash and cash equivalents
Cash and cash equivalents consist of cash and investments in a money market
fund maintained at one financial institution. The Company considers all highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents.
Fair value of financial instruments
The carrying amounts for cash, accounts receivable, accounts payable,
accrued liabilities and loans payable approximate their respective fair values
because of the short term maturity of these items. The carrying value of the
Company's notes payable approximates fair market value.
Concentration of credit risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents
and trade accounts receivable. The Company places its cash primarily in
checking and money market accounts with high quality financial institutions.
F-196
<PAGE>
IKONIC INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company performs ongoing credit evaluations of its customers' financial
condition. The Company has not experienced significant credit losses to date.
The following customers accounted for 10% or more of the Company's total
revenues or accounts receivable for the period indicated:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED JANUARY 31,
OCTOBER 31, ---------------
1997 1997 1998
----------- ------ ------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Customer A.................................... 17% 17% --
Customer B.................................... 10% 13% --
Customer C.................................... 10% -- --
Customer D.................................... -- 16% --
Customer E.................................... -- 15% --
Customer F.................................... -- 12% --
Customer G.................................... -- 11% --
Customer H.................................... -- -- 11%
Customer I.................................... -- -- 10%
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1997 1998
----------- -----------
<S> <C> <C>
Accounts receivable:
Customer C......................................... 11% --
Customer E......................................... 13% 16%
Customer I......................................... -- 19%
</TABLE>
Property and equipment
Property and equipment are recorded at cost. Depreciation is computed on the
straight-line basis over the estimated useful lives of the respective assets
which range from three to seven years.
Income taxes
The Company accounts for income taxes using the asset and liability method.
Under the asset and liability method, deferred income tax assets and
liabilities are determined based on the differences between the financial
reporting and tax bases of assets and liabilities, and are measured using the
currently enacted tax rates and laws, as well as the expected future tax
benefit to be derived from tax loss and tax credit carryforwards. Valuation
allowances are established for deferred tax assets when it is considered more
likely than not that some portion or all of the deferred tax assets will not
be realized.
Stock compensation
The Company accounts for its stock-based compensation plans in accordance
with provisions of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and complies with the disclosure provisions of
Statement of Financial Accounting Standard No. 123, "Accounting for Stock-
Based Compensation," ("FAS 123"). If the accounting recognition provisions of
FAS 123 had been adopted, the effect on the Company's reported net income
(loss) would have been immaterial.
Interim financial information
The accompanying interim financial statements for the three months ended
January 31, 1997 are unaudited. In the opinion of management, the unaudited
interim financial statements have been prepared on
F-197
<PAGE>
IKONIC INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the same basis as the annual financial statements, and reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly the results of the Company's operations and its cash flows for
the three months ended January 31, 1997. The financial data and other
information disclosed in these notes to financial statements related to this
period are unaudited.
NOTE 2--PROPERTY AND EQUIPMENT:
The components of property and equipment are as follows:
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1997 1998
----------- -----------
<S> <C> <C>
Computer hardware and software..................... $1,287,000 $1,299,000
Furniture and fixtures............................. 222,000 222,000
Equipment.......................................... 260,000 267,000
---------- ----------
1,769,000 1,788,000
Less: Accumulated depreciation..................... (940,000) (1,052,000)
---------- ----------
$ 829,000 $ 736,000
========== ==========
</TABLE>
NOTE 3--INCOME TAXES:
No provision (benefit) for income taxes has been recognized for the year
ended October 31, 1997 and three months ended January 31, 1997 (unaudited) and
1998, as the Company incurred net losses for income tax purposes and has no
carryback potential.
Deferred tax assets of approximately $858,000 at January 31, 1998, consist
primarily of federal and state net operating loss carryforwards. Based on 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 deferred tax assets such that a full
valuation allowance has been provided.
At January 31, 1998, the Company had federal and state net operating loss
carryforwards of approximately $774,000 and $84,000, respectively, available
to reduce future taxable income, which expire in varying amounts through 2013.
The Company's ability to utilizes 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 stockholders
during any three-year period would result in certain limitations on the
Company's ability to utilize its net operating loss and credit carryforwards.
NOTE 4--LINE OF CREDIT
During 1996, the Company secured a credit agreement with a commercial
lending institution. The agreement allows the Company to borrow up to the
lesser of $750,000 or 75% of the Company's domestic accounts receivable plus
50% of foreign accounts receivable at the bank's prime lending rate plus 1%.
At January 31, 1998, the prime rate was 10%. The credit agreement is secured
by the assets of the Company. This agreements requires that the Company comply
with certain financial covenants including minimum tangible net worth and
minimum quick ratio.
As of January 31, 1998, the Company had drawn $575,000 on this credit
agreement. The outstanding balance under this line of credit was repaid by
USWeb Corporation ("USWeb") upon completion of its acquisition of the Company
(Note 9).
F-198
<PAGE>
IKONIC INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5--LEASES AND COMMITMENTS:
Capital lease obligations
The Company is obligated under various non-cancelable operating and capital
leases for office space and certain property and equipment which expire in
2001. Future minimum lease payments under these leases at January 31, 1998 are
as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
---------- --------
<S> <C> <C>
Year ending October 31,
1998.................................................. $ 320,000 $251,000
1999.................................................. 397,000 186,000
2000.................................................. 467,000 40,000
2001.................................................. 311,000 --
---------- --------
Total minimum payments................................ $1,495,000 477,000
==========
Less amount representing interest..................... (60,000)
--------
Present value of minimum lease obligations............ 417,000
Less current portion.................................. 269,000
--------
Lease obligation, long-term........................... $148,000
========
</TABLE>
Rent expense totaled $353,000, $88,000 and $103,000 for the year ended
October 31, 1997 and for three months ended January 31, 1997 (unaudited) and
1998, respectively. At October 31, 1997 and January 31, 1998, fixed assets
recorded by the Company under capital leases totaled $909,000 and $916,000,
respectively.
NOTE 6--MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
The Company has authorized 15,000,000 shares of Mandatorily Redeemable
Convertible Preferred Stock ("Preferred Stock"); 5,000,000 shares are
designated Series A Preferred Stock and 5,000,000 shares are designated Series
B Preferred Stock. As of January 31, 1998, there were 2,694,295 shares of
Series A Preferred Stock and 3,665,960 shares of Series B Preferred Stock
issued and outstanding.
Unless the consent of a majority of the holders of the outstanding shares of
Preferred Stock is obtained, the Company may not pay or declare a cash
dividend, nor may any other distribution be made on any equity security of the
Company.
Holders of Preferred Stock receive one vote for each common share into which
such shares of Preferred Stock are convertible. Each share of Series A and
Series B Preferred Stock has a liquidation preference equal to its original
issue price plus an amount equal to 8% of the original issue price for such
share of Preferred Stock compounded per annum from the date of issue plus any
declared but unpaid dividends. Thereafter, the holders of the Common Stock of
the Company receive all remaining assets of the Company. On April 15, 1998,
the Company reached an agreement to be acquired (Note 9). At that time, the
Company's Mandatorily Redeemable Convertible Preferred Stock was converted
into 6,360,255 shares of Common Stock.
NOTE 7--STOCK OPTION PLAN:
In 1993, the Company adopted the 1993 Equity Incentive Plan (the "Plan").
The Plan provides for the issuance of stock options to purchase 3,166,095
shares of the Company's Common Stock to employees, directors of and
consultants to the Company. The Plan authorizes the grant of incentive stock
options,
F-199
<PAGE>
IKONIC INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
nonstatutory stock options, stock bonuses, and sales of restricted stock. The
exercise price of incentive stock options may not be less than the fair value
of the stock at the date of the grant, as determined by the Board of
Directors. The exercise price for nonstatutory stock options, stock bonuses,
and sale of restricted stock may not be less than 85% of the fair market value
of the stock at the date of the grant, as determined by the Board of
Directors. The vesting provisions of individual options may vary, but at a
minimum provide for vesting at the rate of 20% per year over five years from
the date the stock option is granted. The term of the Plan is for ten years
unless terminated sooner by the Board of Directors as provided for in the Plan
agreement.
The following table summarizes the option activity for the year ended
October 31, 1997 and the three months ended January 31, 1998.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
OCTOBER 31, 1997 JANUARY 31, 1998
--------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
----------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning
of the period.......... 2,149,245 $0.23 2,494,800 $0.25
Granted................. 1,499,500 $0.30 29,500 $0.50
Exercised............... (9,550) $0.30 (5,000) $0.30
Canceled................ (1,144,395) $0.28 (407,250) $0.28
----------- ----------
Outstanding at end of
period................. 2,494,800 $0.25 2,112,050 $0.25
----------- ----------
Weighted-average minimum
value of options grant-
ed..................... $ 0.06 $ 0.11
=========== ==========
</TABLE>
The weighted average remaining contractual life of options outstanding at
January 31, 1998 was 8.8 years. At January 31, 1998, 898,508 options were
exercisable at exercise prices ranging from $0.20-0.30.
NOTE 8--SAVINGS PLAN:
In 1994, the Company began sponsoring a defined contribution 401(k) plan
(the "401(k) Plan") which covers substantially all of its employees after they
have completed six months of service. Under the 401(k) Plan, the Company makes
discretionary matching contributions equal to a percentage of the salary
reduction elected by the employee. The percentage matching contribution is
determined each year by the Company, not to exceed the permissible legal
maximum. During 1997, the Company made no contributions to the 401(k) Plan.
NOTE 9--SUBSEQUENT EVENTS
On April 15, 1998, the Company reached an agreement with USWeb whereby USWeb
will acquire all of the Company's outstanding Common Stock in exchange for
498,457 shares of Common Stock of USWeb.
F-200
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other individual has been authorized to give any
information or make any representations not contained in this Prospectus in
connection with the offering covered by this Prospectus. If given or made, such
information or representations must not be relied upon as having been
authorized by the Company. This Prospectus does not constitute an offer to
sell, or a solicitation of any offer to buy, the Common Stock in any
jurisdiction where, or to any person to whom, it is unlawful to make such offer
or solicitation. Except where otherwise indicated, this Prospectus speaks as of
the effective date of the Registration Statement. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
an implication that there has not been any change in the facts set forth in
this Prospectus or in the affairs of the Company since the date hereof.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Information.................................................... 2
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 5
Forward Looking Statements................................................ 14
Use of Proceeds........................................................... 14
Market Information........................................................ 14
Dividend Policy........................................................... 14
Capitalization............................................................ 15
Selected Consolidated Financial Data...................................... 16
Pro Forma Selected Consolidated Financial Data............................ 18
Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................... 19
Business.................................................................. 30
Management................................................................ 44
Certain Transactions...................................................... 54
Principal Stockholders.................................................... 56
Description of Capital Stock.............................................. 58
Plan of Distribution...................................................... 61
Restrictions on Resale.................................................... 61
Legal Matters............................................................. 61
Experts................................................................... 61
Index to Consolidated Financial Statements and Pro Forma Consolidated Fi-
nancial Information...................................................... F-1
</TABLE>
----------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
16,666,667 SHARES
[LOGO OF USWEB]
COMMON STOCK
----------------
PROSPECTUS
----------------
MAY 4, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Reference is made to the Certificate of Incorporation of the Registrant to
be effective upon the completion of this offering, filed herewith as Exhibit
3.3; the Bylaws of the Registrant, filed herewith as Exhibit 3.5; Section 145
of the Delaware General Corporation Law; and the form of indemnification
agreement filed herewith as Exhibit 10.1 which, among other things, and
subject to certain conditions, authorize the Registrant to indemnify, or
indemnify by their terms, as the case may be, the directors and officers of
the Registrant against certain liabilities and expenses incurred by such
persons in connection with claims made by reason of their being such a
director or officer.
The Registrant intends to obtain directors and officers insurance providing
indemnification for certain of the Registrant's directors, officers,
affiliates, partners or employees for certain liabilities.
The indemnification provisions in the Bylaws, and the indemnification
agreements entered into between the Registrant and its directors and executive
officers, may be sufficiently broad to permit indemnification of the
Registrant's officers and directors for liabilities arising under the 1933
Act.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
EXHIBIT
DOCUMENT NUMBER
-------- -------
<S> <C>
Amended and Restated Certificate of Incorporation...................... 3.3
Bylaws of Registrant (Delaware)........................................ 3.5
Form of Indemnification Agreement entered into by the Registrant with
each of its directors and executive officers.......................... 10.1
</TABLE>
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
3.1+ Amended and Restated Certificate of Incorporation of the Registrant.
3.2+ Bylaws of the Registrant.
4.1+ Form of Registrant's Common Stock Certificate.
4.2+ Amended and Restated Investors' Rights Agreement dated May 2, 1997
among the Registrant and the other parties named therein.
4.3+ Form of Registrant's Series A Preferred Stock Purchase Warrant.
4.4+ Form of Registrant's Series C Preferred Stock Purchase Warrant.
4.5+ Form of Registrant's Common Stock Purchase Warrant.
4.6+ Form of Registrant's Signing Warrant.
4.7+ Form of Registrant's AGR Warrant.
4.8+ Form of Amended and Restated Investor Rights Agreement dated November
7, 1997 among the Registrant and the other parties named therein.
5.1** Opinion of Wilson Sonsini Goodrich & Rosati regarding legality of the
securities being issued.
10.1+ Form of Indemnification Agreement entered into by the Registrant with
each of its directors and executive officers.
10.2+ 1996 Stock Option Plan and related agreements.
10.3+ 1996 Equity Compensation Plan and related agreements.
10.4+ 1997 Acquisition Stock Option Plan and related agreements.
10.5+ 1997 Employee Stock Purchase Plan.
10.6+ Form of Restricted Stock Purchase Agreement between the Registrant and
certain executive officers.
10.7+ Management Continuity Agreement between the Registrant and Joseph P.
Firmage.
10.8+ Management Continuity Agreement between the Registrant and Tobin Co-
rey.
10.9+ Management Continuity Agreement between the Registrant and Sheldon
Laube.
10.10+ Management Continuity Agreement between the Registrant and James J.
Heffernan.
10.11+ Form of Affiliate Agreement.
10.12+ Loan and Security Agreement dated September 29, 1997 between the Reg-
istrant and Silicon Valley Bank.
10.13+ Amendment, dated November 5, 1997 to Loan and Security Agreement dated
September 29, 1997 between the Registrant and Silicon Valley Bank.
10.14+ Intel-USWeb Relationship Agreement dated as of November 7, 1997 be-
tween the Registrant and Microsoft Corporation.
10.15** Lease Agreement dated December 16, 1996 by and between the Company and
LAKESIDE DRIVE, INC. for 2880 Lakeside Drive, Santa Clara, CA 95054.
10.16** First Amendment to Lease Agreement dated July 23, 1997 by and between
the Company and LAKESIDE DRIVE, INC. for 2880 Lakeside Drive, Santa
Clara, CA 95054.
11.1 Statement of computation of pro forma net loss per share.
21.1+ Subsidiaries of the Registrant.
23.1** Consent of Wilson Sonsini Goodrich & Rosati (included in Exhibit 5.1).
23.2 Consent of Price Waterhouse LLP, Independent Accountants (see page II-
6).
24.1** Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ---------------------
+ Incorporated by reference from the Company's Registration Statement on Form
S-1 (No. 333-36827).
+ Incorporated by reference from the Company's Proxy Statement on Schedule 14A
filed on April 28, 1998.
** Previously filed.
II-2
<PAGE>
(b) Financial Statement Schedules
None.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
ITEM 22. UNDERTAKINGS
The undersigned Registrant undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933 (the "Securities Act");
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent,
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information in the
Registration Statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each post-effective amendment shall be deemed a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That, prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the application
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
(5) That every prospectus (i) that is filed pursuant to paragraph (4)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(6) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(7) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
II-3
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions referenced in Item 20 of this
Registration Statement or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered hereunder, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS POST-EFFECTIVE AMENDMENT NO. 3 TO THE REGISTRATION
STATEMENT ON FORM S-4 TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED, IN THE CITY OF SANTA CLARA, STATE OF CALIFORNIA, ON THIS 4TH
DAY OF MAY 1998.
USWEB CORPORATION
/s/ Joseph Firmage
By: _________________________________
JOSEPH FIRMAGE
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURES TITLE DATE
Chairman of the
/s/ Joseph Firmage Board and Chief May 4, 1998
- ------------------------------------- Executive Officer
JOSEPH FIRMAGE (Principal
Executive Officer)
Executive Vice
* President, Chief
- ------------------------------------- Financial Officer,
JAMES HEFFERNAN Secretary and
Director (Principal
Financial and
Accounting Officer)
* Director
- -------------------------------------
JEFFREY BALLOWE
* Director
- -------------------------------------
ROBERT HOFF
* Director
- -------------------------------------
GARY RIESCHEL
* Director
- -------------------------------------
BARRY RUBENSTEIN
*By:
/s/ Joseph Firmage May 4, 1998
----------------------------------
JOSEPH FIRMAGE
ATTORNEY-IN-FACT
II-5
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 (No. 333-38351) of our reports dated
January 20, 1998 relating to the consolidated financial statements of USWeb
Corporation, September 17, 1997 related to the financial statements of USWeb
San Francisco, September 12, 1997 related to the financial statements of USWeb
Milwaukee, September 17, 1997 related to the financial statements of USWeb LA
Metro, September 18, 1997 related to the financial statements of USWeb
Atlanta, September 18, 1997 related to the financial statements of USWeb DC,
September 18, 1997 related to the financial statements of USWeb Pittsburgh,
October 31, 1997 related to the financial statements of USWeb Chicago Metro,
October 31, 1997 related to the financial statements of USWeb Hollywood
(formerly KandH, Inc.), October 29, 1997 related to the financial statements
of USWeb Hollywood (formerly DreamMedia, Inc.), October 17, 1997 related to
the financial statements of USWeb Marin, October 31, 1997 related to the
financial statements of USWeb Long Island, October 24, 1997 related to the
financial statements of USWeb Detroit, October 15, 1997 related to the
financial statements of USWeb San Mateo, October 31, 1997 related to the
financial statements of USWeb LA Central, November 4, 1997 related to the
financial statements of USWeb Houston, November 5, 1997 related to the
financial statements of USWeb New York Central (formerly Reach Networks,
Inc.), March 24, 1998 related to the financial statements of
Inter.logic.studios, inc., March 27, 1998 related to the financial statements
of Quest Interactive Media, Inc., March 27, 1998 related to the financial
statements of Ensemble Corporation, April 15, 1998 related to the financial
statements of Ikonic Interactive, Inc., which appear in such Prospectus. We
also consent to the reference to us under the heading "Experts" in such
Prospectus.
Price Waterhouse LLP
San Jose, California
May 1, 1998
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
<C> <S> <C>
3.1+ Amended and Restated Certificate of Incorporation of the
Registrant.
3.2+ Bylaws of the Registrant.
4.1+ Form of Registrant's Common Stock Certificate.
4.2+ Amended and Restated Investors' Rights Agreement dated
May 2, 1997 among the Registrant and the other parties
named therein.
4.3+ Form of Registrant's Series A Preferred Stock Purchase
Warrant.
4.4+ Form of Registrant's Series C Preferred Stock Purchase
Warrant.
4.5+ Form of Registrant's Common Stock Purchase Warrant.
4.6+ Form of Registrant's Signing Warrant.
4.7+ Form of Registrant's AGR Warrant.
4.8+ Form of Amended and Restated Investor Rights Agreement
dated November 7, 1997 among the Registrant and the other
parties named therein.
5.1** Opinion of Wilson Sonsini Goodrich & Rosati regarding le-
gality of the securities being issued.
10.1+ Form of Indemnification Agreement entered into by the
Registrant with each of its directors and executive offi-
cers.
10.2+ 1996 Stock Option Plan and related agreements.
10.3+ 1996 Equity Compensation Plan and related agreements.
10.4+ 1997 Acquisition Stock Option Plan and related agree-
ments.
10.5+ 1997 Employee Stock Purchase Plan.
10.6+ Form of Restricted Stock Purchase Agreement between the
Registrant and certain executive officers.
10.7+ Management Continuity Agreement between the Registrant
and Joseph P. Firmage.
10.8+ Management Continuity Agreement between the Registrant
and Tobin Corey.
10.9+ Management Continuity Agreement between the Registrant
and Sheldon Laube.
10.10+ Management Continuity Agreement between the Registrant
and James J. Heffernan.
10.11+ Form of Affiliate Agreement.
10.12+ Loan and Security Agreement dated September 29, 1997 be-
tween the Registrant and Silicon Valley Bank.
10.13+ Amendment, dated November 5, 1997 to Loan and Security
Agreement dated September 29, 1997 between the Registrant
and Silicon Valley Bank.
10.14+ Intel-USWeb Relationship Agreement dated as of November
7, 1997 between the Registrant and Microsoft Corporation.
10.15** Lease Agreement dated December 16, 1996 by and between
the Company and LAKESIDE DRIVE, INC. for 2880 Lakeside
Drive, Santa Clara, CA 95054.
10.16** First Amendment to Lease Agreement dated July 23, 1997 by
and between the Company and LAKESIDE DRIVE, INC. for 2880
Lakeside Drive, Santa Clara, CA 95054.
11.1 Statement of computation of pro forma net loss per share.
21.1+ Subsidiaries of the Registrant.
23.1** Consent of Wilson Sonsini Goodrich & Rosati (included in
Exhibit 5.1).
23.2 Consent of Price Waterhouse LLP, Independent Accountants
(see page II-6).
24.1** Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ---------------------
+ Incorporated by reference from the Company's Registration Statement on Form
S-1 (No. 333-36827).
+ Incorporated by reference from the Company's Proxy Statement on Schedule 14A
filed on April 28, 1998.
** Previously filed.
<PAGE>
EXHIBIT 11.1
USWEB CORPORATION
CALCULATION OF NET LOSS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL (1) PRO FORMA (2)
--------------------------------------- -----------------------------------------
YEAR ENDED THREE MONTHS ENDED YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, MARCH 31,
------------------ ------------------- ------------------- --------------------
1996 1997 1997 1998 1996 1997 1997 1998
-------- -------- --------- --------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net loss................ $(13,808) $(58,336) $ (5,843) $ (16,360) $(57,069) $(118,832) $ (37,958) $ (17,283)
-------- -------- -------- --------- -------- --------- --------- ---------
Weighted average common
shares outstanding..... 1,334 6,814 2,910 27,995 4,725 9,694 7,631 28,755
Shares deemed
outstanding under stock
bonus arrangements for
employees of acquired
companies.............. - 498 5 1,446 1,450 2,769 1,151 4,770
-------- -------- -------- --------- -------- --------- --------- ---------
Total weighted average
common shares
outstanding............ 1,334 7,312 2,915 29,441 6,175 12,463 8,782 33,525
======== ======== ======== ========= ======== ========= ========= =========
Basic and diluted net
loss per share......... $ (10.35) $ (7.98) $ (2.00) $ (0.56) $ (9.24) $(9.53) $ (4.32) $ (0.57)
======== ======== ======== ========= ======== ========= ========= =========
</TABLE>
- ---------------------
(1) See computation of historical net loss per share in Note 4 to the Condensed
Consolidated Financial Statements.
(2) See computation of pro forma net loss per share in Note 1 to the Condensed
Consolidated Financial Statements.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR YEAR 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1996 JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1997 DEC-31-1996 MAR-31-1998 MAR-31-1997
<CASH> 44,145 3,220 14,186 0
<SECURITIES> 0 0 22,616 0
<RECEIVABLES> 8,722 137 15,698 0
<ALLOWANCES> 819 0 1,011 0
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 52,705 3,411 54,103 0
<PP&E> 7,929 1,347 10,708 0
<DEPRECIATION> 1,727 263 2,494 0
<TOTAL-ASSETS> 79,250 7,482 107,321 0
<CURRENT-LIABILITIES> 12,189 3,338 20,950 0
<BONDS> 0 0 0 0
29 2 0 0
0 16,200 0 0
<COMMON> 0 0 31 0
<OTHER-SE> 66,660 (12,494) 85,095 0
<TOTAL-LIABILITY-AND-EQUITY> 79,250 7,482 107,321 0
<SALES> 0 0 0 0
<TOTAL-REVENUES> 19,278 1,820 13,651 495
<CGS> 0 0 0 0
<TOTAL-COSTS> 17,182 208 10,725 297
<OTHER-EXPENSES> 56,589 15,577 19,774 6,048
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 76 58 50 0
<INCOME-PRETAX> (58,336) (13,808) (16,360) (5,843)
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> (58,336) (13,808) (16,360) (5,843)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (58,336) (13,808) (16,360) (5,843)
<EPS-PRIMARY> (4.78) (2.46) (0.56) (2.00)
<EPS-DILUTED> (4.78) (2.46) (0.56) (2.00)
</TABLE>
