<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended SEPTEMBER 30, 1998.
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____________ to
____________.
COMMISSION FILE NO. 000-23151
USWEB CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 87-0551650
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
2880 LAKESIDE DRIVE, SUITE 300
SANTA CLARA, CALIFORNIA 95054
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(408) 987-3200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [_] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
TITLE OF EACH CLASS OUTSTANDING AT NOVEMBER 16, 1998
------------------- ---------------------------------
Common Stock, $.001 par value 45,543,660
<PAGE>
USWEB CORPORATION
QUARTERLY REPORT ON FORM 10-Q/A
TABLE OF CONTENTS
QUARTER ENDED SEPTEMBER 30, 1998
Page No.
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PART I--FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
(Unaudited and Restated) 1
Condensed Consolidated Balance Sheet at September 30, 1998
and December 31, 1997 1
Condensed Consolidated Statement of Operations for the three
and nine months ended September 30, 1998 and 1997 2
Condensed Consolidated Statement of Cash Flows for the nine
months ended September 30, 1998 and 1997 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Restated) 7
PART II--OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 5. Other Information 28
Item 6. Exhibits 28
Signatures 30
Restatement of Financial Information and Changes to Certain Information
On November 20, 1998, the Company announced that it would restate its
financial statements for the quarters ended June 30, 1998 and September 30, 1998
and for the six and nine-month periods then ended, respectively; to reflect
changes in the classification and amounts recognized for the value of certain
warrants granted to NBC Multimedia, Inc. in May 1998. This amended filing
contains restated financial information and related disclosures for the quarters
ended June 30, 1998 and September 30, 1998 and for the six and nine-month
periods then ended, respectively. See Note 2 to Condensed Consolidated Financial
Statements.
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
USWEB CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(Restated)
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 23,810 $ 44,145
Short-term investments 29,842 -
Accounts receivable, net 34,361 7,903
Other current assets 5,743 657
---------- ----------
Total current assets 93,756 52,705
Property and equipment, net 11,624 6,202
Intangible assets, net 144,941 19,019
Other assets 4,099 1,324
---------- ----------
$ 254,420 $ 79,250
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,879 $ 2,923
Accrued expenses 20,924 7,997
Deferred revenue 990 470
Current portion lease obligations 2,398 799
---------- ----------
Total current liabilities 29,191 12,189
Lease obligations, long-term portion 2,005 372
---------- ----------
31,196 12,561
---------- ----------
Commitments and contingencies
Stockholders' equity:
Common stock 41 29
Additional paid-in capital 406,859 138,804
Accumulated deficit (183,676) (72,144)
---------- ----------
Total stockholders' equity 223,224 66,689
---------- ----------
$ 254,420 $ 79,250
========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
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USWEB CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Revenues:
Services $ 33,945 $ 5,623 $ 72,643 $ 7,868
Other 73 115 443 808
------------ ----------- ------------ -----------
Total revenues 34,018 5,738 73,086 8,676
------------ ----------- ------------ -----------
Cost of revenues:
Services 20,527 3,739 44,171 5,798
Other 312 969 700 1,180
Depreciation and amortization 1,040 286 2,534 398
Stock compensation 4,158 619 9,415 966
Provision for (recovery of) loss
on contract (7,336) 2,094
------------ ----------- ------------ -----------
Total cost of revenues 18,701 5,613 58,914 8,342
------------ ----------- ------------ -----------
Gross profit 15,317 125 14,172 334
------------ ----------- ------------ -----------
Operating expenses:
Marketing and sales 6,841 5,722 17,658 13,930
General and administrative 6,173 3,205 15,303 6,838
Depreciation and amortization 260 123 633 378
Acquired in-process technology 2,896 3,878 25,508 6,726
Stock compensation 7,860 2,552 23,962 3,500
Amortization of intangible assets 23,111 2,744 44,539 4,321
------------ ----------- ------------ -----------
Total operating expenses 47,141 18,224 127,603 35,693
------------ ----------- ------------ -----------
Loss from operations (31,824) (18,099) (113,431) (35,359)
Interest income 798 100 2,230 165
Interest expense (128) (28) (331) (76)
Impairment of investee carried at cost - - - (4,000)
------------ ----------- ------------ -----------
Net loss $ (31,154) $ (18,027) $ (111,532) $ (39,270)
============ =========== ============ ===========
Net loss per share:
Basic and diluted $ (0.77) $ (2.53) $ (3.23) $ (8.10)
============ =========== ============ ===========
Weighted average shares outstanding 40,402 7,134 34,521 4,845
============ =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
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USWEB CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
------------ -----------
(Restated)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (111,532) $ (39,270)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 3,167 776
Provision for doubtful accounts 381 700
Stock, option and warrant expenses 33,524 5,873
Amortization of intangible assets 44,539 4,321
Acquired in-process technology 25,508 6,726
Impairment of investee carried at cost - 4,000
Provision for loss on contract 2,094 -
Changes in assets and liabilities:
Accounts receivable (16,440) (2,209)
Other current assets (3,241) (394)
Other assets (1,889) (118)
Accounts payable (1,173) (297)
Accrued expenses (3,983) 3,328
Deferred revenues (202) -
----------- ----------
Net cash used in operating activities (29,247) (16,564)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (5,104) (1,663)
Cash acquired from (used in) acquisitions, net 959 (1,150)
Purchase of investment in affiliate - 968
Purchases of short-term investments (62,241) -
Proceeds from maturities/sales of short-term investments 32,399 -
----------- ----------
Net cash used in investing activities (33,987) (1,845)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Mandatorily Redeemable
Convertible Preferred Stock, net - 16,288
Proceeds from issuance of Common Stock, net 41,959 -
Proceeds from collection of note receivable - 1,400
Proceeds from capital lease financing 2,570 -
Principal payments on capital leases (1,630) (560)
----------- ----------
Net cash provided by financing activities 42,899 17,128
----------- ----------
Decrease in cash and cash equivalents (20,335) (1,281)
Cash and cash equivalents, beginning of period 44,145 3,220
----------- ----------
Cash and cash equivalents, end of period $ 23,810 $ 1,939
=========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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USWEB CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
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 domestic and international offices, the Company provides
Internet professional services, including strategy consulting; analysis and
design; project management; Intranet, Extranet and Web site design; E-commerce
business systems; application development; technology integration; graphic
design and user interface; online marketing and brand development; deployment
and hosting; and maintenance and support.
NOTE 2--BASIS OF PRESENTATION AND RESTATEMENT:
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not contain all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements reflect all adjustments (consisting
of only normal recurring adjustments) considered necessary for a fair
presentation of USWeb's financial condition as of September 30, 1998, the
results of its operations for the three and nine month periods ended September
30, 1998 and 1997, and the results of its cash flows for the nine months ended
September 30, 1998 and 1997. These financial statements should be read in
conjunction with the Company's audited 1997 financial statements, including the
notes thereto, and the other information set forth therein included in the
Company's annual report on Form 10-K. Operating results for the three and nine
month periods ended September 30, 1998 are not necessarily indicative of the
operating results that may be expected for the year ending December 31, 1998.
Certain prior period amounts have been reclassified to conform to the current
period presentation. The following discussions may contain forward-looking
statements, which are subject to the risk factors set forth in "Risk Factors"
contained in Item 2.
The accompanying restated condensed consolidated balance sheet as of September
30, 1998, and the accompanying restated condensed consolidated statement of
operations for the three and nine month periods ended September 30, 1998, have
been restated to reflect changes in the classification and amounts recognized
for the estimated fair value of certain warrants granted to NBC Multimedia, Inc.
("NBC") during May 1998 (See Note 3 of Notes to Condensed Consolidated Financial
Statements). In its quarterly report on Form 10-Q for the quarter ended June 30,
1998, the Company recognized the fair value of all warrants granted to NBC
totaling $12,568, as stock compensation and a component of operating expenses.
In recent discussions with USWeb, the Staff of the Securities and Exchange
Commission (the "Staff"), expressed their view that the $6,286 estimated fair
value of warrants granted with fixed terms was properly recognized as stock
compensation and a component of operating expenses, but that the $6,282 initial
fair value of warrants with variable terms (the "Variable Warrants") should be
included in the determination of any contract loss on the NBC arrangement and
therefore, excluded from operating expenses. In addition, the Staff expressed
their view that the amount previously recognized for the estimated fair value of
the Variable Warrants should be revised and that at each future reporting date,
the provision for contract loss should be adjusted for any increases or
decreases in the estimated fair value of the Variable Warrants determined using
the Black-Scholes option pricing model.
While the Company believes that its original accounting policy was in
accordance with generally accepted accounting principles, it has accepted the
Staff's view with respect to these matters. Accordingly, the effect of this
restatement on operating results for the quarter and six month periods ended
June 30, 1998, is to reclassify $6,282 from the stock compensation component of
operating expenses to the provision for loss on contract component of cost of
revenues; and to recognize an additional provision for loss on contract in the
amount of $3,148. For the three and six month periods ended June 30, 1998, the
restatement increased the Company's net loss by $3,148, or $0.09 and $0.10 per
basic and diluted share, respectively. As a result of a decrease in the
estimated fair value of the Variable Warrants, for the three and nine month
periods ended September 30, 1998, the restatement decreased the previously
reported net loss by $7,336 and $4,188, or $0.18 and $0.12 per diluted share,
respectively. These restatements had no effect on previously reported net cash
flows for any period, or on previously reported net income or net loss
excluding non-cash charges for any period.
NOTE 3--STRATEGIC ALLIANCES:
In May 1998, the Company entered into a strategic alliance with NBC
to expand production capabilities for NBC's interactive properties and services.
As part of the strategic alliance, the Company was awarded a multi-year contract
where revenues earned under the contract are expected to approximate $10,952. In
connection with the strategic alliance, the Company issued warrants to NBC
allowing them to purchase 1,600,000 and 500,000 shares of the Company's Common
Stock at $22.50 and $25.43 per share, respectively. Warrants to purchase
1,050,000 shares are exercisable at any time prior to their expiration in
November 1999. Warrants to purchase the remaining 1,050,000 shares are subject
to cancellation, or if previously exercised, are subject to repurchase at the
original exercise price, in the event that the agreement is cancelled by NBC
prior to May 2002. The warrants subject to cancellation or repurchase are
exercisable for a period extending from the date of grant to one month beyond
the date when the Company's cancellation or repurchase rights lapse. The
cancellation or repurchase rights lapse as follows: 525,000 shares in November
1999, 315,000 shares in May 2000, 105,000 shares in May 2001 and 105,000 shares
in May 2002. No warrants had been exercised at September 30, 1998.
4
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NOTE 4--ACQUISITIONS.
During the quarter ended September 30, 1998, the Company recognized the
acquisition of all the outstanding stock of Tucker Network Technologies Inc. and
Metrix Communications, Inc. in separate transactions in exchange for a total of
1,156,562 shares of the Company's Common Stock, excluding acquisition expenses.
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
$2,689 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 $2,896 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 $1,114 was
allocated to existing technology and is being amortized over their estimated
useful lives, of one year. The purchase price in excess of the fair value of
identified tangible and intangible assets and liabilities assumed in the amount
of $16,422 was allocated to workforce in place and is being amortized over its
estimated useful life of twenty-four months.
As of September 30, 1998, the Company had recognized the acquisition of
thirty-three businesses ("Acquired Entities"). The following unaudited pro
forma consolidated amounts give effect to these acquisitions as if they had
occurred on January 1, 1998 and on January 1, 1997 by consolidating the results
of operations of the Acquired Entities with the results of USWeb for the three
and nine months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
----------- ----------- ------------ ------------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Revenues $ 34,452 $ 18,951 $ 90,964 $ 49,919
Net loss (28,037) (46,273) (155,578) (183,929)
Net loss per share:
Basic and diluted $ (0.62) $ (2.27) $ (3.69) $ (10.18)
Weighted average shares outstanding 44,965,973 20,388,788 42,118,790 18,076,083
</TABLE>
NOTE 5--RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." The adoption of both statements is required for fiscal
years beginning after December 15, 1997. Under SFAS No. 130, companies are
required to report in the financial statements, in addition to net income,
comprehensive income including, as applicable, foreign currency items, minimum
pension liability adjustments and unrealized gains and losses on certain
investments in debt and equity securities. SFAS No. 131 requires that companies
report separately, in the financial statements, certain financial and
descriptive information about operating segments, if applicable. The Company
does not expect the adoption of SFAS No. 130 or SFAS No. 131 to have any
financial impact on its consolidated financial statements. USWeb has adopted
SFAS No. 130 and is currently assessing the impact of the disclosure
provisions of SFAS No. 131.
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
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obtained for internal use. USWeb has not yet determined the impact, if any, of
adopting SOP 98-1, which will be effective for USWeb's year ending December 31,
1999.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes a new model for
accounting for derivatives and hedging activities and supercedes and amends a
number of existing accounting standards. SFAS 133 requires that all
derivatives be recognized in the balance sheet at their fair market value and
the corresponding derivative gains or losses be either reported in the
statement of operations or as a deferred item depending on the type of hedge
relationship that exists with respect to such derivatives. The Company has not
yet determined the effect, if any, of adopting SFAS 133, which will be
effective for the Company's fiscal year 2000.
NOTE 6--SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
------------ ------------
<S> <C> <C>
Non-cash financing and investing activities:
Common stock issued for acquisitions $190,179 $29,330
Liabilities assumed in acquisitions 4,976 -
</TABLE>
NOTE 7--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Accounts receivable, net:
Accounts receivable $ 38,759 $ 8,722
Less: allowance for doubtful accounts (4,398) (819)
----------- ----------
$ 34,361 $ 7,903
=========== ==========
Property and equipment, net:
Computer and equipment $ 13,926 $ 6,490
Furniture and fixtures 1,609 834
Leasehold improvements 983 605
----------- ----------
16,518 7,929
Less: accumulated depreciation and amortization (4,894) (1,727)
----------- ----------
$ 11,624 $ 6,202
=========== ==========
Intangible assets, net:
Goodwill $ 68,130 $ -
Purchased technology 11,058 3,610
Workforce in-place 119,767 24,885
----------- ----------
198,955 28,495
Less: accumulated amortization (54,014) (9,476)
----------- ----------
$ 144,941 $ 19,019
=========== ==========
Accrued expenses:
Compensation and benefits $ 7,936 $ 1,900
Professional fees 2,738 1,916
Marketing costs 1,883 1,155
Other 8,367 3,026
----------- ----------
$ 20,924 $ 7,997
=========== ==========
</TABLE>
NOTE 8--PENDING MERGER:
On September 1, 1998, the Company entered into an agreement to acquire all of
the outstanding stock of CKS Group, Inc. ("CKS Group") in a transaction expected
to be accounted for as a pooling of interests. Under terms of
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the agreement, each outstanding share of CKS Group's Common Stock will be
exchanged for 1.5 shares of the Company's Common Stock. Additionally, the
Company would assume all outstanding options to purchase CKS Group's Common
Stock and will assume CKS Group's employee stock purchase plan, adjusted for the
1.5 to 1 ratio. The transaction, which requires regulatory approval as well as
approval by both companies' stockholders, is expected to close in the Company's
fourth quarter.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (AS RESTATED)
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains certain forward-looking statements that involve risks and
uncertainties, including statements regarding the Company's strategy, planned
operations, financial performance, and revenue sources. The Company's actual
results could differ materially from the results anticipated in these forward-
looking statements as a result of certain factors set forth under "Risk Factors"
below. For additional information regarding the Company and factors that could
affect future performance, see the information contained in the Company's public
filings with the Securities and Exchange Commission.
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 a 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; project management; Intranet, Extranet and Web
site design; e-Commerce business systems; application development; technology
integration; graphic design and user interface; online marketing and brand
development; deployment and hosting; and maintenance and support integration;
audience development; and maintenance. The Company markets its services to
medium and large companies.
From inception in December 6, 1995 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, beginning 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.
Revenues from Company-owned offices represented approximately 99% of total
company revenues for the three and nine months ended September 30, 1998. 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 the three and nine months ended September 30, 1998 and 1997.
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 are not 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 strategic expansion of its network of consulting offices, continue to
develop the strength and quality of its operations, maximize the value delivered
to clients, enhance the Company's brands, 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
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September 30, 1998 had an accumulated deficit of $183.7 million. Although the
Company has experienced revenue growth in recent quarters, 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 least 1999,
and there can be no assurance that the Company will achieve or sustain
profitability. See "Risk Factors--Limited Operating History; Accumulated
Deficit."
ACQUISITION OF INTERNET PROFESSIONAL SERVICES FIRMS
The Company began to acquire selected Internet professional services firms in
the first quarter of 1997. The Company made a transition 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 4 of Notes to Condensed Consolidated Financial Statements.
The Company typically determines the purchase price of each acquisition
candidate based on strategic fit, geographic coverage, 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, with respect to past domestic acquisitions, generally 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 and payment methodology for future
acquisitions; however, in certain situations the Company may use other
methodologies as appropriate. The Company may increasingly use cash to pay for
acquisitions and, in particular, intends to increase its use of cash in
international acquisitions. The Company's acquisition program will result in
further substantial ownership dilution to investors. See "Risk Factors--
Dilution" and Note 1 of Notes to Condensed Consolidated Financial Statements.
The acquisitions to date have been accounted for using the purchase method of
accounting, although the pending merger with CKS Group, Inc. ("CKS Group") is
expected to be accounted for using the pooling-of-interests method. For each
acquisition to date, 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 (i) amounts allocated to in-process technology and
immediately charged to operations, (ii) amounts allocated to completed
technology and amortized on a straight-line basis over the estimated useful
life of the technology of six months to one year, (iii) amounts allocated
to workforce in place are amortized on a straight-line basis over the
estimated period of benefit, which ranges from 12 to 42 months, and (iv) to
goodwill, which is amortized over three 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.
To determine the amounts to be allocated to acquired in-process technology the
Company used two distinct approaches. For all acquisitions except Gray Peak,
the Company performed a detailed internal valuation. For the acquisition of
Gray Peak, which was individually significant, the Company engaged a valuation
consultant to perform an independent valuation of the Company's purchase price
including an allocation of such purchase price to assets acquired and
liabilities assumed. Each of these approaches is discussed in greater detail
below.
For each acquisition, excluding Gray Peak, the Company performed a detailed
inventory of existing in-process technology. Such technology consisted
primarily of software objects, which, if successfully developed, could be reused
by the Company in various future client engagements. These software objects
were under development as part of client engagements, or as independent research
conducted by the acquired companies. The Company additionally reviewed the
financial forecasts of the acquired businesses. The future cash flows of the
acquired companies were then allocated between existing software technology, in-
process software technology and as yet undeveloped technology. The value
attributed to existing software and in-process software technology was
determined by discounting future cash flows attributed to such software
technology on a tax adjusted basis using a 25% discount rate. Given the rapidly
changing technology and resulting limited utility of such software, it was
8
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estimated that existing software technology had an estimated maximum life of 12
months with an average life of approximately six months. Additionally, due to
rapidly changing technologies and processes within the Internet market place,
many items under development may be rendered obsolete prior to completion.
Therefore, cash flows beyond a period of 18 months were attributed entirely to
as yet undeveloped software technology and were excluded from the valuation of
existing and in-process software technology. Remaining costs to complete in-
process technology included further coding, development and testing. The amount
of funding necessary to complete the in-process technology varies by
acquisition. In the aggregate, the Company estimates such amount to range
between $5 million to $7 million. Should the Company fail to complete such in-
process technology, the Company may not be able to recover costs invested in
development of such technology or realize any anticipated future net cash flows.
Due to the relative size of the Gray Peak acquisition, as well as the
different nature of the Gray Peak business compared to the Company's other
acquisitions, the Company engaged the services of an independent consultant to
assist in the valuation of the purchase price, including options assumed, and
allocation of such purchase price to assets acquired, including intangible
Assets. As part of its analysis of the intangible assets acquired, the
consultant reviewed the various research and development projects under
development on the acquisition date. Such in-process development included Gray
Peak's development of a network operating center and voice over Internet
protocol telephony technologies. The total value of the acquisition purchase
price of Gray Peak allocated to in-process technology was $11.1 million or
approximately 12% of the total purchase price of Gray Peak.
The Company generally grants target company employees and non-employee
shareholders that enter into consulting agreements options to purchase shares
of the Company's Common Stock, which typically become 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 the Company's 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
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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
September 30, 1998, stock compensation expense included in cost of revenues
totaled $4.2 million, stock compensation expense included in operating expenses
totaled $7.9 million and amortization of intangible assets totaled $23.1
million, all of which were related to the acquisition of the thirty-three
Company-owned offices completed since the Company's inception. In addition, the
Company recognized an aggregate cost of $2.9 million for acquired in-process
technology related to the two acquisitions completed during the quarter ended
September 30, 1998. The Company expects these acquisition-related non-cash
expenses to continue on a basis corresponding with operation of the
acquisition program.
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 or other affiliates 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 "Risk Factors--Management of
Growth; Integration of Acquisitions" and "--Future Capital Needs; Uncertainty of
Additional Financing."
SOURCES OF REVENUES
The Company consolidates the financial statements of acquired entities
beginning on the date the Company assumes effective control of those entities.
Revenues primarily consist of fees from consulting services engagements
(including both time-and-materials and fixed-price engagements). The services
offered by the Company include strategy consulting; analysis and design; project
management; Intranet, Extranet and Web site design; e-Commerce business systems;
application development; technology integration; graphic design and user
interface; online marketing and brand development; deployment and hosting; and
maintenance and support. Revenues from time-and-material engagements are
recognized as incurred and revenues from fixed-price engagements are recognized
using the percentage-of-completion method. Billable rates vary by the service
provided and geographical region. Although a majority of engagements are
currently performed on a time and materials basis, the Company intends to
increase the percentage of its engagements that are based on a fixed price. The
pricing, management and execution of individual engagements are the
responsibility of the consulting office that performs or coordinates the
services.
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
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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 royalty
revenue is recognized as reported by the Affiliate to the Company. 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. During
the three and nine months ended September 30, 1998, revenues from Affiliates
were insignificant.
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 and sales
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.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
(Dollars in thousands) THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------- --------------------------------------
(Unaudited) 1998 % of 1997 % of 1998 % of 1997 % of
---- REVENUE ---- REVENUE ---- REVENUE ---- REVENUE
(Restated) (Restated)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 34,018 100% $ 5,738 100% $ 73,086 100% $ 8,676 100%
Cost of revenues:
Service and other 20,839 61% 4,708 82% 44,871 61% 6,978 80%
Depreciation and amortization 1,040 3% 286 5% 2,534 3% 398 5%
Stock compensation 4,158 12% 619 11% 9,415 13% 966 11%
Provision for (recovery of) loss
on contract (7,336) (22%) - - 2,094 3%
Operating expenses
Marketing and sales 6,841 20% 5,722 100% 17,658 24% 13,930 161%
General and administrative 6,173 18% 3,205 56% 15,303 21% 6,838 79%
Depreciation and amortization 260 1% 123 2% 633 1% 378 4%
Acquired in-process technology 2,896 9% 3,878 68% 23,962 33% 6,726 78%
Stock compensation 7,860 23% 2,552 44% 30,244 41% 3,500 40%
Amortization of intangible assets 23,111 68% 2,744 48% 44,539 61% 4,321 50%
Interest income (expense) 670 72 1,899 89
Impairment of investee carried at cost - - - (4,000)
Net loss $(31,154) $(18,027) $(111,532) $(39,270)
</TABLE>
Revenues. The increase in total revenues for the three-month and nine-month
periods ended September 30, 1998 compared to the corresponding periods ending
September 30, 1997 was attributable to the acquisition program, which began in
the first quarter of 1997, and the increased number and relative size of
client engagements. The Company had completed thirty-three acquisitions as of
September 30, 1998 compared to sixteen as of September 30, 1997.
Cost of Revenues. For both the three-month and the nine-month periods, the
increase in cost of revenues was primarily attributable to increased staffing
for engagements, largely due to acquisitions, and an increase in stock
compensation in connection with stock bonus awards to employees of newly
acquired entities. During the three-month period, the overall increase in cost
of revenues was offset by a $7,336 recovery of the previously recognized loss on
the NBC agreement due to changes in the estimated fair value of the Variable
Warrants under the Black-Scholes option pricing model. For the nine-month
period, cost of revenues includes a provision for loss on the NBC contract
totaling $2,094. As a percentage of revenues, cost of revenues decreased for
both the three-month and nine-month periods. The decreases resulted from further
integration of the Company's acquisitions, many of which were fully integrated
as of July 1, 1998. Included in cost of revenues for the three months and the
nine months ended September 30, 1998 are net non-cash charges (credits)
aggregating ($2.1) million and $14.0 million, respectively, which include stock
compensation resulting from the Company's acquisition program, depreciation and
amortization of fixed assets and leasehold improvements and provision for
(recovery of) loss on contract. 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 Company-owned offices accept
additional engagements. In addition, the Company expects that the provision for
(recovery of) loss on contract will continue to reflect significant volatility
based on changes in the estimated fair value of the Variable Warrants granted to
NBC.
Marketing and Sales Expenses. For both the three-month and the nine-month
periods, the increase in Marketing and sales expenses was primarily attributable
to the consolidation of the results of operations of acquired
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companies, increases in personnel to support the growth in the Company's
operations, and costs related to USWeb branding campaigns. As a percentage of
revenues, marketing and sales expenses decreased for both the three-month and
the nine-month periods. These decreases resulted primarily from economies of
scale. The Company anticipates that marketing and sales 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
additional Internet professional service firms.
General and Administrative Expenses. For both the three-month and the nine-
month periods, the increase in general and administrative expenses was primarily
attributable to the consolidation of the results of operations of acquired
companies and increases in personnel to support the growth in the Company's
operations. As a percentage of revenues, general and administrative expenses
decreased for both the three-month and the nine-month periods. These decreases
resulted primarily from economies of scale. The Company anticipates that the
absolute dollar level of general and administrative expenses will increase in
future periods as a result of increased staffing and costs associated with
acquiring and consolidating the results of additional Internet professional
service firms.
Acquired In-Process Technology. Acquired in-process technology decreased in
the three-month period ended September 30, 1998, and increased in the nine-month
period ended September 30, 1998, from the corresponding periods in the prior
year. These fluctuations are due to the amount of in-process technology
associated with acquisitions completed in the respective periods. The value of
the acquired in-process technology was determined using a combination of risk-
adjusted income approaches and independent valuations. The acquired in-process
technology related to each acquired 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 in future periods will vary in absolute dollars and as a percentage of
revenues.
Stock Compensation. Stock compensation expense includes costs relating to
stock bonus awards to employees and non-employees who are consultants to
acquired entities, compensation expense associated with employee stock options
and affiliate warrant expenses, and, for the nine months ended September 30,
1998, the value of warrants with fixed terms granted to NBC in connection with
a strategic relationship (see Note 2 of Notes to Condensed Consolidated
Financial Statements). The increase in stock compensation expense for the
three months ended September 30, 1998, as compared to the corresponding period
in 1997, resulted from the increased number and relative size of the Company's
acquisitions. The increase in stock compensation expense for the nine months
ended September 30, 1998, as compared to the corresponding period in 1997, was
due to the grant of warrants to NBC, as well as the increased number and
relative size of the Company's acquisitions. The Company anticipates that
stock compensation expense will vary in future periods.
Amortization of Intangible Assets. Intangible assets consist primarily of
purchased technology, workforce in place and goodwill. For both the three-month
and the nine-month periods, the increase in amortization of intangible assets
resulted from the increased number and relative size of the Company's
acquisitions completed prior to September 30, 1998. The Company anticipates
that expenses related to the amortization of intangible assets will increase in
future periods in absolute dollars as it continues to acquire additional
Internet professional service firms.
Interest Income and Expense. The increases in net interest income resulted
from interest earned on the investment of the net proceeds of the Company's
public equity offerings, completed in December 1997 and April 1998, offset by
interest expense incurred on the Company's debt and lease obligations.
Impairment of Investee. During June 1997, the Company recognized an impairment
provision totaling $4.0 million, representing the total amount of it cost basis
investment in Utopia, Inc., an independent Internet consulting firm.
Income Taxes. No provision for federal and state income taxes was recorded for
the three months or nine months ended September 30, 1998 and 1997 because the
Company incurred net operating losses in each of those periods.
Net Loss. The increase in the net loss for the three months ended September
30, 1998 was primarily attributable to non-cash charges of $32.0 million, the
majority of which resulted from the Company's acquisition program, compared to
non-cash charges of $10.2 million for the three months ended September 30, 1997.
The increase in the
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net loss for the nine months ended September 30, 1998 was primarily attributable
to non-cash charges of $108.7 million, the majority of which resulted from the
Company's acquisition program, compared to non-cash charges of $16.3 million for
the nine months ended September 30, 1997. Excluding the non-cash charges, the
Company had an operating profit of $165,000 for the three months ended September
30, 1998, compared to a net loss of $7.9 million for the three-month period in
the prior year, and a net loss of $4.7 million for the nine months ended
September 30, 1998, compared to a net loss of $19.0 million for the nine-month
period in the prior year.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," in the nine months
ended September 30, 1998. SFAS No. 130 requires USWeb to report in its
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 nine months September 30, 1998, such
items were not significant, and USWeb's comprehensive loss approximated its net
loss.
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. USWeb 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.
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. USWeb has not yet determined the
impact, if any, of adopting SOP 98-1, which will be effective for USWeb's year
ending December 31, 1999.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes a new model for
accounting for derivatives and hedging activities and supercedes and amends a
number of existing accounting standards. SFAS 133 requires that all
derivatives be recognized in the balance sheet at their fair market value and
the corresponding derivative gains or losses be either reported in the
statement of operations or as a deferred item depending on the type of hedge
relationship that exists with respect to such derivatives. The Company has not
yet determined the effect, if any, of adopting SFAS 133, which will be
effective for the Company's fiscal year 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company invests predominantly in instruments that are highly liquid,
investment grade, and have maturities of less than one year, with the intent to
make such funds readily available for operating purposes. At September 30, 1998,
the Company had approximately $53.7 million in cash, cash equivalents and short-
term investments compared to $44.1 million at December 31, 1997.
Cash used in operating activities was $29.2 million for the nine months
ended September 30, 1998 and resulted primarily from the net loss from
operations of $111.5 million, offset by non-cash charges of $109.2 million
(which includes primarily stock compensation, acquired in-process technology,
amortization of intangible assets, depreciation and amortization of fixed
assets and leasehold improvements and provision for loss on contract), and an
increase in accounts receivable of $16.4 million resulting from an increase in
the number and size of engagements being entered into. Cash used in operating
activities was $16.6 million for the nine months ended September 30, 1997, and
was primarily due to the
13
<PAGE>
net loss from operations of $39.3 million, offset by non-cash charges of $16.3
million and an impairment provision of $4.0 million, representing the cost basis
in Utopia, Inc.
Cash used in investing activities was $34.0 million for the nine months ended
September 30, 1998. Purchases (net of sales and maturities) of investments in
marketable securities during the period were $29.8 million and capital
expenditures totaled $5.1 million. Capital expenditures have generally been
comprised of purchases of computer hardware and software as well as leasehold
improvements related to leased facilities and are expected to increase in future
periods. Cash used in investing activities was $1.8 million for the nine months
ended September 30, 1997, and was primarily due to capital expenditures of $1.7
million.
Cash provided by financing activities was $42.9 million for the nine months
ended September 30, 1998. In April 1998, the Company completed a follow-on
public offering of its Common Stock, resulting in net proceeds of $31.2 million.
Additionally, various stock option, employee stock purchase and common stock
warrant holders exercised or purchased their stock options, employee shares and
common stock warrants, offset by common stock repurchases, resulting in net
proceeds of $11.0 million. Cash provided by financing activities was $17.1
million for the nine months ended September 30, 1997, and was primarily due to
the issuance of Mandatorily Redeemable Preferred Stock (which converted to
shares of Common Stock upon the close of the Company's initial public offering
in December 1997), resulting in net proceeds of $16.3 million.
The Company currently has no material commitments other than those under
operating lease agreements and costs incurred in connection with the pending
merger with CKS Group, including investment banking fees. The Company has
experienced a substantial increase in its capital expenditures and operating
lease arrangements since its inception, which is consistent with increased
staffing, and anticipates that this will continue in the future. Also, the
Company has announced that its board of directors approved the repurchase of up
to one million shares of the Company's common stock depending on certain market
conditions. Additionally, the Company will continue to evaluate possible
acquisitions of or investments in businesses, products, and technologies that
are complementary to those of the Company, which may require the use of cash.
The Company believes that existing cash, investments, and borrowings available
under its credit facilities will be sufficient to fund its requirements for
working capital and capital expenditures for at least the next 12 months;
however, the Company may sell additional equity or debt securities or seek
additional credit facilities if it believes such actions would be a better way
to fund acquisition-related or other costs. 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."
OTHER INFORMATION
On September 1, 1998, the Company entered into an agreement to acquire all of
the outstanding stock of CKS Group in a transaction (the "Merger") expected to
be accounted for as a pooling of interests. Under terms of the agreement, each
outstanding share of CKS Group's Common Stock will be exchanged for 1.5 shares
of the Company's Common Stock. Additionally, the Company would assume all
outstanding options to purchase CKS Group's Common Stock and will assume CKS
Group's employee stock purchase plan, adjusted for the 1.5 to 1 ratio. The
Merger, which requires regulatory approval, as well as approval by both
companies' stockholders, is expected to close in the Company's fourth quarter.
The proposed combined company is referred to herein as the "Combined Company"
or "USWeb/CKS."
For information regarding the Company's efforts to prepare for problems
associated with the Year 2000, see "--Risk Factors--Risks Related to the
Combined Company, USWeb and CKS Group--Year 2000 Compliance."
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RISK FACTORS
Risks Related to the Combined Company, USWeb and CKS Group
The obligations of USWeb and CKS Group to complete the Merger are subject
to the satisfaction or waiver of certain conditions, including the accuracy of
the other party's representations and warranties, compliance by the other party
with its obligations under the reorganization agreement between the two parties,
the absence of a "Material Adverse Effect" as defined in the reorganization
agreement with respect to the other party, and other conditions. There is no
guarantee that these conditions will be satisfied or waived or that the Merger
will be completed. Noncompletion of the Merger may have a material adverse
effect on the stock trading price of either party or both parties or on the
business, financial condition, results of operations or prospects of either
party or both parties. While each of the risk factors identified in this section
relate to the Combined Company, each of the risk factors in this section, unless
the context requires otherwise, should be read as applying to USWeb in the event
the Merger is not consummated.
Fluctuations in Quarterly Operating Results and Margins; Seasonality of
Business. Each of USWeb's and CKS Group's operating results have fluctuated in
the past and the Combined Company's operating results are likely to fluctuate in
the future as a result of a variety of factors, many of which will be outside of
the Combined Company's control. Some of these factors include timing of the
completion, material reduction or cancellation of major projects or the loss of
a major client; the amount and timing of the receipt of new business; timing of
hiring or loss of personnel; the amount and timing of the opening or closing of
an office; the amount and the relative mix of high-margin creative or strategy
consulting projects as compared to lower margin projects, capital expenditures
and other costs relating to the expansion of operations; the level of demand for
Intranet, Extranet and Web site development; the productivity of consultants;
the ability to maintain adequate staffing to service clients effectively; the
cost of advertising and related media; the amount and timing of expenditures by
clients for professional services; the introduction of new products or services
by competitors; pricing changes in the industry; the relative mix of lower cost
full-time employees versus higher cost independent contractors; technical
difficulties with respect to the use of the Internet; economic conditions
specific to Internet technology usage; government regulation and legal
developments regarding the use of the Internet; and general economic conditions.
The Company Combined may also experience seasonality in its business, resulting
in diminished revenues as a consequence of decreased demand for professional
services during summer and year-end vacation and holiday periods. Due to all of
the foregoing factors, the Combined Company's operating results in any given
quarter may fall below the expectations of securities analysts and investors. In
such event, the trading price of the Combined Company's Common Stock would
likely be materially and adversely affected and litigation may ensue.
CKS Group has experienced some seasonality in its business which results
from timing of product introductions and business cycles of CKS Group's clients.
CKS Group's revenues for the first fiscal quarter tend to be somewhat lower than
for the preceding fourth quarter because many clients have expended most of
their marketing budgets prior to the end of the calendar year and do not release
funds from the next calendar year's marketing budget until mid- to late January.
For the foregoing reasons and other factors, historical revenues and operating
results of USWeb and CKS Group are not necessarily meaningful and cannot be
relied upon as indicators of future performance of the Combined Company.
USWeb's and CKS Group's historical financial data is of limited value in
planning future operating expenses. Accordingly, the Combined Company's expense
levels will be based in part on its expectations concerning future revenues and
will be fixed to a large extent. The Combined Company will be unable to adjust
spending in a timely manner to compensate for any unexpected shortfall in
revenues. Accordingly, a significant shortfall in demand for services could have
an immediate and material adverse effect on the Combined Company's business,
financial condition, results of operations and prospects.
Limited Operating History; Accumulated Deficit; Evolving Business Model.
USWeb was founded in December 1995, has incurred net losses since inception and
as of September 30, 1998 had an accumulated deficit of $187.9 million. The
predecessor company to CKS Group was founded in 1987. Accordingly, the Combined
Company will have only a limited operating history on which to base an
evaluation of its business and prospects.
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The Combined Company and its prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in an early stage
of development, particularly companies in new and rapidly evolving markets such
as Internet professional services. Such risks for the Combined Company include,
but are not limited to, an evolving business model. To address these risks, the
Combined Company must, among other things, strengthen its business development
and management activities while continuing to expand its network of consulting
offices, continue to develop the strength and quality of its operations,
maximize the value delivered to clients by the Combined Company Internet
Strategy and Solutions Center, develop and enhance the Combined Company brand,
respond to competitive developments and continue to attract, retain and
motivate qualified employees. There can be no assurance that the Combined
Company will be successful in meeting these challenges and addressing such
risks and the failure to do so could have a material adverse effect on the
Combined Company's business, financial condition, results of operations and
prospects.
Dilution, Earnings and Growth. The Combined Company expects that future
acquisition agreements, if any, could provide for consideration to be paid in
cash, stock or a combination of cash and stock. The number of shares which may
be issued in future acquisitions will depend on the market price of the
Combined Company's Common Stock and a variety of other factors and, as a
result, future acquisitions may have a significant dilutive impact on USWeb's
and CKS Group's existing stockholders. The Merger will dilute the percentage
ownership held by the stockholders of each of USWeb and CKS Group in the
Combined Company when compared to their ownership in each of the respective
companies. Based upon the capitalization of USWeb and CKS Group as of October
20, 1998, an aggregate of approximately 23,306,912 shares of USWeb Common
Stock will be issued in connection with the Merger. As a result, the CKS Group
stockholders will hold approximately 33.9% of the outstanding shares of the
Combined Company's Common Stock after giving effect to such issuance. USWeb
has outstanding a large number of warrants and both USWeb and CKS Group have
outstanding a large number of stock options to purchase Common Stock of the
respective companies, many of which have exercise prices significantly below
the market price of each company's respective Common Stock as of the date of
this Report. To the extent such options or warrants are exercised, there will
be further dilution. The Combined Company expects to continue to make
acquisitions to fill strategic needs and expand internationally. If such
acquisitions are made using the Combined Company's securities, such
acquisitions could result in significant dilution to the Combined Company's
stockholders. USWeb currently has in effect a shelf Registration Statement,
which registers 16,666,667 shares of its Common Stock (of which approximately
9,200,000 shares, as provided in the existing acquisition agreements, remain
available for future issuance as of September 30, 1998), which may be used for
future acquisitions. Pursuant to its prior acquisition agreements, USWeb may
be required to issue substantial additional stock to the sellers of the
acquired companies as well as stock options and stock bonuses to the employees
of the acquired companies. These obligations will continue following the
Merger. Furthermore, the Combined Company expects to continue to enter into
selected acquisition agreements that require it to issue stock, stock options
and stock bonuses to the stockholders and employees of acquired companies.
Although such additional issuances have not resulted in significant dilution
to date, they could be material in the future. For these reasons, the Combined
Company's acquisition program may result in further substantial ownership
dilution.
While the Combined Company is expected to generate higher earnings per
share than those historically generated by USWeb, it is also expected to
generate lower earnings per share than those historically generated by CKS Group
and, therefore, CKS Group stockholders may experience dilution of earnings per
share as a result of the Merger. CKS Group's business has historically grown at
a lower rate than USWeb's historic growth rate. In addition, although USWeb has
had significant growth in net revenue and net income in absolute terms, USWeb's
growth rate has slowed in recent periods. The Combined Company is expected to
have an overall lower growth rate than USWeb's historic growth rate both because
of the Merger and the decrease in growth rate as the size and maturity of the
Combined Company increases.
Recruitment and Retention of Consulting Professionals. The Combined
Company's business of delivering Internet professional services is labor
intensive. Accordingly, the Combined Company's success depends in large part on
its ability to identify, hire, train and retain consulting professionals who can
provide the Internet strategy, technology, marketing, audience development and
creative skills required by clients. There is currently a shortage of such
personnel, and this shortage is likely to continue for the foreseeable future.
The Combined Company will encounter intense competition for qualified personnel
from other companies, and there can be no assurance that it will be able to
identify, hire, train and or retain other highly qualified technical, marketing
and managerial personnel in the future. The inability to attract and retain the
necessary technical, marketing and managerial personnel would
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have a material adverse effect on the Combined Company's business, financial
condition, results of operations and prospects.
Integration of Other Acquired Businesses. Over the 25-month period ended
September 30, 1998, USWeb completed acquisitions of over 30 businesses and CKS
Group completed acquisitions of six businesses. The difficulties of integrating
USWeb's and CKS Group's businesses may be exacerbated by the size and number of
prior business combinations. Further, the Combined Company's future performance
will depend on its ability to integrate these acquired businesses, which, even
if successful, may take a significant period of time, will place a significant
strain on the Combined Company's resources, and could subject it to additional
expenses during the integration process and to the risks commonly encountered in
acquisitions of businesses. Such risks include, among other things, the
difficulty of assimilating the operations and personnel of the acquired
businesses, the potential disruption of the Combined Company's ongoing business,
the inability of management to maximize the financial and strategic position of
the Combined Company through the successful incorporation of acquired personnel
and clients, the maintenance of uniform standards, controls, procedures and
policies and the impairment of relationships with employees and clients as a
result of any integration of new management personnel. There can be no assurance
that the services, technologies, key personnel and businesses of previously
acquired companies will be effectively integrated into the Combined Company's
business or service offerings, or that such integration will not adversely
affect the Combined Company's business, financial condition, results of
operations or prospects. There can also be no assurance that any acquired
services, technologies or businesses will contribute at anticipated levels to
the Combined Company's sales or earnings, or that the sales and earnings from
combined businesses will not be adversely affected by the integration process.
Because a majority of the Combined Company's acquisitions have been completed
since March 1997, the Combined Company is currently facing all of these
challenges and its ability to meet them over the long term has not been
established. The failure to integrate such acquisitions successfully could have
a material adverse effect on the business, financial condition, results of
operations and prospects of the Combined Company.
Risks Related to Future Acquisitions. A key component of the Combined
Company's continued growth strategy is expected to be the acquisition of
professional service firms that meet the Combined Company's goals for strategic
growth and international expansion. The successful implementation of this
acquisition strategy will depend on the Combined Company's ability to identify
suitable acquisition candidates, acquire such companies on acceptable terms and
integrate their operations successfully with those of the Combined Company.
There can be no assurance that the Combined Company will be able to continue to
identify additional suitable acquisition candidates or that the Combined Company
will be able to acquire such candidates on acceptable terms. Moreover, in
pursuing acquisition opportunities the Combined Company may compete with other
companies with similar growth strategies, certain of which competitors may be
larger and have greater financial and other resources than the Combined Company.
Competition for these acquisition targets may also result in increased prices of
acquisition targets and a diminished pool of companies available for
acquisition. Acquisitions also involve a number of other risks, including
adverse effects on the Combined Company's reported operating results from
increases in goodwill amortization, acquired in-process technology, stock
compensation expense and increased compensation expense resulting from newly
hired employees, the diversion of management attention, potential disputes with
the sellers of one or more acquired entities and the possible failure to retain
key acquired personnel. Lack of client satisfaction or performance problems with
an acquired firm could also have a material adverse impact on the reputation of
the Combined Company as a whole, and any acquired subsidiary could significantly
underperform relative to the Combined Company's expectations. For all of these
reasons, the Combined Company's pursuit of an overall acquisition strategy or
any individual pending or future acquisition may have a material adverse effect
on the Combined Company's business, financial condition, results of operations
and prospects. To the extent the Combined Company chooses to use cash
consideration for acquisitions in the future, the Combined Company may be
required to obtain additional financing, and there can be no assurance that such
financing will be available on favorable terms, if at all. As the Combined
Company issues stock to complete future acquisitions, existing stockholders will
experience further ownership dilution. See "--Dilution, Earnings and Growth," "-
- -Future Capital Needs; Uncertainty of Additional Financing," and Note 1 to
Consolidated Financial Statements.
Risks Associated with Failure to Manage Growth. The growth of each of
USWeb and CKS Group has placed, and any further expansion of the Combined
Company would continue to place, a significant strain on the company's limited
personnel, management and other resources. In the future, the Combined Company
will be required to attract, train, motivate and manage new employees
successfully, to effectively integrate new employees
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into its operations and to continue to improve its operational, financial,
management and information systems and controls. There can be no assurance that
the Combined Company's systems, procedures or controls will be adequate to
support the Combined Company's operations or that the Combined Company's
management will be able to achieve the rapid execution necessary to exploit the
market for the Combined Company's business model. The failure to effectively
manage any further growth could have a material adverse effect on the Combined
Company's business, financial condition, results of operations and prospects.
Risk of Litigation. Each of USWeb and CKS Group is from time to time the
subject of miscellaneous lawsuits. While USWeb and CKS each believe that the
outcome of any such litigation pending against it is unlikely to be material to
USWeb, CKS Group or the Combined Company, due to the inherent uncertainties of
litigation, there is a risk that the outcome of pending or any future litigation
would have a material adverse effect on the business, financial condition,
results of operations and prospects of USWeb, CKS Group or the Combined Company.
CKS Group and certain of its officers and directors have had a lawsuit
filed against them on behalf of stockholders pertaining to alleged violations of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Combined Company, as successor to the liabilities of CKS Group, will be subject
to this lawsuit if it has not been dismissed, settled or otherwise resolved
prior to the consummation of the Merger. CKS Group believes that this lawsuit is
without merit and intends to defend this action vigorously. If the lawsuit is
successful and CKS Group's Insurance either does not cover such claim or is
insufficient in amount to cover amounts paid in connection with such claim, it
could have a material adverse effect on the financial condition, results of
operations, cash flows, and prospects of CKS Group and the Combined Company's
business.
Risks Associated with International Operations. Upon completion of the
Merger, the Combined Company will have ten offices outside of the United States;
however, it has limited experience in either managing an international network
of consulting offices or in marketing services to international clients. The
Combined Company expects to incur significant costs to do both. If revenues from
international consulting offices are not adequate to offset the expenses of
establishing and maintaining international operations and of localizing the
Combined Company's marketing programs, the Combined Company's business, results
of operations and financial condition could be materially adversely affected.
There can be no assurance that the Combined Company will be able to establish
and maintain international consulting offices or market its services to
international clients. In addition to the uncertainty as to the Combined
Company's ability to generate revenues from foreign operations and expand its
international presence, there are certain risks inherent in doing business on an
international level, such as unexpected changes in regulatory requirements,
export and import restrictions, tariffs and other trade barriers; difficulties
in staffing and managing foreign operations; potentially adverse differences in
business customs, practices and norms; longer payment cycles; problems in
collecting accounts receivable; political instability; fluctuations in currency
exchange rates; software piracy; seasonal reductions in business activity; and
potentially adverse tax consequences, any of which could adversely affect the
Combined Company's international operations. There can be no assurance that one
or more of the factors described above will not have a material adverse effect
on the Combined Company's future international operations and, consequently, on
the Combined Company's business, financial condition, results of operations and
prospects.
Competition; Low Barriers to Entry. The market for Internet professional
services is relatively new, intensely competitive, rapidly evolving and
subject to rapid technological change. The Combined Company expects
competition to persist, intensify and increase in the future. The Combined
Company's competitors can be divided into several groups: computer hardware
and service vendors such as International Business Machines Corporation,
Digital Equipment Corporation and Hewlett-Packard Company; advertising and
media agencies such as Ogilvy & Mather, Young & Rubicam, and Foote, Cone &
Belding; Internet integrators and Web presence providers such as Agency.com,
iXL Holding, Inc., Organic Online, Inc., Proxicom, Inc., Sapient (which
recently announced a business combination with Studio Archetype, a design and
branding firm); large information technology consulting service providers such
as Andersen Consulting, Cambridge Technology Partners and Electronic Data
Systems Corporation; telecommunications companies such as AT&T Corporation and
MCI Communications Group; Internet and online service providers such as
America Online Incorporated, NETCOM On-Line Communications Services Inc. and
UUNet Technologies, Inc.; and software vendors such as Lotus Development
Corporation, Microsoft Corporation, Netscape Communications Corp., Novell,
Inc. and Oracle Corporation. Many of the Combined Company's
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current and potential competitors have longer operating histories, larger
installed customer bases, longer relationships with clients and significantly
greater financial, technical, marketing and public relations resources than the
Combined Company and could decide at any time to increase their resource
commitments to the Combined Company's target markets. In addition, the market
for Intranet, Extranet and Web site development is relatively new and subject to
continuing definition, and, as a result, may better position the Combined
Company's competitors to compete in this market as it matures. As a strategic
response to changes in the competitive environment, the Combined Company may
from time to time make certain pricing, service, technology or marketing
decisions or business or technology acquisitions that could have a material
adverse effect on the Combined Company's business, financial condition, results
of operations and prospects. Competition of the type described above could
materially adversely affect the Combined Company's business, results of
operations, financial condition and prospects.
In addition, the Combined Company's ability to maintain its existing client
relationships and generate new clients will depend to a significant degree on
the quality of its services and its reputation among its clients and potential
clients, compared with the quality of services provided by, and the reputations
of, the Combined Company's competitors. To the extent the Combined Company loses
clients to its competitors because of dissatisfaction with the Combined
Company's services or its reputation is adversely affected for any other reason,
the Combined Company's business, financial condition, results of operations and
prospects could be materially adversely affected.
There are relatively low barriers to entry into the Combined Company's
business. Because professional services firms such as USWeb and CKS Group rely
on the skill of their personnel and the quality of their client service, they
have no patented technology that would preclude or inhibit competitors from
entering their markets. The Combined Company is likely to face additional
competition from new entrants into the market in the future. There can be no
assurance that existing or future competitors will not develop or offer services
that provide significant performance, price, creative or other advantages over
those offered by the Combined Company, which could have a material adverse
effect on its business, financial condition, results of operations and
prospects.
Reliance Upon Key Strategic Relationships. USWeb and CKS Group have
established a number of strategic relationships with leading hardware and
software companies, including Intel Corporation, Microsoft Corporation, SAP
America Inc., Hewlett-Packard, Pandesic LLC (the Internet company from Intel
Corporation and SAP America, Inc.), Sun Microsystems, Inc., Reuters Ltd. and
NBC, and with the Interpublic Group of Companies, a leading advertising
consortium. The loss of any one of these strategic relationships would deprive
the Combined Company of the opportunity to gain early access to leading-edge
technology, cooperatively market products with the vendor, cross-sell
additional services and gain enhanced access to vendor training and support.
Maintenance of the Combined Company's strategic relationships is based
primarily on an ongoing mutual business opportunity and a good overall working
relationship. The legal contracts associated with these relationships, certain
of which are terminable at-will by the parties, would not be sufficient to
force the strategic relationship to continue effectively if that were
otherwise not in the strategic partner's best interests. In the event that any
strategic relationship is terminated, the Combined Company's business,
financial condition, results of operations and prospects may be materially
adversely affected.
Developing Internet Economy, Market for e-Commerce Solutions; Unproven
Acceptance of the Combined Company's Complete Media Solutions and Client
Outsourcing. A substantial portion of the Combined Company's revenues is
expected to be derived from services that depend upon the adoption of Internet
solutions by companies to improve their business positioning and processes, and
the continued development of the World Wide Web, the Internet and e- Commerce.
The Internet may not prove to be a viable commercial marketplace because of
inadequate development of the necessary infrastructure, lack of development of
complementary products, implementation of competing technology, delays in the
development or adoption of new standards and protocols required to handle
increased levels of Internet activity, governmental regulation, or other
reasons. The Internet has experienced, and is expected to continue to
experience, significant growth in the number of users and volume of traffic.
There can be no assurance that the Internet infrastructure will continue to be
able to support the demands placed on it by this continued growth. Moreover,
critical issues concerning the use of Internet and e-Commerce solutions
(including security, reliability, cost, ease of deployment and administration
and quality of service) remain unresolved and may affect the growth of the use
of such technologies to maintain, manage and operate a business, expand product
marketing, improve corporate communications and increase business efficiencies.
The adoption of Internet solutions for these purposes, particularly by those
individuals and enterprises that have historically relied on traditional means,
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can be capital intensive and generally requires the acceptance of a new way of
conducting business and exchanging information. If critical issues concerning
the ability of Internet solutions to improve business positioning and processes
are not resolved or if the necessary infrastructure is not developed, the
Combined Company's business, financial condition, results of operations and
prospects will be materially adversely affected.
Even if these issues are resolved, there can be no assurance that
businesses will elect to outsource the design, development and maintenance of
their Web sites to Internet professional services firms. Companies may decide to
assign the design, development and implementation of Internet solutions to their
internal information technology divisions, which have ready access to both key
client decision makers and the information required to prepare proposals for
such solutions. If independent providers of Internet professional services prove
to be unreliable, ineffective or too expensive, or if software companies develop
tools that are sufficiently user-friendly and cost-effective, enterprises may
choose to design, develop or maintain all or part of their Intranets, Extranets
or Web sites in-house. If the market for such services does not continue to
develop or develops more slowly than expected, or if the Combined Company's
services do not achieve market acceptance, its business, results of operations,
financial condition and prospects will be materially adversely affected.
Volatility of Stock Price. The trading prices of USWeb Common Stock and
CKS Group Common Stock have historically been subject to wide fluctuations, due
to a variety of factors including announcements regarding financial results,
acquisitions, and significant orders. Failure to achieve periodic revenue,
earnings and other operating and financial results as forecasted or anticipated
by brokerage firms or industry analysts could result in an immediate and adverse
effect on the market price of the Combined Company's common stock. The Combined
Company may not discover, or be able to confirm, revenue or earnings shortfalls
until the end of a quarter, which could result in a greater immediate and
adverse effect on the common stock of the Combined Company. In addition, the
stock market, which has recently been at or near historic highs, has experienced
extreme price and volume fluctuations that have particularly affected the market
prices of equity securities of many technology companies and that often have
been unrelated to the operating performance of such companies. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has often been instituted against such a
company. Such litigation could result in substantial costs and a diversion of
management's attention and resources, which would have a material adverse effect
on the Combined Company's business, financial condition, results of operations
and prospects. See "--Risk of Litigation."
Conflicts of Interest. Conflicts of interest are inherent in certain
segments of the marketing communications industry, particularly in advertising.
CKS Group has in the past, and the Combined Company likely will in the future,
be unable to pursue potential advertising and other opportunities because such
opportunities will require the Combined Company to provide services to direct
competitors of existing CKS Group or USWeb clients. In addition, CKS Group and
USWeb risk alienating or straining relationships with existing clients each time
CKS Group or USWeb agree to provide services to even indirect competitors of
existing CKS Group or USWeb clients. Conflicts of interest may jeopardize the
stability of revenues generated from existing clients and preclude access to
business prospects, either of which developments could have a material adverse
effect on the Combined Company's business, financial condition, results of
operations and prospects.
Rapid Technological Change. The market for Internet professional services
and marketing communications services is characterized by rapid technological
change, changes in user and client requirements and preferences, frequent new
product and service introductions embodying new processes and technologies and
evolving industry standards and practices that could render the Combined
Company's existing service practices and methodologies obsolete. The Combined
Company's success will depend, in part, on its ability to improve its existing
services, develop new services and solutions that address the increasingly
sophisticated and varied needs of its current and prospective clients, and
respond to technological advances, emerging industry standards and practices,
and competitive service offerings. Failure to do so could result in the loss of
existing customers or the inability to attract and retain new customers, either
of which developments could have a material adverse effect on the Combined
Company's business, financial condition, results of operations and prospects.
There can be no assurance that the Combined Company will be successful in
responding quickly, cost-effectively and sufficiently to these developments. If
the Combined Company is unable, for technical, financial or other reasons, to
adapt in a timely manner in response to changing market conditions or client
requirements, its business, financial condition, results of operations and
prospects would be materially adversely affected.
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Risks of Fixed-Price Engagements. CKS Group generates a significant
portion of its revenues through project fees on a fixed fee for service basis
and USWeb intends to increase the percentage of its engagements that are billed
on a fixed-price basis, as well as the percentage of revenues derived from
fixed- price engagements, as distinguished from USWeb's current principal method
of billing on a time and materials basis. Both USWeb and CKS Group assume
greater financial risk from fixed-price type contracts than on either time-and-
material or cost-reimbursable contracts. The failure to estimate accurately the
resources and time required for an engagement, to manage client expectations
effectively regarding the scope of services to be delivered for the estimated
fees or to complete fixed-price engagements within budget, on time and to
clients' satisfaction would expose the Combined Company to risks associated with
cost overruns and, in certain cases, penalties, any of which could have a
material adverse effect on the Combined Company's business, results of
operations and financial condition.
Intellectual Property Risks. Each of USWeb and CKS Group regard their
copyrights, trademarks, trade secrets (including their methodologies, practices
and tools) and other intellectual property rights as important to the success of
the Combined Company. To protect their rights in these various intellectual
properties, both USWeb and CKS Group have relied on a combination of trademark
and copyright law, trade secret protection and confidentiality agreements and
other contractual arrangements with their employees, Affiliates, clients,
strategic partners, acquisition targets and others to protect its proprietary
rights. USWeb and CKS Group have also registered several of their trademarks in
the U.S. and internationally. Effective trademark, copyright and trade secret
protection may not be available in every country in which USWeb or CKS Group
offer or intend to offer their services. There can be no assurance that the
steps taken by USWeb or CKS Group to protect their proprietary rights will be
adequate or that third parties will not infringe or misappropriate USWeb's or
CKS Group's proprietary rights, or that USWeb or CKS Group will be able to
detect unauthorized use and take appropriate steps to enforce their rights. In
addition, although USWeb and CKS Group believe that their proprietary rights do
not infringe on the intellectual property rights of others, there can be no
assurance that other parties will not assert infringement claims against the
Combined Company. Such claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources. In addition,
patents recently issued to third parties regarding Internet business processes
indicate that additional Internet business process patents may be issued in the
future. While USWeb and CKS Group do not believe they infringe any existing
business process patent, future patents may limit the Combined Company's ability
to use processes covered by such patents or expose the Combined Company to
claims of patent infringement or otherwise require the Combined Company to seek
to obtain related licenses. There can be no assurance that such licenses would
be available on acceptable terms or at all. The failure to obtain such licenses
on acceptable terms could have a material adverse effect on the Combined
Company's business, financial condition, results of operations and prospects.
Potential Liability to Clients. Many of USWeb's and CKS Group's consulting
engagements involve the development, implementation and maintenance of
applications that are critical to the operations of their clients' businesses.
The Combined Company's failure or inability to meet a client's expectations in
the performance of its services could injure the Combined Company's business
reputation or result in a claim for substantial damages against the Combined
Company, regardless of its responsibility for such failure. In addition, USWeb
and CKS Group possess technologies and content that may include confidential or
proprietary client information. Although USWeb and CKS Group have implemented
policies to prevent such client information from being disclosed to unauthorized
parties or used inappropriately, any such unauthorized disclosure or use could
result in a claim for substantial damages. USWeb and CKS Group have attempted to
limit contractually their damages arising from negligent acts, errors, mistakes
or omissions in rendering professional services; however there can be no
assurance that any contractual protections will be enforceable in all instances
or would otherwise protect the Combined Company from liability for damages.
Although USWeb and CKS Group maintain general liability insurance coverage,
including coverage for errors and omissions, there can be no assurance that such
coverage will continue to be available on reasonable terms or will be available
in sufficient amounts to cover one or more large claims, or that the insurer
will not disclaim coverage as to any future claim. The successful assertion of
one or more large claims against the Combined Company that are uninsured, exceed
available insurance coverage or result in changes to USWeb's or CKS Group's
insurance policies, including premium increases or the imposition of a large
deductible or co-insurance requirements, could adversely affect the Combined
Company's business, results of operations and financial condition.
Year 2000 Compliance. Many computer systems and software and electronic
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
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distinguish 21st century dates from 20th century dates. In addition, certain
systems and products do not correctly process "leap year" dates. As a result, in
the next 14 months, computer systems and software ("IT Systems") and other
property and equipment not directly associated with information systems ("Non-IT
Systems"), such as elevators, phones, other office equipment used by many
companies, including USWeb and CKS Group and customers and potential customers
of USWeb and CKS Group, may need to be upgraded, repaired or replaced to comply
with such "Year 2000" requirements, and "leap year" requirements.
USWeb has conducted an internal review of most of its internal corporate
headquarters IT Systems, including finance, human resources, Intranet
applications and payroll systems. USWeb has contacted most of the vendors of its
internal corporate headquarters IT Systems to determine potential exposure to
Year 2000 issues and has obtained certificates developed in cooperation with
USWeb's independent auditors from such vendors assuring Year 2000 compliance.
Although USWeb has determined that most of its principal internal corporate
headquarters IT Systems are Year 2000 compliant, certain of such internal
systems, including USWeb's Windows NT operating system and internal networking
systems are not Year 2000 compliant or have not been evaluated by USWeb. USWeb
has not yet made an assessment of the status of the IT Systems at USWeb's
subsidiaries or the Non-IT Systems for the corporate headquarters and its
subsidiaries.
CKS Group is conducting an internal review of its IT Systems and is in the
process of correcting areas of exposure to Year 2000 issues. CKS Group's core
financial and reporting systems have also been identified by internal review as
either being Year 2000 compliant or upgradable to be Year 2000 compliant,
although a number of ancillary applications may not yet be Year 2000 compliant.
CKS Group has not yet made an assessment of the status of its Non- IT Systems.
As part of the integration of USWeb and CKS in connection with the Merger,
USWeb and CKS intend to appoint a task force (the "Task Force") to oversee Year
2000 and leap year issues of the Combined Company. The task force is expected to
review all IT Systems and Non-IT Systems that have not been determined to be
Year 2000 and leap year compliant and will attempt to identify and implement
solutions to ensure such compliance. USWeb and CKS expect to evaluate its
systems for Year 2000 and leap year compliance in accordance with DISC PD2000-1
Year 2000 compliance standards established by the British Standards Institute.
To date, USWeb and CKS Group have spent an immaterial amount to remediate their
Year 2000 issues. USWeb and CKS presently estimate that the total cost of
addressing their Year 2000 and leap year issues will be immaterial. These
estimates were derived utilizing numerous assumptions, including the assumption
that they have already identified their most significant Year 2000 and leap year
issues and that the plans of its third-party suppliers will be fulfilled in a
timely manner without cost to the Company. However, these assumptions may not be
accurate, and actual results could differ materially from those anticipated.
USWeb and CKS Group have been informed by most of their suppliers that such
suppliers will be Year 2000 compliant by the Year 2000. Any failure of these
third parties systems to timely achieve Year 2000 compliance could have a
material adverse effect on the business, financial condition, results of
operations and prospects of the Combined Company.
Neither CKS Group nor USWeb has determined the state of compliance of
certain third-party suppliers of services such as phone companies, long distance
carriers, financial institutions and electric companies, the failure of any one
of which could severely disrupt the Combined Company's ability to carry on its
business as well as disrupt the business of the Combined Company's customers.
Failure to provide Year 2000 and leap year compliant business solutions to
their customers or to receive such business solutions from their suppliers could
result in liability to the Combined Company or otherwise have a material adverse
effect on the Combined Company's business, results of operations, financial
condition and prospects. Furthermore, USWeb and CKS Group believe that the
purchasing patterns of customers and potential customers may be affected by Year
2000 issues as companies expend significant resources to correct or patch their
current software systems for Year 2000 compliance. These expenditures may result
in reduced funds available to purchase products and services such as those
offered by USWeb or CKS Group, which could result in a material adverse effect
on the Combined Company's business, results of operations and financial
condition. USWeb and the Combined Company could be affected through disruptions
in the operation of the enterprises with which USWeb interacts or from general
widespread problems or an economic crisis resulting from noncompliant Year 2000
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systems. Despite USWeb's efforts to address the Year 2000 effect on its internal
systems and business operations, such effect could result in a material
disruption of its business or have a material adverse effect on USWeb's or the
Combined Company's business, financial condition or results of operations. USWeb
and CKS have not developed a contingency plan to respond to any of the foregoing
consequences of internal and external failures to be Year 2000 and leap year
compliant, but expect the Task Force to develop such a plan.
Future Capital Needs; Uncertainty of Additional Financing. USWeb and CKS
Group currently anticipate that their available cash resources and credit
facilities will be sufficient to meet the Combined Company's presently
anticipated working capital and capital expenditure requirements for at least
the next 12 months. However, the Combined Company may need to raise additional
funds in order to support more rapid expansion, develop new or enhanced services
and products, respond to competitive pressures, acquire complementary businesses
or technologies or take advantage of unanticipated opportunities. The Combined
Company's future liquidity and capital requirements will depend upon numerous
factors, including the success of the Combined Company's existing and new
service offerings and competing technological and market developments. The
Combined Company may be required to raise additional funds through public or
private financing, strategic relationships or other arrangements, particularly
as its acquisition strategy matures. There can be no assurance that such
additional funding, if needed, will be available on terms acceptable to the
Combined Company, or at all. Furthermore, any additional equity financing may be
dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants, which may limit the Combined Company's operating
flexibility with respect to certain business matters. Strategic arrangements, if
necessary to raise additional funds, may require the Combined Company to
relinquish its rights to certain of its intellectual property or selected
business opportunities. If additional funds are raised through the issuance of
equity securities, the percentage ownership of the stockholders of the Combined
Company will be reduced, stockholders may experience additional dilution in net
book value per share, and such equity securities may have rights, preferences or
privileges senior to those of the holders of the Combined Company's Common
Stock. If adequate funds are not available on acceptable terms, the Combined
Company may be unable to develop or enhance its services and products, take
advantage of future opportunities or respond to competitive pressures, any of
which could have a material adverse effect on the Combined Company's business,
financial condition, results of operations and prospects.
Government Regulation and Legal Uncertainties. USWeb and CKS Group are not
currently subject to direct government regulation, other than pursuant to
certain franchising regulations, the securities laws and the regulations
thereunder applicable to all publicly owned companies, and laws and regulations
applicable to businesses generally, and there are currently few laws or
regulations directly applicable to access to or commerce on the Internet.
However, due to the increasing popularity and use of the Internet, it is likely
that a number of laws and regulations may be adopted at the local, state,
national or international levels with respect to the Internet covering issues
such as user privacy, freedom of expression, pricing of products and services,
taxation, advertising, intellectual property rights, information security or the
convergence of traditional communications services with Internet communications.
For example, the Telecommunications Act of 1996 (the "Telecommunications Act")
imposes criminal penalties on anyone who distributes obscene or indecent
communications over the Internet. Although the anti-indecency provisions of the
Telecommunications Act have been declared unconstitutional by the federal
courts, the increased attention focused upon these liability issues as a result
of the Telecommunications Act could adversely affect the growth of the Internet
and therefore demand for the Combined Company's services. In addition, because
of the growth in the electronic commerce market, Congress has held hearings on
whether to regulate providers of services and transactions in the electronic
commerce market, which regulations could negatively affect client demand for
Internet solutions that facilitate electronic commerce. Moreover, the adoption
of any such laws or regulations may decrease the growth of the Internet, which
could in turn decrease the demand for the Combined Company's services or
increase the cost of doing business or in some other manner have a material
adverse effect on the Combined Company's business, financial condition, results
of operations or prospects. In addition, the applicability to the Internet of
existing laws governing issues such as property ownership, copyrights and other
intellectual property issues, taxation, libel and personal privacy is uncertain.
The vast majority of such laws were adopted prior to the advent of the Internet
and related technologies and, as a result, do not contemplate or address the
unique issues of the Internet and related technologies. Changes to such laws
intended to address these issues, including some recently proposed changes,
could create uncertainty in the marketplace which could reduce demand for the
Combined Company's services or increase the cost of doing business as a result
of costs of litigation or increased service delivery costs, or could in some
other manner have a material adverse effect on the Combined Company's business,
financial condition, results of operations and prospects.
23
<PAGE>
Dependence on Key Accounts. CKS Group's five largest clients accounted for
39% and 37% of CKS Group's revenues for the fiscal years ended November 30, 1996
and November 30, 1997, respectively, with fluctuations in the amount of revenue
contribution from each such client from quarter to quarter. Audi of America,
Inc. and Computer Associates International, Inc., CKS Group's two largest
clients during the fiscal year ended November 30, 1997, accounted for
approximately 15% and 7% of CKS Group's revenues, respectively, during the
period. Since many of CKS Group's clients generally retain CKS Group on a
project by project basis, a client from whom CKS Group generates substantial
revenue in one period may not be a substantial source of revenue in a subsequent
period. For example, of the five largest clients (in terms of fees paid to CKS
Group) during the fiscal year ended November 30, 1997, only two were in the top
five for the fiscal year ended November 30, 1996. To the extent that any of CKS
Group's major clients does not remain a significant source of revenues, there
could be a direct and immediate material adverse effect on the Combined
Company's business, financial condition, results of operations and prospects.
For instance, one of CKS Group's major clients, Barnett Bank, was acquired
during the fourth quarter of 1997 and, as a result, substantially reduced its
level of spending with CKS Group. This reduction in spending contributed to a
significant decline in CKS Group's earnings during that quarter. Historically,
CKS Group's typical project has lasted only four to six weeks, and once a
project is completed there can be no assurance that a client will engage CKS
Group for further services. In addition, CKS Group's clients may unilaterally
reduce their use of CKS Group's services or terminate existing projects without
penalty. The termination of CKS Group's business relationship with any of its
significant clients or a material reduction in the use of CKS Group's services
by a significant client may have a material adverse effect on the Combined
Company's business, financial condition and operating results.
Risks of Franchising. USWeb has entered into franchise agreements with
certain franchisees (each an "Affiliate"), which manage a number of its
consulting offices. While these agreements permit USWeb to terminate the
franchise relationship if an Affiliate continues to underperform relative to
other Affiliates, such an Affiliate must be given at least 12 months to improve
its performance. Consequently, a significantly underperforming Affiliate could
adversely affect USWeb's, and correspondingly the Combined Company's,
reputation. In addition, a terminated Affiliate may refuse to comply with the
terms of the franchise agreement relating to relinquishment of USWeb brands and
other USWeb intellectual property or initiate litigation against the Combined
Company. The operational autonomy granted to each Affiliate through the
franchise structure, together with the absence of certain territorial
restrictions on its activities, may inhibit the Combined Company's control over
its market presence or enable the Affiliate to compete with company-owned
offices for client engagements. Further, despite implementation of contractual
safeguards and insurance against such a possibility, the Combined Company may be
held by a court to be responsible for some action or liability of an Affiliate.
Varying rights and protections under different state laws, lack of control of
Affiliate actions, or findings of vicarious liability for Affiliate actions
could have a material adverse effect on the Combined Company's business,
operating results and financial condition. USWeb has been named as a defendant
in a lawsuit filed in the Superior Court of California for the County of Los
Angeles on June 10, 1998, by Larmark Inc. alleging, among other claims, breach
of contract against USWeb's former affiliate "SystemLogic" in Santa Monica,
California, and apparent agency of USWeb. USWeb believes the claims are without
substantial merit and intends to defend itself vigorously against the claims
made. In addition, if a significant portion of the Affiliates chose not to work
cooperatively, or if any significant Affiliate or group of Affiliates were to
leave the USWeb network, the network would be correspondingly weaker.
Furthermore, although for a period of two years after the end of the Affiliate
relationship, the Affiliate and key persons associated with the Affiliate are
prohibited from certain activities in competition with the Combined Company and
from soliciting the Combined Company employees for alternate employment,
enforceability of these restrictions will vary depending on applicable state
law. To the extent that the action or inaction of any Affiliate proves
deleterious to the reputation associated with the USWeb or the Combined Company
brand, the Combined Company's business, results of operations and financial
condition could be materially adversely affected. USWeb has been named as a
defendant in a lawsuit filed in the Superior Court of California for the County
of Los Angeles on June 10, 1998, by Larmark Inc. alleging, among other claims,
breach of contract against USWeb's former affiliate "SystemLogic" in Santa
Monica, California, and apparent agency of USWeb. USWeb believes the claims are
without merit and intends to defend itself vigorously against the claims made.
Effect of Certain Provisions; Anti-Takeover Effects of Certificate of
Incorporation, Bylaws and Delaware Law. The board of directors of the Combined
Company (the "Combined Company Board") will have the authority to issue up to
1,000,000 shares of Preferred Stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by its stockholders. The rights
24
<PAGE>
of the holders of the common stock of the Combined Company will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of the outstanding voting stock. Further,
certain provisions of Delaware law and the Combined Company's Certificate of
Incorporation and Bylaws could delay or impede a merger, tender offer or proxy
contest involving the Combined Company. While such provisions are intended to
enable the Combined Company Board to maximize stockholder value, they may have
the effect of discouraging takeovers which could be in the best interest of
certain stockholders. There is no assurance that such provisions will not have
an adverse effect on the market value of the common stock of the Combined
Company.
Concentration of Stock Ownership. The present directors, executive
officers and their respective affiliates beneficially own a substantial portion,
although less than a majority, of the outstanding Common Stock of the Combined
Company. For example, as of October 20, 1998, the present directors, executive
officers and 10% or more stockholders of USWeb beneficially own approximately
25.4% of the USWeb Common Stock, and the present directors, executive officers
and 10% or more stockholders of CKS Group own approximately 30.6% of the CKS
Group Common Stock. Following the completion of the Merger, the directors,
executive officers and 10% or more stockholders of the Combined Company and
their respective affiliates are expected to own approximately 22.5% of the
Combined Company's Common Stock based on share information as of October 20,
1998. As a result, these stockholders will be able to exercise significant
influence over all matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions. Such
concentration of ownership may also have the effect of delaying or preventing a
change in control of the Combined Company.
Susceptibility to General Economic Conditions. CKS Group's and USWeb's
revenues and results of operations are subject to fluctuations based upon
general economic conditions. If there were to be a general economic downturn or
a recession in the United States, then the Combined Company expects that
business enterprises, including its clients and potential clients, likely will
substantially and immediately reduce their budgets. Because certain of CKS
Group's and USWeb's largest clients have substantial overseas operations, their
budgets may also be adversely affected by economic conditions in overseas
markets, including the recent volatility in Asian and Russian economies and
Asian and Russian currency and securities markets. In the event of such an
economic downturn, the Combined Company's business, financial condition, results
of operations and prospects would not be materially and adversely affected.
Risks Related to the Merger
Difficulties of Integrating USWeb and CKS Group. Following the Merger, to
maintain and increase profitability and to achieve the anticipated benefits of
the Merger, the combined company will need to effectively and efficiently
integrate the two companies' operations in a timely manner. In particular, the
Combined Company will need to integrate (i) management, technical, creative and
other personnel, (ii) technical and creative service offerings, (iii) sales and
marketing efforts and (iv) financial, accounting and other operational controls,
procedures, information systems and policies. The integration process will be
further complicated by the need to integrate widely dispersed operations and
distinct corporate cultures. There can be no assurance that such integration
will be accomplished in an efficient or effective manner, if at all. The
integration process will require the dedication of management and other
personnel which may distract their attention from the conduct of day-to-day
business activities, the formulation of strategy and the rapidly evolving
industry in which the Combined Company will compete. In addition, the
integration process will require the development of new service offerings and
the pursuit of other business acquisition opportunities. These factors, in turn,
could interrupt or cause a loss of momentum in the pre-Merger activities of
either or both companies following the Merger, and could lead customers to
defer, reduce and/or cancel purchase decisions or to select other vendors. The
business of the Combined Company also may be disrupted by employee departures or
reductions in employee productivity due to uncertainty during the integration
process. The integration of USWeb and CKS Group will be made more difficult by
the large number of other relatively small businesses recently acquired by the
two companies, some of which the companies still are in the process of
integrating into their respective businesses. Moreover, while USWeb and CKS
Group each recently have acquired other businesses, neither USWeb nor CKS Group
has attempted an acquisition with the scope or magnitude of the Merger.
Difficulties encountered in the transition and integration process, disruption
caused by the process of combining the companies, the diversion of management
and employee attention from day-to-day and other
25
<PAGE>
activities, or an inability to effectively and efficiently integrate the
operations of the companies in a timely manner could have a material adverse
effect on the business, financial condition, results of operations and prospects
of the Combined Company and on the anticipated benefits of the Merger. See "--
Risks Related to the Combined Company, USWeb and CKS Group--Integration of Other
Acquired Businesses."
Risk of Failure to Achieve Synergies. USWeb and CKS Group have entered
into a reorganization agreement with the expectation that the Merger will result
in beneficial operating synergies. These expectations are based on certain
assumptions, including that clients desire integrated Internet professional
services and marketing communications from a single vendor, that the two
companies will be able to sell their respective expertise to one another's
current customers, that the increased scale of the business will make the
Combined Company a more desirable partner for Fortune 500 accounts, and that
certain cost savings can be realized. The inability to achieve the desired
synergies for any reason could have a material adverse effect on the business,
financial condition, results of operations and prospects of the Combined Company
and on the benefits anticipated from the Merger.
Risks Associated with Fixed Exchange Ratio. Upon consummation of the
Merger, each outstanding share of CKS Group Common Stock will be converted into
the right to receive 1.5 shares of USWeb Common Stock. Because this exchange
ratio is fixed, it will not increase or decrease with fluctuations in the market
price of either USWeb Common Stock or CKS Group Common Stock. The specific
market value of the shares of USWeb Common Stock to be received by CKS Group
stockholders in the Merger will, therefore, depend on the market price of the
USWeb Common Stock on and after the consummation of the Merger. If the Merger
had occurred on October 20, 1998, then 23,306,912 shares of USWeb Common Stock
would have been issued to the CKS stockholders, having an aggregate value of
approximately $316 million, as determined by the $13.56 per share closing market
price of USWeb's Common Stock on the Nasdaq National Market on such date. USWeb
Common Stock and CKS Group Common Stock historically have been subject to
substantial price volatility. In the event that the market price of USWeb Common
Stock decreases or increases prior to the consummation of the Merger, the market
value of the USWeb Common Stock to be received by CKS Group stockholders in the
Merger would correspondingly decrease or increase. USWeb and CKS Group
stockholders are advised to obtain current market quotations for USWeb Common
Stock and CKS Group Common Stock immediately prior to each Company's special
meeting of stockholders in connection with the Merger. See "--Risks Related to
the Combined Company, USWeb and CKS--
26
<PAGE>
Volatility of Stock Price."
Dependence upon Key Personnel and Integration of Management. The success
of the Combined Company will depend upon the retention of senior executives and
other key employees who are critical to the continued advancement, development
and support of the companies' technologies as well as ongoing sales and
marketing efforts. As commonly occurs with mergers of technology companies,
during the pre-merger and integration phases competitors may intensify their
efforts to recruit key employees. Employee uncertainty regarding the effects of
the Merger could also cause increased turnover. USWeb and CKS Group employees
are generally not bound by employment agreements or noncompetition covenants.
The recent decline in stock market prices in general, and the stock prices of
both USWeb and CKS Group in particular, may have the effect of decreasing the
incentive value of stock options or other equity held by employees and thereby
increase the risk of employee turnover, as could recent management changes.
There can be no assurance that the Combined Company will be able to retain key
creative, technical, sales or marketing personnel prior to or after the Merger.
The loss of the services of any key personnel or of any significant group of
employees could have a material adverse effect on the Combined Company's
business, results of operations, financial condition and prospects and on the
benefits anticipated from the Merger.
The Combined Company's success depends to a significant extent on the
ability of its executive officers and other members of senior management to
operate effectively, both independently and as a group. In addition, some
members of management, including Robert Shaw as Chief Executive Officer, have
recently joined or will have new roles in the Combined Company. No assurance can
be given that management will succeed in their roles or that the Combined
Company can efficiently allocate management responsibilities and cause its
officers and senior managers to operate effectively as a group.
Client Uncertainty; Conflicts. Uncertainty regarding the Merger and the
ability of USWeb and CKS Group to effectively integrate their operations without
significant reduction in quality of service could lead certain customers to
defer purchase decisions or select other vendors, as could recent management
changes. In addition, some clients desire that their vendors avoid providing
similar services to the competitors of such clients. The Merger and resulting
combination of client bases may generate client conflicts and potentially cause
the loss of current clients or an inability to perform services for certain
competing businesses. The loss of significant clients or an inability to provide
services to a significant group of potential clients could have a material
adverse effect on the Combined Company's business, financial condition, results
of operations and prospects.
Uncertain Market Acceptance of the Combined Company Brands. USWeb and CKS
Group have each invested significant efforts in building brand recognition and
customer acceptance of their respective brand names. The Combined Company
believes that transferring market acceptance for the USWeb and CKS Group brands
to the Combined Company brands will be an important aspect of its efforts to
retain and attract clients. The Combined Company expects that the importance of
recognition and acceptance of the Combined Company brands will increase due to
the increasing number of companies entering the market for Internet marketing
and communications services. Promoting and positioning the Combined Company
brands will depend largely on the success of the Combined Company's marketing
efforts and the ability of the Combined Company to provide high quality,
reliable and cost-effective services in the areas of Internet marketing,
communications, strategy consulting, analysis and design, technology
development, implementation and integration, audience development, and
maintenance. If clients do not perceive the Combined Company's services as
meeting their needs, or if the Combined Company fails to market those services
effectively, the Combined Company will be unsuccessful in maintaining and
strengthening its brands. In addition, although the Combined Company intends to
centralize its marketing efforts, it intends to provide a significant part of
its client services through individual consulting offices and client
dissatisfaction with the performance of a single office could diminish the value
of the Combined Company brands. Furthermore, in order to promote the Combined
Company brands in response to competitive pressures, the Combined Company may
find it necessary to increase its marketing expenditures or otherwise increase
its financial commitment to creating and maintaining brand loyalty and awareness
among existing and potential clients. If the Combined Company fails to promote
and maintain its brands, or incurs excessive expenses in an attempt to promote
and maintain its brands, the Combined Company's business, financial condition,
results of operations and prospects will be materially adversely affected and
the Combined Company will not achieve the benefits anticipated from the Merger.
Substantial Expenses Resulting from the Merger. The negotiation and
implementation of the Merger will result in significant pre-tax expenses to
USWeb and CKS Group. Excluding costs associated with combining the operations of
the two companies and costs associated with the new brands of the Combined
Company (which costs are difficult to estimate), pre-tax expenses are estimated
at approximately $18.0 million, primarily consisting of fees for investment
bankers, attorneys, accountants, regulatory compliance, financial printing and
other integration-related charges. The aggregate amount of such expenses may be
greater and unanticipated contingencies could occur that would substantially
increase the costs of combining the operations of the two companies. In any
event, costs associated with the Merger are expected to negatively affect
results of operations in the quarter ending December 31, 1998 and possibly the
quarter ending March 31, 1999. The substantial majority of these costs will have
been incurred whether or not the Merger is approved or consummated.
27
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS.
Miscellaneous Proceedings
As is typical for companies in USWeb's business and of USWeb's size, USWeb
is from time to time the subject of lawsuits. USWeb does not believe that the
outcome of any pending litigation is likely to be material to USWeb, but due to
the inherent uncertainties of litigation, there is a risk that the outcome of
pending or any future litigation could have a material adverse effect on USWeb's
business, financial condition, cash flows or results of operations.
Inventa Corporation filed a complaint on September 25, 1998 in the United
States District Court for the Northern District of California naming both
USWeb and CKS Group as defendants and alleging that the names "Reinvent" and
"Reinvent Communications," the name formerly proposed to be the name of the
Combined Company, infringe the plaintiff's name and should therefore be
enjoined from use. On November 18, 1998, the judge in the case issued a
limited injunction to apply during the pendency of the litigation restricting
the style of presentation of the name Reinvent until resolution of the
lawsuit. Inventa is also seeking treble damages, as well as exemplary and
punitive damages in the amount of $5,000,000. USWeb believes that the
complaint is without merit and intends to defend itself vigorously; however,
USWeb and CKS Group no longer intend that the Combined Company adopt the name
"Reinvent Communications."
Larmark Inc. filed a complaint on June 10, 1998 in the Superior Court of
California for the County of Los Angeles naming USWeb as a defendant and
alleging, among other claims, breach of contract against USWeb's former
Affiliate, SystemLogic, in Santa Monica, California, and that USWeb is liable
for the acts of this former franchisee. USWeb believes the claims against it
are without merit and intends to defend itself vigorously against the claims
made.
CKS Group Stockholder Class Action Lawsuit Proceedings
On November 5, 1998, a putative class action lawsuit captioned Wilson v. CKS
Group, Inc., et al. was filed in the United States District Court for the
Northern District of California against CKS Group and three of its officers and
directors (Mark Kvamme, Thomas Suiter and Carlton Baab). The complaint alleges
that during the period March 20, 1997 to November 7, 1997 (the "Class Period"),
the defendants violated the Securities Exchange Act by issuing false and
misleading statements about CKS Group's operations, revenues and earnings which
allegedly inflated CKS Group's reported revenues, earnings and stock price. The
complaint further alleges that those who purchased CKS Group's stock suffered
damages when on November 7, 1997, the price of CKS Group Common Stock dropped,
allegedly causing losses to the members of the class. The plaintiff seeks to
recover damages in an unspecified amount (together with interest and attorneys'
fees) on behalf of all purchasers of CKS Group Common Stock during the Class
Period. CKS Group believes that this lawsuit is without merit and intends to
defend this action vigorously. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Other Information" and "--Risk
of Litigation."
ITEM 5. OTHER INFORMATION.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations Other Information."
Pursuant to Rule 14a-4 under the Exchange Act, proposals of stockholders of
the Company that are intended to be presented by such stockholders at the
Company's 1999 Annual Meeting of Stockholders and that are not eligible for
inclusion in the proxy statement and form of proxy relating to that meeting must
be received by the Company no later than March 14, 1999. If such stockholders
fail to comply with the foregoing notice provision, then the proxy holders will
be allowed to use their discretionary voting authority when the proposal is
raised at the 1999 Annual Meeting.
ITEM 6. EXHIBITS.
a. Exhibits:
28
<PAGE>
Exhibit 4.1*** Agreement and Plan of Reorganization dated September 1, 1998
among the Registrant, USWeb Acquisition Corporation No. 134 and
CKS Group, Inc. (see Annex A to Joint Proxy
Statement/Prospectus contained in the Registration Statement).
Exhibit 10.1*** Form of CKS Voting Agreement between Registrant and certain
stockholders of CKS Group, Inc. dated September 1, 1998.
Exhibit 10.2*** Form of CKS Group, Inc. Holder Agreement among Registrant, CKS
Group, Inc. and certain stockholders of Registrant dated
September 1, 1998.
Exhibit 10.3*** Form of USWeb Corporation Holder Agreement among Registrant,
CKS Group, Inc. and certain stockholders of Registrant dated
September 1, 1998.
Exhibit 10.4*** Employment Offer Letter dated November 4, 1998 between Robert
Shaw and USWeb.
Exhibit 11.1 Statement of calculation of basic and diluted net loss and pro
forma net loss per share.
Exhibit 27.1 Financial Data Schedule.
- -------------
***Incorporated by reference from the Company's Registration Statement on Form
S-4 (No. 333-63323).
29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report on Form 10-Q/A to be signed on its
behalf by the undersigned, thereunto duly authorized.
USWEB CORPORATION
Registrant
By: /s/ CAROLYN V. AVER
----------------------
CAROLYN V. AVER
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(on behalf of the Registrant and as
principal financial officer)
Dated: November 19, 1998
30
<PAGE>
EXHIBIT 11.1
USWEB CORPORATION
CALCULATION OF NET LOSS AND PRO FORMA NET LOSS PER SHARE (RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Historical (1) Pro Forma (2)
--------------------------------------------------------- ---------------------------------------------------------
Three Months Ended Sept 30, Nine Months Ended Sept 30, Three Months Ended Sept 30, Nine Months Ended Sept 30,
--------------------------- -------------------------- --------------------------- --------------------------
1998 1997 1998 1997 1998 1997 1998 1997
---------- --------- ---------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net loss $ (31,154) $ (18,027) $ (111,532) $ (39,270) $ (28,037) $ (46,273) $ (155,578) $ (183,929)
---------- --------- ---------- --------- ---------- ----------- ---------- ----------
Weighted
average
common
shares
outstanding 38,950,552 6,749,998 33,485,750 4,683,920 39,502,555 15,423,886 37,779,943 14,950,033
Shares
deemed
outstanding
under stock
bonus
arrangements
for employees
of acquired
companies 1,451,351 384,002 1,034,775 161,688 5,463,418 4,964,902 4,338,847 3,126,050
---------- --------- ---------- --------- ---------- ----------- ---------- ----------
Total
weighted
average
common
shares
outstanding 40,401,903 7,134,000 34,520,525 4,845,608 44,965,973 20,388,788 42,118,790 18,076,083
========== ========= ========== ========= ========== =========== ========== ==========
Basic and
diluted
net loss
per share $ (0.77) $ (2.53) $ (3.23) $ (8.10) $ (0.62) $ (2.27) $ (3.69) $ (10.18)
========== ========= ========== ========= ========== =========== ========== ==========
</TABLE>
(1) Net loss per share is computed in accordance with SFAS No. 128, Earnings Per
Share, and SEC Staff Accounting Bulletin No. 98 for all periods presented.
The computation excludes: (i) acquisition-related shares held in escrow
(Acquisition Shares), (ii) Common Stock subject to repurchase rights
(Restricted Shares), and (iii) Mandatorily Redeemable Convertible Preferred
Stock prior to their conversion into Common Stock on December 5, 1997. The
computation 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. Common
shares deemed outstanding under stock bonus arrangements for employees of
acquired companies is computed for each period by dividing cumulative
deferred compensation expense recognized in the statement of operations by
the weighted average price of the Company's Common Stock during the period.
(2) The computation of pro forma net loss per share is computed on the basis
described in (1) above and giving effect to the common shares issued to
acquired companies and the related amortization of deferred compensation
expense as if acquired on January 1, 1998 and 1997.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE USWEB
CORPORATION FORM 10-Q FOR THE NINE MONTHS ENDED 9/30/98 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 23,810
<SECURITIES> 29,842
<RECEIVABLES> 38,759
<ALLOWANCES> 4,398
<INVENTORY> 0
<CURRENT-ASSETS> 93,756
<PP&E> 16,518
<DEPRECIATION> 4,894
<TOTAL-ASSETS> 254,420
<CURRENT-LIABILITIES> 29,191
<BONDS> 0
0
0
<COMMON> 41
<OTHER-SE> 223,224
<TOTAL-LIABILITY-AND-EQUITY> 254,420
<SALES> 73,086
<TOTAL-REVENUES> 73,086
<CGS> 58,914
<TOTAL-COSTS> 58,914
<OTHER-EXPENSES> 127,603
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 331
<INCOME-PRETAX> (111,532)
<INCOME-TAX> 0
<INCOME-CONTINUING> (111,532)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (111,532)
<EPS-PRIMARY> (3.23)
<EPS-DILUTED> (3.23)
</TABLE>
