<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 1, 1998
REGISTRATION NO. 333-38351
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
AMENDMENT NO. 1 TO
POST-EFFECTIVE AMENDMENT NO. 5
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
USWEB CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
<TABLE>
<S> <C> <C>
DELAWARE 8742 870551650
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
---------------
USWEB CORPORATION
2880 LAKESIDE DRIVE, SUITE 300
SANTA CLARA, CA 95054
(408) 987-3200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
CAROLYN V. AVER
CHIEF FINANCIAL OFFICER
USWEB CORPORATION
2880 LAKESIDE DRIVE, SUITE 300
SANTA CLARA, CA 95054
(408) 987-3200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
---------------
COPIES TO:
MARK BONHAM, ESQ.
PAUL TOBIAS, ESQ.
KEVIN GALLIGAN, ESQ.
WILSON SONSINI GOODRICH & ROSATI
PROFESSIONAL CORPORATION
650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304
(650) 493-9300
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] ________
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
PROSPECTUS
16,666,667 SHARES
[LOGO OF USWEB]
COMMON STOCK
This Prospectus relates to 16,666,667 shares (the "Shares") of Common Stock,
$0.001 par value per share (the "Common Stock" or "USWeb Common Stock"), of
USWeb Corporation ("USWeb" or the "Company") that may be issued by the Company
and offered for sale from time to time in connection with future acquisitions
of the assets, technologies or securities of complementary businesses in such
amounts, at such prices and on such terms as may be determined at the time of
offering. No period of time has been fixed within which the Shares may be
offered or sold.
The consideration for acquisitions may consist of shares of Common Stock,
cash, assumptions of liabilities or a combination thereof as determined by
negotiations between the Company's representatives and the owners or
controlling persons, the assets, technologies or securities of the
complementary businesses to be acquired. Factors taken into account in
acquisitions include quantitative factors, including historical revenues,
profitability, financial condition and contract backlog, and the Company's
qualitative evaluation of the acquisition candidates' managerial team,
operation scalability and customer base, of the assets, technologies or
securities of the complementary businesses to be acquired, market value of the
Common Stock and other relevant factors. In addition, the Company may lease
property from and enter into employment, management, consulting or non-
competition agreements with former owners and key executive personnel of the
businesses to be acquired. The Company's management anticipates that the
Shares issued in any acquisition will be valued at a price reasonably related
to the market price of the Common Stock near the time of the acquisition.
All expenses of this offering will be paid by the Company. No underwriting
discounts or commissions will be paid in connection with the issuance of
Shares by the Company in business combination transactions or technology
acquisitions, although finder's fees may be paid with respect to specific
acquisitions. Any person receiving a finder's fee may be deemed to be an
underwriter within the meaning of Section 2(11) of the Securities Act of 1933,
as amended (the "Securities Act").
The Common Stock is traded on the Nasdaq National Market under the symbol
"USWB." On November 23, 1998, the last reported sale price for the Common
Stock on the Nasdaq National Market was $21.75 per share.
----------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 6.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is December 1, 1998
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-4
under the Securities Act and the rules and regulations promulgated thereunder
with respect to the Common Stock offered hereby. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. Statements contained in the Prospectus as to the contents
of any contract or other document that is filed as an exhibit to the
Registration Statement are not necessarily complete and each such statement is
qualified in all respects by reference to the full text of such contract or
document. For further information with respect to the Company and the Common
Stock, references hereby made to such exhibits and schedules thereto, which
may be inspected and copied at the principal office of the Commission, 450
Fifth Street, Suite 1400, Chicago, Illinois 60661, and copies of all or any
part thereof may be obtained at prescribed rates from the Commission's Public
Reference Section at such addresses. Also, the Commission maintains a World
Wide Web site on the Internet as http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants
(including USWeb) that file electronically with the Commission. USWeb Common
Stock is quoted on Nasdaq, and such reports, proxy and information statements
and other information also can be inspected at the office of Nasdaq
Operations, 1735 K Street, N.W., Washington, D.C. 20066.
The Company intends to continue furnishing its stockholders with annual
reports containing financial statements audited by an independent accounting
firm and make available to its stockholders quarterly reports for the first
three quarters of each fiscal year containing interim unaudited financial
information.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein (or in any
other subsequently filed document that is or is deemed to be incorporated by
reference herein) modifies or supersedes such previous statement. Any
statement so modified or superseded shall not be deemed to constitute a part
hereof except as so modified or superseded.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE THAT ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER THAN EXHIBITS TO SUCH
DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE
HEREIN) CONTAIN IMPORTANT BUSINESS AND FINANCIAL INFORMATION RELATED TO THE
COMPANY AND ARE AVAILABLE, WITHOUT CHARGE, UPON ORAL OR WRITTEN REQUEST BY ANY
PERSON TO WHOM THIS PROSPECTUS HAS BEEN DELIVERED, FROM USWEB CORPORATION,
2880 LAKESIDE DRIVE, SUITE 300, SANTA CLARA, CALIFORNIA 95054, ATTENTION:
INVESTOR RELATIONS; TELEPHONE NUMBER: (408) 987-3200. IN ORDER TO ASSURE
TIMELY DELIVERY OF THE DOCUMENTS, ANY SUCH REQUEST SHOULD BE MADE AT LEAST 5
DAYS BEFORE MAKING AN INVESTMENT DECISION.
TRADEMARKS
USWeb, the USWeb logo, A Strategic Partner for the Information Age and the
names of products and services offered by USWeb are trademarks, registered
trademarks, service marks or registered service marks of USWeb Corporation.
This Prospectus also includes product names, trade names and trademarks of
other companies.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Pro Forma
Consolidated Financial Information, including the Notes thereto, appearing
elsewhere in this Prospectus. This Prospectus contains, in addition to
historical information, "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act, which
can be identified by the use of forward-looking terminology, such as
"believes," "expects," "anticipates," "plans," "may," "will," "projects,"
"continues," "estimates," "potential" or "opportunity" or other variations
thereof or comparable terminology or the negative thereof. See "Forward-Looking
Statements." Such forward looking statements involve risks and uncertainties
and the Common Stock offered hereby involves a high degree of risk. The
Company's actual results or experience could differ significantly from those
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in "Risk Factors," as well as those discussed elsewhere in this Prospectus.
Investors should carefully consider the information set forth under the heading
"Risk Factors."
THE COMPANY
USWeb is an Internet professional services firm that provides Intranet,
Extranet and Web site solutions and services to businesses. USWeb is recognized
as a leader in this market. Forrester Research Inc. expects the shift to
electronic commerce will drive the worldwide Internet development services
market from $4 billion in 1998 to $15 billion by 2002. To take advantage of the
opportunity presented by this market, the Company has invested substantial
resources to establish a national network of consulting offices. Because of
this investment, the Company believes it has built one of the most recognized
brands for Internet professional services and developed a highly scalable
organization that can leverage central resources as its operations expand
through acquisitions as well as internal growth. The Company has pursued an
aggressive domestic acquisition program and is now focusing on strategic and
international opportunities.
The Company offers a comprehensive range of services to deliver Internet
solutions designed to improve clients' business processes. The Company's
services include strategy consulting; analysis and design; technology
development; implementation and integration; audience development; and
maintenance. The Company delivers these services to clients through its network
of consulting offices, whose regional presence enables each office to develop
close client relationships and an understanding of client needs. In addition,
individual consulting offices may draw as needed upon the assistance of one or
more additional offices with specialized creative or technical expertise.
The Company has developed central resources to provide clients with Internet
solutions based on the most effective technologies and proven methodologies.
The USWeb Internet Strategy and Solutions Center aggregates and redeploys the
best practices, technologies and creative work delivered by USWeb consulting
offices. The Strategy and Solutions Center provides the offices with efficient,
real-time access to these resources through USWeb Central, the Company's secure
Intranet, thereby enabling them to leverage the capabilities of the entire
USWeb operation.
The Company markets its services to medium-sized and large companies. Among
the clients of Company owned offices during the year ended December 31, 1997
were Amgen, Barnes & Noble, Charles Schwab, Chevron, Harley-Davidson, Ingram
Micro, Microsoft, REI, Silicon Graphics and Sony Music. Clients typically begin
their adoption of Internet solutions by establishing a basic Web site costing
several thousand dollars and then implementing increasingly powerful business
solutions, which can include business critical, fully integrated Intranets or
Extranets costing several million dollars. The Company's strategy is to provide
clients with services at all stages of their adoption of Internet solutions.
3
<PAGE>
The Company has made a significant investment in building and maintaining the
USWeb brands. Increasing recognition of the USWeb brands improves the ability
of USWeb consulting offices to access and influence key client decision makers,
hire skilled employees and leverage strategic relationships. The Company
believes that its marketing, advertising, seminars and other brand development
efforts have established the Company as one of the most recognized Internet
professional services firms. If the proposed merger is consumated, USWeb may
change its name. See "Risk Factors--Risks Related to Merger with CKS Group--
Uncertain Market Acceptance of the Combined Company Brands." As as result of
the Merger, CKS Group will become a wholly owned subsidiary of USWeb/CKS and
the former stockholders of CKS Group will own approximately 33.9% of USWeb/CKS.
Strategic relationships are an important element of the Company's efforts to
enter new markets, gain early access to leading-edge technology, cooperatively
market products and services with leading technology vendors, cross-sell
additional services and gain enhanced access to vendor training and support.
The Company has entered into, and intends to continue entering into, strategic
relationships with a limited number of leading Internet hardware, software and
content vendors. The Company currently has strategic relationships with Intel,
Microsoft, Hewlett-Packard, Pandesic LLC (the Internet company from Intel and
SAP), Sun Microsystems and Reuters.
As of November 16, 1998, the Company had acquired 33 companies and one
additional acquisition was probable. The Company regularly evaluates potential
acquisition candidates, is currently holding preliminary discussions with a
number of such candidates and is in active negotiations with a number of such
other candidates. If, after due diligence review and negotiation, such
companies can be acquired on a basis considered fair to the Company and its
stockholders, the Company may proceed with such acquisitions. The Company is
also evaluating or negotiating acquisition transactions outside the United
States. The Company expects most of its future acquisitions to include the
issuance of additional shares of the Company's Common Stock in the future. The
Company has filed a "shelf" Registration Statement on Form S-4, which this
Prospectus is a part, registering 16,666,667 shares of its Common Stock of
which approximately 9,200,000 shares, subject to additional issuances as
provided in the existing acquisition agreements, remain available, as of
November 16, 1998, for use in future acquisitions. See "Risk Factors--Risks
Related to Acquisitions," "--Management of Growth; Integration of
Acquisitions," "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Acquisition of Internet
Professional Services Firms," and "Business--Strategy" and "--Consulting Office
Network Development."
The Company was incorporated in Utah in December 1995 and changed its
jurisdiction of incorporation to Delaware in December 1997. The Company's
principal executive offices are located at 2880 Lakeside Drive, Suite 300,
Santa Clara, California 95054, its World Wide Web address is
http://www.usweb.com and its telephone number is (408) 987-3200. As used in
this Prospectus, the "Company" and "USWeb" refer to USWeb Corporation, a
Delaware corporation and its Utah predecessor.
4
<PAGE>
PROPOSED CKS MERGER
USWeb and CKS Group, Inc., a Delaware corporation ("CKS Group"), have entered
into an Agreement and Plan of Reorganization, dated as of September 1, 1998
(the "Reorganization Agreement"), among USWeb, USWeb Acquisition Corporation
134, a wholly owned subsidiary of USWeb ("Merger Sub"), and CKS Group. Pursuant
to the Reorganization Agreement, Merger Sub will merge with and into CKS Group,
CKS Group will continue as the surviving corporation and will become a wholly
owned subsidiary of USWeb, and each outstanding share of Common Stock, par
value $0.001 per share, of CKS Group ("CKS Group Common Stock"), will be
converted into the right to receive 1.5 shares (the "Exchange Ratio") of Common
Stock, par value $0.001 per share, of USWeb ("USWeb Common Stock") (the "CKS
Merger"). In connection with the Reorganization Agreement, USWeb and CKS Group
each granted the other a stock option to purchase up to 19.9% of the
outstanding shares of Common Stock of the company granting the option on the
date of exercise. Each stock option is exercisable following the announcement
of an alternative business combination proposal involving the company granting
the option and the occurrence of certain triggering events, none of which has
occurred to date.
A Joint Proxy Statement/Prospectus, which is a part of USWeb's Registration
Statement on Form S-4 (File No. 333-63323) (the "Joint Proxy
Statement/Prospectus"), has been furnished to all stockholders of record, as of
October 20, 1998 of USWeb and CKS Group in connection with special meetings of
the stockholders of USWeb and CKS Group which are expected to be held on
December 16, 1998 (individually, the "USWeb Special Meeting" and the "CKS Group
Meeting," respectively, and collectively, the "Special Meetings"). THIS
PROSPECTUS IS NOT THE JOINT PROXY STATEMENT/PROSPECTUS WHICH WILL BE PROVIDED
IN CONNECTION WITH THE SPECIAL MEETINGS. See "Risk Factors--Risks Related to
CKS Merger" for a discussion of the risks related to the proposed combination
of the Company with CKS Group. For more information regarding the
Reorganization Agreement, the USWeb Option, the CKS Option and other matters
relating to the CKS Merger, see USWeb's Registration Statement on Form S-4
(File No. 333-63323) and see "Information Regarding Proposed Merger with CKS
Group."
----------------
Unless otherwise indicated, all information contained in this Prospectus: (i)
assumes the Company receives no proceeds from the offerings pursuant to this
Prospectus; and (ii) unless otherwise indicated, refers to historical and not
pro forma results of operations. See "Use of Proceeds," "Capitalization,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Recent Events," "Description of Capital Stock" and "Plan of
Distribution." The phrase "Company-owned office" refers to an office managed by
an entity included in the Company's Consolidated Financial Statements as of the
date indicated.
5
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those discussed in
the forward-looking statements as a result of certain factors, including the
factors set forth below and elsewhere in this Prospectus. The following risk
factors should be considered carefully in addition to the other information
contained in this Prospectus before purchasing the Common Stock offered
hereby. The following discussion contains "forward-looking statements" within
the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act, which can be identified by the use of forward-looking
terminology such as "believes," "expects," "anticipates," "plans," "may,"
"will," "projects," "continues," "potential" or "opportunity" or the negative
thereof or other variations thereon or comparable terminology. See "Forward-
Looking Statements." The matters set forth below constitute cautionary
statements identifying important factors with respect to such forward-looking
statements, including certain risks and uncertainties that could cause actual
results to differ materially and adversely from those in such forward-looking
statements.
RISKS RELATED TO THE COMPANY
Limited Operating History; Accumulated Deficit. The Company was founded in
December 1995 and enrolled its first franchisee ("Affiliate") in April 1996.
Accordingly, the Company has only a limited operating history on which to base
an evaluation of its business and prospects. The Company and its prospects
must be considered in light of the risks, expenses and difficulties frequently
encountered by companies in an early stage of development, particularly
companies in new and rapidly evolving markets such as Internet professional
services. Such risks for the Company include, but are not limited to, an
evolving business model and the management of both internal and acquisition-
based growth. To address these risks, the Company must, among other things,
continue to expand its network of consulting offices, continue to develop the
strength and quality of its operations, maximize the value delivered to
clients by the USWeb Internet Strategy and Solutions Center (the "Strategy and
Solutions Center"), enhance the USWeb 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 September 30,
1998, had an accumulated deficit of $183.7 million. Although the Company has
experienced revenue growth in recent months, such growth rates may not be
sustainable or indicative of future operating results. In addition, the
Company intends to continue to invest heavily in acquisitions, infrastructure
development and marketing. As a result, the Company expects to continue to
incur substantial operating losses at least through the remainder of 1998, and
there can be no assurance that the Company will achieve or sustain
profitability. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Risks Related to Acquisitions. A key component of the Company's growth
strategy is the acquisition of Internet professional service firms that meet
the Company's criteria for strategic fit, geographic presence, revenues,
profitability, growth potential and operating strategy. The successful
implementation of this strategy depends on the Company's ability to identify
suitable acquisition candidates, acquire such companies on acceptable terms
and integrate their operations successfully with those of the Company. As of
September 1, 1998, the Company had acquired 33 companies and one additional
acquisition was probable. There can be no assurance that the Company will be
able to continue to identify additional suitable acquisition candidates or
that the Company will be able to acquire such candidates on acceptable terms.
Moreover, in pursuing acquisition opportunities the Company may compete with
other companies with similar growth strategies, certain of which competitors
may be larger and have greater financial and other resources than the Company.
Competition for these acquisition targets likely could also result in
increased prices of acquisition targets and a diminished pool of companies
available for acquisition. Acquisitions also involve a number of other risks,
including adverse effects on the Company's reported operating results from
increases in goodwill amortization,
6
<PAGE>
acquired in-process technology, stock compensation expense and increased
compensation expense resulting from newly hired employees, the diversion of
management attention, potential disputes with the sellers of one or more
acquired entities and the possible failure to retain key acquired personnel.
Client satisfaction or performance problems with an acquired firm could also
have a material adverse impact on the reputation of the Company as a whole,
and any acquired subsidiary could significantly underperform relative to the
Company's expectations. Because all of the Company's acquisitions have been
completed since March 1997, the Company is currently facing all of these
challenges and its ability to meet them over the long term has not been
established. For all of these reasons, the Company's pursuit of an overall
acquisition strategy or any individual completed, pending or future
acquisition may have a material adverse effect on the Company's business,
results of operations and financial condition. See "--Risks Related to Merger
of CKS Group" and "Risks Related to the Combined Company, USWeb and CKS
Group." To the extent the Company chooses to use cash consideration for
acquisitions in the future, the Company may be required to obtain additional
financing, and there can be no assurance that such financing will be available
on favorable terms, if at all. As the Company issues stock to complete future
acquisitions, existing stockholders will experience further ownership
dilution. See "--Dilution," "--Future Capital Needs; Uncertainty of Additional
Financing," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and "Business--Consulting Office Network Development"
and Note 1 to Consolidated Financial Statements.
Potential Fluctuations in Quarterly Results. As a result of the Company's
limited operating history, rapid growth and the emerging nature of the markets
in which it competes, the Company's historical financial data is of limited
value in planning future operating expenses. Accordingly, the Company's
expense levels are based in part on its expectations concerning future
revenues and are fixed to a large extent. The Company's revenues are derived
primarily from consulting fees for Internet solution engagements, which are
difficult to forecast accurately. The Company may be unable to adjust spending
in a timely manner to compensate for any unexpected shortfall in revenues.
Accordingly, a significant shortfall in demand for the Company's services
could have an immediate and material adverse effect on the Company's business,
results of operations and financial condition. Further, the Company intends to
increase its business development and marketing expenses significantly to
expand operations and enhance the Company's brands to increase other operating
expenses as required to build the Strategy and Solutions Center and support
the operations of the Company's consulting offices. To the extent that such
expenses precede or are not rapidly followed by increased revenues, the
Company's business, results of operations and financial condition may be
materially adversely affected.
The Company's quarterly operating results may fluctuate significantly in the
future as a result of a variety of factors, many of which are outside the
Company's control. These factors include the level of demand for Intranet,
Extranet and Web site development; the productivity of the Company's
consulting offices; the Company's success in finding and acquiring suitable
acquisition candidates; the Company's ability to attract and retain personnel
with the necessary strategic, technical and creative skills required to
service clients effectively; the cost of advertising and related media; the
amount and timing of expenditures by USWeb clients for Internet professional
services; client budgetary cycles; the amount and timing of capital
expenditures and other costs relating to the expansion of the Company's
operations; the introduction of new products or services by the Company or its
competitors; pricing changes in the industry; technical difficulties with
respect to the use of the Internet; economic conditions specific to Internet
technology usage; government regulation and legal developments regarding the
use of the Internet; and general economic conditions. As a strategic response
to changes in the competitive environment, the Company may from time to time
make certain pricing, service, technology or marketing decisions or business
or technology acquisitions that could have a material adverse effect on the
Company's business, results of operations and financial condition. The Company
may also experience seasonality in its business in the future, resulting in
diminished revenues to the Company as a consequence of decreased demand for
Internet professional services during summer and year-end vacation and holiday
periods. Due to all of the foregoing factors, in some future quarter the
Company's operating results may fall below the expectations of securities
analysts and investors. In such event, the trading price of the Company's
Common Stock would likely be materially and adversely affected and litigation
may ensue. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
7
<PAGE>
Recruitment and Retention of Internet Solutions Professionals. The Company's
business of delivering Internet professional services is labor intensive.
Accordingly, the Company's success depends in part on its ability to identify,
hire, train and retain consulting professionals who can provide the Internet
strategy, technology, marketing, audience development and creative skills
required by clients. There is currently a shortage of such personnel, and this
shortage is likely to continue for the foreseeable future. The Company
competes intensely for qualified personnel with other companies, and there can
be no assurance that the Company will be able to attract, assimilate or retain
other highly qualified technical, marketing and managerial personnel in the
future. The inability to attract and retain the necessary technical, marketing
and managerial personnel would have a material adverse effect on the Company's
business, results of operations and financial condition.
Competition; Low Barriers to Entry. The market for Internet professional
services is relatively new, intensely competitive, rapidly evolving and
subject to rapid technological change. The Company expects competition to
persist, intensify and increase in the future. The Company's competitors can
be divided into several groups: computer hardware and service vendors such as
International Business Machines Corporation ("IBM"), Digital Equipment
Corporation ("DEC") and Hewlett-Packard Company ("Hewlett-Packard");
advertising and media agencies such as Foote, Cone & Belding and Ogilvy &
Mather; Internet integrators and Web presence providers such as iXL Holding,
Inc. ("iXL"), Organic Online, Inc. ("Organic Online"), Poppe Tyson and
Proxicom, Inc. ("Proxicom"); large information technology consulting service
providers such as Andersen Consulting, Cambridge Technology Partners and
Electronic Data Systems Corporation ("EDS"); telecommunications companies such
as AT&T Corporation ("AT&T") and MCI Communications Group ("MCI"); Internet
and online service providers such as America Online Incorporated ("America
Online"), NETCOM On-Line Communications Services Inc. ("NETCOM") and UUNet
Technologies, Inc. ("UUNet"); and software vendors such as Lotus Development
Corporation ("Lotus"), Microsoft Corporation ("Microsoft"), Netscape
Communications Corp. ("Netscape"), Novell, Inc. ("Novell") and Oracle
Corporation ("Oracle"). Although only a few of these competitors have to date
offered a full range of Internet professional services, several have announced
their intention to offer comprehensive Internet technology solutions.
Furthermore, most of the Company's current and potential competitors have
longer operating histories, larger installed customer bases, longer
relationships with clients and significantly greater financial, technical,
marketing and public relations resources than the Company, and could decide at
any time to increase their resource commitments to the Company's market. In
addition, the market for Intranet, Extranet and Web site development is
relatively new and subject to continuing definition, and, as a result, may
better position the Company's competitors to compete in this market as it
matures. Competition of the type described above could materially adversely
affect the Company's business, results of operations and financial condition.
There are relatively low barriers to entry into the Company's business.
Because professional services firms such as the Company rely on the skill of
their personnel and the quality of their client service, the Company has no
patented technology that would preclude or inhibit competitors from entering
the Internet professional services market. The Company expects that it will
face additional competition from new entrants into the market in the future.
There can be no assurance that existing or future competitors will not develop
or offer services that provide significant performance, price, creative or
other advantages over those offered by the Company, which could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Business--Competition."
Management of Growth; Integration of Acquisitions. The Company's rapid
growth has placed, and is expected to continue to place, a significant strain
on the Company's managerial, operational, financial and other resources. As of
June 30, 1998, the Company had grown to 1,080 employees since its inception in
December 1995, and the Company expects that continued hiring of new personnel
will be required to support its business. The Company's future success will
depend, in part, upon its ability to manage its growth effectively, which will
require that the Company continue to implement and improve its operational,
administrative and financial and accounting systems and controls and to
expand, train and manage its employee base. There can be no assurance that the
Company's systems, procedures or controls will be
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adequate to support the Company's operations or that the Company's management
will be able to achieve the rapid execution necessary to exploit the market
for the Company's business model. Furthermore, the Company's future
performance will depend on the Company's ability to integrate the
organizations acquired by the Company, which, even if successful, may take a
significant period of time, will place a significant strain on the Company's
resources, and could subject the Company to additional expenses during the
integration process. As a result, there can be no assurance that the Company
will be able to integrate acquired businesses successfully or in a timely
manner in accordance with its strategic objectives. If the Company is unable
to manage internal or acquisition-based growth effectively, the Company's
business, results of operations and financial condition will be materially
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business--Strategy," "--Consulting
Office Network Development" and "--Employees."
Dilution. Investors participating in these offerings will incur immediate,
substantial dilution. The Company also has outstanding a large number of stock
options and warrants to purchase the Company's Common Stock with exercise
prices significantly below the initial public offering price. To the extent
such options or warrants are exercised, there will be further dilution. The
Company expects to continue its acquisition program through at least the end
of 1998 and, pursuant to a "shelf" Registration Statement of which this
Prospectus is a part, is registering 16,666,667 shares of its Common Stock (of
which approximately 9,200,000 shares, subject to additional issuances as
provided in the existing acquisition agreements, remain available for future
issuance as of November 16, 1998), which the Company has committed to issue or
intends to issue as acquisition consideration in addition to granting
substantial stock options and stock bonuses to the employees of the acquired
companies. Furthermore, the Company may be required, pursuant to the terms of
the definitive acquisition agreements, to issue additional shares, stock
options and stock bonuses to the stockholders and employees of the acquired
companies at each of six and twelve months after acquisitions of the acquired
companies. Although the Company's experience to date with such additional
issuances has not resulted in significant changes, they could be material in
the future. For these reasons, the Company's acquisition program will result
in further substantial ownership dilution to investors participating in these
offerings.
Uncertain Maintenance and Strengthening of USWeb Brands. The Company
believes that maintaining and strengthening USWeb brands is an important
aspect of its efforts to attract clients and that the importance of brand
recognition will increase due to the increasing number of companies entering
the market for Internet professional services. Promoting and positioning USWeb
brands will depend largely on the success of the Company's marketing efforts
and the ability of the Company to provide high quality, reliable and cost
effective Internet solution strategy consulting, analysis and design,
technology development, implementation and integration, audience development
and maintenance services. If clients do not perceive the Company's services as
meeting their needs, or if the Company fails to market those services
effectively, the Company will be unsuccessful in maintaining and strengthening
its brand. In addition, while the Company centralizes its marketing efforts,
it provides client service through the individual consulting offices and
client dissatisfaction with the performance of a single office could tarnish
the perception of USWeb brands as a whole. Furthermore, in order to promote
USWeb brands in response to competitive pressures, the Company may find it
necessary to increase its marketing budget or otherwise increase its financial
commitment to creating and maintaining brand loyalty among clients. If the
Company fails to promote and maintain its brands, or incurs excessive expenses
in an attempt to promote and maintain its brands, the Company's business,
results of operations and financial condition will be materially adversely
affected. See "Business--Services" and "--Marketing."
Reliance Upon Key Strategic Relationships. The Company has established a
number of strategic relationships with leading hardware and software
companies, including Intel Corporation ("Intel"), Microsoft, Hewlett-Packard,
Pandesic LLC ("Pandesic," the Internet company from Intel) and SAP America
Inc. ("SAP"), Sun Microsystems, Inc. ("Sun Microsystems") and Reuters Ltd.
("Reuters"). The loss of any one of these strategic relationships would
deprive the Company of the opportunity to gain early access to leading-edge
technology, cooperatively market products with the vendor, cross-sell
additional services and gain
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enhanced access to vendor training and support. Maintenance of the Company's
strategic relationships is based primarily on an ongoing mutual business
opportunity and a good overall working relationship. The legal contracts
associated with these relationships, certain of which are terminable at-will
by the parties, would not be sufficient to force the strategic relationship to
continue effectively if that were otherwise not in the strategic partners'
best interests. In the event that any strategic relationship is terminated,
the Company's business, results of operations and financial condition may be
materially adversely affected. See "Business--Strategy" and "--Strategic
Relationships."
Uncertain Adoption of Internet Solutions; Dependence on Client
Outsourcing. The market for the Company's services will depend upon the
adoption of Internet solutions by companies to improve their business
processes. The Internet may not prove to be a viable commercial marketplace
because of inadequate development of the necessary infrastructure, lack of
development of complementary products, such as high speed modems and high
speed communication lines, implementation of competing technology, delays in
the development or adoption of new standards and protocols required to handle
increased levels of Internet activity, governmental regulation, or other
reasons. The Internet has experienced, and is expected to continue to
experience, significant growth in the number of users and volume of traffic.
There can be no assurance that the Internet infrastructure will continue to be
able to support the demands placed on it by this continued growth. Moreover,
critical issues concerning the use of Internet solutions (including security,
reliability, cost, ease of deployment and administration and quality of
service) remain unresolved and may affect the growth of the use of such
technologies to solve business problems. The adoption of Internet solutions
for commerce and communications, particularly by those individuals and
enterprises that have historically relied on alternative means of commerce and
communication, generally requires the acceptance of a new way of conducting
business and exchanging information, which may be difficult for those with
substantial investments in alternate means that might be made obsolete. If
critical issues concerning the ability of Internet solutions to improve
business processes are not resolved or if the necessary infrastructure is not
developed, the Company's business, results of operations and financial
condition will be materially adversely affected.
Even if these issues are resolved, there can be no assurance that businesses
will elect to outsource the design, development and maintenance of their
Intranets, Extranets and Web sites to Internet professional services firms.
Companies may decide to assign the design, development and implementation of
Internet solutions to their internal information technology divisions, which
have ready access to both key client decision makers and the information
required to prepare proposals for such solutions. If independent providers of
Internet professional services prove to be unreliable, ineffective or too
expensive, or if software companies develop tools that are sufficiently user-
friendly and cost-effective, enterprises may choose to design, develop or
maintain all or part of their Intranets, Extranets or Web sites in-house. If
the market for the Company's services does not continue to develop or develops
more slowly than expected, or if the Company's services do not achieve market
acceptance, the Company's business, results of operations and financial
condition will be materially adversely affected. See "Business--Industry
Background" and "--Strategy."
Rapid Technological Change. The market for Internet professional services is
characterized by rapid technological change, changes in user and client
requirements and preferences, frequent new product and service introductions
embodying new processes and technologies and evolving industry standards and
practices that could render the Company's existing service practices and
methodologies obsolete. The Company's success will depend, in part, on its
ability to improve its existing services, develop new services and solutions
that address the increasingly sophisticated and varied needs of its current
and prospective clients, and respond to technological advances, emerging
industry standards and practices, and competitive service offerings. There can
be no assurance that the Company will be successful in responding quickly,
cost-effectively and sufficiently to these developments. If the Company is
unable, for technical, financial or other reasons, to adapt in a timely manner
in response to changing market conditions or client requirements, its
business, results of operations and financial condition would be materially
adversely affected. See "Business--Strategy" and "--Clients."
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Risks Associated with International Operations and Expansion. The Company
intends to expand its operations into international markets. However, to date
the Company has established only two businesses with consulting offices
outside of the United States and has no experience in either managing an
international of consulting offices or in marketing services to international
clients. The Company expects to incur significant costs to do both. If
revenues from international consulting offices are not adequate to offset the
expenses of establishing and maintaining an international network and of
localizing the Company's marketing programs, the Company's business, results
of operations and financial condition could be materially adversely affected.
There can be no assurance that the Company will be able to establish and
maintain international consulting offices or market its services to
international clients. In addition to the uncertainty as to the Company's
ability to generate revenues from foreign operations and expand its
international presence, there are certain risks inherent in doing business on
an international level, such as unexpected changes in regulatory requirements,
export and import restrictions, tariffs and other trade barriers; difficulties
in staffing and managing foreign operations; potentially adverse differences
in business customs, practices and norms; longer payment cycles; problems in
collecting accounts receivable; political instability; fluctuations in
currency exchange rates; software piracy; seasonal reductions in business
activity; and potentially adverse tax consequences, any of which could
adversely affect the Company's international operations. There can be no
assurance that one or more of the factors described above will not have a
material adverse effect on the Company's future international operations and,
consequently, on the Company's business, results of operations and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Risks of Fixed-Price Engagements. The Company intends to increase the
percentage of its engagements that are billed on a fixed-price basis, as well
as the percentage of revenues derived from fixed-price engagements, as
distinguished from the Company's current principal method of billing on a time
and materials basis. To date, the Company has had only limited experience with
fixed-price engagements. The Company's failure to estimate accurately the
resources and time required for an engagement, to manage client expectations
effectively regarding the scope of services to be delivered for the estimated
fees or to complete fixed-price engagements within budget, on time and to
clients' satisfaction would expose the Company to risks associated with cost
overruns and, in certain cases, penalties, any of which could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Risks of Franchising. USWeb has entered into franchise agreements with
Affiliates, which manage a number of its consulting offices. While these
agreements permit the Company to terminate the franchise relationship if an
Affiliate continues to underperform relative to other Affiliates, such an
Affiliate must be given at least 12 months to improve its performance.
Consequently, a significantly underperforming Affiliate could adversely affect
the Company's reputation. In addition, a terminated Affiliate may refuse to
comply with the terms of the franchise agreement relating to relinquishment of
USWeb brands and other Company intellectual property or initiate litigation
against the Company. The operational autonomy granted to each Affiliate
through the franchise structure, together with the absence of certain
territorial restrictions on its activities, may inhibit the Company's control
over its market presence or enable the Affiliate to compete with Company-owned
offices for client engagements. Further, despite implementation of contractual
safeguards and insurance against such a possibility, USWeb may be held by a
court to be responsible for some action or liability of an Affiliate. Varying
rights and protections under different state laws, lack of control of
Affiliate actions, or findings of vicarious liability for Affiliate actions
could have a material adverse effect on the Company's business, operating
results and financial condition. In addition, if a significant portion of the
Affiliates chose not to work cooperatively, or if any significant Affiliate or
group of Affiliates were to leave the USWeb network, the network would be
correspondingly weaker. Furthermore, although for a period of two years after
the end of the Affiliate relationship the Affiliate and key persons associated
with the Affiliate are prohibited from certain activities in competition with
USWeb and from soliciting USWeb employees for alternate employment,
enforceability of these restrictions will vary depending on applicable state
law. To the extent that the action or inaction of any Affiliate proves
deleterious to the reputation associated with USWeb brands, the Company's
business, results of operations and financial condition could be materially
adversely
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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 substantial
merit and intends to defend itself vigorously against the claims made.
Dependence on Key Personnel. The Company's performance is substantially
dependent on the continued services and on the performance of its executive
officers and other key employees, many of whom have worked together for only a
short period of time. Particularly in light of the Company's relatively early
stage of development, the Company is dependent on retaining and motivating
highly qualified personnel, especially its senior management. The Company does
not have "key person" life insurance policies on any of its executive
officers. The loss of the services of any of its executive officers or other
key employees could have a material adverse effect on the business, results of
operations or financial condition of the Company. See "Management."
Intellectual Property Risks. The Company regards its copyrights, trademarks,
trade secrets (including its methodologies, practices and tools) and other
intellectual property rights as critical to its success. To protect its rights
in these various intellectual properties, the Company relies on a combination
of trademark and copyright law, trade secret protection and confidentiality
agreements and other contractual arrangements with its employees, Affiliates,
clients, strategic partners, acquisition targets and others to protect its
proprietary rights. The Company has also registered several of its trademarks
in the U.S. and internationally. Effective trademark, copyright and trade
secret protection may not be available in every country in which the Company
offers or intends to offer its services. There can be no assurance that the
steps taken by the Company to protect its proprietary rights will be adequate
or that third parties will not infringe or misappropriate the Company's
copyrights, trademarks and similar proprietary rights, or that the Company
will be able to detect unauthorized use and take appropriate steps to enforce
its rights. In addition, although the Company believes that its proprietary
rights do not infringe on the intellectual property rights of others, there
can be no assurance that other parties will not assert infringement claims
against the Company. Such claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources.
Potential Liability to Clients. Many of the Company's consulting engagements
involve the development, implementation and maintenance of applications that
are critical to the operations of its clients' businesses. The Company's
failure or inability to meet a client's expectations in the performance of its
services could injure the Company's business reputation or result in a claim
for substantial damages against the Company, regardless of the Company's
responsibility for such failure. In addition, the Company aggregates and makes
available through the Strategy and Solutions Center methodologies,
technologies and content which may include confidential or proprietary client
information. Although the Company has implemented policies to prevent such
client information from being disclosed to unauthorized parties or used
inappropriately, any such unauthorized disclosure or use could result in a
claim for substantial damages. The Company attempts to limit contractually its
damages arising from negligent acts, errors, mistakes or omissions in
rendering Internet professional services; however there can be no assurance
that any contractual protections will be enforceable in all instances or would
otherwise protect the Company from liability for damages. Although the Company
maintains general liability insurance coverage, including coverage for errors
and omissions, there can be no assurance that such coverage will continue to
be available on reasonable terms or will be available in sufficient amounts to
cover one or more large claims, or that the insurer will not disclaim coverage
as to any future claim. The successful assertion of one or more large claims
against the Company that are uninsured, exceed available insurance coverage or
result in changes to the Company's insurance policies, including premium
increases or the imposition of a large deductible or co-insurance
requirements, could adversely affect the Company's business, results of
operations and financial condition.
Year 2000 Compliance. Many currently installed computer systems and software
products are coded to accept only two-digit entries in the date code field.
These date code fields will need to accept four digit entries
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to distinguish 21st century dates from 20th century dates. As a result, in
less than two years, computer systems and software used by many companies,
including customers and potential customers of the Company, may need to be
upgraded to comply with such "Year 2000" requirements. Although the Company
believes that its internal systems are Year 2000 compliant, failure to provide
Year 2000 compliant business solutions to its customers could have a material
adverse effect on the Company's business, results of operations and financial
condition. Furthermore, the Company believes that the purchasing patterns of
customers and potential customers may be affected by Year 2000 issues as
companies expend significant resources to correct or patch their current
software systems for Year 2000 compliance. These expenditures may result in
reduced funds available to purchase products and services such as those
offered by the Company, which could result in a material adverse effect on the
Company's business, results of operations and financial condition.
Future Capital Needs; Uncertainty of Additional Financing. The Company
currently anticipates that its available cash resources and credit facilities,
combined with the net proceeds to the Company from its initial and follow-on
public offerings, will be sufficient to meet its presently anticipated working
capital and capital expenditure requirements through at least 1999. However,
the Company may need to raise additional funds in order to support more rapid
expansion, develop new or enhanced services and products, respond to
competitive pressures, acquire complementary businesses or technologies or
take advantage of unanticipated opportunities, in which event additional cash
might be required earlier. The Company's future liquidity and capital
requirements will depend upon numerous factors, including the success of the
Company's existing and new service offerings and competing technological and
market developments. The Company may be required to raise additional funds
through public or private financing, strategic relationships or other
arrangements. There can be no assurance that such additional funding, if
needed, will be available on terms acceptable to the Company, or at all.
Furthermore, any additional equity financing may be dilutive to stockholders,
and debt financing, if available, may involve restrictive covenants, which may
limit the Company's operating flexibility with respect to certain business
matters. Strategic arrangements, if necessary to raise additional funds, may
require the Company to relinquish its rights to certain of its intellectual
property. If additional funds are raised through the issuance of equity
securities, the percentage ownership of the stockholders of the Company will
be reduced, stockholders may experience additional dilution in net book value
per share, and such equity securities may have rights, preferences or
privileges senior to those of the holders of the Company's Common Stock. If
adequate funds are not available on acceptable terms, the Company may be
unable to develop or enhance its services and products, take advantage of
future opportunities or respond to competitive pressures, any of which could
have a material adverse effect on the Company's business, results of
operations and financial condition. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Government Regulation and Legal Uncertainties. The Company is not currently
subject to direct government regulation, other than pursuant to certain
franchising regulations, the securities laws and the regulations thereunder
applicable to all publicly owned companies, and laws and regulations
applicable to businesses generally, and there are currently few laws or
regulations directly applicable to access to or commerce on the Internet.
However, due to the increasing popularity and use of the Internet, it is
likely that a number of laws and regulations may be adopted at the local,
state, national or international levels with respect to the Internet covering
issues such as user privacy, freedom of expression, pricing of products and
services, taxation, advertising, intellectual property rights, information
security or the convergence of traditional communications services with
Internet communications. For example, the Telecommunications Act of 1996
imposes criminal penalties on anyone who distributes obscene or indecent
communications over the Internet. Although the anti-indecency provisions of
the Telecommunications Act have been declared unconstitutional by the federal
courts, the increased attention focused upon these liability issues as a
result of the Telecommunications Act could adversely affect the growth of the
Internet and therefore demand for the Company's services. In addition, because
of the growth in the electronic commerce market, Congress has held hearings on
whether to regulate providers of services and transactions in the electronic
commerce market, which regulations could negatively affect client demand for
Internet solutions that facilitate electronic commerce. Moreover, the adoption
of any such laws or regulations may decrease the growth of the Internet,
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which could in turn decrease the demand for the Company's services or increase
the cost of doing business or in some other manner have a material adverse
effect on the Company's business, results of operations or financial
condition. In addition, the applicability to the Internet of existing laws
governing issues such as property ownership, copyrights and other intellectual
property issues, taxation, libel and personal privacy is uncertain. The vast
majority of such laws were adopted prior to the advent of the Internet and
related technologies and, as a result, do not contemplate or address the
unique issues of the Internet and related technologies. Changes to such laws
intended to address these issues, including some recently proposed changes,
could create uncertainty in the marketplace which could reduce demand for the
Company's services or increase the cost of doing business as a result of costs
of litigation or increased service delivery costs, or could in some other
manner have a material adverse effect on the Company's business, results of
operations and financial condition.
Volatility of Stock Price. Prior to the Company's initial public offering,
there was no public market for the Company's Common Stock. The market price of
the Company's Common Stock has been and is likely to continue to be highly
volatile and could be subject to wide fluctuations in response to quarterly
variations in operating results, announcements of technological innovations or
new products by the Company or its competitors, changes in financial estimates
by securities analysts, or other events or factors. In addition, the stock
market, which has recently been at or near historic highs, has experienced
significant price and volume fluctuations that have particularly affected the
market prices of equity securities of many technology companies and that often
have been unrelated to the operating performance of such companies. In the
past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted
against such a company. Such litigation could result in substantial costs and
a diversion of management's attention and resources, which would have a
material adverse effect on the Company's business, operating results and
financial condition.
Effect of Certain Charter Provisions; Antitakeover Effects of Certificate of
Incorporation, Bylaws and Delaware Law. The Board of Directors has the
authority to issue up to 1,000,000 shares of Preferred Stock and to determine
the price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult
for a third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no present plans to issue shares of Preferred Stock.
Further, certain provisions of the Company's Amended and Restated Certificate
of Incorporation and Bylaws and of Delaware law could delay or make difficult
a merger, tender offer or proxy contest involving the Company. See
"Description of Capital Stock--Preferred Stock" and "--Certain Antitakeover
Effects of Provisions of the Certificate of Incorporation, Bylaws and Delaware
Law."
Concentration of Stock Ownership. The present directors, executive officers
and their respective affiliates beneficially own a substantial portion,
although less than a majority, of the outstanding Common Stock. As a result,
these stockholders will be able to exercise significant influence over all
matters requiring stockholder approval, including the election of directors
and approval of significant corporate transactions. Such concentration of
ownership may also have the effect of delaying or preventing a change in
control of the Company. See "Principal Stockholders" and "Description of
Capital Stock--Certain Antitakeover Effects of Provisions of the Certificate
of Incorporation, Bylaws and Delaware Law."
RISKS RELATED TO THE MERGER WITH CKS GROUP
USWeb and CKS Group have entered into the Reorganization Agreement, pursuant
to which Merger Sub will merge with and into CKS Group, CKS Group will
continue as the surviving corporation and will become a wholly owned
subsidiary of USWeb, and each outstanding share of CKS Group Common Stock, par
value $0.001 per share, of CKS Group ("CKS Group Common Stock"), will be
converted into the right to receive 1.5 shares of USWeb Common Stock.
Consummation of the CKS Merger is dependent on receiving approval
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of the stockholders of each company as well as certain governmental approvals.
The matters set forth below constitute cautionary statements identifying
important factors with respect to the proposed CKS Merger, including certain
risks and uncertainties that could cause actual results to differ materially
and adversely from present expectations. The proposed combined company is
referred to herein as "USWeb/CKS" or the "Combined Company."
Difficulties of Integrating USWeb and CKS Group, Inc. Following the CKS
Merger, to maintain and increase profitability and to achieve the anticipated
benefits of the CKS 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 that 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 CKS Merger, and could lead customers to defer, reduce 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 CKS Merger.
Difficulties encountered in the transition and integration process, disruption
caused by the process of combining the companies, the diversion of management
and employee attention from day-to-day and other activities, or an inability
to effectively and efficiently integrate the operations of the companies in a
timely manner could have a material adverse effect on the business, financial
condition, results of operations and prospects of the Combined Company and on
the anticipated benefits of the CKS Merger. See "--Risks Related to the
Combined Company, USWeb and CKS Group--Integration of Other Acquired
Businesses."
Risk of Failure to Achieve Synergies. USWeb and CKS Group have entered into
the Reorganization Agreement with the expectation that the CKS 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 CKS Merger.
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. USWeb 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
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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 USWeb intends to centralize
the Combined Company's 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. See "Business--Services" and "--
Marketing."
Risks Associated with Fixed Exchange Ratio. At the effective time of the CKS
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 the
Exchange Ratio is fixed, it will not increase or decrease with fluctuations in
the market price of either USWeb Common Stock or CKS Group Common Stock. The
specific market value of the shares of USWeb Common Stock to be received by
CKS Group stockholders in the CKS Merger will, therefore, depend on the market
price of the USWeb Common Stock on and after the Effective Time. 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 Effective Time, the
market value of the USWeb Common Stock to be received by CKS Group
stockholders in the CKS Merger would correspondingly decrease or increase.
USWeb and CKS Group stockholders are advised to obtain current market
quotations for USWeb Common Stock and CKS Group Common Stock immediately prior
to the Special Meetings. See "--Risks Related to the Combined Company, USWeb
and CKS--Volatility of Stock Price" and "Comparative Market Price Data."
Dependence upon Key Personnel and Integration of Management. The success of
the Combined Company will depend upon the retention of senior executives and
other key employees who are critical to the continued advancement, development
and support of the companies' technologies as well as ongoing sales and
marketing efforts. As commonly occurs with mergers of technology companies,
during the pre-merger and integration phases competitors may intensify their
efforts to recruit key employees. Employee uncertainty regarding the effects
of the CKS 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 CKS 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 CKS 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
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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 CKS 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 CKS Merger
and resulting combination of client bases may generate client conflicts and
potentially cause the loss of current clients or an inability to perform
services for certain competing businesses. The loss of significant clients or
an inability to provide services to a significant group of potential clients
could have a material adverse effect on the Combined Company's business,
financial condition, results of operations and prospects.
Substantial Expenses Resulting from the CKS Merger. The negotiation and
implementation of the CKS 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 CKS 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 CKS Merger is
approved or consummated.
Risks Associated with Noncompletion of the Merger with CKS. The obligations
of USWeb and CKS Group to complete the merger with CKS 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, 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 with CKS will
be completed. Noncompletion of the merger with CKS 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.
RISKS RELATED TO THE COMBINED COMPANY, USWEB AND CKS GROUP
Fluctuations in Quarterly Operating Results and Margins; Seasonality of
Business. Each of USWeb's and CKS Group's operating results have fluctuated in
the past and the Combined Company's operating results are likely to fluctuate
in the future as a result of a variety of factors, many of which will be
outside of the Combined Company's control. Some of these factors include
timing of the completion, material reduction or cancellation of major projects
or the loss of a major client; the amount and timing of the receipt of new
business; timing of hiring or loss of personnel; the amount and timing of the
opening or closing of an office; the amount and the relative mix of high-
margin creative or strategy consulting projects as compared to lower margin
projects, capital expenditures and other costs relating to the expansion of
operations; the level of demand for Intranet, Extranet and Web site
development; the productivity of consultants; the ability to maintain adequate
staffing to service clients effectively; the cost of advertising and related
media; the amount and timing of expenditures by clients for professional
services; the introduction of new products or services by competitors; pricing
changes in the industry; the relative mix of lower cost full-time employees
versus higher cost independent contractors; technical difficulties with
respect to the use of the Internet; economic conditions specific to Internet
technology usage; government regulation and legal developments regarding the
use of the Internet; and general economic conditions. The Combined Company may
also experience
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seasonality in its business, resulting in diminished revenues as a consequence
of decreased demand for professional services during summer and year-end
vacation and holiday periods. Due to all of the foregoing factors, the
Combined Company's operating results in any given quarter may fall below the
expectations of securities analysts and investors. In such event, the trading
price of the Combined Company's Common Stock would likely be materially and
adversely affected and litigation may ensue. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
CKS Group has experienced some seasonality in its business which results
from timing of product introductions and business cycles of CKS Group's
clients. CKS Group's revenues for the first fiscal quarter tend to be somewhat
lower than for the preceding fourth quarter because many clients have expended
most of their marketing budgets prior to the end of the calendar year and do
not release funds from the next calendar year's marketing budget until mid- to
late January. For the foregoing reasons and other factors, historical revenues
and operating results of USWeb and CKS Group are not necessarily meaningful
and cannot be relied upon as indicators of future performance of the Combined
Company.
USWeb's and CKS Group's historical financial data is of limited value in
planning future operating expenses. Accordingly, the Combined Company's
expense levels will be based in part on its expectations concerning future
revenues and will be fixed to a large extent. The Combined Company will be
unable to adjust spending in a timely manner to compensate for any unexpected
shortfall in revenues. Accordingly, a significant shortfall in demand for
services could have an immediate and material adverse effect on the Combined
Company's business, financial condition, results of operations and prospects.
Limited Operating History; Accumulated Deficit; Evolving Business
Model. USWeb was founded in December 1995, has incurred net losses since
inception and as of 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. The Combined
Company and its prospects must be considered in light of the risks, expenses
and difficulties frequently encountered by companies in an early stage of
development, particularly companies in new and rapidly evolving markets such
as Internet professional services. Such risks for the Combined Company
include, but are not limited to, an evolving business model. To address these
risks, the Combined Company must, among other things, strengthen its business
development and management activities while continuing to expand its network
of consulting offices, continue to develop the strength and quality of its
operations, maximize the value delivered to clients by the Combined Company
Internet Strategy and Solutions Center (the "Strategy and Solutions Center"),
develop and enhance the Combined Company brand, respond to competitive
developments and continue to attract, retain and motivate qualified employees.
There can be no assurance that the Combined Company will be successful in
meeting these challenges and addressing such risks and the failure to do so
could have a material adverse effect on the Combined Company's business,
financial condition, results of operations and prospects.
Dilution, Earnings and Growth. The Combined Company expects that future
acquisition agreements, if any, could provide for consideration to be paid in
cash, stock or a combination of cash and stock. The number of shares which may
be issued in future acquisitions will depend on the market price of the
Combined Company's Common Stock and a variety of other factors and, as a
result, future acquisitions may have a significant dilutive impact on USWeb's
and CKS Group's existing stockholders. The CKS 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
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market price of each company's respective Common Stock as of the date of this
Prospectus. To the extent such options or warrants are exercised, there will
be further dilution. The Combined Company expects to continue to make
acquisitions to fill strategic needs and expand internationally. If such
acquisitions are made using the Combined Company's securities, such
acquisitions could result in significant dilution to the Combined Company's
stockholders. Pursuant to a "shelf" Registration Statement of which this
Prospectus is a part, USWeb is registering 16,666,667 shares of its Common
Stock (of which approximately 9,200,000 shares, subject to potential
additional issuances as provided in the existing acquisition agreements,
remain available for future issuance as of November 16, 1998) 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
CKS 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 CKS 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 CKS Merger and the decrease in growth rate as the
size and maturity of the Combined Company increases.
Recruitment and Retention of Consulting Professionals. The Combined
Company's business of delivering Internet professional services is labor
intensive. Accordingly, the Combined Company's success depends in large part
on its ability to identify, hire, train and retain consulting professionals
who can provide the Internet strategy, technology, marketing, audience
development and creative skills required by clients. There is currently a
shortage of such personnel, and this shortage is likely to continue for the
foreseeable future. The Combined Company will encounter intense competition
for qualified personnel from other companies, and there can be no assurance
that it will be able to identify, hire, train and or retain other highly
qualified technical, marketing and managerial personnel in the future. The
inability to attract and retain the necessary technical, marketing and
managerial personnel would have a material adverse effect on the Combined
Company's business, financial condition, results of operations and prospects.
Integration of Other Acquired Businesses. Over the 24-month period ended
September 30, 1998, USWeb completed acquisitions of 33 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
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that any acquired services, technologies or businesses will contribute at
anticipated levels to the Combined Company's sales or earnings, or that the
sales and earnings from combined businesses will not be adversely affected by
the integration process. Because a majority of the Combined Company's
acquisitions have been completed since March 1997, the Combined Company is
currently facing all of these challenges and its ability to meet them over the
long term has not been established. The failure to integrate such acquisitions
successfully could have a material adverse effect on the business, financial
condition, results of operations and prospects of the Combined Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Acquisition of Internet Professional Services Firms," "Business--
Strategy," "--Consulting Office Network Development" and "--Employees."
Risks Related to Future Acquisitions. A key component of the Combined
Company's continued growth strategy is expected to be the acquisition of
professional service firms that meet the Combined Company's goals for
strategic growth and international expansion. The successful implementation of
this acquisition strategy will depend on the Combined Company's ability to
identify suitable acquisition candidates, acquire such companies on acceptable
terms and integrate their operations successfully with those of the Combined
Company. There can be no assurance that the Combined Company will be able to
continue to identify additional suitable acquisition candidates or that the
Combined Company will be able to acquire such candidates on acceptable terms.
Moreover, in pursuing acquisition opportunities the Combined Company may
compete with other companies with similar growth strategies, certain of which
competitors may be larger and have greater financial and other resources than
the Combined Company. Competition for these acquisition targets may also
result in increased prices of acquisition targets and a diminished pool of
companies available for acquisition. Acquisitions also involve a number of
other risks, including adverse effects on the Combined Company's reported
operating results from increases in goodwill amortization, acquired in-process
technology, stock compensation expense and increased compensation expense
resulting from newly hired employees, the diversion of management attention,
potential disputes with the sellers of one or more acquired entities and the
possible failure to retain key acquired personnel. Lack of client satisfaction
or performance problems with an acquired firm could also have a material
adverse impact on the reputation of the Combined Company as a whole, and any
acquired subsidiary could significantly underperform relative to the Combined
Company's expectations. For all of these reasons, the Combined Company's
pursuit of an overall acquisition strategy or any individual pending or future
acquisition may have a material adverse effect on the Combined Company's
business, financial condition, results of operations and prospects. To the
extent the Combined Company chooses to use cash consideration for acquisitions
in the future, the Combined Company may be required to obtain additional
financing, and there can be no assurance that such financing will be available
on favorable terms, if at all. As the Combined Company issues stock to
complete future acquisitions, existing stockholders will experience further
ownership dilution. See "--Dilution, Earnings and Growth" "--Future Capital
Needs; Uncertainty of Additional Financing," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and "Business--
Consulting Office Network Development" and Note 1 to Consolidated Financial
Statements.
Risks Associated with Failure to Manage Growth. The growth of each of USWeb
and CKS Group has placed, and any further expansion of the Combined Company
would continue to place, a significant strain on the company's limited
personnel, management and other resources. In the future, the Combined Company
will be required to attract, train, motivate and manage new employees
successfully, to effectively integrate new employees into its operations and
to continue to improve its operational, financial, management and information
systems and controls. There can be no assurance that the Combined Company's
systems, procedures or controls will be adequate to support the Combined
Company's operations or that the Combined Company's management will be able to
achieve the rapid execution necessary to exploit the market for the Combined
Company's business model. The failure to effectively manage any further growth
could have a material adverse effect on the Combined Company's business,
financial condition, results of operations and prospects.
Risk of Litigation. Each of USWeb and CKS Group is from time to time the
subject of miscellaneous lawsuits. While USWeb and CKS Group each believe that
the outcome of any such litigation pending against
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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. See "USWeb Corporation--USWeb
Business--Legal Proceedings" and "CKS Group, Inc.--CKS Group Business--Legal
Proceedings."
A lawsuit has been filed against CKS Group and certain of its officers and
directors on behalf of stockholders pertaining to alleged violations of the
Securities 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 effective time of the proposed
merger with CKS Group. 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 CKS
Merger, the Combined Company will have ten offices outside of the United
States; however, it will have limited experience in either managing an
international network of consulting offices or in marketing services to
international clients. The Combined Company expects to incur significant costs
to do both. If revenues from international consulting offices are not adequate
to offset the expenses of establishing and maintaining international
operations and of localizing the Combined Company's marketing programs, the
Combined Company's business, results of operations and financial condition
could be materially adversely affected. There can be no assurance that the
Combined Company will be able to establish and maintain international
consulting offices or market its services to international clients. In
addition to the uncertainty as to the Combined Company's ability to generate
revenues from foreign operations and expand its international presence, there
are certain risks inherent in doing business on an international level, such
as unexpected changes in regulatory requirements, export and import
restrictions, tariffs and other trade barriers; difficulties in staffing and
managing foreign operations; potentially adverse differences in business
customs, practices and norms; longer payment cycles; problems in collecting
accounts receivable; political instability; fluctuations in currency exchange
rates; software piracy; seasonal reductions in business activity; and
potentially adverse tax consequences, any of which could adversely affect the
Combined Company's international operations. There can be no assurance that
one or more of the factors described above will not have a material adverse
effect on the Combined Company's future international operations and,
consequently, on the Combined Company's business, financial condition, results
of operations and prospects. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Competition; Low Barriers to Entry. The market for Internet professional
services is relatively new, intensely competitive, rapidly evolving and
subject to rapid technological change. The Combined Company expects
competition to persist, intensify and increase in the future. The Combined
Company's competitors can be divided into several groups: computer hardware
and service vendors such as International Business Machines Corporation
("IBM"), Digital Equipment Corporation ("DEC") and Hewlett-Packard Company
("Hewlett-Packard"); advertising and media agencies such as Ogilvy & Mather,
Young & Rubicam, and Foote, Cone & Belding; Internet integrators and Web
presence providers such as Agency.com, iXL Holding, Inc. ("iXL"), Organic
Online, Inc. ("Organic Online"), Proxicom, Inc. ("Proxicom"), Sapient (which
recently announced a business combination with Studio Archetype, a design and
branding firm); large information technology consulting service providers such
as Andersen Consulting, Cambridge Technology Partners and Electronic Data
Systems Corporation ("EDS"); telecommunications companies such as AT&T
Corporation ("AT&T") and MCI Communications Group ("MCI"); Internet and online
service providers such as America Online Incorporated ("America Online"),
NETCOM On-Line Communications Services Inc. ("ICG Netcom") and UUNet
Technologies, Inc. ("UUNet"); and software vendors such as Lotus Development
Corporation ("Lotus"), Microsoft Corporation ("Microsoft"), Netscape
Communications Corp. ("Netscape"), Novell, Inc. ("Novell") and Oracle
Corporation ("Oracle"). Many of the Combined Company's current and
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potential competitors have longer operating histories, larger installed
customer bases, longer relationships with clients and significantly greater
financial, technical, marketing and public relations resources than the
Combined Company and could decide at any time to increase their resource
commitments to the Combined Company's target markets. In addition, the market
for Intranet, Extranet and Web site development is relatively new and subject
to continuing definition, and, as a result, may better position the Combined
Company's competitors to compete in this market as it matures. As a strategic
response to changes in the competitive environment, the Combined Company may
from time to time make certain pricing, service, technology or marketing
decisions or business or technology acquisitions that could have a material
adverse effect on the Combined Company's business, financial condition,
results of operations and prospects. Competition of the type described above
could materially adversely affect the Combined Company's business, results of
operations, financial condition and prospects.
In addition, the Combined Company's ability to maintain its existing client
relationships and generate new clients will depend to a significant degree on
the quality of its services and its reputation among its clients and potential
clients, compared with the quality of services provided by, and the
reputations of, the Combined Company's competitors. To the extent the Combined
Company loses clients to its competitors because of dissatisfaction with the
Combined Company's services or its reputation is adversely affected for any
other reason, the Combined Company's business, financial condition, results of
operations and prospects could be materially adversely affected.
There are relatively low barriers to entry into the Combined Company's
business. Because professional services firms such as USWeb and CKS Group rely
on the skill of their personnel and the quality of their client service, they
have no patented technology that would preclude or inhibit competitors from
entering their markets. The Combined Company is likely to face additional
competition from new entrants into the market in the future. There can be no
assurance that existing or future competitors will not develop or offer
services that provide significant performance, price, creative or other
advantages over those offered by the Combined Company, which could have a
material adverse effect on its business, financial condition, results of
operations and prospects. See "Business--Competition."
Reliance Upon Key Strategic Relationships. USWeb and CKS Group have
established a number of strategic relationships with leading hardware and
software companies, including Intel Corporation ("Intel"), Microsoft, SAP
America Inc. ("SAP"), Hewlett-Packard, Pandesic LLC ("Pandesic," the Internet
company from Intel and SAP), Sun Microsystems, Inc. ("Sun Microsystems"),
Reuters Ltd. ("Reuters") and NBC Multimedia, Inc., and with the Interpublic
Group of Companies, a leading advertising consortium. The loss of any one of
these strategic relationships would deprive the Combined Company of the
opportunity to gain early access to leading-edge technology, cooperatively
market products with the vendor, cross-sell additional services and gain
enhanced access to vendor training and support. Maintenance of the Combined
Company's strategic relationships is based primarily on an ongoing mutual
business opportunity and a good overall working relationship. The legal
contracts associated with these relationships, certain of which are terminable
at-will by the parties, would not be sufficient to force the strategic
relationship to continue effectively if that were otherwise not in the
strategic partner's best interests. In the event that any strategic
relationship is terminated, the Combined Company's business, financial
condition, results of operations and prospects may be materially adversely
affected. See "Business--Strategy" and "--Strategic Relationships."
Developing Internet Economy, Market for e-Commerce Solutions; Unproven
Acceptance of the Combined Company's Complete Media Solutions and Client
Outsourcing. A substantial portion of the Combined Company's revenues is
expected to be derived from services that depend upon the adoption of Internet
solutions by companies to improve their business positioning and processes,
and the continued development of the World Wide Web, the Internet and e-
commerce. The Internet may not prove to be a viable commercial marketplace
because of inadequate development of the necessary infrastructure, lack of
development of complementary products, implementation of competing technology,
delays in the development or adoption of new standards and protocols required
to handle increased levels of Internet activity, governmental regulation,
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or other reasons. The Internet has experienced, and is expected to continue to
experience, significant growth in the number of users and volume of traffic.
There can be no assurance that the Internet infrastructure will continue to be
able to support the demands placed on it by this continued growth. Moreover,
critical issues concerning the use of Internet and e-commerce solutions
(including security, reliability, cost, ease of deployment and administration
and quality of service) remain unresolved and may affect the growth of the use
of such technologies to maintain, manage and operate a business, expand
product marketing, improve corporate communications and increase business
efficiencies. The adoption of Internet solutions for these purposes,
particularly by those individuals and enterprises that have historically
relied on traditional means, can be capital intensive and generally requires
the acceptance of a new way of conducting business and exchanging information.
If critical issues concerning the ability of Internet solutions to improve
business positioning and processes are not resolved or if the necessary
infrastructure is not developed, the Combined Company's business, financial
condition, results of operations and prospects will be materially
adversely affected.
Even if these issues are resolved, there can be no assurance that businesses
will elect to outsource the design, development and maintenance of their Web
sites to Internet professional services firms. Companies may decide to assign
the design, development and implementation of Internet solutions to their
internal information technology divisions, which have ready access to both key
client decision makers and the information required to prepare proposals for
such solutions. If independent providers of Internet professional services
prove to be unreliable, ineffective or too expensive, or if software companies
develop tools that are sufficiently user-friendly and cost-effective,
enterprises may choose to design, develop or maintain all or part of their
Intranets, Extranets or Web sites in-house. If the market for such services
does not continue to develop or develops more slowly than expected, or if the
Combined Company's services do not achieve market acceptance, its business,
results of operations, financial condition and prospects will be materially
adversely affected. See "Business--Industry Background" and "--Strategy."
Volatility of Stock Price. The trading prices of USWeb Common Stock and CKS
Group Common Stock have historically been subject to wide fluctuations, due to
a variety of factors including announcements regarding financial results,
acquisitions, and significant orders. Failure to achieve periodic revenue,
earnings and other operating and financial results as forecasted or
anticipated by brokerage firms or industry analysts could result in an
immediate and adverse effect on the market price of the Combined Company's
common stock. The Combined Company may not discover, or be able to confirm,
revenue or earnings shortfalls until the end of a quarter, which could result
in a greater immediate and adverse effect on the common stock of the Combined
Company. In addition, the stock market, which has recently been at or near
historic highs, has experienced extreme price and volume fluctuations that
have particularly affected the market prices of equity securities of many
technology companies and that often have been unrelated to the operating
performance of such companies. In the past, following periods of volatility in
the market price of a company's securities, securities class action litigation
has often been instituted against such a company. Such litigation could result
in substantial costs and a diversion of management's attention and resources,
which would have a material adverse effect on the Combined Company's business,
financial condition, results of operations and prospects. 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.
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Rapid Technological Change. The market for Internet professional services
and marketing communications services is characterized by rapid technological
change, changes in user and client requirements and preferences, frequent new
product and service introductions embodying new processes and technologies and
evolving industry standards and practices that could render the Combined
Company's existing service practices and methodologies obsolete. The Combined
Company's success will depend, in part, on its ability to improve its existing
services, develop new services and solutions that address the increasingly
sophisticated and varied needs of its current and prospective clients, and
respond to technological advances, emerging industry standards and practices,
and competitive service offerings. Failure to do so could result in the loss
of existing customers or the inability to attract and retain new customers,
either of which developments could have a material adverse effect on the
Combined Company's business, financial condition, results of operations and
prospects. There can be no assurance that the Combined Company will be
successful in responding quickly, cost-effectively and sufficiently to these
developments. If the Combined Company is unable, for technical, financial or
other reasons, to adapt in a timely manner in response to changing market
conditions or client requirements, its business, financial condition, results
of operations and prospects would be materially adversely affected. See
"Business--Strategy" and "--Clients."
Risks of Fixed-Price Engagements. CKS Group generates a significant portion
of its revenues through project fees on a fixed fee for service basis and
USWeb intends to increase the percentage of its engagements that are billed on
a fixed-price basis, as well as the percentage of revenues derived from fixed-
price engagements, as distinguished from USWeb's current principal method of
billing on a time and materials basis. Both USWeb and CKS Group assume greater
financial risk from fixed-price type contracts than on either time-and-
material or cost-reimbursable contracts. The failure to estimate accurately
the resources and time required for an engagement, to manage client
expectations effectively regarding the scope of services to be delivered for
the estimated fees or to complete fixed-price engagements within budget, on
time and to clients' satisfaction would expose the Combined Company to risks
associated with cost overruns and, in certain cases, penalties, any of which
could have a material adverse effect on the Combined Company's business,
results of operations and financial condition. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Intellectual Property Risks. Each of USWeb and CKS Group regard their
copyrights, trademarks, trade secrets (including their methodologies,
practices and tools) and other intellectual property rights as important to
the success of the Combined Company. To protect their rights in these various
intellectual properties, both USWeb and CKS Group have relied on a combination
of trademark and copyright law, trade secret protection and confidentiality
agreements and other contractual arrangements with their employees,
Affiliates, clients, strategic partners, acquisition targets and others to
protect its proprietary rights. USWeb and CKS Group have also registered
several of their trademarks in the U.S. and internationally. Effective
trademark, copyright and trade secret protection may not be available in every
country in which USWeb or CKS Group offer or intend to offer their services.
There can be no assurance that the steps taken by USWeb or CKS Group to
protect their proprietary rights will be adequate or that third parties will
not infringe or misappropriate USWeb's or CKS Group's proprietary rights, or
that USWeb or CKS Group will be able to detect unauthorized use and take
appropriate steps to enforce their rights. In addition, although USWeb and CKS
Group believe that their proprietary rights do not infringe on the
intellectual property rights of others, there can be no assurance that other
parties will not assert infringement claims against the Combined Company. Such
claims, even if not meritorious, could result in the expenditure of
significant financial and managerial resources. In addition, patents recently
issued to third parties regarding 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.
24
<PAGE>
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 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
25
<PAGE>
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 using 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 Combined 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 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. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Year 2000--USWeb and
Combined Company."
Future Capital Needs; Uncertainty of Additional Financing. USWeb and CKS
Group currently anticipate that their available cash resources and credit
facilities will be sufficient to meet the Combined Company's presently
anticipated working capital and capital expenditure requirements for at least
the next 12 months. However, the Combined Company may need to raise additional
funds in order to support more rapid expansion, develop new or enhanced
services and products, respond to competitive pressures, acquire complementary
businesses or technologies or take advantage of unanticipated opportunities,
in which event additional cash might be required earlier. 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
26
<PAGE>
stockholders of the Combined Company will be reduced, stockholders may
experience additional dilution in net book value per share, and such equity
securities may have rights, preferences or privileges senior to those of the
holders of the Combined Company's Common Stock. If adequate funds are not
available on acceptable terms, the Combined Company may be unable to develop
or enhance its services and products, take advantage of future opportunities
or respond to competitive pressures, any of which could have a material
adverse effect on the Combined Company's business, financial condition,
results of operations and prospects. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Government Regulation and Legal Uncertainties. USWeb and CKS Group are not
currently subject to direct government regulation, other than pursuant to
certain franchising regulations, the securities laws and the regulations
thereunder applicable to all publicly owned companies, and laws and
regulations applicable to businesses generally, and there are currently few
laws or regulations directly applicable to access to or commerce on the
Internet. However, due to the increasing popularity and use of the Internet,
it is likely that a number of laws and regulations may be adopted at the
local, state, national or international levels with respect to the Internet
covering issues such as user privacy, freedom of expression, pricing of
products and services, taxation, advertising, intellectual property rights,
information security or the convergence of traditional communications services
with Internet communications. For example, the Telecommunications Act of 1996
(the "Telecommunications Act") imposes criminal penalties on anyone who
distributes obscene or indecent communications over the Internet. Although the
anti-indecency provisions of the Telecommunications Act have been declared
unconstitutional by the federal courts, the increased attention focused upon
these liability issues as a result of the Telecommunications Act could
adversely affect the growth of the Internet and therefore demand for the
Combined Company's services. In addition, because of the growth in the
electronic commerce market, Congress has held hearings on whether to regulate
providers of services and transactions in the electronic commerce market,
which regulations could negatively affect client demand for Internet solutions
that facilitate electronic commerce. Moreover, the adoption of any such laws
or regulations may decrease the growth of the Internet, which could in turn
decrease the demand for the Combined Company's services or increase the cost
of doing business or in some other manner have a material adverse effect on
the Combined Company's business, financial condition, results of operations or
prospects. In addition, the applicability to the Internet of existing laws
governing issues such as property ownership, copyrights and other intellectual
property issues, taxation, libel and personal privacy is uncertain. The vast
majority of such laws were adopted prior to the advent of the Internet and
related technologies and, as a result, do not contemplate or address the
unique issues of the Internet and related technologies. Changes to such laws
intended to address these issues, including some recently proposed changes,
could create uncertainty in the marketplace which could reduce demand for the
Combined Company's services or increase the cost of doing business as a result
of costs of litigation or increased service delivery costs, or could in some
other manner have a material adverse effect on the Combined Company's
business, financial condition, results of operations and prospects.
Dependence on Key Accounts. CKS Group's five largest clients accounted for
39% and 37% of CKS Group's revenues for the fiscal years ended November 30,
1996 and November 30, 1997, respectively, with fluctuations in the amount of
revenue contribution from each such client from quarter to quarter. Audi of
America, Inc. and Computer Associates International, Inc., CKS Group's two
largest clients during the fiscal year ended November 30, 1997, accounted for
approximately 15% and 7% of CKS Group's revenues, respectively, during the
period. Since many of CKS Group's clients generally retain CKS Group on a
project by project basis, a client from whom CKS Group generates substantial
revenue in one period may not be a substantial source of revenue in a
subsequent period. For example, of the five largest clients (in terms of fees
paid to CKS Group) during the fiscal year ended November 30, 1997, only two
were in the top five for the fiscal year ended November 30, 1996. To the
extent that any of CKS Group's major clients does not remain a significant
source of revenues, there could be a direct and immediate material adverse
effect on the Combined Company's business, financial condition, results of
operations and prospects. For instance, one of CKS Group's major clients,
Barnett Bank, was acquired during the fourth quarter of 1997 and, as a result,
substantially reduced its level of spending with CKS Group. This reduction in
spending contributed to a
27
<PAGE>
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.
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 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
28
<PAGE>
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. See "Principal Stockholders" and "Description
of Capital Stock," "--Effect of Certain Provisions; Antitakeover Effects of
Certificate of Incorporation, Bylaws and Delaware Law."
Susceptibility to General Economic Conditions. CKS Group's and USWeb's
revenues and results of operations are subject to fluctuations based upon
general economic conditions. If there were to be a general economic downturn
or a recession in the United States, then the Combined Company expects that
business enterprises, including its clients and potential clients, likely will
substantially and immediately reduce their budgets. Because certain of CKS
Group's and USWeb's largest clients have substantial overseas operations,
their budgets may also be adversely affected by economic conditions in
overseas markets, including the recent volatility in Asian and Russian
economies and Asian and Russian currency and securities markets. In the event
of such an economic downturn, the Combined Company's business, financial
condition, results of operations and prospects would not be materially and
adversely affected.
29
<PAGE>
FORWARD LOOKING STATEMENTS
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act which
are subject to the "safe harbor" created by those sections. These forward-
looking statements include, but are not limited to, statements concerning the
Company's strategy, mission, acquisition program, opportunities and goals and
the potential development of the market for Intranet, Extranet and Web site
solutions and services. Any statements contained herein (including without
limitation statements to the effect that the Company or its management
"believes," "expects," "anticipates," "plans," "may," "will," "projects,"
"continues," "estimates," "potential," or "opportunity" or other variations
thereof or comparable terminology or the negative thereof) that are not
statements of historical fact should be considered forward-looking statements.
These forward-looking statements may be found in the "Prospectus Summary,"
"Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business." Forward-looking
statements not specifically set forth above may also be found in these and
other sections of this Prospectus. Actual results could differ materially and
adversely from those discussed in the forward-looking statements as a result
of certain factors, including those discussed in "Risk Factors" and elsewhere
in this Prospectus. See "Risk Factors."
The Company makes no express or implied representation or warranty as to the
attainability of the projected or estimated financial information referenced
or set forth herein as to the accuracy or completeness of the assumptions from
which such projected or estimated information is derived. Projections or
estimations of USWeb's future performance are necessarily subject to a high
degree of uncertainty and may vary materially and adversely from actual
results. Reference is made to the particular discussions set forth under
"Risk Factors" and "USWeb Management's Discussion and Analysis of Financial
Conditions and Results of Operations."
USE OF PROCEEDS
This Prospectus relates to shares of Common Stock that the Company may issue
from time to time in connection with proposed acquisitions by the Company or
one or more of its subsidiaries. The Company will not receive any proceeds
from these offerings other than the value of the businesses or properties
acquired by the Company or one or more of its subsidiaries in the proposed
acquisitions.
MARKET INFORMATION
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "USWB." Prior to the completion of the Company's initial public
offering on December 5, 1997, there had been no established trading market for
the Common Stock. The Company's Common Stock was first offered to the public
at a price of $7.50 per share. The last reported sales price by the Nasdaq
National Market for the Company's Common Stock on November 16, 1998, was
$18.00.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain any future earnings to finance
the growth and development of its business and therefore does not anticipate
paying any cash dividends in the foreseeable future. The payment of cash
dividends in the future will be at the discretion of the Board of Directors
and subject to certain limitations under the Delaware General Corporation Law
and will depend upon factors such as the Company's earnings levels, capital
requirements, financial condition and other factors deemed relevant by the
Board of Directors. There can be no assurance that the Company will pay any
dividends in the future.
30
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1998 (i) on an actual basis, and (ii) pro forma to reflect the
probable acquisition by the Company of CKS Group, Inc. This table should be
read in conjunction with the Consolidated Financial Statements and Unaudited
Pro Forma Combined Financial Information and Notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
---------------------
ACTUAL PRO FORMA
---------- ---------
(RESTATED)
(IN THOUSANDS)
<S> <C> <C>
Lease obligations, long-term portion..................... $ 2,005 $ 2,771
Stockholders' equity:
Preferred Stock, $.001 par value, 1,000,000 shares
authorized; no shares issued and outstanding.......... -- --
Common Stock, $.001 par value, 100,000,000 shares
authorized actual; 200,000,000 shares authorized pro
forma; 44,668,981 shares issued and outstanding
actual; 67,071,420 shares issued and outstanding
pro forma(1).......................................... 41 56
Additional paid-in capital............................. 406,859 489,458
Accumulated deficit.................................... (183,676) (179,554)
--------- ---------
Total stockholders' equity........................... 223,224 309,960
--------- ---------
Total capitalization............................... $ 225,229 $ 407,387
========= =========
</TABLE>
- ---------------------
(1) Excludes, as of September 30, 1998, (i) 27,600,000 shares of Common Stock
reserved for issuance under the Company's stock option plans, of which
14,339,631 shares were issuable upon exercise of outstanding options at a
weighted average exercise price of $13.34 per share, (ii) the assumption
of 4,687,058 outstanding options, related to the Company's acquisition of
CKS Group, Inc. as adjusted for the 1.5-to-1 exchange ratio, at a weighted
average exercise price of $9.79 per share, (iii) 2,718,809 shares of
Common Stock issuable upon exercise of outstanding warrants at a weighted
average exercise price of $19.57 per share, (iv) 333,333 shares of Common
Stock reserved for issuance under the Company's Affiliate Warrant Program,
of which 258,563 shares were issuable upon exercise of outstanding
warrants at a weighted average exercise price of $2.53 per share, (v)
3,000,000 shares of Common Stock reserved for issuance under the Company's
1997 Employee Stock Purchase Plan, of which 168,064 shares have been
issued to date, and (vi) additional shares of Common Stock that are
considered probable of issuance as stock bonuses and acquisition purchase
price adjustments. See "Risk Factors--Dilution," "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Acquisition
of Internet Professional Services Firms," "Business--Consulting Office
Network Development," "Management--Employee Benefit Plans" and Notes 1, 9
and 10 to Consolidated Financial Statements.
31
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
included elsewhere herein. The statement of operations data set forth below
with respect to the years ended December 31, 1996 and 1997 and the balance
sheet data at December 31, 1996 and 1997 are derived from, and are qualified
by reference to, the audited consolidated financial statements of the Company
included elsewhere in this Prospectus. The selected consolidated financial
data for the nine months ended September 30, 1997 and 1998, are derived from
unaudited financial statements prepared by the Company and include all
adjustments, consisting only of normal recurring adjustments, which the
Company believes are necessary for a fair presentation of the Company's
results of operations for those periods. Operating results for the nine months
ended September 30, 1998 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1998. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The unaudited pro forma combined statement of operations data for the year
ended December 31, 1997 and the nine months ended September 30, 1998, reflect
the effects of the acquisitions of XCom Corporation, Cosmix Corporation, Fetch
Interactive, Inc., NewLink Corporation, InterNetOffice, LLC, NetWORKERS
Corporation, Infopreneurs Inc., Netphaz Corporation, Electronic Images, Inc.,
Multimedia Marketing & Design Inc., KandH, Inc., DreamMedia, Inc., Internet
Cybernautics, Inc., Synergetix Systems Integration, Inc., Online Marketing
Company, Zendatta, Inc., W3-design, USWeb-Apex, Inc., Reach Networks, Inc.,
InnoMate Online Marketing GmbH, Utopia Inc., Inter.logic.studios, inc., Quest
Interactive Media, Inc., Ensemble Corporation, Ikonic Interactive, Inc.,
Xplora Limited, Kallista, Inc., Nutley Systems, Inc. (nSET), USWeb San Jose,
Gray Peak Technologies, Inc., Advanced Video Communications, Tucker Network
Technologies, and Metrix Communications, Inc., and the probable acquisition of
CKS Group, Inc., as if each of the acquisitions had occurred on January 1,
1997. The unaudited pro forma balance sheet data reflects the probable
acquisition of CKS Group, Inc., as if such acquisition occurred on September
30, 1998. All intercompany transactions have been eliminated in consolidation.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------------------------------------- --------------------------
NINE MONTHS
YEAR ENDED ENDED NINE MONTHS
DECEMBER 31, SEPTEMBER 30, YEAR ENDED ENDED
------------------ -------------------- DECEMBER 31, SEPTEMBER 30,
1996 1997 1997 1998 1997 (2) 1998 (3)
-------- -------- -------- ---------- ------------ -------------
(RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA (1):
Revenues:
Services............... $ -- $ 18,366 $ 7,868 $ 72,643 $ 165,914 $ 173,387
Other.................. 1,820 912 808 443 403 443
-------- -------- -------- --------- --------- ---------
Total revenues (4).... 1,820 19,278 8,676 73,086 166,317 173,830
-------- -------- -------- --------- --------- ---------
Cost of revenues:
Services............... -- 13,468 6,196 46,705 109,182 112,040
Other.................. 208 1,294 1,180 700 1,294 700
Provision for loss on
contract.............. -- -- -- 2,094 -- 2,094
Stock compensation (5). -- 2,420 966 9,415 20,992 15,744
-------- -------- -------- --------- --------- ---------
Total cost of
revenues............. 208 17,182 8,342 58,914 131,468 130,578
-------- -------- -------- --------- --------- ---------
Gross profit............ 1,612 2,096 334 14,172 34,849 43,252
-------- -------- -------- --------- --------- ---------
Operating expenses:
Marketing, sales and
support .............. 12,764 20,672 14,119 17,903 35,008 23,669
General and
administrative........ 2,813 10,271 7,027 15,691 39,315 34,759
Acquired in-process
technology (5)........ -- 9,472 6,726 25,508 34,980 --
Stock compensation (5). -- 6,698 3,500 23,962 38,588 35,227
Amortization of
intangible assets (5)
...................... -- 9,476 4,321 44,539 101,065 52,016
-------- -------- -------- --------- --------- ---------
Total operating
expenses............. 15,577 56,589 35,693 129,603 248,956 145,671
-------- -------- -------- --------- --------- ---------
Loss from operations.... (13,965) (54,493) (35,359) (113,431) (214,107) (102,419)
Interest income......... 215 233 165 2,230 2,528 3,907
Interest expense........ (58) (76) (76) (331) (1,080) (903)
Impairment of investee
carried at cost ....... -- (4,000) (4,000) -- (4,000) --
-------- -------- -------- --------- --------- ---------
Loss before income
taxes.................. $(13,808) $(58,336) $(39,270) $(111,532) $(216,659) $ (99,415)
Provision for income
taxes (6).............. -- -- -- -- 5,635 5,210
-------- -------- -------- --------- --------- ---------
Net loss (6)............ $(13,808) $(58,336) $(39,270) $(111,532) $(222,294) $(104,625)
======== ======== ======== ========= ========= =========
Net loss per share:
Basic and diluted
(6)(7)(8)............. $ (10.35) $ (7.98) $ (8.10) $ (3.23) $ (5.24) $ (1.61)
======== ======== ======== ========= ========= =========
Weighted average shares
outstanding (7)(8).... 1,334 7,312 4,845 34,521 42,448 65,137
======== ======== ======== ========= ========= =========
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------------- -------------
DECEMBER 31,
----------------- SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1998 1998(9)
-------- ------- ------------- -------------
(RESTATED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DA-
TA(10):
Cash, cash equivalents and short-
term investments................ $ 3,220 $44,145 $ 53,652 $100,792
Working capital.................. 73 40,516 64,565 104,803
Total assets..................... 7,482 79,250 254,420 407,387
Debt and lease obligations, long-
term portion.................... 436 372 2,005 2,771
Mandatorily Redeemable Convert-
ible Preferred Stock............ 16,200 -- -- --
Stockholders' equity (deficit)... (12,492) 66,689 223,224 309,960
</TABLE>
- -------------------
(1) The Company was incorporated on December 6, 1995 and had insignificant
activities from inception through December 31, 1995, which have been
included in the 1996 financial statements to facilitate presentation.
(2) Includes CKS Group results for the years ended November 30, 1997.
(3) Includes CKS Group results for the nine-month period ended August 31
1998.
(4) Pro forma combined revenue reflects a reclassification of CKS Group's
historical revenues which nets certain production revenues and related
costs to conform to USWeb's accounting policies and basis of
presentation. The effect of netting certain production revenues and
related costs was to decrease both revenues and cost of revenues by $38.6
million and $35.8 million for the year ended December 31, 1997 and the
nine months ended September 30, 1998. See Note 2 of Notes to Unaudited
Pro Forma Combined Financial Information.
(5) Non-cash acquisition-related charges incurred as a result of the
Company's acquisition program. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Notes 1 and 9 to
Consolidated Financial Statements.
(6) Pro forma net loss and pro forma net loss per share gives effect to the
pro forma tax provision recorded to present CKS Group's acquisition of a
partnership in January 1997, accounted for as a pooling of interests, as
if the partnership had been a C corporation fully subject to income
taxes. See Note 3 of Notes to Unaudited Pro Forma Combined Financial
Information.
(7) See Note 2 of Notes to Consolidated Financial Statements for a
description of per share computation and weighted average shares
outstanding computation.
(8) See Note 4 of Notes to Unaudited Pro Forma Combined Financial Information
for description of per share computation and weighted average shares
outstanding computation.
(9) Includes CKS Group consolidated balance sheet data as of August 31, 1998.
(10) It is anticipated that USWeb will incur charges to operations related to
the CKS Merger currently estimated to be $18.0 million, principally in
the quarter in which the CKS Merger is consummated. These charges include
direct transaction costs, primarily for financial advisory and legal
fees, and costs associated with combining operations of the two
companies. The estimated charge is reflected in the unaudited pro forma
combined balance sheet data, but is not reflected in the unaudited pro
forma combined statement of operations data. This charge is a preliminary
estimate only and is subject to change.
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (AS RESTATED)
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data," "Pro Forma Selected Consolidated
Financial Data," "Pro Forma Consolidated Financial Information" and the
Company's Consolidated Financial Statements, including the Notes thereto,
included elsewhere in this Prospectus. The discussion in Management's
Discussion and Analysis of Financial Condition and Results of Operations
contains forward-looking statements that involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations and intentions,
as well as financial trends. The cautionary statements made in Management's
Discussion and Analysis of Financial Condition and Results of Operations
should be read as being applicable to all related forward-looking statements
wherever they appear in this Prospectus. The Company's actual results could
differ materially from those discussed below. Factors that could cause or
contribute to such differences include those discussed in "Risk Factors," as
well as those discussed elsewhere herein.
OVERVIEW
USWeb is a leading Internet professional services firm that provides
Intranet, Extranet and Web site solutions and services to businesses. The
Company has built 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;
maintenance and support; integration; audience development; and maintenance.
The Company markets its services to medium and large companies.
From December 6, 1995 (inception) to March 31, 1997, the Company's operating
activities related primarily to recruiting personnel, raising capital,
preparing and securing approval of its Uniform Franchise Offering Circular and
conducting business as a franchisor of Internet professional services firms.
Each such firm that entered into a franchise agreement with USWeb was
designated an "Affiliate." In March 1997, the Company entered into its last
Affiliate agreement and does not expect to enter into any additional Affiliate
agreements. In the first quarter of 1997, the Company initiated the second
phase of its corporate development strategy and began to acquire Internet
professional services firms, starting with certain qualified Affiliates. To
date, the Company has derived its revenues from a combination of service
revenues generated by its Company-owned offices and fees paid by its
Affiliates. Revenues from Company-owned offices, represented approximately 99%
of total Company revenues for the 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 nine months ended September 30, 1998 and 1997.
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 to expand its network of consulting offices, continue to develop the
strength and quality of its operations, maximize the value delivered to
clients, enhance USWeb 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
34
<PAGE>
Company's business, results of operations and financial condition. The Company
has incurred net losses since inception, and as of September 30, 1998 had an
accumulated deficit of $187.9 million. Although the Company has experienced
revenue growth in recent months, such growth rates may not be sustainable or
indicative of future operating results. The Company expects to continue to
incur substantial operating losses through at least 1999, and there can be no
assurance that the Company will achieve or sustain profitability. See "Risk
Factors--Limited Operating History; Accumulated Deficit" and "--Risks Related
to the Combined Company, USWeb and CKS Group--Limited Operating History;
Accumulated Deficit."
RECENT EVENTS
The Company filed a Registration Statement on Form S-1 (Registration No.
333-36827) and registered 5,000,000 shares of the Company's Common Stock plus
an additional 750,500 shares of the Company's Common Stock solely to cover
over-allotments that were issued on December 5, 1997 in connection with the
Company's initial public offering. The Company also filed another Registration
Statement on Form S-1 (Registration No. 333-46821), and on April 7, 1998,
completed a follow-on offering whereby 1,581,216 and 5,261,284 shares of
Common Stock were sold by the Company and existing stockholders, respectively.
Net proceeds to the Company from the follow-on offering aggregated
approximately $32.3 million, after underwriting discounts and commissions and
related expenses. In addition, various option and warrant holders who
participated as selling stockholders in the offering exercised 387,118 Common
Stock options and 56,547 Common Stock warrants. Net proceeds to the Company
from the exercise of stock options and common stock warrants aggregated
approximately $2.7 million. At the Company's 1998 Annual Meeting of
Stockholders, its stockholders approved amendments to the 1996 Equity
Compensation Plan, the 1997 Acquisition Stock Option Plan and the 1997
Employee Stock Purchase Plan to increase the number of shares reserved for
issuance under each of the respective plans by 5,000,000 shares, 10,000,000
shares and 2,000,000 shares. The Company has filed a Registration Statement on
Form S-4 (Registration No. 333-63323) in connection with the proposed merger
with CKS Group whereby the Company's stockholders are asked, among other
things, to approve an increase in the number of authorized shares of Common
Stock by 100,000,000 shares and to approve the merger with CKS Group, which
may result in the issuance of up to 24,954,011 shares of the Company's Common
Stock. The Company also authorized a stock repurchase of the Company's Common
Stock in the open market of up to the lesser of 1,000,000 shares or
$15,000,000 during late 1998 and early 1999.
ACQUISITION OF INTERNET PROFESSIONAL SERVICES FIRMS AND STRATEGIC ALLIANCE
The Company began to acquire selected Internet professional services firms
in the first quarter of 1997. The Company transitioned from a franchise-based
business model to one based on Company-owned operations to provide greater
economies of scale, enable the consulting offices to focus on providing
Internet professional services and facilitate their growth by furnishing
needed working capital. See Note 1 to Consolidated Financial Statements.
The Company 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, at least fifty percent
of the shares to be issued are deposited into a one-year escrow and the
remaining shares are delivered to the acquired company's shareholders. The
acquired company is valued again, typically at each of six and twelve months
after acquisition, and additional shares are issued or escrowed shares are
returned depending on whether the valuation has increased or decreased. After
all such purchase price adjustments have been made, all shares remaining in
escrow are issued to the acquired company's shareholders. The Company expects
to continue using this valuation 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
35
<PAGE>
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 participating in this
offering. See "Risk Factors--Dilution," "--Risks Related to the Combined
Company, USWeb and CKS Group--Dilution, Earnings and Growth" and Note 1 to
Consolidated Financial Statements.
The acquisitions have been accounted for using the purchase method of
accounting, although the pending merger with 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, which are
amortized on a straight-line basis over the estimated period of benefit, which
ranges from twelve to forty-two months and (iv) amounts allocated to goodwill
and amortized on a straight-line basis 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. The CKS Merger is expected to
be accounted for on a pooling-of-interests basis.
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 estimated that existing software technology
had an estimated life ranging from six months to one year. 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 their 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
36
<PAGE>
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.
Companies typically must invest significant amounts of capital in hardware,
software and employee costs to obtain the benefits of a local or wide area
network. Gray Peak is developing a business model whereby companies can
outsource their network system needs. Network operating center technology
represents the development of hardware, software, processes and services,
which can be used to provide outsourced network services. Using such
technology, a company would subscribe to various network services for a fee
that would vary based upon the level and quantity of service provided. Such a
network operating center service could save companies significant amounts of
capital as well as the management attention necessary to maintain such
services in-house. As of the date of acquisition, the network operating center
was not complete. Based upon discounted cash flows, which included the costs
to complete development of the network operating center, the Consultant
estimated the in-process value of network operating center to be approximately
$9.1 million. The estimate of costs to complete consisted entirely of the
development of unique software and processes and excluded any hardware costs.
As such technology had not reached the stage of technological feasibility and
the network operating center had no alternative future use other than its
original intended use, such amounts were recognized as an operating expense at
acquisition. As of the date of acquisition, it was estimated that $675,000 of
additional expenditures was necessary to complete the in-process technology.
Subsequent to acquisition, the Company has continued to invest in development
of the network operating center and has only recently begun to generate
revenues related to the providing of network operating center services.
However, to date, such revenue has been limited and has not generated positive
cash flows. It is expected that it will be necessary for the Company to invest
additional funds in further development of the network operating center
technology through the end of 1999.
Internet protocol telephony represents a new technology that allows voice
transmission over Internet lines and connections allowing for long distance
telephone communications at prices much lower than existing long distance
telephone rates. As of the acquisition date, it was estimated that $1.1
million of additional expenditures were necessary to complete the Internet
protocol telephony in-process technology. The estimated costs to complete the
technologies consisted entirely of unique software and process development and
excluded any hardware costs. As such amount had not reached the stage of
technological feasibility and had no alternative future use, such amounts were
recognized as an operating expense at acquisition. Subsequent to acquisition,
the Company has continued to invest in development of the Internet protocol
telephony technology, which has not yet begun to generate revenues. It is
expected that it will be necessary for the Company to invest additional funds
in further development of the Internet protocol telephony technology between
the current date and the end of 1999. Should Internet protocol telephony fail
to achieve technological feasibility, the Company may not recover the costs
invested in development of the Internet protocol telephony technology and
realize anticipated future net cash flows.
Target company employees and non-employee shareholders that enter into
consulting agreements are generally granted 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 USWeb Common Stock on the date of grant.
Additional options generally are granted at the revaluation dates if the
target company's formula-based valuation increases. In most cases, each
optionee is also given the right to receive a stock bonus at the time an
option is granted. The stock bonus vests at the same rate as the corresponding
option and is equal in value to the aggregate exercise price of this option.
The stock bonus is payable at the earlier of three years from the date of
grant or, to the extent vested, upon termination of employment. The stock
bonus amount is amortized ratably over a 36-month period and recorded as
compensation expense. This charge is identified as "Stock Compensation" and
allocated to cost of revenues or operating expenses depending on whether the
optionee is acting in a service delivery or administrative capacity.
37
<PAGE>
During the nine-month period ended September 30, 1998, USWeb options were
exchanged for outstanding vested options only with respect to the acquisitions
of Gray Peak Technologies, Inc. and Ikonic Interactive, Inc. In these
transactions, the value of such options was determined using the Black-Scholes
option pricing model and included in the determination of purchase price. For
transactions in which option vesting accelerated as a result of the merger
transaction, the vested options were required to be exercised prior to
acquisition and the resultant target company shares exchanged for the Company's
Common Stock. All target company employees that become employees of the Company
and non-employee shareholders that enter into consulting agreements with the
Company are granted options to purchase shares of the Company's Common Stock.
The exercise price of each option is equal to at least the fair market value of
a share of the Company's Common Stock on the date of grant and such options
generally vest over three years. Options granted to new employees at fair
market value in exchange for future services are accounted for in accordance
with APB Opinion No. 25, with no compensation expense recognized in the
Company's consolidated financial statements. Options granted to consultants
with non-variable terms are valued on the date of grant using the Black-Scholes
option pricing model with the resulting compensation cost being allocated to
cost of revenues or operating expenses depending on whether the optionee is
acting in a services delivery or administrative capacity.
In May 1998, the Company entered into a strategic alliance with NBC
Multimedia, Inc. ("NBC") to expand production capabilities for NBC's
interactive properties and services. As part of the strategic alliance, the
Company was awarded a multi-year contract where revenues earned under the
contract are expected to approximate $11.0 million. In connection with the
strategic alliance, the Company issued warrants to NBC allowing them to
purchase 1,600,000 and 500,000 shares of the Company's Common Stock at $22.50
and $25.43 per share, respectively. Warrants to purchase 1,050,000 shares are
exercisable at any time prior to their expiration in November 1999 (the "Fixed
Warrants"). Warrants to purchase the remaining 1,050,000 shares are subject to
cancellation, or if previously exercised, are subject to repurchase by the
Company at the original purchase price, in the event that the agreement is
cancelled by NBC prior to May 2002 (the "Variable Warrants"). The warrants were
initially valued at $12.6 million. Of the total value ascribed to the NBC
warrants, $6.3 million was attributable to the Fixed Warrants and recorded as
part of stock compensation in operating expenses in the quarter ended June 30,
1998, and $6.3 million was attributable to the Variable Warrants. Because the
inclusion of the value of the Variable Warrants as a sales discount over the
life of the NBC contract will result in an overall loss on the contract, an
accrual of $9.4 million was provided in the quarter ended June 30, 1998 to
recognize this loss. The Variable Warrants are subject to future revaluation at
each balance sheet date through the date the related cancellation or repurchase
rights lapse. During the quarter ended September 30, 1998, the Company recorded
a recovery of the previously recognized loss totaling $7.3 million due to
changes in the estimated fair value of the Variable Warrants.
As a result of both the purchase accounting adjustments, the stock
compensation charges and the charges associated with the NBC warrants described
above, the Company has incurred significant non-cash expenses. For example, for
the nine-month period ended September 30, 1998, stock compensation expense
included in cost of revenues totaled $9.4 million, stock compensation expense
included in operating expenses totaled $24.0 million (including the $6.3
million associated with warrants issued to NBC; see "Results of Operations--
Stock Compensation") and amortization of intangible assets totaled $44.5
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 has recognized an aggregate cost of $25.5 million for acquired in-
process technology related to the 14 acquisitions during the nine-month period
ended September 30, 1998. The Company expects these acquisition-related non-
cash expenses to continue on a basis corresponding with the operation of the
acquisition program.
To capitalize on the growth opportunities for a newly acquired consulting
office, the Company generally hires a number of additional Internet
professionals during the three-month period following the office's integration
into the USWeb network. The capacity utilization rates of these new employees
are initially not as high as those of seasoned employees because of the time
spent on training and professional development.
38
<PAGE>
Consequently, the Company expects that the cost of service revenues as a
percentage of service revenues of an integrated office will generally increase
during the first three months following such integration. The Company believes
that this investment in training and professional development will contribute
to its ability to meet its growth targets.
As of September 30, 1998, the Company had issued an aggregate of
approximately 7,460,000 shares of Common Stock and may issue additional shares
pursuant to the Registration Statement on Form S-4 (Registration No. 333-
38351) in connection with the acquisitions of Inter.logic.studios, inc., Quest
Interactive Media, Inc., Ensemble Corporation, Ikonic Interactive, Inc.,
Xplora Limited, Kallista, Inc., USWeb San Jose, Nutley Systems, Inc. ("nSET"),
Gray Peak, Tucker Network Technologies, Inc. and Metrix Communications, Inc.
See "Pro Forma Consolidated Financial Information--Overview." The total number
of shares the Company has issued and expects to issue in connection with the
above-mentioned acquisitions and pending acquisitions is not necessarily
indicative of the total number of shares that will be issued in connection
with such acquisitions because each of the acquired companies is usually
valued again, typically at each of six and twelve months after each
acquisition, and additional shares are issued or escrowed shares are returned,
depending on whether the valuation has increased or decreased.
The successful implementation of the Company's acquisition strategy depends
on the Company's ability to identify suitable acquisition candidates, acquire
such companies on acceptable terms and integrate their operations successfully
with those of the Company. There can be no assurance that the Company will be
able to do so. Moreover, in pursuing acquisitions the Company may compete with
companies with similar acquisition strategies, certain of which competitors
may be larger and have greater financial and other resources than the Company.
Competition for these acquisition targets could also result in increased
prices for acquisition targets and a diminished pool of companies available
for acquisition. Acquisitions also involve a number of other risks, including
adverse effects on the Company's reported operating results from increases in
goodwill amortization, acquired in-process technology, stock compensation
expense and increased compensation expenses resulting from newly hired
employees, the diversion of management attention, risks associated with the
subsequent integration of acquired businesses, potential disputes with the
sellers of one or more acquired entities and the failure to retain key
acquired personnel. Client satisfaction or performance problems with an
acquired firm could also have a material adverse impact on the reputation of
the Company as a whole, and any acquired subsidiary could significantly under-
perform relative to the Company's expectations. For all of these reasons, the
Company's pursuit of an overall acquisition strategy or any individual
completed, pending or future acquisition may have a material adverse effect on
the Company's business, results of operations and financial condition. To the
extent the Company chooses to use cash consideration in the future to pay for
all or part of any acquisitions, the Company may be required to obtain
additional financing, and there can be no assurance that such financing will
be available on favorable terms, if at all. See "Risk Factors--Risks Related
to Acquisitions," "--Future Capital Needs; Uncertainty of Additional
Financing," "--Risks Related to the Combined Company, USWeb and CKS Group--
Risks Related to Future Acquisitions" and Note 1 to Consolidated Financial
Statements.
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
39
<PAGE>
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 its inception in
December 1995 through the first quarter of 1997. During that period, revenues
were derived almost exclusively from initial fees and monthly royalties from
Affiliates. Initial fees were typically recognized when received because all
obligations required of USWeb by the Affiliate agreement were substantially
performed concurrently with the execution of the agreement. Monthly royalty
revenue is recognized as reported by the Affiliate to USWeb. In the first
quarter of 1997, USWeb ended its program for attracting new Affiliates and
initiated the acquisition phase of its corporate development strategy. During
the 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
YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenues. Total revenues increased to $19.3 million for the year ended
December 31, 1997 from $1.8 million for the year ended December 31, 1996. This
increase was primarily attributable to the Company beginning its acquisition
program in the first quarter of 1997. No service revenues were recorded for
the year ended December 31, 1996 because during this period the Company did
not have any Company-owned offices and instead derived its revenues from
initial fees and monthly royalties from Affiliates. The Company anticipates
that revenues will be impacted in future periods as a result of internal
growth and as a result of acquisitions of additional Internet professional
service firms.
Cost of Revenues. Cost of revenues increased to $17.2 million for the year
ended December 31, 1997 from $208,000 for the year ended December 31, 1996.
The increase in cost of revenues was primarily attributable to the cost of
revenues associated with Company-owned offices subsequent to their respective
acquisition dates. The Company anticipates that cost of revenues will increase
in absolute dollars as service fees generated by the Company-owned offices and
the level of services increase, and as a result of acquisitions of additional
Internet professional service firms.
Marketing, Sales and Support Expenses. Marketing, sales and support expenses
increased to $20.7 million for the year ended December 31, 1997 from $12.8
million for the year ended December 31, 1996. Approximately $3.9 million of
the increase was due to the consolidation of the results of operations of
acquired Internet professional services firms with those of the Company
throughout 1997, $3.7 million was due to increases in personnel to support the
growth in the Company's operations and $1.3 million was due to the Company's
branding campaigns. These increases were partially offset by decreases in
marketing and operations activities of $2.1 million resulting from the
transition of the affiliate franchising model to Company-owned operations. In
addition, during December 1997, the Company recognized a non-cash charge of
$1.3 million associated with the discounted sale of Common Stock to Intel
Corporation. The Company anticipates that marketing, sales and support
expenses will increase in future periods in absolute dollars as it
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continues to pursue an aggressive brand building strategy and continues to
acquire and consolidate the results of Internet professional service firms.
General and Administrative Expenses. General and administrative expenses
increased to $10.3 million for the year ended December 31, 1997, from $2.8
million for the year ended December 31, 1996. This increase was primarily
attributable to $3.7 million related to the consolidation of the results of
operations of acquired Internet professional services firms with those of the
Company throughout 1997, $2.2 million of increases in personnel and overhead
costs to support the internal growth in the Company's operations and a non-
cash severence related compensation charge of $1.1 million during the quarter
ended September 30, 1997 related to the Company's decision to end its program
for attracting new Affiliates. The Company believes that the absolute dollar
level of general and administrative expenses will increase in future periods,
as a result of increased staffing, fees for professional services, and costs
associated with acquiring and consolidating the results of Internet
professional service firms with those of the Company.
Acquired In-Process Technology. The Company recognized the cost of acquired
in-process technology totaling $9.5 million during the year ended December 31,
1997. The Company did not record any such
expenses for the year ended December 31, 1996, because the Company did not
acquire any entities during such period. The acquired in-process technology
had not reached the stage of technological feasibility at the date of
acquisition and had no alternative future use. The Company anticipates that
acquired in-process technology expenses will increase in future periods in
absolute dollars as it continues to acquire Internet professional service
firms with in-process technology.
Stock Compensation. Stock compensation expense relating to stock bonus
awards to employees of acquired entities totaled $6.7 million for the year
ended December 31, 1997. The Company did not record any such expenses for the
year ended December 31, 1996 because the Company did not acquire any entities
during such period. The Company anticipates that stock compensation expense
will increase in future periods in absolute dollars as it continues to acquire
Internet professional service firms.
Amortization of Intangible Assets. Amortization of intangible assets,
consisting primarily of purchased technology and goodwill, was $9.5 million
for the year ended December 31, 1997. The Company did not record any such
expenses for the year ended December 31, 1996 because the Company did not
acquire any entities during such period. The Company anticipates that costs
related to the amortization of intangible assets will increase in future
periods in absolute dollars as it continues to acquire Internet professional
service firms.
Impairment of Investee. During June 1997, the Company recognized an
impairment provision totaling $4.0 million, representing the total amount of
its cost basis investment in Utopia Inc., an independent Internet consulting
firm. In assessing the level of impairment, the Company considered the
entity's current financial position, recent operating performance and the
likelihood of recovery of some or all of its investment in the event of
liquidation, sale or merger.
Income Taxes. No provision for federal and state income taxes was recorded
for either of the years ended December 31, 1997 and 1996 because the Company
incurred net operating losses in each of those periods.
Net Loss. Net losses for the years ended December 31, 1997 and 1996 were
$58.3 million and $13.8 million, respectively. The increase in the net loss
was primarily attributable to increases in marketing, sales and support
expenditures, approximately $28.1 million of non-cash charges associated with
the Company's acquisition program and a $4.0 million impairment charge
relating to an investee carried at cost.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Revenues. Total revenues increased to $73.1 million for the nine months
ended September 30, 1998, from $8.7 million for the nine months ended
September 30, 1997. This increase was attributable to the
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Company's acquisition program, which began in the first quarter of 1997,
combined with the increased number and relative size of client engagements.
The Company had completed 33 acquisitions as of September 30, 1998 compared to
16 as of September 30, 1997.
Cost of Revenues. Cost of revenues increased to $58.9 million for the nine
months ended September 30, 1998, from $8.3 million for the nine months ended
September 30, 1997. The increase in cost of revenues was primarily
attributable to the cost of revenues associated with acquired companies
subsequent to their respective acquisition dates which aggregated $28.4
million and to the increased staffing for engagements that resulted in $12.1
million of additional cost during the period. Also included in cost of
revenues was an increase in stock compensation of $8.4 million in connection
with stock bonus awards to employees of newly acquired entities and an accrual
of $2.1 million to provide for a loss on the Company's contract with NBC (see
Note 12 of Notes to Consolidated Financial Statements). As a percentage of
revenues, cost of revenues decreased to 81% for the nine months ended
September 30, 1998, from 96% for the corresponding period in 1997. This
decrease resulted from the further integration of the Company's acquisitions,
many of which were fully integrated as of September 30, 1998. Included in cost
of revenues for the nine months ended September 30, 1998 are non-cash charges
aggregating $14.0 million, which include an accrual to provide for a loss on
the Company's contract with NBC, stock compensation resulting from the
Company's acquisition program and depreciation and amortization of fixed
assets and leasehold improvements. 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.
Marketing, Sales and Support Expenses. Marketing, sales and support expenses
increased to $17.9 million for the nine months ended September 30, 1998, from
$14.1 million for the nine months ended September 30, 1997. Approximately $6.1
million of this increase was attributable to the consolidation of the results
of operation of additional Internet professional services firms with those of
the Company during the period. This increase was partially offset by decreases
in marketing and operations activities of $1.9 million resulting from the
transition from the affiliate franchising model to Company-owned operations.
As a percentage of revenues, marketing, sales and support expenses decreased
to 24% of revenues for the nine months ended September 30, 1998, compared to
163% for the corresponding period in 1997. This decrease resulted primarily
from economies of scale. Included in marketing, sales and support expenses for
the nine months ended September 30, 1998 are non-cash charges aggregating
$244,000 related to depreciation and amortization of fixed assets and
leasehold improvements. The Company anticipates that marketing, sales and
support expenses will increase in future periods in absolute dollars as it
continues to pursue an aggressive brand building strategy and continues to
acquire and consolidate the results of additional Internet professional
service firms.
General and Administrative Expenses. General and administrative expenses
increased to $15.7 million for the nine months ended September 30, 1998, from
$7.0 million for the nine months ended September 30, 1997. This increase was
primarily attributed to an increase of $5.3 million resulting from the
consolidation of the operations of acquired Internet professional services
firms with those of the Company during each period and increases in personnel
and overhead costs to support the internal growth in the Company operations
totaling $3.2 million. As a percentage of revenues, general and administrative
expenses decreased to 21% of revenues for the nine months ended September 30,
1998, compared to 81% for the corresponding period in 1997. This decrease
resulted primarily from economies of scale. Included in general and
administrative expenses for the nine months ended September 30, 1998 are non-
cash charges aggregating $389,000 related to depreciation and amortization of
fixed assets and leasehold improvements. The Company believes 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. In November 1998, the Company entered into an employment
arrangement with an individual who will serve as the Company's Chief Executive
Officer. As part of the employment
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arrangement, the Company granted the individual options to purchase 1.2
million shares of the Company's Common Stock with an exercise price of $10.00
per share. The aggregate difference between the exercise price of the options
and the fair market value of the Common Stock on the date of grant,
approximating $8.3 million, will be recognized ratably as an operating expense
over the four-year vesting period of the related options.
Acquired In-Process Technology. Acquired in-process technology increased to
$25.5 million for the nine months ended September 30, 1998, from $6.7 million
for the nine months ended September 30, 1997. This increase resulted from the
number and relative size of acquisitions completed in the nine months ended
September 30, 1998, compared to the corresponding period in 1997. 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 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 increased to $24.0 million
for the nine months ended September 30, 1998, from $3.5 million for the nine
months ended September 30, 1997. Included in stock compensation is $6.3
million associated with the value of the Fixed Warrants granted to NBC in
connection with a strategic relationship (see Note 12 of Notes to Consolidated
Financial Statements) as well as costs relating to stock bonus awards to
employees of acquired entities. The increase in stock compensation expense for
the nine months ended September 30, 1998, as compared to the corresponding
period in 1997, resulted from the value of the warrants associated with the
NBC agreement, as well as the increased number and relative size of the
Company's various acquisitions. The Company anticipates that stock
compensation expense will vary in future periods.
Amortization of Intangible Assets. Amortization of intangible assets,
consisting primarily of purchased technology, workforce in place, and
goodwill, increased to $44.5 million for the nine months ended September 30,
1998, from $4.3 million for the nine months ended September 30, 1997. This
increase 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. Net interest income increased to $1.9 million
for the nine months ended September 30, 1998, from $89,000 for the nine months
ended September 30, 1997. This increase 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.
Income Taxes. No provision for federal and state income taxes was recorded
for the nine months ended September 30, 1998 and 1997 because the Company
incurred net operating losses in each of those periods.
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.
Net Loss. Net losses for the nine months ended September 30, 1998 and 1997
were $111.5 million and $39.3 million, respectively. The increase in the net
loss was primarily attributable to non-cash charges of $108.7 million for the
nine months ended September 30, 1998, 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 a net loss of $2.8 million for the nine months ended September
30, 1998, compared to a net loss of $23.0 million for the nine-month period in
the prior year.
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FACTORS AFFECTING OPERATING RESULTS
The Company's operating results may fluctuate significantly in the future as
a result of a variety of factors, many of which are outside the Company's
control. These factors include the level of demand for Intranet, Extranet and
Web site development; the productivity of the Company's consulting offices;
the Company's success in finding and acquiring suitable acquisition
candidates; the Company's ability to attract and retain personnel with the
necessary strategic, technical and creative skills required to service clients
effectively; the cost of advertising and related media; the amount and timing
of expenditures by the Company clients for Internet professional services;
client budgetary cycles; the amount and timing of capital expenditures and
other costs relating to the expansion of the Company's operations; the
introduction of new products or services by the Company or its competitors;
pricing changes in the industry; technical difficulties with respect to the
use of the Internet; economic conditions specific to Internet technology
usage; and general economic conditions. As a strategic response to changes in
the competitive environment, the Company may from time to time make certain
pricing, service, technology or marketing decisions or business or technology
acquisitions that could have a material adverse effect on the Company's
business, results of operations and financial condition. The Company may also
experience seasonality in its business in the future, resulting in diminished
revenues to the Company as a consequence of decreased demand for Internet
professional services during summer and year-end vacation and holiday periods.
Due to all of the foregoing factors, in future periods the Company's operating
results may fall below the expectations of securities analysts and investors.
In such event, the trading price of the Company's Common Stock would likely be
materially and adversely affected. See "Risk Factors--Risks Related to the
Combined Company, USWeb and CKS Group--Fluctuations in Quarterly Operating
Results and Margins; Seasonality of Business."
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 the Company 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 the Company'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. The Company does not expect the adoption of
SFAS No. 131 to have any impact on the Company's consolidated financial
results and is currently assessing the disclosure requirements of the new
pronouncement.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance for determining whether computer software is internal-use software
and on accounting for the proceeds of computer software originally developed
or obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer
software developed or obtained for internal use. The Company has not yet
determined the impact, if any, of adopting SOP 98-1, which will be effective
for 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
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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.
YEAR 2000--USWEB AND THE COMBINED COMPANY
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 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 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.
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 the 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
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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 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. See "CKS Group Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000."
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BUSINESS
The following Business section also contains forward-looking statements
which involve risks and uncertainties, including forward-looking statements
regarding, without limitation, development and application of new media
marketing communication services and products, and industry trends, the
Company's actual results could differ materially from those anticipated in
these forward-looking statements as a result of a variety of factors,
including those factors set forth under "Risk Factors" and elsewhere in this
Prospectus. See "Forward-Looking Statements." The following information
provides information on the business of the Company on a stand-alone basis and
does not describe the business of the Company if the proposed merger with CKS
Group is completed.
OVERVIEW
USWeb is an Internet professional services firm that provides Intranet,
Extranet and Web site solutions and services to medium-sized and large
companies. USWeb is recognized as a leader in this market. The Company has
built a national network of consulting offices and what it believes to be one
of the most recognized brands for Internet professional services. The Company
offers a comprehensive range of services to deliver Internet solutions
designed to improve clients' business processes. The Company's services
include strategy consulting; analysis and design; technology development;
implementation and integration; audience development and maintenance. The
Company markets its services to medium-sized and large companies.
INDUSTRY BACKGROUND
Intranets, Extranets and Web sites (collectively, "Internet solutions")
provide companies with a new set of tools for improving basic business
processes such as communications, data transmission, marketing, transaction
processing and customer service. An Intranet enables a company's employees to
receive corporate information and training efficiently, communicate through e-
mail, use the internal network's business applications, and access proprietary
information and legacy databases. An Extranet can extend part or all of the
functionality of a secure Intranet to selected business partners outside of
the company, such as customers, suppliers or distributors. Forrester Research,
Inc. ("Forrester") estimates that the worldwide market to build business-to-
business Internet sites that support transactions and dynamic trading
processes will increase from $253 million in 1998 to $2.7 billion in 2002. Web
sites, which are accessible by the general public, can present advertising and
marketing materials in new and compelling fashions, display products and
services in electronic catalogs, offer products and services for sale online,
process transactions and fulfill orders, provide customers with rapid and
accurate responses to their questions, and gather customer feedback
efficiently. Forrester expects the shift to electronic commerce will drive the
worldwide Internet development services market from $4 billion in 1998 to $15
billion by 2002. The Company believes that the market size estimates in this
paragraph are based on reasonable assumptions about the number of companies
that will adopt Internet and e-Commerce solutions and the speed and cost of
such implementation; however, actual development of these markets will be
dependent on many factors outside the Company's control.
Although businesses are adopting Internet solutions rapidly and at
increasing rates, the basic technical differences of such solutions from
earlier technologies and the broad scope of business process improvements that
such solutions can provide require companies to take fundamentally new
approaches toward implementing them. Businesses seeking to realize the
benefits provided by Internet solutions face a formidable series of challenges
presented by the need to link business strategy, new and rapidly changing
technologies and continuously updated content. Before creating an Intranet,
Extranet or Web site, a company must first conduct a thorough needs assessment
to review its strategic business requirements and compare them to the
capabilities of its existing processes and systems. Next, the company must
architect the solution and develop an implementation plan. The implementation,
establishment and maintenance of the solution will require significant
technical expertise in a number of areas, such as electronic commerce systems,
security and privacy technologies, application and database programming,
mainframe and legacy integration technologies and advanced user interface and
multimedia production.
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To perform this multitude of functions in-house, a company would have to
make substantial commitments of time, money and technical personnel to keep
current with rapidly evolving technologies, content presentation techniques
and competitors' offerings. Professionals with the requisite strategic,
technical and creative skills are often in short supply and many organizations
are reluctant to expand their internal information systems or marketing
departments for particular engagements at a time when they are attempting to
minimize fixed costs to increase returns on investment. At the same time,
external economic factors encourage organizations to focus on their core
competencies and trim workforces in the information technology management
area. Accordingly, many businesses have chosen to outsource a significant
portion of the design, development and maintenance of their Intranets,
Extranets and Web sites to independent professionals who can leverage
accumulated strategic, technical and creative talent and stay current with
ongoing developments in a field characterized by extremely short technology,
process and content lifecycles.
Companies seeking to establish Internet solutions may turn to their
traditional marketing or technology service providers for assistance. However,
most of these providers have neither a proven track record of successful
Internet solution deployment nor the full portfolio of strategy, technology,
marketing and creative skills required to serve client needs effectively. Most
advertising and marketing communications agencies lack the extensive technical
skills, such as application development and legacy system and database
integration, required to produce the increasingly complex and functional
solutions demanded by clients. Most national information technology consulting
service providers have sizable corporate infrastructures and have therefore
chosen to focus on multi-million dollar engagements such as Year 2000 projects
and client/server enterprise resource planning software deployments, not
Internet solution consulting engagements. Most large computer technology
product and service vendors lack the creative and marketing skills required to
build audiences and deliver unique and compelling content, and are further
constrained by their need to recommend their proprietary brands. Internet
access service providers, whose core strength is in providing Internet access
and site hosting rather than solution development, typically lack both the
necessary creative and application development skills.
A number of small Internet professional services firms have emerged to
address the significant and rapidly growing market for Internet solutions.
However, the small size and capital constraints of most of these firms
restrict their ability to supply clients with the necessary depth and
integration of strategic, technical and creative skills. Furthermore, many of
these providers tend to develop expertise in a limited number of vertical
markets because of the need to leverage the information and experiences gained
from the relatively small number of Internet solution engagements they have
completed.
The Company believes that the rapidly increasing demand for Internet
solutions, combined with the inability of most current providers to supply the
full range and integration of strategic, technical and creative skills
required by clients, has created a significant market opportunity for a scaled
Internet professional services firm. In the currently fragmented and rapidly
changing environment, an organization that could deliver the creative
strengths of advertising and marketing firms, the strategic skills and
technical capabilities of information technology consulting service providers,
and the national reputation, economies of scale, multiple points of local
presence and information sharing capabilities of a large organization could
capitalize on this opportunity to help companies significantly improve their
business processes.
THE USWEB SOLUTION
USWeb's mission is to provide clients with the vision, expertise and
resources required to develop new strategies and improve business processes
using Internet solutions. To capitalize on the opportunity presented by the
rapid growth in demand for such solutions combined with a fragmented group of
organizations serving this demand, USWeb has built and is continuing to expand
through acquisitions and internal growth an Internet professional services
firm with 43 Company-owned and Affiliate offices as of June 30, 1998. The
Company's services include strategy consulting; analysis and design;
technology development; implementation and integration; audience development;
and maintenance.
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The Company delivers value to its clients through the application of its
Internet strategy and solutions methodology. Through its focus on Internet
technologies, the Company believes that it is well positioned to provide wide-
ranging and leading edge expertise with regard to:
. Internet browsers, servers and plug-ins
. Electronic commerce and transaction systems
. Security authentication and privacy technologies
. E-mail and advanced collaboration systems
. Digital asset management systems
. Client/server and database application systems
. Mainframe and legacy integration technologies
. Advanced user interface and multimedia production
. Internet-based video conferencing
. Custom programming and tool applications
. Site administration and reporting tools
. Internet marketing systems and services
. Client, server and routing hardware
. Internet access and hosting services
The Company delivers these services to clients through its network of
consulting offices, whose regional presence enables each office to develop
close client relationships and an understanding of client needs. Each
consulting office also benefits from the resources of the overall USWeb
organization. For example, individual consulting offices may draw as needed
upon the assistance of one or more additional offices with specialized
creative or technical expertise. Each consulting office also draws upon the
USWeb Internet Strategy and Solutions Center, which aggregates the expertise
of the entire USWeb network of offices to provide resources such as USWeb
Business Solutions that target selected client market segments or business
functions, a centralized index of best demonstrated practice methodologies, a
technology library of proprietary reusable software and content objects, a
central project registry, executive briefing programs for client decision
makers, SiteCast Internet solution education broadcasts and professional
Internet technology certification programs. The consulting offices can
leverage these central resources to provide clients efficiently with effective
Internet business solutions. The Company believes that its methodology has a
proven track record of delivering value to clients and is an important factor
in retaining existing clients and marketing to new ones.
USWeb believes that its operational model enables it to scale rapidly by
leveraging its central resources as its operations expand. First, the Company
believes that its aggregation and deployment of the accumulated experience and
expertise of its network of offices provides clients with enhanced business
solutions. Second, the Company's ability to leverage central technology and
operational resources enables the Company to scale efficiently, both through
the growth of existing consulting offices and the acquisition of new offices,
which also provides significant numbers of additional skilled personnel.
Finally, the Company's aggressive brand development campaign, which reinforces
the message that USWeb is a secure, reliable, high quality choice for the
provision of Internet professional services, increases the Company's ability
to access and influence key client decision makers.
STRATEGY
The Company's objective is to become and remain the leading global Internet
professional services firm. The Company's strategy to achieve this objective
includes the following elements:
Continue to Expand Network of Company-Owned Offices. The Company is
continuing to build its network of Company-owned offices through acquisitions
and internal growth. Acquisition efforts are focused on strategic and
international opportunities. The Company believes that in the fragmented
market for
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providing Internet solutions, rapidly building a critical mass of strategic,
technical and creative talent through both internal growth and acquisitions
will provide USWeb with a substantial competitive advantage. As of
September 30, 1998, USWeb had Company-owned offices in 37 locations across the
United States, including Atlanta, Austin, Boston, Chicago, Detroit, Irvine,
Los Angeles, Memphis, Milwaukee, New York, Phoenix, Pittsburgh, Santa Clara,
San Francisco, San Jose, Seattle, South Norwalk, St. Paul, and Washington,
D.C., as well as an office in Dusseldorf, Germany and an office near London in
the United Kingdom. The Company intends to acquire additional entities on a
strategic basis in both the U.S. and abroad.
Strengthen Position as a Leading Internet Professional Services Firm. The
Company is continuing to strengthen its position as a leading Internet
professional services firm in order to provide clients with superior Internet
solutions. The Company intends to continue investing significantly in
identifying, reviewing and integrating the latest Internet technologies and
accumulating and deploying the best demonstrated practices for developing and
implementing Internet solutions. The Company is continuing to develop USWeb
Business Solutions, partially pre-built Internet solutions that combine USWeb
methodologies, services and reusable software and content objects with third-
party software. The Company's consulting offices intend to continue leveraging
the Company's nationwide presence, operational scale and professional
marketing tools, which provide each consulting office with resources and
credibility to convince client decision makers that USWeb can provide
successful Internet solutions to meet the most demanding business needs. The
Company also intends to remain focused on delivering the Internet solution
best suited to a client's needs.
Develop Additional Strategic Relationships. The Company intends to continue
developing strategic relationships because they enable USWeb to enter new
markets, gain early access to leading-edge technology, cooperatively market
products and services with leading technology vendors, cross-sell additional
services and gain enhanced access to vendor training and support. USWeb has
developed a number of strategic relationships with leading Internet hardware,
software and content companies, including Intel, Microsoft, Hewlett-Packard,
Pandesic LLC (the Internet company from Intel and SAP), Sun Microsystems and
Reuters. Collectively these relationships provide for co-marketing programs,
joint research and development on leading implementations of Internet
solutions, technical education, client feedback channels and hardware and
software distribution rights.
Leverage Operational Economies of Scale. USWeb provides certain operational
and administrative services centrally, allowing the network of offices to
benefit from the economies of scale created by a large operation while
enabling the consulting offices to focus on their core competency of providing
superior client services. These centrally provided services include business
development programs, operations management guides, client support assistance,
carrier-grade site hosting, human resources programs, financial reporting and
forecasting, performance appraisals and standardized methodologies.
Increase Outsourcing Service Offerings. USWeb intends to expand the range of
its service offerings related to managing its clients' information technology
operations. The Company believes that growing adoption of the Internet and its
related technologies, often by companies whose core expertise does not include
information technology, and growing complexity of electronic infrastructures,
will result in an increase in the outsourcing of such services. The Company
intends to leverage its relationships with leading technology companies to
offer clients a variety of Internet application modules, which the Company
will customize to the needs of each client. The Company further intends to
maintain a data center where the client systems can be operated with high
reliability and efficiency.
SERVICES
The Company offers a comprehensive range of services to deliver Internet
solutions designed to improve clients' business processes. In each consulting
engagement, the client can contract for the specific services it requires,
depending on the nature of the engagement and the capabilities of the client's
organization. The Company bills most of its engagements on a time and
materials basis, although it has delivered several solutions on a fixed-price
basis and intends to increase the percentage of engagements provided on such a
basis.
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INTERNET SOLUTION DEVELOPMENT AND DEPLOYMENT. The Company's Internet
solution development and deployment methodology consists of six phases:
Strategy Consulting. USWeb works closely with the client to conduct a
thorough study of the client's strategic market position, business
requirements and existing systems and capabilities to determine the ways in
which Internet solutions can most improve the client's business processes. The
Company then delivers its recommendations, which define the strategic basis
for a specific Internet solution that takes into account the client's budget,
timeline and available resources.
Analysis and Design. Once the strategic groundwork has been established, the
Company translates the client's strategic requirements into a system or
process design architecture, a blueprint that defines the roles the system
will perform to meet those requirements. By choosing USWeb, the Company's
clients receive vendor-neutral solutions prepared by Internet-focused
consultants. USWeb researches, tests and evaluates virtually all major
Internet technologies and tools to design system and process architectures
that successfully meet client needs. The Company's objective is to design,
build and deploy a solution that is logically planned, scales well over time,
is sufficiently secure, and is easy to use, administer and manage.
Technology Development. In the development phase, the Company builds a
testable version of the client's solution based on the blueprint produced in
the analysis and design phase. The Company designs, codes, integrates and
tests all necessary programs and components using a broad range of expertise,
including object-based and relational database systems; electronic commerce
systems; custom ActiveX, Java and C++ programming and host integration;
implementation of third-party applications and security technologies; and
integration of hardware, software and Internet access products. USWeb's
experienced and professional graphic designers also work to create a
compelling user interface for the solution to enable it to attract and hold
the attention of the client's target audience while conforming to the client's
brand image and marketing campaigns. In performing these functions, USWeb
professionals benefit from access to an extensive library of re-usable
software and content objects.
Implementation and Integration. In the implementation phase, USWeb tests the
solution created in the development phase and readies it to be deployed into a
full production system. The Company delivers the system to the client,
installs it, converts and initializes all necessary data, performs acceptance
testing and puts the system into operation. The Company also integrates
Intranet solutions with back-office legacy systems to ensure that each
client's critical applications are secure and seamless. USWeb maintains third-
party vendor relationships that offer its clients secure, state-of-the-art,
high-availability Intranet, Extranet and Web site hosting and integrated
services for relational databases, workgroup collaboration, streaming audio
and video, management and monitoring, e-mail and secure electronic commerce.
Audience Development. The Company can work with the client to develop a
strategy for achieving its online marketing objectives by increasing Web site
traffic, strengthening brand awareness and generating sales leads. The Company
provides online media planning and purchasing services and advice regarding
online public relations. The Company has also developed a proprietary audience
creation methodology designed to optimize a Web site's search engine presence,
increase site access through hyperlink recruitment and disseminate the
client's key messages to Internet newsgroups, mailing lists and forums.
Maintenance. USWeb can provide the client with ongoing support services for
its Internet solutions, from content maintenance to site administration, for
as long as the client wishes. The Company's technical staff can also assist
clients on a case-by-case basis to resolve technical problems, provide
assistance with the hosting environment, and deliver support for Internet
solution software.
EXAMPLES OF USWEB INTERNET SOLUTIONS. The following examples illustrate the
Company's Internet solution development capabilities.
Ingram Micro E-Commerce Extranet. Ingram Micro Inc. ("Ingram Micro"), a
leading wholesale distributor of technology products and services, teamed with
USWeb to build and deploy an e-commerce
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Extranet for on-line distribution. The business-to-business commerce solution,
called Auction Block, is a real-time, on-line bidding service that allows
resellers to purchase new, unopened products that are not returnable to the
manufacturer. USWeb developed a customized Java-based inventory auction system
that automates inventory negotiation processes in real-time and integrated it
with Ingram Micro's back-end database to facilitate user authentication and
inventory tracking. This new Internet distribution channel has become a new
source of revenues for Ingram Micro.
Harley-Davidson Dealer Extranet. Harley-Davidson, a motorcycle manufacturer,
was seeking ways to streamline two specific business processes: technical
documentation distribution and warranty claims processing. To obtain
instruction sheets, service bulletins or other technical documentation,
dealers previously had to request the appropriate documents by telephone and
then wait for Harley-Davidson to process the request manually and fax the
documents back to the dealership. To process warranty claims, dealers
previously had to mail such claims to Harley-Davidson and wait for them to be
manually entered into a database and checked for errors through overnight
batch processing. Both of these procedures were slow, inefficient and prone to
errors. To improve these basic business processes, USWeb created an Extranet
accessible via a Web browser that allows dealers to securely search, view and
print technical documents at their convenience and submit warranty claims
directly online. Using the Extranet has reduced turnaround time for
documentation distribution and warranty claims processing, reduced the error
rate and reduced overhead costs associated with providing information through
paper forms or telephone support.
Warner/Chappell SuperSite. Warner/Chappell, the largest music publishing
company in the world, partnered with USWeb to develop a "supersite," or single
site architecture, that integrates Internet, intranet and extranet
capabilities. The site is the central gateway that provides multiple tiers of
interaction and site functionality based on user identification and
authentication among multiple user groups such as customers, partners,
suppliers, and employees. Complementing Warner/Chappell's existing music
licensing business, the supersite enables hundreds of thousands of songs in
its catalog to be referenced, cross-indexed, and immediately accessed using
intricate site interactivity and dynamic page creation. USWeb wove extensive
archival search capabilities into the site, allowing clients various options
to drill down and view information and therefore to make better, more informed
purchasing decisions. The site's dynamic front end integrates with back-end
legacy systems and a site maintenance interface to enable automatic publishing
of up-to-the-minute information by site administrators. All information is
entered via a browser-based, password-protected intranet application on the
back end and is dynamically published in various sections throughout the site.
Although primarily a business-to-business venue, the supersite also delivers a
wealth of information to music aficionados, including new releases, music
facts, updated singles, album chart ratings, articles by music-industry
notables, and artist trivia. All visitors to the site may also access an
online music store, which offers CDs, songbooks, instructional videos, online
sheet music, and music publications. All of the sites information is entered
through a centralized Intranet that uses WebObjects, Oracle Database, and a
sophisticated search engine, integrated seamlessly with Warner/Chappell's
existing legacy backend.
The foregoing examples of the Company's Internet solutions show the breadth
of the Company's Internet solution capabilities. Because each USWeb client and
its needs is different from others, the Internet solutions in these examples
may be more extensive and successful than others that do not achieve all the
goals of a particular client. There can be no assurance that any particular
client project will meet the client's objectives, stay within budgeted expense
levels, be completed at the desired or scheduled date or otherwise allow the
Company's clients to realize the intended benefits of a project. Promoting and
positioning USWeb brands will depend largely on the success of the Company's
marketing efforts and the ability of the Company to provide high quality,
reliable and cost effective Internet solution strategy consulting, analysis
and design, technology development, implementation and integration, audience
development and maintenance services. If clients do not perceive the Company's
solutions or services as meeting their needs, or if the Company fails to
market those solutions or services effectively, the Company will be
unsuccessful in maintaining and strengthening its brands, which could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Risk Factors--Uncertain Maintenance and
Strengthening of USWeb Brands," "--Potential Liability to Clients" and
"Management's Discussion and Analysis of Financial Condition and
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Results of Operations," "--Risks Related to the Merger--Uncertain Market
Acceptance of the Combined Company Brands."
CONSULTING OFFICE NETWORK DEVELOPMENT
USWeb has established and is continuing to expand a network of consulting
offices. As of September 30, 1998, the Company had 46 consulting offices, 38
of which were Company-owned and 8 of which were owned by Affiliates. The
number of Affiliate offices has decreased over time because of acquisitions of
Affiliates by USWeb, consolidation of offices and discontinuance of franchise
relationships. The Company believes that in the fragmented market for
providing Internet solutions, rapidly building a critical mass of strategic,
technical and creative talent through both internal growth and acquisition
will provide USWeb with a substantial competitive advantage. The Company
promotes internal growth through expansion and improvement of the Strategy and
Solutions Center, new and existing strategic partnerships, and rigorous
management of business fundamentals.
The Company is pursuing a selective acquisition program, particularly in
strategic and international opportunities. The Company has frequently used a
standardized transaction structure that includes a purchase price adjustment
feature to provide target company management with an incentive to improve and
expand their organizations. The Company also generally grants stock options to
all employees of a target company to provide them with an incentive to
contribute to the success of the overall USWeb organization.
The Company has a team of professionals dedicated to identifying potential
acquisition candidates and implementing the Company's acquisition methodology.
This team identifies those Internet professional services firms that meet its
acquisition criteria, engages in a series of meetings and due diligence
activities with each candidate to explore whether it meets USWeb's criteria
for growth potential and operating strategy, and completes the acquisition of
a significant percentage of those candidates. The Company stresses to each
desired candidate the advantages of merging with USWeb, including client
recognition and acceptance of the USWeb brands, additional funding required to
pursue profitably large, long-term client opportunities and strategic
partnerships with leading hardware, software and content vendors. Following
the closing of each acquisition, the Company moves rapidly to integrate the
new subsidiary into USWeb operations by deploying a conversion team to
integrate financial, marketing and operating procedures, providing access to
USWeb Central, the Company's secure Intranet, and delivering a thorough
orientation to all employees.
The Company regularly evaluates potential acquisition candidates, is
currently holding preliminary discussions with a number of such candidates and
is in active negotiations with a number of such other candidates. If, after
due diligence review and negotiation, such companies can be acquired on a
basis considered fair to the Company and its stockholders, the Company may
proceed with such acquisitions. The Company expects most of its future
acquisitions to include the issuance of additional shares of the Company's
Common Stock. The Company filed a "shelf" Registration Statement on Form S-4
of which this Prospectus is a part to register 16,666,667 shares of its Common
Stock for use in future acquisitions. See "Risk Factors--Risks Related to
Acquisitions," "--Management of Growth; Integration of Acquisitions," and "--
Dilution," "--Risks Related to the Combined Company, USWeb and CKS Group--
Risks Associated with Failure to Manage Growth; Integration of Other Acquired
Businesses," "--Dilution, Earnings and Growth" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Acquisition of
Internet Professional Services Firms."
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As of November 16, 1998, the Company had acquired or had signed acquisition
agreements with the following companies:
<TABLE>
<CAPTION>
OFFICE MONTH OF
NAME LOCATIONS CONSOLIDATION (1)
---- ----------------------- -----------------
<S> <C> <C>
XCom Corporation................. San Francisco, CA March 1997
San Diego, CA
Cosmix Corporation............... Seattle, WA April 1997
Fetch Interactive, Inc........... Milwaukee, WI April 1997
NewLink Corporation.............. Los Angeles, CA April 1997
NetWORKERS Corporation........... Santa Clara, CA May 1997
InterNetOffice, LLC.............. Atlanta, GA May 1997
Austin, TX
Infopreneurs Inc................. Washington, D.C. June 1997
Netphaz Corporation.............. Phoenix, AZ June 1997
Electronic Images, Inc........... Pittsburgh, PA July 1997
Multimedia Marketing & Design Chicago, IL July 1997
Inc.............................
DreamMedia, Inc. (2)............. Hollywood, CA August 1997
KandH, Inc. (2).................. Hollywood, CA August 1997
Internet Cybernautics, Inc....... Sausalito, CA September 1997
Synergetix Systems Integration, Long Island, NY September 1997
Inc.............................
Online Marketing Company......... Detroit, MI September 1997
Zendatta, Inc.................... San Mateo, CA September 1997
USWeb--Apex, Inc................. Houston, TX November 1997
W3-design........................ Culver City, CA November 1997
Reach Networks, Inc.............. New York, NY November 1997
InnoMate Online Marketing GmbH... Dusseldorf, Germany February 1998
Utopia, Inc...................... Boston, MA March 1998
Inter.logic.studios, inc.(3)..... Atlanta, GA March 1998
Quest Interactive Media, Inc. Memphis, TN March 1998
(3).............................
Ensemble Corporation............. Dallas, TX March 1998
Ikonic Interactive, Inc.......... San Francisco, CA March 1998
New York, N.Y.
Xplora Limited................... Windsor, United Kingdom April 1998
Kallista, Inc. .................. Chicago, IL May 1998
Nutley Systems, Inc. (nSET)...... Seattle, WA May 1998
Advanced Video Communications
(AVC)........................... Boston, MA May 1998
USWeb San Jose................... San Jose, CA May 1998
Gray Peak Technologies, Inc. .... New York, NY June 1998
Boston, MA
Reston, VA
Iselin, NJ
Wanchoi, Hong Kong
Tucker Network Technologies...... So. Norwalk, CT July 1998
Metrix Communications, Inc. ..... St. Paul, MN August 1998
Irvine, CA
Probable Acquisition
CKS Group, Inc. ................. Cupertino, CA Pending
</TABLE>
- ---------------------
(1) The Company consolidates the target entity's financial statements as of
the date USWeb establishes effective control of the target entity, which
date is generally in advance of the legal completion of the underlying
merger.
(2) DreamMedia, Inc. and KandH, Inc. combined their operations into a single
wholly owned subsidiary of the Company upon the consummation of the
acquisitions. W3-design has also combined its operations with these
entities.
(3) Inter.logic.studios, inc. and Quest Interactive Media, Inc. combined their
operations into a single wholly owned subsidiary of the Company upon the
consummation of the acquisitions.
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The Company believes that there are many other potential acquisition
candidates in the U.S. and abroad that satisfy its acquisition criteria. The
Company is currently discussing on a non-binding basis the acquisitions of
several companies in the U.S. and abroad. To penetrate foreign markets, the
Company may use joint ventures as well as acquisitions, so as to capitalize on
a foreign partner's local knowledge and reputation as well as USWeb brands and
central technical, marketing and administrative resources. The Company's
acquisition strategy involves a number of risks and uncertainties, and there
can be no assurance that the Company will be able to identify suitable
acquisition candidates, acquire such companies on acceptable terms or
integrate their operations successfully with those of the Company. As the
Company issues stock to complete future acquisitions, there will be ownership
dilution to existing stockholders. In addition, to the extent the Company
chooses to pay cash consideration for such acquisitions, the Company may be
required to obtain additional financing and there can be no assurance that
such financing will be available on favorable terms, if at all. See "Risk
Factors--Risks Related to the Company--Risks Related to Acquisitions," "--
Dilution," "--Management of Growth; Integration of Acquisitions," "--Future
Capital Needs; Uncertainty of Additional Financing," "--Risks Related to the
Combined Company, USWeb and CKS Group," "--Dilution, Earnings and Growth" "--
Risks Associated with Failure to Manage Growth," "--Integration of Other
Acquired Businesses" and "--Future Capital Needs; Uncertainty of Additional
Financing."
In addition to its Company-owned offices, as of September 30, 1998 USWeb had
5 Affiliates which collectively managed an aggregate of 8 consulting offices.
Each Affiliate agreement typically grants a nonexclusive right to the
Affiliate to maintain an office and advertise in a designated metropolitan
area or territory. The Affiliate agreements, which have terms ranging from
five to ten years, also include a nonexclusive license to use the Company's
intellectual property and proprietary information, including USWeb brands, the
Company's Internet solution development methodology and the Strategy and
Solutions Center. In exchange for these rights, most Affiliates paid the
Company an initial fee and all Affiliates make monthly royalty payments to the
Company. Monthly royalties are equal to the greater of (i) a minimum monthly
payment or (ii) the aggregate of a five percent royalty and a two percent
marketing promotion payment, each based on the Affiliate's adjusted gross
revenues. For the year ended December 31, 1997 and the nine months ended
September 30, 1998, initial fees and monthly royalty payments together
represented 4% and less than 1%, respectively, of the Company's total
revenues. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Revenues recognized by Affiliates are subject to royalty payments to USWeb.
Such royalty payments are included in "Other revenue" in the Company's
consolidated results of operations. Revenues and related expenses recognized
by the Company-owned offices are consolidated and included in "Service
revenue" and appropriate expense categories in the Company's consolidated
results of operations.
The Company selected a franchise business model as the first phase of its
corporate development strategy because it enabled the Company to rapidly scale
its operations and build its brand with relatively low risk and capital
commitment while leveraging the existing infrastructure, expertise and client
relationships of the Affiliates. The Company launched the second phase of its
market entry strategy, the acquisition of those Affiliates and other Internet
professional services firms that meet its acquisition criteria, in the first
quarter of 1997. The Company last enrolled an Affiliate in March 1997 and does
not intend to enter into any additional Affiliate agreements. The Company may
also decide to terminate the Affiliate agreements of those Affiliates that do
not meet the performance criteria required by such agreements to ensure their
continuation. A significant number of Affiliates remain and the operation of
franchises does entail certain risks to the Company's business. See "Risk
Factors--Risks Related to the Company--Risks of Franchising."
CLIENTS
The Company markets its services to medium-sized and large companies, which
it defines as those with over 100 employees or $10 million in annual revenues.
Such companies have several desirable characteristics as potential clients: a
need for Internet solutions ranging from basic Web sites to complex and highly
functional Intranets, substantial budgets devoted to information technology
expenditures, and a relatively high
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willingness to adopt Internet-based strategies and solutions. The Company
tailors its professional services to meet the specific needs of these clients.
No individual customer accounted for more than 10% of the Company's total
revenues for the year ended December 31, 1997 and the nine months ended
September 30, 1998. The Company's top 10 clients accounted for 31% and 14% of
the Company's total revenues during such respective periods.
The Company provides Internet professional services to clients in a variety
of industries, as indicated by the selected clients set forth below, each of
which was responsible for at least $50,000 in services revenues for the year
ended December 31, 1997.
Amgen Harley-Davidson Real Estate Tax
Bantam Doubleday Dell Ingram Micro Services
Barnes & Noble Marcus & Millichap Silicon Graphics
Catalina Marketing Microsoft Thomasville
Charles Schwab New York Magazine Furniture
Chevron Polk Audio Time
Toshiba
World Economic Forum
Clients typically begin their adoption of Internet solutions by establishing
a basic Web site costing several thousand dollars and then implement
increasingly powerful business solutions, which can include business critical,
fully integrated Intranets or Extranets costing several million dollars. The
Company's strategy is to provide clients with services at all stages of their
adoption of Internet solutions. The Company targets clients whose Internet
technology consulting needs will result in contracts ranging from $150,000 to
$3,000,000 per engagement. The Company's 30 largest clients spent
approximately $150,000 to $3,000,000 each for USWeb services, on a pro forma
basis, for the year ended December 31, 1997.
USWEB INTERNET STRATEGY AND SOLUTIONS CENTER
The Strategy and Solutions Center, located at the Company's headquarters in
Santa Clara, California, is designed to provide clients with more effective
Internet solutions by aggregating and redeploying the best methodologies,
technologies and creative work delivered by USWeb consulting offices. The
Company believes that the Strategy and Solutions Center provides USWeb
consulting offices with a competitive advantage by giving them efficient, real
time access to these assets, thereby allowing them to leverage the
capabilities of the entire USWeb operation in their efforts on behalf of each
client. The Strategy and Solutions Center is a centrally managed resource that
can be made available to a large number of consulting offices through USWeb
Central, the Company's secure Intranet.
The Strategy and Solutions Center provides the following resources and
programs for the USWeb Network and its clients:
USWeb Technology Library. The Strategy and Solutions Center maintains and
continually expands a technology library of proprietary reusable software and
content objects developed during the course of client engagements. The Company
believes that access to these assets helps reduce the costs of designing and
implementing individual Internet solutions, improves the quality of client
service and facilitates the Company's development of USWeb Business Solutions.
USWeb Project Registry. The Strategy and Solutions Center has constructed a
database in which each client engagement is summarized and registered,
enabling each consulting office to find rapidly which offices have performed
certain types of work. This project registry is used to facilitate the real-
time distribution of engagement activity to those consulting offices best
equipped to serve the client.
USWeb Executive Briefing Program. The Strategy and Solutions Center has
established a program that enables USWeb consulting offices to provide their
key clients with executive seminars, solution demonstrations and discussions
with senior USWeb executives on-site at the Strategy and Solutions Center.
These sessions provide key client decision makers with first-hand experience
on the ways Internet solutions can significantly improve business processes.
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In each area where methodologies, technologies and content are aggregated,
the Company has implemented policies to ensure that confidential or
proprietary client information and assets are accessible only by properly
authorized personnel and not disclosed to unauthorized parties.
MARKETING
The Company's marketing efforts are dedicated to demonstrating the benefits
of Internet solutions, and the proven effectiveness of the USWeb organization
in providing such solutions, to key decision makers in client organizations.
The Company believes that a strong USWeb brand provides USWeb consulting
offices with a competitive advantage over those Internet professional services
firms whose brands may not be as well known or may not convey the same focused
message of competence, security and results. The Company's marketing programs
are also highly scalable because most advertising campaigns and marketing
tools are developed by the Company's corporate marketing group and can be
delivered to all of the consulting offices without requiring significant
additional expenses.
The Company's marketing program includes the following initiatives:
Enhance USWeb Brands. The continued strengthening of the USWeb brands is
crucial to the achievement of the Company's objective of becoming the most
recognized provider of Internet professional services to medium-sized and
large business clients. The Company's brand development programs are designed
to reinforce the message that USWeb is a national company with a local
presence that can provide a complete range of services to build and deploy
business solutions and has a proven track record of doing so. The Company is
continuing to build and differentiate its brands through the use of publicity
campaigns that include Internet, print and radio advertising; national
seminars and executive briefings; Internet broadcasts; extensive marketing
tools and educational "white papers"; and co-marketing programs with strategic
partners.
Generate Client Leads. The Company's marketing campaigns are intended to
generate client leads for its consulting offices in several ways. In addition,
the Company has established a national account program to help manage the
accounts of clients with multiple locations and direct service fulfillment to
the consulting office best situated by geography and specialty to meet the
client's needs.
Develop Marketing and Sales Tools for Consulting Offices. The Company has
developed a toolkit of marketing and sales materials to be used by consulting
offices in their business generation efforts. These materials include
brochures, reprints of articles, fact sheets, white papers, summary "success
stories," PR handbooks, business development guides and client presentation
templates and technologies. These materials are designed to increase the
effectiveness of the sales and marketing efforts of the Company's consulting
offices by providing them with centralized expert advice and consistent,
professional marketing tools.
STRATEGIC RELATIONSHIPS
The Company has entered into, and intends to continue entering into,
strategic relationships with a limited number of leading Internet hardware,
software and content companies. The Company believes that these relationships,
which typically are non-exclusive, enable it to deliver clients more effective
solutions with greater efficiency because the strategic relationships provide
the Company with the opportunity to gain early access to leading-edge
technology, cooperatively market products and services with leading technology
vendors, cross-sell additional services and gain enhanced access to vendor
training and support. The Company also believes that these relationships are
important because they leverage the strong brand and technology positions of
these market leaders.
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The Company has strategic relationships with the following companies:
[INTEL LOGO Intel. In November 1997, the Company entered into a
APPEARS HERE] Relationship Agreement with Intel pursuant to which the
Company and Intel will jointly define and develop a program
designed to establish and promote end-to-end e-business solutions running on
high-end Intel Architecture-based platforms. Activities under the program will
range from creation of specific business solutions to joint advertising. These
programs will be administered by representatives of each party. Intel purchased
$10.0 million of the Company's Common Stock in a private placement transaction
which closed contemporaneously with the Company's initial public offering.
[MICROSOFT LOGO Microsoft. The Company and Microsoft have entered into a joint
APPEARS HERE] marketing and technical information sharing agreement. The
companies are engaging in a jointly branded marketing
campaign designed to increase demand for Microsoft's Internet software products
and USWeb's professional services. Microsoft is also providing USWeb consulting
offices with education and support in the use of Microsoft's Internet products,
and the USWeb consulting offices are providing Microsoft with product feedback
and customer reactions.
[HEWLETT-PACKARD Hewlett-Packard. The Company and Hewlett-Packard have entered
LOGL APPEARS into an agreement to launch collaborative marketing and
HERE] technical support programs to offer business clients a
complete set of Internet solutions. The companies are
engaging in a joint branded marketing campaign designed to increase demand for
Hewlett-Packard's Internet systems and USWeb's professional services. Hewlett-
Packard is also providing USWeb consulting offices with education and support
in the use of Hewlett-Packard's Internet systems and USWeb consulting offices
are providing Hewlett-Packard with product feedback and client reactions.
[PANDESIC Pandesic. Intel and SAP have formed Pandesic LLC to deliver a
LOGO APPEARS comprehensive hardware, software and service solution for
HERE] managing Internet-based electronic commerce. The Company and
Pandesic have entered into a letter agreement regarding plans
to implement a joint systems integration program, develop joint marketing and
sales programs, build field development programs and conduct ongoing technical
exchanges to ensure the proper deployment and efficient utilization of the
Pandesic electronic commerce platform.
[SUN Sun Microsystems. The Company and Sun Microsystems have
MICROSYSTEMS entered into an agreement enabling USWeb consulting offices
APPEARS HERE] to become authorized resellers of Sun NETRA network servers
after having filed the appropriate documentation and attended
required training classes. This marketing program enables USWeb affiliates to
deliver a complete UNIX Intranet solution to a customers.
[REUTERS LOGO Reuters. The Company and Reuters have entered into
APPEARS HERE] a letter agreement regarding plans to develop USWeb
Business Solutions that will integrate Reuters data
feeds into corporate Intranet environments. The two parties also intend to
develop joint sales and marketing programs.
The contractual agreements regarding these strategic relationships do not
cover the entire scope of the strategic relationship and are typically
terminable at will by either party. In the event that any strategic
relationship is discontinued, either in connection with termination of an
agreement or otherwise, the Company's business, results of operations and
financial condition may be materially adversely affected. See "Risk Factors--
Reliance Upon Key Strategic Relationships."
In early 1998, the Company assisted in the formation of USWeb Learning,
Inc., a separate company with the mission to become the leading provider of
education and certification services relating to Internet technologies to
address the shortage of technology professionals. USWeb Learning licensed the
USWeb brands from the Company and the Company contributed certain training
materials it has created. In April 1998, the Company made a minority equity
investment in USWeb Learning and added management experience through board
representation.
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OPERATIONS
The Company's organization includes its headquarters in Santa Clara,
California and as of June 30, 1998, 41 Company-owned and Affiliate consulting
offices in the U.S. and two international offices. Each consulting office is
responsible for providing Internet professional services to its clients,
either alone or in conjunction with one or more other offices. The managers of
each office also make all client sales, engagement pricing, and staffing
decisions for that office. However, the Company's executive officers take an
active role in directing the activities of all consulting offices.
USWeb headquarters manages the Strategy and Solutions Center, the Company's
marketing campaigns, the strategic relationships with partner companies and
the acquisition program. The Company's headquarters also provides consulting
offices with operational support in financial management and reporting, human
resources, office administration, and management performance improvement
tools. USWeb also negotiates with product, office equipment and financing
vendors to deliver quality products to its consulting offices at favorable
prices. Finally, the Company has established relationships with leading
Internet communications companies to provide clients with carrier-grade,
highly reliable central hosting and value-added services such as shared
databases, electronic commerce, and audio and video streaming.
USWeb headquarters also manages USWeb Central, the Company's Intranet and
the Company's primary channel for enterprise-wide interaction and
communication. The Company developed and maintains USWeb Central in-house.
USWeb Central provides Company-owned and Affiliate consulting offices with
rapid, secure and efficient online access to each other and to all of the
Company's centrally managed resources, such as the Strategy and Solutions
Center libraries, sales and marketing tools, vendor information and
operational assistance. The Company believes that USWeb Central is both
scalable and critical to its strategy of strengthening its position as a
leading Internet professional services firm, because USWeb Central is the
primary mechanism by which the Company is able to aggregate and redeploy the
best strategic, technical and creative work developed by the consulting
offices.
COMPETITION
The market for Internet professional services is relatively new, intensely
competitive, rapidly evolving and subject to rapid technological change. The
Company expects competition to persist, intensify and increase in the future.
The Company's competitors can be divided into several groups: computer
hardware and service vendors such as IBM, DEC and Hewlett-Packard; advertising
and media agencies such as CKS, Foote, Cone & Belding and Ogilvy & Mather;
Internet integrators and Web presence providers such as iXL, Organic Online,
Poppe Tyson and Proxicom; large information technology consulting service
providers such as Andersen Consulting, Cambridge Technology Partners and EDS;
telecommunications companies such as AT&T and MCI; Internet and online service
providers such as America Online, ICG Netcom and UUNet; and software vendors
such as Lotus, Microsoft, Netscape, Novell and Oracle. Although only a few of
these competitors have to date offered a full range of Internet professional
services, several have announced their intention to offer comprehensive
Internet technology solutions.
The Company believes that the principal competitive factors in its market
are strategic expertise, technical knowledge and creative skills, brand
recognition, reliability of the delivered solution, client service and price.
Most of the Company's current and potential competitors have longer operating
histories, larger installed client bases, longer relationships with clients
and significantly greater financial, technical, marketing and public relations
resources than the Company and could decide at any time to increase their
resource commitments to the Company's market. In addition, the market for
Internet solutions is relatively new and subject to continuing definition,
and, as a result, the core business of certain of the Company's competitors
may better position them to compete in this market as it matures. Competition
of the type described above could materially adversely affect the Company's
business, results of operations and financial condition.
There are relatively low barriers to entry into the Company's business. For
example, the Company has no patented technology that would preclude or inhibit
competitors from entering the Internet professional
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services market. The Company expects that it will face additional competition
from new entrants into the market in the future. There can be no assurance
that existing or future competitors will not develop or offer services that
provide significant performance, price, creative or other advantages over
those offered by the Company, which could have a material adverse effect on
the Company's business, results of operations and financial condition.
Moreover, in pursuing acquisition opportunities the Company may compete with
other companies with similar growth strategies, certain of which competitors
may be larger and have greater financial and other resources than the Company.
Competition for these acquisition targets likely could also result in
increased prices of acquisition targets and a diminished pool of companies
available for acquisition. See "Risk Factors--Risks Related to the Company--
Competition; Low Barriers to Entry."
EMPLOYEES
As of September 30, 1998 the Company had 1,217 employees, of which 77 were
located at the Company's headquarters in Santa Clara, California and 1,140
were located in consulting offices. The headquarters employees included 26 in
sales and marketing, 6 in internet hosting services and 45 in finance and
administration. None of the Company's employees is represented by a labor
union. The Company has experienced no work stoppages and believes its
relationship with its employees is good. Competition for qualified personnel
in the industry in which the Company competes is intense. The Company believes
that its future success will depend in part on its continued ability to
attract, hire or acquire and retain qualified employees. See "Risk Factors--
Risks Related to the Company--Recruitment and Retention of Internet Solutions
Professionals," "--Dependence on Key Personnel," "--Risks Related to the
Merger--Dependence on Key Personnel and Integration of Management" and "--
Risks Related to the Combined Company, USWeb and CKS Group--Recruitment and
Retention of Consulting Professionals."
FACILITIES
The Company's principal administrative, sales, marketing, training, and
research and development facilities occupy approximately 27,100 square feet in
a single building in Santa Clara, California, pursuant to a lease that expires
in January 2007. All Company-owned offices also lease their facilities. The
Company believes its current facilities are adequate to meet its needs for the
foreseeable future. No facilities have been identified for acquisition in
connection with potential acquisition candidates and the Company does not
anticipate acquiring property or buildings in the foreseeable future.
LEGAL 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
the Company'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
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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.
INFORMATION REGARDING PROPOSED MERGER WITH CKS GROUP
INTRODUCTION
USWeb and CKS Group have entered into an Agreement and Plan of
Reorganization, dated as of September 1, 1998 (the "Reorganization
Agreement"), among USWeb, USWeb Acquisition Corporation 134, a wholly owned
subsidiary of USWeb ("Merger Sub"), and CKS Group. Pursuant to the
Reorganization Agreement, Merger Sub will merge with and into CKS Group, CKS
Group will continue as the surviving corporation and will become a wholly
owned subsidiary of USWeb, and each outstanding share of CKS Group Common
Stock will be converted into the right to receive 1.5 shares USWeb Common
Stock. In connection with the Reorganization Agreement, USWeb and CKS Group
each granted the other a stock option to purchase up to 19.9% of the
outstanding shares of Common Stock of the company granting the option on the
date of exercise. Each stock option is exercisable following the announcement
of an alternative business combination proposal involving the company granting
the option and the occurrence of certain triggering events, none of which has
occurred to date. The proposed combined company is referred to herein as
"USWeb/CKS" or the "Combined Company."
A Joint Proxy Statement/Prospectus, which is a part of USWeb's Registration
Statement on Form S-4 (File No. 333-63323) (the "Joint Proxy
Statement/Prospectus") will be furnished to all stockholders of record of
USWeb and CKS Group in connection with special meetings of the stockholders of
USWeb and CKS Group which are expected to be held on December 16, 1998
(individually, the "USWeb Special Meeting" and the "CKS Group Special
Meeting," respectively, and collectively, the "Special Meetings".) THIS
PROSPECTUS IS NOT THE JOINT PROXY STATEMENT/PROSPECTUS WHICH WILL BE PROVIDED
IN CONNECTION WITH THE SPECIAL MEETINGS. See "Risk Factors--Risks Related to
CKS Merger" for a discussion of the risks related to the proposed combination
of the Company with CKS Group. For more information regarding the
Reorganization Agreement, the USWeb Option, the CKS Option and other matters
relating to the CKS Merger, see USWeb's Registration Statement on Form S-4
(File No. 333-63323) and "Information Regarding Proposed Merger with CKS
Group."
In connection with the Joint Proxy Statement/Prospectus, the holders of CKS
Group Common Stock will be asked at the CKS Group Special Meeting to approve
and adopt the Reorganization Agreement and to approve the CKS Merger and the
holders of USWeb Common Stock will be asked at the USWeb Special Meeting to
approve the issuance of USWeb Common Stock in the CKS Merger and to approve an
amendment to USWeb's Amended and Restated Certificate of Incorporation (the
"USWeb Certificate") to increase the number of authorized shares of USWeb
Common Stock by 100 million shares to a total of 200 million shares. As a
result of the CKS Merger, CKS Group will become a wholly-owned subsidiary of
USWeb and the former stockholders of CKS Group will own approximately 33.9% of
USWeb/CKS.
THE COMPANIES
USWeb Corporation
USWeb is an Internet professional services firm that provides Intranet,
Extranet and Web site solutions and services to businesses. USWeb is
recognized as a leader in this market. USWeb has built a network of consulting
offices and what it believes to be one of the most recognized brands for
Internet professional services. USWeb offers a comprehensive range of services
to deliver Internet solutions designed to improve clients' business processes.
USWeb's services include strategy consulting; analysis and design; technology
development; implementation and integration; audience development; and
maintenance. USWeb markets its services to medium-sized and large companies.
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USWeb was incorporated in Utah in December 1995 and changed its jurisdiction
of incorporation to Delaware in December 1997. USWeb's principal executive
offices are located at 2880 Lakeside Drive, Suite 300, Santa Clara, California
95054 and its telephone number at that address is (408) 987-3200. Its World
Wide Web address is http://www.usweb.com. The information at this World Wide
Web address is not incorporated into this Prospectus.
CKS Group, Inc.
CKS Group is an international integrated marketing services and technology
company headquartered in Cupertino, California. CKS Group specializes in
offering a wide range of integrated marketing communication services and
technology solutions that help companies market their products, services and
messages. The integrated marketing communication services CKS Group provides
include strategic corporate and product positioning, corporate identity and
product branding, new media, systems integration, environmental design,
packaging, electronic commerce, collateral systems, advertising, direct
marketing, consumer promotions, trade promotions and media placement services.
CKS Group was incorporated in California in 1994 and changed its
jurisdiction of incorporation to Delaware in December 1995. CKS Group's
principal executive offices are located at 10441 Bandley Drive, Cupertino,
California 95014, and its telephone number at that address is (408) 366-5100.
Its World Wide Web address is http://www.cks.com. The information at this
World Wide Web address is not incorporated into this Prospectus.
USWeb Acquisition Corporation 134
Merger Sub is a corporation recently organized by USWeb for the purpose of
effecting the CKS Merger. It has no material assets and has not engaged in any
activities except in connection with the CKS Merger. Merger Sub's executive
offices are located at 2880 Lakeside Drive, Suite 300, Santa Clara, California
95054, and its telephone number is (408) 987-3200.
THE MERGER
Terms of the CKS Merger; Exchange Ratio
At the Effective Time (as defined below in "--Certain Provisions of
Reorganization Agreement") of the CKS Merger, upon the terms and subject to
the conditions set forth in the Reorganization Agreement, Merger Sub will
merge with and into CKS Group and CKS Group will continue as the surviving
corporation and become a wholly-owned subsidiary of USWeb. As a result of the
CKS Merger, each outstanding share of CKS Group Common Stock, other than
shares owned by Merger Sub, USWeb or any wholly-owned subsidiary of USWeb, if
any, will be converted into the right to receive 1.5 shares of USWeb Common
Stock, and each CKS Group Stock Option will be assumed by USWeb and will
become an option to purchase that number of shares of USWeb Common Stock as is
equal (subject to rounding) to the number of shares of CKS Group Common Stock
that were subject to such option immediately prior to the Effective Time,
multiplied by the Exchange Ratio. The exercise price of each Assumed Option
will be equal to the quotient determined by dividing the exercise price per
share of CKS Group Common Stock at which such CKS Group Stock Option was
exercisable immediately prior to the Effective Time by the Exchange Ratio,
with the result rounded up to the nearest whole cent. Each of CKS Group's
outstanding employee stock purchase plan options (each a "CKS Group ESPP
Option") will also be assumed by USWeb at the Effective Time, and will have
the same terms and conditions set forth in CKS Group's employee stock purchase
plans except that: (i) the CKS Group ESPP Options will be exercisable for
shares of USWeb Common Stock, (ii) the limit on the number of shares of USWeb
Common Stock an employee may purchase pursuant to an assumed CKS Group ESPP
Option is 3,750, determined by multiplying 2,500, the limit under the CKS
Group employee stock purchase plans ("CKS Group ESPPs") by the Exchange Ratio,
rounded down to the nearest whole share and (iii) the purchase price per share
of USWeb Common Stock shall be equal to 85% of the lesser of (A) the quotient
of the closing price of
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a share of CKS Common Stock on the first day of the applicable offering period
divided by the Exchange Ratio, with the result rounded up to the nearest whole
cent, or (B) the closing price of a share of USWeb Common Stock on the date on
which the CKS Group ESPP Option is exercised, rounded up to the nearest whole
cent.
Based upon the capitalization of USWeb and CKS Group as of November 16,
1998, an aggregate of approximately 23,373,845 shares of USWeb Common Stock
will be issued in connection with the CKS Merger, representing approximately
33.9% of the outstanding shares of USWeb Common Stock outstanding after giving
effect to such issuance.
On September 1, 1998, the last full trading day prior to the public
announcement of the execution and delivery of the Reorganization Agreement,
the closing prices per share of USWeb Common Stock and CKS Group Common Stock
on Nasdaq were $14.44 and $14.13, respectively. On November 16, 1998, the
closing prices per share of USWeb Common Stock and CKS Group Common Stock on
Nasdaq were $18.00 and $25.94, respectively. Because the Exchange Ratio is
fixed, the number of shares of USWeb Common Stock issued for each share of CKS
Group Common Stock will not change, and changes in the market price of USWeb
Common Stock will affect the market value of the USWeb Common Stock to be
received by stockholders of CKS Group in the CKS Merger. USWeb stockholders
and CKS Group stockholders are encouraged to obtain current market quotations
for USWeb Common Stock and CKS Group Common Stock prior to the USWeb Special
Meeting and CKS Group Special Meeting, respectively. See "Risk Factors--Risks
Related to the CKS Merger--Risks Associated with Fixed Exchange Ratio" and
"Risk Factors--Risks Related to the Combined Company, USWeb and CKS Group--
Volatility of Stock Price."
SPECIAL MEETING OF STOCKHOLDERS OF USWEB
Date, Time, Place and Purpose
The USWeb Special Meeting will be held at the offices of USWeb at 2880
Lakeside Drive, Suite 300, Santa Clara, California 95054 on December 16, 1998
at 10:00 a.m., local time. The purpose of the USWeb Special Meeting is to
consider and vote upon proposals to approve (i) the issuance of shares of
USWeb Common Stock to the stockholders of CKS Group pursuant to the
Reorganization Agreement; and (ii) an amendment to the USWeb Certificate to
increase the number of authorized shares of USWeb Common Stock by
100 million shares to 200 million shares.
Record Date and Vote Required
Only USWeb stockholders of record at the close of business on October 20,
1998 (the "USWeb Record Date"), are entitled to notice of and to vote at the
USWeb Special Meeting. Under the Delaware General Corporate Law ("DGCL"), the
charter documents of USWeb and the rules of Nasdaq, the amendment to the USWeb
Certificate require the affirmative vote of a majority of the votes entitled
to be cast by holders of outstanding shares of USWeb Common Stock, and the
issuance of the shares of USWeb Common Stock pursuant to the Reorganization
Agreement requires the affirmative vote of a majority of the total votes cast
in person or by proxy regarding such proposal.
As of the USWeb Record Date there were approximately 853 stockholders of
record of USWeb Common Stock and 45,451,382 shares of USWeb Common Stock
outstanding, with each share entitled to one vote on each matter to be acted
upon at the USWeb Special Meeting. As of the date of this Prospectus, there
were no shares of USWeb Preferred Stock outstanding. USWeb does not expect the
number of shares outstanding or the number of stockholders of record to change
materially between the date of this Prospectus and the USWeb Record Date.
As of the Record Date, the executive officers and directors of USWeb owned
approximately 25.4% of the outstanding shares of USWeb Common Stock,
representing approximately 25.4% the votes entitled to be cast by holders of
USWeb securities entitled to vote together with USWeb Common Stock issued and
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outstanding as of the date of this Prospectus. Each of these executive
officers and directors, Softven No. 2 and Crosspoint Venture Partners 1996
have entered into a Voting Agreement with CKS Group obligating such executive
officer, director, or stockholder, among other things, to vote his, her or its
respective shares of USWeb Common Stock in favor of the issuance of USWeb
Common Stock pursuant to the Reorganization Agreement. These Voting Agreements
cover approximately 25.4% of the votes entitled to be cast by holders of USWeb
Common Stock at the USWeb Special Meeting.
Recommendations of USWeb Board of Directors
The USWeb Board, by unanimous vote of the directors at a special meeting of
the USWeb Board on August 30, 1998, approved the Reorganization Agreement and
the transactions contemplated thereby and determined that the CKS Merger is
fair to, and in the best interests of, USWeb and its stockholders. After
careful consideration, the USWeb Board unanimously recommends a vote in favor
of approval of (i) the issuance of shares of USWeb Common Stock pursuant to
the Reorganization Agreement; and (ii) the amendment of the USWeb Certificate
to increase the number of authorized shares of USWeb Common Stock by 100
million shares to 200 million shares. See "Risk Factors."
SPECIAL MEETING OF STOCKHOLDERS OF CKS GROUP
Date, Time, Place and Purpose
The CKS Group Special Meeting will be held at the offices of CKS Group at
10441 Bandley Drive, Cupertino, California 95014 on December 16, 1998 at 10:00
a.m., local time. The purpose of the CKS Group Special Meeting is to consider
and vote upon a proposal to approve and adopt the Reorganization Agreement and
to approve the CKS Merger.
Record Date and Vote Required
Only CKS Group stockholders of record at the close of business on October
20, 1998 (the "CKS Group Record Date"), are entitled to notice of and to vote
at the CKS Group Special Meeting. Under the DGCL, the Certificate of
Incorporation of CKS Group (the "CKS Group Certificate") and the Bylaws of CKS
Group (the "CKS Group Bylaws"), the affirmative vote of the majority of votes
entitled to be cast by the holders of CKS Group Common Stock outstanding as of
the CKS Group Record Date is required to approve and adopt the Reorganization
Agreement and to approve the CKS Merger.
As of the CKS Group Record Date, there were approximately 126 stockholders
of record of CKS Group Common Stock and 15,537,941 shares of CKS Group Common
Stock outstanding, with each share entitled to one vote on the matters to be
acted upon at the CKS Group Special Meeting.
As of the CKS Group Record Date, the executive officers and directors of CKS
Group owned approximately 19.0% of the outstanding shares of CKS Group Common
Stock, representing approximately 19.0% of the votes entitled to be cast by
holders of CKS Group Common Stock issued and outstanding as of the date of
this Prospectus. Each of these executive officers and directors and the
Interpublic Group of Companies, Inc. have entered into Voting Agreements with
USWeb obligating them, among other things, to vote their shares of CKS Group
Common Stock in favor of the CKS Merger. These Voting Agreements cover
approximately 30.6% of the votes entitled to be cast by the holders of CKS
Group Common Stock at the CKS Group Special Meeting.
Recommendations of CKS Group Board of Directors
The CKS Group Board at a special meeting of the CKS Group Board on September
1, 1998 unanimously approved the Reorganization Agreement and the transactions
contemplated thereby, and determined that the CKS Merger is fair to, and in
the best interests of, CKS Group and its stockholders. After careful
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consideration, the CKS Group Board unanimously recommended a vote in favor of
approval and adoption of the Reorganization Agreement and approval of the CKS
Merger. See "Risk Factors."
RISK FACTORS; DISADVANTAGES OF THE MERGER TO CKS GROUP AND USWEB STOCKHOLDERS
The completion of the CKS Merger and the performance of the Combined Company
are subject to a number of significant risks and uncertainties. In addition to
the risks and uncertainties resulting from the Merger, USWeb and CKS Group
have incurred substantial expenses in connection with the negotiation and
implementation of the Merger. The costs of combining the operations of the two
companies are expected to negatively affect results of operations in the
quarter ending December 31, 1998 and possibly the quarter ending March 31,
1999. The integration process will also require the dedication of management
and other personnel which may distract their attention from the conduct of
other business activities. See "Risk Factors" for a discussion of certain
factors pertaining to the CKS Merger and the combined businesses of USWeb and
CKS Group.
REASONS FOR THE CKS MERGER; ADVANTAGES OF THE MERGER TO CKS GROUP AND USWEB
STOCKHOLDERS
The directors of CKS Group and USWeb have approved the Reorganization
Agreement with the expectation that the proposed CKS Merger would provide
USWeb/CKS with the potential to realize improved long-term operating and
financial results and a stronger competitive position than their
respective companies on a stand-alone basis. USWeb/CKS will be able to offer
clients a spectrum of integrated Internet systems and marketing communications
services from a single source. USWeb and CKS Group believe that this broad and
deep range of expertise and experience, together with their combined and
expanded management talent and business systems and processes, will establish
USWeb/CKS as a leading partner for clients seeking to participate in and
profit from the new business environment created by the emergence of the
Internet. See "Risk Factors."
FAIRNESS OPINIONS
Morgan Stanley & Co. Incorporated ("Morgan Stanley") delivered to the USWeb
Board its oral opinion, subsequently confirmed in writing, to the effect that,
as of August 30, 1998, the Exchange Ratio pursuant to the Reorganization
Agreement was fair from a financial point of view to USWeb.
On September 1, 1998, Goldman Sachs & Co. ("Goldman Sachs") delivered to the
CKS Group Board its oral opinion, subsequently confirmed in writing, to the
effect that, as of September 1, 1998, the Exchange Ratio pursuant to the
Reorganization Agreement was fair from a financial point of view to the
stockholders of CKS Group.
INCOME TAX TREATMENT
The CKS Merger is intended to qualify as a reorganization under Section
368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), in which
case no gain or loss generally should be recognized by the holders of shares
of CKS Group Common Stock on the exchange of their shares of CKS Group Common
Stock solely for shares of USWeb Common Stock. As a condition to the
consummation of the CKS Merger, each of USWeb and CKS Group will have received
an opinion from its respective tax counsel to the effect that the CKS Merger
will constitute a reorganization under Section 368(a) of the Code. However,
all CKS Group stockholders are urged to consult their own tax advisors.
REGULATORY MATTERS
Consummation of the CKS Merger is subject to compliance with the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"). On
September 22, 1998, USWeb and CKS Group filed the notifications required under
the HSR Act, as well as certain information required to be furnished to
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the Federal Trade Commission (the "FTC") and the Antitrust Division of the
U.S. Department of Justice (the "Antitrust Division"). On October 2, 1998,
USWeb's and CKS Group's requests for early termination of review under the HSR
Act were granted. The CKS Merger is also subject to satisfaction of the
requirements of federal securities laws and applicable securities and "blue
sky" laws of the various states.
ACCOUNTING TREATMENT
The CKS Merger is intended to qualify as a pooling of interests for
financial reporting purposes in accordance with United States generally
accepted accounting principles. Consummation of the CKS Merger
is conditioned upon receipt by USWeb and CKS Group of letters at the closing
of the Merger from PricewaterhouseCoopers LLP, USWeb's independent
accountants, and KPMG Peat Marwick LLP, CKS Group's independent auditors,
respectively, regarding each firm's concurrence with USWeb and CKS Group
managements' conclusions, respectively, as to the appropriateness of pooling
of interests accounting for the CKS Merger under Accounting Principles
Board Opinion No. 16 ("APB No. 16"), if consummated in accordance with the
Reorganization Agreement.
CERTAIN PROVISIONS OF REORGANIZATION AGREEMENT
Effective Time of the CKS Merger
The CKS Merger will become effective upon the filing of a Certificate of
Merger (the "Certificate of Merger") with the Secretary of State of the State
of Delaware or at such later time as may be agreed in writing by USWeb and CKS
Group and specified in the Certificate of Merger (the "Effective Time").
Assuming all conditions to the CKS Merger are met or waived prior thereto, it
is anticipated that the Closing Date of the CKS Merger (the "Closing Date")
and Effective Time will be on December 16, 1998.
Exchange of CKS Group Stock Certificates; Assumption of CKS Group Options
Promptly after the Effective Time, USWeb, acting through ChaseMellon
Shareholder Services, L.L.C. as its exchange agent (the "Exchange Agent"),
will deliver to each CKS Group stockholder of record as of the CKS Record Date
a letter of transmittal with instructions to be used by such stockholder in
surrendering certificates which, prior to the CKS Merger, represented shares
of CKS Group Common Stock. CERTIFICATES SHOULD NOT BE SURRENDERED BY THE
HOLDERS OF CKS GROUP COMMON STOCK UNTIL SUCH HOLDERS RECEIVE THE LETTER OF
TRANSMITTAL FROM THE EXCHANGE AGENT. At the Effective Time, each outstanding
CKS Group Stock Option and CKS Group ESPP Option will be assumed by USWeb as
described above. OPTION AGREEMENTS NEED NOT BE SURRENDERED. IT IS NOT
NECESSARY FOR HOLDERS OF USWEB COMMON STOCK TO SURRENDER CERTIFICATES
REPRESENTING USWEB COMMON STOCK.
Form S-8 Registration Statement
Within two business days after the Closing Date, USWeb will file a
Registration Statement on Form S-8 under the Securities Act covering the
shares of USWeb Common Stock issuable with respect to the Assumed Options.
Stock Ownership Following the CKS Merger
Based upon the number of shares of CKS Group Common Stock outstanding as of
November 16, 1998, an aggregate of approximately 23,373,845 shares of USWeb
Common Stock will be issued to CKS Group stockholders in the CKS Merger, and
USWeb will assume CKS Group Stock Options to purchase approximately 4,675,479
additional shares of USWeb Common Stock. Based upon the number of shares of
USWeb Common Stock issued and outstanding as of November 16, 1998, and after
giving effect to the issuance of USWeb Common Stock as described in the
previous sentence, the former holders of CKS Group Common Stock outstanding
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immediately prior to the CKS Merger would be converted into, and have voting
power with respect to, approximately 33.9% of the Combined Company's total
issued and outstanding shares as of the Effective Time, and holders of former
CKS Group Stock Options would hold options to purchase approximately 6.4% of
the Combined Company's total issued and outstanding shares (assuming the
exercise of only such CKS Group Stock Options). The foregoing numbers of
shares and percentages are subject to change in the event that the
capitalization of either USWeb or CKS Group changes subsequent to November 16,
1998 and prior to the Effective Time, and there can be no assurance as to the
actual capitalization of USWeb or CKS Group at the Effective Time or the
Combined Company at any time following the Effective Time.
Board of Directors; Management Following the CKS Merger
Pursuant to the Reorganization Agreement, the Board of Directors of
USWeb/CKS following the CKS Merger (the "Combined Company Board") will
initially consist of ten members, eight of whom are designees of USWeb, and
two of whom are designees of CKS Group. The designees of USWeb will be Robert
Shaw, Joseph Firmage, Tobin Corey, James Daley, Robert Hoff, Joseph Marengi,
Gary Rieschel and Klaus Schwab, and the designees of CKS Group will be Mark
Kvamme and Thomas Suiter. Jeffrey Ballowe, James Heffernan and Barry
Rubenstein will be leaving the USWeb Board effective upon consummation of the
CKS Merger.
In addition, following the CKS Merger, the principal executive officers of
the Combined Company will be as follows: Mark Kvamme, currently Chairman of
the Board and Chief Executive Officer of CKS Group, will be Chairman of the
Board of USWeb/CKS; Robert Shaw, Chairman of the Board and Chief Executive
Officer of USWeb, will be Chief Executive Officer of USWeb/CKS; Joseph
Firmage, a founder, director and former Chief Executive Officer of USWeb, will
continue to serve as Chief Strategist; and the following persons will continue
to hold their same positions in the Combined Company: Tobin Corey, a co-
founder and current President and Chief Operating Officer of USWeb, Thomas
Suiter, current Chief Creative Officer of CKS Group, Sheldon Laube, a co-
founder and current Chief Technical Officer of USWeb, and Carolyn Aver,
current Executive Vice President, Chief Financial Officer and Secretary of
USWeb, Kurt Garbe, current Chief Operating Officer of Professional Services of
USWeb, and Robert Wise, current Chief Operating Officer of Electronic Services
of USWeb.
Conduct of Business Prior to the CKS Merger
Pursuant to the Reorganization Agreement, until the earlier of the
termination of the Reorganization Agreement pursuant to its terms or the
Effective Time, each of CKS Group and USWeb has agreed, except (i) in the case
of CKS Group, as indicated in the disclosure schedule delivered by CKS Group
to USWeb in connection with the Reorganization Agreement and in the case of
USWeb, as indicated in the disclosure schedule delivered by USWeb to CKS Group
in connection with the Reorganization Agreement and as agreed in a Waiver and
Consent Agreement between the parties executed on November 4, 1998, or (ii) to
the extent that the other shall otherwise consent in writing, to carry on its
business diligently and in accordance with good commercial practice and to
carry on business in the usual, regular and ordinary course, in substantially
the same manner as previously conducted and in compliance with all applicable
laws and regulations, to pay its debts and taxes when due subject to good
faith disputes over such debts or taxes, to pay or perform other material
obligations when due, and use its commercially reasonable efforts consistent
with past practices and policies to preserve intact its present business
organization, keep available the services of its present officers and
employees and preserve its relationships with customers, suppliers,
distributors, licensors, licensees, and others with which it has business
dealings. USWeb may continue to execute its acquisition program in the usual,
regular and ordinary course; provided, however, that USWeb is obligated to
obtain CKS Group's written consent prior to acquiring, agreeing to acquire or
completing an acquisition if (i) the business to be acquired, without taking
any other acquisition into account, would constitute a "significant
subsidiary" of USWeb pursuant to the conditions specified in Rule 1-02(w) of
SEC Regulation S-X, substituting 20 percent for 10 percent each place it
appears therein or (ii) the aggregate number of shares of USWeb Common Stock
issued in connection with all acquisitions after September 1, 1998 and prior
to the Effective Time shall exceed
67
<PAGE>
5,000,000. Each of USWeb and CKS Group have agreed to promptly notify the
other of any material event involving its business or operations. Furthermore,
USWeb and CKS Group have agreed that they will exchange monthly summary
financial data and that their respective senior management groups will
participate in informational meetings on a monthly basis.
No Solicitation
Under the terms of the Reorganization Agreement, except under certain
limited circumstances, each of USWeb and CKS Group has agreed that it will not
solicit or engage in certain other activities relating to, or which could
result in, an acquisition proposal from a third party.
Termination and Termination Fees
The Reorganization Agreement may be terminated under certain circumstances,
including, without limitation, by mutual written consent of USWeb and CKS
Group authorized by their respective Boards of
Directors, and by either USWeb or CKS Group: (i) if the other party commits
and fails to cure within the specified time certain breaches of any
representation, warranty or covenant contained in the Reorganization
Agreement; (ii) if consummation of the CKS Merger is prohibited by an order or
other action of a court of competent jurisdiction or a governmental,
regulatory or administrative agency or commission; (iii) if the CKS Merger is
not consummated on or before February 28, 1999 (except that the Reorganization
Agreement cannot be terminated pursuant to this provision by a party whose
action or failure to act has been a principal cause of the failure of the CKS
Merger to occur on or before such date where such action or failure to act
constitutes a breach of the Reorganization Agreement); however, such date may
be extended by up to 90 days by either party by written notice to the other
party if the CKS Merger would have been consummated but for the absence of one
or more required approvals, consents, orders or authorizations of any
governmental entity or any required third-party consent, waiver or approval,
under the HSR Act or like foreign competition or merger control laws and
regulations; (iv) if the other party shall have accepted certain acquisition
proposals or if any such proposal has been recommended by the board of
directors of the other party to its stockholders or the other party failed to
include in its Proxy Statement a recommendation from its respective board of
directors in favor of the CKS Merger; (v) if the required approval of the
stockholders of CKS Group shall not have been obtained by reason of the
failure to obtain the required vote upon a vote taken at a meeting of
stockholders duly convened therefor or any adjournment thereof (except that
such right of termination shall not be available to CKS Group if the failure
to obtain stockholder approval shall have been caused by action or inaction in
material breach of the Reorganization Agreement); (vi) if the required
approval of the stockholders of USWeb shall not have been obtained by reason
of the failure to obtain the required vote upon a vote taken at a meeting of
the USWeb stockholders duly convened therefor or any adjournment thereof
(except that such right of termination shall not be available to USWeb if the
failure to obtain stockholder approval shall have been caused by action or
inaction of USWeb in material breach of the Reorganization Agreement).
Each of USWeb and CKS Group has agreed that if the CKS Merger is not
consummated as a result of certain specified events, it will pay to the other
party a termination fee of $12 million.
If the USWeb stockholders do not approve the issuance of USWeb Common Stock
in connection with the CKS Merger, CKS Group may be entitled to terminate the
Reorganization Agreement, and in certain circumstances, USWeb may be required
to pay CKS Group a termination fee of $12 million and CKS Group may be
entitled to exercise an option to purchase shares equal to 19.9% of the then-
outstanding shares of USWeb Common Stock. Similarly, the failure by the CKS
Group stockholders to approve the CKS Merger may entitle USWeb to terminate
the Reorganization Agreement and, in certain circumstances, CKS Group may be
required to pay USWeb a termination fee of $12 million and USWeb may be
entitled to exercise an option to purchase shares equal to 19.9% of the then-
outstanding shares of CKS Group Common Stock.
68
<PAGE>
Conditions to the CKS Merger
The obligations of USWeb and CKS Group to consummate the CKS Merger are
subject to certain conditions, including: (i) certain approvals by the
stockholders of CKS Group and USWeb in connection with the CKS Merger; (ii)
declaration by the SEC of the effectiveness of the Joint Proxy
Statement/Prospectus; (iii) absence of any law or order prohibiting
consummation of the CKS Merger; (iv) receipt by USWeb and CKS Group of
opinions of their respective tax counsel that the CKS Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code; (v) receipt
by USWeb and CKS Group of letters from their independent accountants regarding
the firms' respective concurrence with USWeb and CKS Group managements'
respective conclusions as to the appropriateness of pooling of interests
accounting for the CKS Merger under APB No. 16; (vi) approval for listing on
Nasdaq, upon notice of issuance, of the shares of USWeb Common Stock to be
issued to CKS Group stockholders pursuant to the CKS Merger; (vii) the
continued accuracy in all material respects of the representations and
warranties given by the other party in the Reorganization Agreement;
(viii) performance by the other party in all material respects of all
agreements and covenants required by the Reorganization Agreement; (ix) the
absence of a material adverse change, event or effect with regard to the other
party (with certain exceptions described elsewhere in the Joint Proxy
Statement/Prospectus); and (x) the continued effectiveness of the "Holder
Agreements" executed by certain directors, officers and stockholders of the
other party. In addition, the obligations of USWeb to consummate the CKS
Merger are subject to the continued effectiveness of certain non-competition
agreements with Mr. Kvamme and Mr. Suiter.
Stock Option Agreements
As an inducement to USWeb to enter into the Reorganization Agreement, CKS
Group entered into a Stock Option Agreement with USWeb dated as of September
1, 1998 (the "CKS Group Stock Option Agreement") pursuant to which CKS Group
granted USWeb an option to purchase, under certain
circumstances, a number of newly issued shares of CKS Group Common Stock equal
to 19.9% of the issued and outstanding shares of CKS Group Common Stock as of
the date of exercise of such option. Subject to certain conditions, the option
granted under the CKS Group Stock Option Agreement becomes exercisable
following the announcement of an alternative business combination proposal
involving CKS Group and the occurrence of certain further triggering events,
including but not limited to the failure by the CKS Group stockholders to
approve the Merger while there is a proposal for an alternative business
combination with CKS Group outstanding, none of which has occurred as of the
date of this Prospectus. When exercisable, the option granted under the CKS
Group Stock Option Agreement may be exercised by delivery of the per-share
exercise price in cash which is equal to the lower of (i) the Exchange Ratio
multiplied by the closing price of USWeb Common Stock on the last trading day
prior to the date of the CKS Group Stock Option Agreement or (ii) the average
closing price of CKS Group Common Stock during the five trading-day period
immediately prior to the first public announcement of an alternative business
combination proposal. In general, the maximum net proceeds that may be
retained by USWeb from termination fees payable under the Reorganization
Agreement and the exercise of such stock option and the sale of the underlying
stock is $18 million.
As an inducement to CKS Group to enter into the Reorganization Agreement,
USWeb entered into a Stock Option Agreement with CKS Group (the "USWeb Stock
Option Agreement") pursuant to which USWeb granted CKS Group an option to
purchase, under certain circumstances, a number of newly issued shares of
USWeb Common Stock equal to 19.9% of the issued and outstanding shares of
USWeb Common Stock as of the date of exercise of such option. Subject to
certain conditions, the option granted under the USWeb Stock Option Agreement
becomes exercisable following the announcement of an alternative business
combination proposal involving USWeb and the occurrence of certain further
triggering events, including but not limited to the failure by the USWeb
stockholders to approve the Merger while there is a proposal for an
alternative business combination with USWeb outstanding, none of which has
occurred as of the date hereof. When exercisable, the option granted under the
USWeb Stock Option Agreement may be exercised by delivery of the per-share
exercise price in cash which is equal to the lower of (i) the closing price of
USWeb Common Stock on the last trading day before the date of the USWeb Stock
Option Agreement or (ii) the
69
<PAGE>
average closing price of USWeb Common Stock during the five trading-day period
immediately prior to the first public announcement of an alternative business
combination proposal. In general, the maximum net proceeds that may be
retained by CKS Group from termination fees payable under the Reorganization
Agreement and the exercise of such stock option and the sale of the underlying
stock is $18 million.
Each Stock Option Agreement gives the option holder the right, under certain
circumstances, to require the option grantor to repurchase all or any portion
of the shares acquired thereunder.
Holder Agreements
Each executive officer and director and certain significant stockholders of
USWeb have entered into an agreement (each a "USWeb Holder Agreement")
restricting sales, dispositions or other transactions reducing their risk of
investment in respect of the shares of USWeb Common Stock and CKS Group Common
Stock held by them to help ensure that the CKS Merger will be treated as a
pooling of interests for accounting and financial reporting purposes. Each
executive officer and director and one significant stockholder of CKS Group
have entered into an agreement (each a "CKS Group Holder Agreement")
restricting sales, dispositions or other transactions reducing their risk of
investment in respect of the shares of CKS Group Common Stock held by them
prior to the CKS Merger and the shares of USWeb Common Stock received by them
in the CKS Merger to help ensure that the CKS Merger will be treated as a
pooling of interests for accounting and financial reporting purposes.
Voting Agreements
Each executive officer and director and certain significant stockholders of
USWeb and CKS Group have entered into a voting agreement (each a "Voting
Agreement"). Pursuant to these Voting Agreements, such persons have agreed to
vote all shares of USWeb Common Stock or CKS Group Common Stock, as
applicable, of which they have beneficial ownership or acquire beneficial
ownership prior to the termination of the Voting Agreements, in the case of
USWeb stockholders, in favor of (i) approval of the issuance of shares
of USWeb Common Stock by virtue of the CKS Merger and (ii) certain amendments
to the USWeb Certificate and, in the case of CKS Group stockholders, in favor
of the approval and adoption of the Reorganization Agreement and approval of
the CKS Merger. In addition, each such person has granted an irrevocable proxy
to the Board of Directors of the other party to vote such person's shares in
accordance with the terms of the applicable Voting Agreement. USWeb has
received Voting Agreements in respect of approximately 30.6% of the CKS Group
Common Stock, and CKS Group has received Voting Agreements in respect of
approximately 25.4% of the USWeb Common Stock outstanding as of October 20,
1998.
Interests of Certain Persons in the CKS Merger
Certain directors and executive officers of CKS Group have certain interests
in the CKS Merger that are in addition to the interests of holders of CKS
Group Common Stock generally. Each of the executive officers of CKS Group as
of the date of the Joint Proxy Statement/Prospectus will hold a senior
management position with USWeb/CKS following the CKS Merger. In addition,
certain CKS Group executive officers--in particular, Carlton Baab, Robert
Clarkson, Ian Small and Kimberly Johnson--have existing contractual
arrangements under which they will receive certain financial benefits as a
result of the CKS Merger. In addition, Pierre Lamond, a director of CKS Group,
is the father-in-law of Mark Kvamme, the Chairman, President and Chief
Executive Officer of CKS Group.
Pursuant to the Reorganization Agreement, USWeb has agreed to indemnify each
person who was an officer, director or employee of CKS Group against certain
liabilities. In addition, USWeb has agreed to maintain, with certain
limitations, the policies of directors' and officers' liability insurance
maintained by CKS Group or to provide comparable coverage.
70
<PAGE>
The foregoing interests of the directors and certain members of management
of CKS Group in the CKS Merger may mean that such persons have personal
interests in the CKS Merger that may not be identical to the interests of
other CKS Group stockholders.
In addition to the foregoing interests, as of November 16, 1998, the
executive officers and directors of CKS Group beneficially owned an aggregate
of approximately 3,251,599 shares of CKS Group Common Stock (including
approximately 298,144 shares of CKS Group Common Stock subject to CKS Group
Options exercisable within 60 days of November 16, 1998). Based upon the
closing sale price of USWeb Common Stock on November 16, 1998 of $18.00, and
assuming the exercise of outstanding CKS Group Options exercisable within 60
days of such date, the aggregate dollar value of USWeb Common Stock to be
received in the CKS Merger by the executive officers and directors of CKS
Group is approximately $87,793,173.
NO APPRAISAL RIGHTS
CKS Group stockholders are not entitled to appraisal rights under the DGCL
in connection with the CKS Merger. See "Approval of the CKS Merger and Related
Transactions--No Appraisal Rights." Accordingly, CKS Group stockholders who do
not wish to receive USWeb Common Stock in exchange for their shares of CKS
Group Common Stock must liquidate their investment by selling their CKS Group
Common Stock prior to the consummation of the CKS Merger.
MARKET AND PRICE DATA
USWeb Common Stock is traded on Nasdaq under the symbol USWB. On September
1, 1998, the last trading day before public announcement of the execution of
the Reorganization Agreement, the closing price of USWeb Common Stock as
reported on Nasdaq was $14.44 per share. On November 16, 1998, the closing
price of USWeb Common Stock as reported on Nasdaq was $18.00 per share. There
can be no assurance as to the actual price of USWeb Common Stock prior to, at
or at any time following the Effective Time of the CKS Merger, or in the event
the CKS Merger is not consummated.
CKS Group Common Stock is traded on Nasdaq under the symbol CKSG. On
September 1, 1998, the last trading day before public announcement of the
execution of the Reorganization Agreement, the closing
price of CKS Group Common Stock as reported on Nasdaq was $14.13 per share. On
November 16, 1998, the closing price of CKS Group Common Stock as reported on
Nasdaq was $25.94 per share. There can be no assurance as to the actual price
of CKS Group Common Stock prior to, or at the Effective Time of the CKS
Merger, or in the event the CKS Merger is not consummated. In the event the
CKS Merger is consummated, CKS Group Common Stock will no longer be traded on
Nasdaq.
The following table sets forth the closing price per share of USWeb Common
Stock and CKS Group Common Stock on Nasdaq on September 1, 1998, the last full
trading day prior to the public announcement of the signing of the
Reorganization Agreement, and on November 16, 1998, the last practicable
trading date for which information is available before the printing of this
Prospectus, and the equivalent per share prices for CKS Group Common Stock
based on the USWeb Common Stock trading prices multiplied by the Exchange
Ratio of 1.5:
<TABLE>
<CAPTION>
CKS
USWEB GROUP
COMMON COMMON CKS GROUP
STOCK STOCK EQUIVALENT
------ ------ ----------
<S> <C> <C> <C>
September 1, 1998................................... $14.44 $14.13 $21.66
November 16, 1998................................... $18.00 $25.94 $27.00
</TABLE>
Because the Exchange Ratio is fixed, the number of shares of the Combined
Company's Common Stock issued for each share of CKS Group Common Stock will
not change, and changes in the market price of USWeb Common Stock will affect
the market value of the USWeb Common Stock to be received by
71
<PAGE>
stockholders of CKS Group in the CKS Merger. USWeb stockholders and CKS Group
stockholders are encouraged to obtain current market quotations for USWeb
Common Stock and CKS Group Common Stock prior to the USWeb Special Meeting and
CKS Group Special Meeting, respectively. See "Risk Factors--Risks Related to
the CKS Merger--Risks Associated with Fixed Exchange Ratio" and "Risk
Factors--Risks Related to the Combined Company, USWeb and CKS Group--
Volatility of Stock Price."
RESTRICTIONS ON RESALE OF USWEB COMMON STOCK
The shares of USWeb Common Stock issuable to stockholders of CKS Group upon
consummation of the CKS Merger will be registered under the Securities Act.
Such shares may be freely traded without restriction by those stockholders who
are not deemed to be "affiliates" of USWeb or CKS Group, as that term is
defined in the rules under the Securities Act.
Shares of USWeb Common Stock received by those stockholders of CKS Group who
are deemed to be affiliates of CKS Group may be resold without registration
under the Securities Act only as permitted by Rule 145 promulgated under the
Securities Act or as otherwise permitted under the Securities Act. Each person
who may be deemed to be an affiliate of CKS Group has agreed not to offer,
sell, pledge, transfer or otherwise dispose of any shares of USWeb Common
Stock distributed pursuant to the CKS Merger, except in compliance with Rule
145 under the Securities Act, or in a transaction that is otherwise exempt
from the registration requirements of the Securities Act and provided that an
opinion of counsel, satisfactory to USWeb, has been provided to USWeb to the
effect that no such registration is required in connection with the proposed
transaction, or in an offering that is registered under the Securities Act. In
addition, each person who may be deemed to be an affiliate of USWeb and CKS
Group has agreed not to sell, transfer or otherwise dispose of, or reduce such
person's interest in or risk relating to (i) any shares of USWeb Common Stock
and CKS Group Common Stock beneficially owned or subsequently acquired or
(ii) any shares of USWeb Common Stock issued to such person in the CKS Merger
or otherwise beneficially owned by such person, except in each case for
amounts of CKS Group Common Stock and USWeb Common Stock not more than the de
minimis amount permitted by the rules and releases of the SEC relating to
pooling of interests accounting treatment, until the Combined Company has
publicly released combined financial results of the Combined Company covering
a period of at least 30 days of combined operations.
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<PAGE>
SELECTED HISTORICAL AND SELECTED PRO FORMA COMBINED FINANCIAL DATA
The following selected historical financial information of USWeb and CKS
Group has been derived from their respective audited and unaudited historical
financial statements and should be read in conjunction with such consolidated
financial statements and notes thereto. The consolidated financial statements
for USWeb for the two years ended December 31, 1996 and 1997 and for CKS Group
for the three fiscal years ended November 30, 1995, 1996 and 1997 are included
elsewhere in this Prospectus. The selected unaudited historical financial
information as of June 30, 1998, and for the nine-month periods ended
September 30, 1997 and 1998 for USWeb and as of August 31, 1998, and for the
nine-month periods, ended August 31, 1997 and 1998 for CKS Group has been
derived from the unaudited consolidated financial statements of USWeb and CKS
Group as of and for such periods which are included elsewhere in this
Prospectus, and which, in the opinion of USWeb's management, reflect all
adjustments, consisting only of normal recurring adjustments, necessary for
the fair presentation of this unaudited interim financial information. The
results of operations for these interim periods are not necessarily indicative
of the results to be expected for the entire year. The selected pro forma
combined financial information is derived from the unaudited pro forma
combined financial information included in this Prospectus, and should be read
in conjunction with such unaudited pro forma combined financial information
and the notes thereto. For purposes of the pro forma operating data, CKS
Group's consolidated financial statements for each of the three fiscal years
in the period ended November 30, 1997, and for the nine-month periods ended
August 31, 1997 and 1998, have been combined with USWeb's consolidated
financial statements for each of the two years in the period ended December
31, 1997, and the nine-month periods ended September 30, 1997 and 1998,
respectively. The pro forma information is presented for illustrative purposes
only and is not necessarily indicative of the operating results or financial
position that would have occurred if the CKS Merger had been consummated at
the beginning of the periods indicated, nor is it necessarily indicative of
future operating results or financial position.
USWEB SELECTED HISTORICAL FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------ -------------------
1996 1997 1997 1998
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Total revenues....................... $ 1,820 $ 19,278 $ 8,676 $ 73,086
Loss from operations................. (13,965) (54,493) (35,359) (113,431)
Net loss............................. (13,808) (58,336) (39,270) (111,532)
Net loss per share--basic and dilut-
ed.................................. (10.35) (7.98) (8.10) (3.33)
Weighted average shares.............. 1,334 7,312 4,845 34,521
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1996 1997 1998
-------- ------- -------------
<S> <C> <C> <C>
HISTORICAL CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments................................... $ 3,220 $44,145 $ 53,652
Working capital................................ 73 40,516 64,565
Total assets................................... 7,482 79,250 254,420
Lease obligations, non-current................. 436 372 2,005
Total stockholders' equity (deficit)........... (12,492) 66,689 223,224
</TABLE>
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<PAGE>
CKS GROUP SELECTED HISTORICAL FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED NOVEMBER 30, AUGUST 30,
---------------------------------------- ----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED
STATEMENT OF INCOME
DATA:
Revenues................ $27,383 $44,761 $58,383 $88,248 $133,602 $99,980 $118,633
Operating income........ 2,414 4,987 6,578 11,361 11,434 9,990 11,452
Net income.............. 2,291 4,916 5,809 10,449 7,666 6,451 7,400
Pro forma net income(1). 1,502 3,087 4,051 8,367 7,348 6,133 --
Net income per share:
Basic................. -- -- -- -- -- -- $0.48
Diluted............... -- -- -- -- -- -- $0.45
Weighted average shares:
Basic................. -- -- -- -- -- -- 15,345
Diluted............... -- -- -- -- -- -- 16,335
Pro forma net income per
share(1):
Basic................. $ 0.30 $ 0.43 $ 0.44 $ 0.61 $ 0.50 $ 0.42 $ --
Diluted............... $ 0.18 $ 0.32 $ 0.36 $ 0.58 $ 0.47 $ 0.39 $ --
Weighted average shares:
Basic................. 4,934 7,112 9,176 13,646 14,633 14,543 --
Diluted............... 8,175 9,639 11,265 14,435 15,590 15,705 --
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 30, AUGUST 30,
---------------------------------------- ----------
1993 1994 1995 1996 1997 1998
------- ------- ------- ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED
BALANCE
SHEET DATA:
Cash, cash equivalents
and marketable
securities............. $ 3,699 $ 4,314 $ 4,817 $57,280 $ 42,264 $ 47,140
Working capital......... 1,677 3,056 3,626 50,775 49,114 58,238
Total assets............ 11,175 20,596 23,659 95,476 146,473 152,967
Lease obligations, non-
current................ 145 446 496 502 739 766
Total stockholders' eq-
uity................... 3,282 5,244 6,350 60,858 94,592 104,736
</TABLE>
- ---------------------
(1) Pro forma net income and pro forma net income per share gives effect to the
pro forma tax provision recorded to present CKS Group's acquisition of a
partnership in January 1997, accounted for as a pooling of interests, as if
the partnership had been a C corporation fully subject to income taxes. See
Note 3 of Notes to Unaudited Pro Forma Combined Financial Information.
74
<PAGE>
SELECTED PRO FORMA COMBINED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- --------------------
1995(2) 1996(2) 1997(2) 1997(3) 1998(3)
------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PRO FORMA COMBINED STATEMENT
OF OPERATIONS DATA:
Revenue(4).................. $43,656 $66,389 $ 166,317 $ 120,661 $ 173,830
Income (loss) from
operations................. 6,578 (2,604) (214,107) (169,865) (102,419)
Net income (loss)........... 4,051 (5,441) (222,294) (177,796) (104,625)
Net income (loss) per
share(5):
Basic..................... $ 0.29 $ (0.25) $ (5.24) $ (4.46) $ (1.61)
Diluted................... 0.24 (0.25) (5.24) (4.46) (1.61)
Weighted average shares(5):
Basic..................... 13,764 21,803 42,448 39,891 65,137
Diluted................... 16,898 21,803 42,448 39,891 65,137
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998(6)
-------------
<S> <C>
PRO FORMA COMBINED BALANCE SHEET DATA(7):
Cash, cash equivalents and short-term investments................. $100,792
Working capital................................................... 104,803
Total assets...................................................... 407,387
Lease obligations, non-current.................................... 2,771
Total stockholders' equity........................................ 309,960
</TABLE>
- ---------------------
(2) Includes CKS Group results for the years ended November 30, 1995, 1996 and
1997, respectively.
(3) Includes CKS Group results for the nine-month periods ended August 31,
1997 and 1998, respectively.
(4) Pro forma combined revenue reflects a reclassification of CKS Group's
historical revenues which nets certain production revenues and related
costs to conform to USWeb's accounting policies and basis of presentation.
The effect of netting certain production revenues and related costs was to
decrease both revenues and cost of revenues by $14.7 million, $23.6
million, $38.6 million, $29.2 million and 35.8 million for the years ended
December 31, 1995, 1996 and 1997 and the nine months ended September 30,
1997 and 1998. See Note 2 of Notes to Unaudited Pro Forma Combined
Financial Information.
(5) See Note 4 of Notes to Unaudited Pro Forma Combined Financial Information
for description of per share computation and weighted average shares
outstanding computation.
(6) Includes CKS Group consolidated balance sheet data as of August 31, 1998.
(7) It is anticipated that USWeb will incur charges to operations related to
the CKS Merger currently estimated to be $18.0 million, principally in the
quarter in which the CKS Merger is consummated. These charges include
direct transaction costs, primarily for financial advisory and legal fees,
and costs associated with combining operations of the two companies. The
estimated charge is reflected in the unaudited pro forma combined balance
sheet data, but is not reflected in the unaudited pro forma combined
statement of operations data. This charge is a preliminary estimate only
and is subject to change.
Estimated transaction, merger and integration costs include the following:
<TABLE>
<S> <C>
Merger Costs:
Financial Advisory Fees......................................... $12,000
Legal and Accounting Professional Fees.......................... 2,000
Financial Printer Fees.......................................... 300
Shareholder Costs............................................... 200
Various filing fees............................................. 200
Integration Costs:
Lease termination costs......................................... 2,350
Write off of fixed assets....................................... 750
Other........................................................... 200
-------
Total......................................................... $18,000
=======
</TABLE>
Actual amounts ultimately incurred could differ from estimated amounts due
to movements in USWeb's stock price, which affects the amount of fees to be
paid to financial advisors, the actual time incurred by professional
advisors, including attorneys and accountants, as well as negotiations
between the Combined Company and its vendors, including landlords.
Additionally, the amounts shown above do not include other integration
costs expected to be incurred which do not qualify for inclusion in the
above amounts under existing authoritative literature. Such costs are
expected to include costs associated with severance, moving and integrating
facilities and other related non-recurring charges. To date, neither USWeb
nor CKS Group has identified employees or positions to be eliminated or
relocated, nor has USWeb or CKS Group determined what benefits will be
provided to any terminated employees. Accordingly, neither USWeb nor CKS
Group has estimated the amount of such additional integration costs. Such
costs will be recognized when incurred in accordance with EITF 94-3.
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<PAGE>
CKS GROUP BUSINESS
The following sections provide information on the business of CKS Group on a
stand-alone basis and does not describe the business of CKS Group if the CKS
Merger is consummated. The following CKS Group Business section also contains
forward-looking statements which involve risks and uncertainties, including
forward-looking statements regarding, without limitation, development and
application of new media marketing communication services and products, and
industry trends, CKS Group's actual results could differ materially from those
anticipated in these forward-looking statements as a result of a variety of
factors, including those factors set forth under "Risk Factors" and elsewhere
in this Prospectus. See "Forward-Looking Statements."
BUSINESS
CKS Group is an international integrated marketing services and technology
company headquartered in Cupertino, California. CKS Group specializes in
offering a wide range of integrated marketing communication services and
technology solutions that help companies market their products, services and
messages. The integrated marketing communication services that CKS Group
provides include strategic corporate and product positioning, corporate
identity and product branding, new media, systems integration, environmental
design, packaging, electronic commerce, collateral systems, advertising,
direct marketing, consumer promotions, trade promotions and media placement
services. CKS Group is a provider of integrated marketing communication
programs that use advanced technology solutions and new media. New media is
defined by CKS Group as media that delivers content to the end user in digital
form, including the World Wide Web, the Internet, proprietary online services,
CDROMs, laptop PC presentations and interactive kiosks. New media services
represented approximately 25.8%, 25.2% and 15.5% of CKS Group's revenues for
fiscal years 1997, 1996 and 1995, respectively. The balance of CKS Group's
revenue for such periods was derived from CKS Group's other integrated
marketing communication services, including strategic corporate and product
positioning, corporate identity and product branding, systems integration,
environmental design, packaging, electronic commerce, collateral systems,
advertising, direct marketing, consumer promotions, trade promotions and media
placement.
CKS Group was incorporated in California in 1994 and is the successor to
three predecessor corporations, CKS Group Partners, Inc., CKS Group Pictures,
Inc., and CKS Group Interactive, Inc., which are now wholly owned subsidiaries
of CKS Group. CKS Group Partners, Inc. originally began business in 1987 with
two employees as Cleary Communications. CKS Group Pictures, Inc. and CKS Group
Interactive, Inc. were incorporated in 1994 and merged into CKS Group
Partners, Inc. in January 1998. CKS Group was reincorporated in Delaware in
December 1995. CKS Group acquired Schell/Mullaney, Inc. ("Schell/Mullaney") in
August 1996; Donovan & Green, Inc. ("Donovan & Green") and McKinney & Silver
("M&S") in January 1997; CKS Group Holding (Deutschland) GmbH ("CKS Group
GmbH"), formerly Electronische Publikationen GmbH and Gormley & Partners, Inc.
("Gormley") in March 1997; and SiteSpecific, Inc. ("SiteSpecific") in June
1997.
INDUSTRY BACKGROUND
Several recent trends within the U.S. and international business communities
are changing the marketing communications needs of businesses throughout the
world. These trends include the following:
. Shortening product life cycles and preparation times for marketing
campaigns, which increase the need for rapid development and execution
of marketing strategies.
. Rapid growth of new media, such as the World Wide Web, proprietary
online services, CDROMs, laptop PC presentations and interactive kiosks,
as an integral component of marketing communication strategy.
. Increasing complexity of sophisticated digital delivery, storage and
multimedia enhancement tools and technologies designed to improve the
effectiveness of new media communications.
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. Advancements in electronic commerce technology and the technological
sophistication required by large corporate web presences.
. The development of narrowly focused media delivery vehicles, such as
proprietary online services, the World Wide Web, satellite television
and special interest magazines, which allow greater market segmentation,
but demand coordination of multiple variations of marketing messages
aimed at particular market subsegments.
. Corporate downsizing, which has led many corporations to reduce the size
of their in-house marketing departments, which in turn has led to an
increased need to outsource the creation, coordination and
implementation of such corporations' marketing strategies.
CKS GROUP STRATEGY
CKS Group's overall strategy is to consistently deliver integrated marketing
communication services and products to its clients through the creative use of
advanced technology, breakthrough design and superior account management. CKS
Group's goals are to expand its client base and continue to diversify upon its
core strengths in order to further enhance its ability to provide high quality
marketing solutions that must be developed quickly and efficiently. CKS
Group's strategy also includes the following:
CREATIVE EXCELLENCE. CKS Group attempts to provide creative solutions in all
areas of marketing communications to meet or exceed the highest standards of
service within each individual discipline. CKS Group has received numerous
honors and awards, including Addy Awards, Margaret Larsen Awards for Design,
Murphy Awards, Telly Awards and a Communication Arts Design Annual Award. In
order to maintain high levels of creativity and quality, CKS Group places
great importance on recruiting and retaining talented employees. CKS Group's
investment in tools and technologies has been an important factor in
recruiting and retaining talented employees who are attracted to CKS Group's
technology-driven culture. In addition, CKS Group's integrated approach to
marketing communications services attracts many highly qualified employees who
are interested in applying their skills to more than one marketing discipline.
UTILIZATION OF TECHNOLOGY AS A COMPETITIVE FACTOR. CKS Group seeks to
capitalize on the fundamental changes in the marketing communication services
marketplace by becoming the premier supplier of integrated marketing
communications through the continued use of its advanced technology expertise.
CKS Group employs its extensive information technology expertise and
experience to provide clients with end-to-end new media content delivery
solutions. The engineering staff includes individuals with extensive
experience in computer systems, networking and relational database technology
and provides a broad range of information technology services, such as systems
database design, systems architectural design and performance tuning. These
services enable clients to extend new media marketing content to include live
audio and video event broadcasts over the World Wide Web, Internet commerce
infrastructure and access to corporate intranets and commercial databases. CKS
Group's programming staff is skilled in Java, PL/SQL, HTML, C/C++, Perl,
Visual Basic and other programming languages, and Oracle, Microsoft SQL
Server, Sybase and Informix database environments, as well as multimedia tools
such as Director, JavaScript, QuickTime VR and various content distribution,
or "push" technologies. Finally, CKS Group's engineering staff is experienced
in integrating a wide variety of Internet-oriented software solutions.
USE INTEGRATION AS A TOOL FOR BUILDING CLIENT RELATIONSHIPS. CKS Group has
been able to utilize its integrated approach to marketing communication
services as an effective tool in forming its present client relationships, and
CKS Group believes that such integration will continue to serve this function
in the future. CKS Group's client relationships have typically begun with a
single assignment that might encompass corporate identity or packaging, a
brochure or a World Wide Web site. Such single project relationships have
allowed clients to experience CKS Group's services with minimal long-term
risk. In many instances, with clients such as Fujitsu PC Corporation, Apple
Computer, and Audi of America, Inc., CKS Group has been successful in
expanding relationships beyond the single-project assignment to include
additional projects in other marketing disciplines.
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<PAGE>
CAPITALIZE ON LEADERSHIP POSITION AND MARKET OPPORTUNITIES IN NEW MEDIA. CKS
Group has been and continues to be a leader in the development and application
of new media marketing communication services and products. CKS Group believes
that the proliferation of the Internet and other new media will continue to
provide substantial opportunities to CKS Group. These opportunities have
enabled companies to better focus their marketing messages and may ultimately
result in one-on-one marketing to specific individuals. Towards this end, CKS
Group seeks to provide clients with integrated new media design and
development services as well as support in implementing and maintaining key
content delivery technologies.
GROW THROUGH ACQUISITIONS OF COMPLEMENTARY BUSINESSES. CKS Group seeks to
acquire businesses that offer complementary marketing communication services,
products and technologies. CKS Group evaluates potential acquisitions for
their ability to add to CKS Group's new media capabilities, technological
proficiency, creative excellence, management expertise and integrated
marketing services skills. Other factors that CKS Group evaluates in
considering potential acquisitions include a reputation for superb creative
work both in specialties where CKS Group is particularly strong and in
specialties that have not been CKS Group's historic strengths. Additional
factors include the accessibility of proprietary technology and new media
expertise, potential for geographic expansion, relationships with certain
companies and clients and the degree to which the potential acquisition
candidate shares CKS Group's vision of combining integrated marketing
communications services with an understanding of technology. To date, CKS
Group has completed the following acquisitions:
<TABLE>
<CAPTION>
ACQUIRED ENTITY ACQUISITION DATE
--------------- ----------------
<S> <C>
Schell/Mullaney--a New York advertising and marketing
firm specializing in marketing communication services
for high technology clients............................. August 1996
Donovan & Green--a New York integrated marketing
communications firm with a strong emphasis in
environmental design, brand identity and imaging and the
evolving discipline of information architecture......... January 1997
McKinney & Silver--a Raleigh, North Carolina advertising
and marketing services firm............................. January 1997
CKS Group Holding (Deutschland)--an integrated marketing
communications firm that provides direct marketing, ad-
vertising, event marketing, public relations and channel
marketing services in Germany, Switzerland and Austria.. March 1997
Gormley & Partners--a Greenwich, Connecticut strategic
corporate and product positioning strategy firm......... March 1997
SiteSpecific--a New York marketing communications firm
specializing in new media and on-line network marketing
services................................................ June 1997
</TABLE>
See "Risk Factors--Risks Related to the Combined Company, USWeb and CKS
Group--Integration of Other Acquired Businesses" and "--Risks Related to
Future Acquisitions."
CKS GROUP CLIENTS AND SERVICES
CKS GROUP PROVIDES A BROAD RANGE OF MARKETING COMMUNICATION
SERVICES. Depending on the scope of the assignment, CKS Group's services to
its clients range from execution of a discrete marketing project, such as
designing product packaging, to taking responsibility for the overall
marketing message through multiple methods. When CKS Group assumes
responsibility for the overall marketing message, CKS Group works with the
client to analyze the client's products or services and the market for those
services and to evaluate the appropriate media to reach the desired market
efficiently. CKS Group then creates and distributes various versions of the
message through the chosen media. CKS Group's services include the following:
. STRATEGIC CORPORATE AND PRODUCT POSITIONING Development of a unique
selling proposition for either a company or product that differentiates
it from the competition.
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<PAGE>
. CORPORATE IDENTITY AND PRODUCT BRANDING Development of a creative look
and feel that establishes a corporate or brand personality to
differentiate it from the competition.
. NEW MEDIA Development of media to be delivered to end users in digital
form, including the World Wide Web, the Internet, proprietary online
services, CDROMs, laptop PC presentations and interactive kiosks.
. SYSTEMS INTEGRATION Development and execution of information technology
services such as systems database design, systems architectural design
and performance tuning, that enable clients to extend new media
marketing content to include live audio and video broadcasts over the
World Wide Web, Internet commerce infrastructure and access to corporate
intranets and commercial databases.
. ENVIRONMENTAL DESIGN Creative design, development and management of
virtual and physical images as well as information and entertainment
environments, including the development of public exhibition spaces and
retail store formats.
. PACKAGING Creative development, design and production of individual
retail packages or integrated retail packaging systems.
. ELECTRONIC COMMERCE Architecture, development, integration and
implementation of complex and secure systems that enable clients to
conduct business electronically.
. COLLATERAL SYSTEMS Development and implementation of literature systems
including, for example, individual brochures, flyers and data sheets.
. ADVERTISING Broadcast and/or print advertising designed to generate
awareness of a company, product, or service over an extended period of
time.
. DIRECT MARKETING Development of marketing programs designed to generate
demand among a specific target audience within a limited time frame.
. CONSUMER PROMOTIONS Marketing communications campaigns and merchandising
materials designed to increase sales among consumers.
. TRADE PROMOTIONS Marketing communications campaigns designed to provide
information and incentives to specific industry trade groups in a
limited time frame.
. MEDIA PLACEMENT SERVICES Strategic planning, negotiation and purchase of
both traditional and new media.
DEVELOPMENT OF NEW CLIENT RELATIONSHIPS
CKS Group attracts new clients through a number of different methods. In
December 1997, CKS Group established a new business development organization
composed of senior executives from several of CKS Group's operating units. The
charter of this organization is to pursue larger client relationships through
a more centralized and focused sales effort. Additionally, CKS Group has
relied heavily on referrals from existing clients to attract new clients. CKS
Group's executive officers have historically engaged in numerous speaking
tours and other presentations aimed at attracting new clients. These speaking
tours have led directly to the formation of new client relationships by CKS
Group as well as substantial press and other media coverage of CKS Group,
which has indirectly assisted CKS Group in forming new client relationships.
CKS Group also advertises its integrated marketing communication services in
certain business magazines.
USE OF TECHNOLOGY
CKS Group's founders' and many of its employees' prior experience in
technology companies, along with the location of CKS Group's headquarters in
Silicon Valley, have helped CKS Group to utilize technology as a major
competitive advantage. CKS Group employs its extensive information technology
expertise and experience in providing clients with end-to-end new media
content creation and delivery solutions. CKS Group also acquires licenses to
certain third-party software products and tools prior to the time such
products
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<PAGE>
and tools are generally available by acting as a beta site for pre-release
versions of these products and tools. In addition, CKS Group employs
technology to maximize its ability to provide high quality, integrated
marketing communication services to its clients in a timely and cost-effective
manner.
ACCESS TO NEW TECHNOLOGIES. CKS Group's reputation as a technological
innovator frequently allows it access to advanced media and communications
technologies before such technologies are available to the general public or
to CKS Group's competitors. In addition, CKS Group is frequently involved in
alpha and beta test programs for pre-release versions of new information
technologies. Early access to emerging technologies often allows CKS Group to
provide innovative media and marketing solutions to its customers before CKS
Group's competitors, and to more rapidly explore and exploit the benefits of
such new technologies. As a result of these relationships, CKS Group's
engineers and creative staff regularly interact with the persons who design
and develop the new media tools CKS Group uses. CKS Group believes it enjoys
an advantage over its competition in effectively utilizing advanced multimedia
and communications technologies to deliver its clients' marketing messages.
DIGITAL CONTENT. CKS Group has made a substantial investment in technology
that allows all of its employees to share and utilize digital content as well
as other Company and client information in an easy and efficient manner. A
substantial portion of the work performed by most of CKS Group's offices are
maintained in digital form on CDROMs. CKS Group has created an electronic
network among its offices, which facilitates the sharing of information and
allows each office to benefit from the experience and knowledge of other
offices. CKS Group believes that its use of digital technology for the
production and shipping of audio and video content, packaging and design
assignments, frequent updating of content for whatever distribution medium
being used, virtual sets, internal communication, and cost control enable CKS
Group to provide superior solutions to its clients at lower costs than
traditional marketing communication services companies.
ELECTRONIC JOB JACKET SOFTWARE. The Electronic Job Jacket is a proprietary
software system that CKS Group uses for internal purposes to track financial
and other information relating to completed and open projects being worked on
by CKS Group. CKS Group uses the Electronic Job Jacket in project bids to help
estimate, based upon historical information from prior projects, the various
resources that will be needed to complete the project. When a project
commences, each person working on the project records, on a daily or weekly
basis, the time spent on the project. This allows the account manager,
individuals working on the account, CKS Group's executive officers and finance
personnel to compare, at any time, CKS Group's performance against the
estimates that formed the basis for CKS Group's project quote. The system
allows CKS Group to evaluate, throughout a project, if its costs of performing
the services are likely to exceed the revenue received, or result in lower
margins than anticipated. By closely monitoring the information contained in
the Electronic Job Jacket, CKS Group is better able to manage its projects.
CKS Group can also obtain data on the cost of performing certain services,
thereby improving its ability to prepare appropriate bids on future projects.
Additionally, the Electronic Job Jacket is linked with CKS Group's accounting
system, allowing CKS Group to obtain accurate information as to the extent of
project completion for the purpose of recognizing revenues.
COMPETITION
The markets for CKS Group's services are highly competitive and are
characterized by pressures to reduce prices, incorporate new capabilities and
accelerate job completion schedules.
CKS Group faces competition from a number of sources. These sources include
national and regional advertising agencies as well as specialized and
integrated marketing communication firms. In addition, with respect to new
media, many national advertising agencies have internally developed or
acquired new media capabilities. New competitors that either provide
integrated or specialized services (e.g., corporate identity and packaging,
advertising services or World Wide Web site design) or are technologically
proficient, especially in the new media arena, have emerged and are competing
with CKS Group. Many of CKS Group's competitors or potential competitors have
longer operating histories, longer client relationships and
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significantly greater financial, management, technology, development, sales,
marketing and other resources than CKS Group. In addition, CKS Group's ability
to maintain its existing client relationships and generate new clients
depends, 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, CKS Group's competitors. To
the extent CKS Group loses clients to CKS Group's competitors because of
dissatisfaction with CKS Group's services or CKS Group's reputation is
adversely impacted for any other reason, CKS Group's business, financial
condition and operating results could be materially adversely affected.
There are relatively low barriers to entry into CKS Group's business. CKS
Group has no significant proprietary technology that would preclude or inhibit
competitors from entering the integrated marketing communication solutions
market. CKS Group expects that it will face additional competition from new
entrants into the market in the future. There can be no assurance that
existing or future competitors will not develop or offer marketing
communication services and products that provide significant performance,
price, creative or other advantages over those offered by CKS Group, which
could have a material adverse effect on CKS Group business, financial
condition and operating results.
The principal factors on which CKS Group competes are creative quality,
client service, technological and new media sophistication, price and
intangible factors such as the interpersonal skills of the individuals
managing the client account. CKS Group believes that it competes favorably
with respect to each of these factors.
MAJOR 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. See "Risk
Factors--Risks Related to the Combined Company, USWeb and CKS Group--
Dependence on Key Accounts."
FACILITIES
CKS Group's primary facility consists of approximately 93,000 square feet in
Cupertino, California including a 22,000 square foot video production
facility. CKS Group's other facilities include the following: New York--
approximately 19,500 square feet; Portland, Oregon--approximately 8,500 square
feet; San Francisco--approximately 12,850 square feet; Washington, D.C.,--
approximately 10,900 square feet; Atlanta, Georgia--approximately 3,825 square
feet; Raleigh, North Carolina,--approximately 30,307 square feet; and
Greenwich, Connecticut, approximately 2,635 square feet. CKS Group leases all
of its facilities.
EMPLOYEES
As of November 30, 1997, CKS Group had a total of 641 employees, 580 of
which were full-time regular employees.
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LEGAL 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 and the SEC
rules and regulations thereunder by issuing false and misleading statements
about CKS Group's operations, revenues and earnings which allegedly inflated
CKS Group's reported revenues, earnings and stock price. The complaint further
alleges that those who purchased CKS Group's stock 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.
CKS Group is from time to time the subject of miscellaneous lawsuits. CKS
Group does not believe that the outcome of the stockholder class action
described above or any other pending litigation is likely to be material to
CKS Group, 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 CKS Group's business, financial condition, cash
flows, or results of operations. For example, 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 Communication," 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. CKS Group 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."
Certain of such legal proceedings may be covered under insurance policies or
indemnification agreements. Based upon information presently available, CKS
Group believes that the final outcome of such proceedings should not have a
material adverse effect upon CKS Group's business, results of operations or
financial condition.
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COMPARATIVE MARKET PRICE DATA
The table below sets forth, for the calendar quarters indicated, the
reported high and low closing prices of USWeb Common Stock and CKS Group
Common Stock as reported on Nasdaq.
<TABLE>
<CAPTION>
CKS GROUP
USWEB COMMON
COMMON STOCK(1) STOCK(2)
--------------- -------------
HIGH LOW HIGH LOW
--------------- ------ ------
<S> <C> <C> <C> <C>
1996 CALENDAR YEAR
First Quarter.................................. -- -- 37.250 25.000
Second Quarter................................. -- -- 43.750 24.500
Third Quarter.................................. -- -- 31.500 23.625
Fourth Quarter................................. -- -- 29.625 18.000
1997 CALENDAR YEAR
First Quarter.................................. -- -- 35.500 21.000
Second Quarter................................. -- -- 34.250 21.250
Third Quarter.................................. -- -- 44.250 29.625
Fourth Quarter................................. 13.125 8.500 43.500 11.375
1998 CALENDAR YEAR
First Quarter.................................. 23.000 10.125 23.250 13.813
Second Quarter................................. 36.750 17.188 26.250 17.625
Third Quarter.................................. 29.250 8.438 22.750 10.688
Fourth Quarter (through November 16, 1998)..... 20.375 7.875 28.625 11.125
</TABLE>
- ---------------------
(1) USWeb's Common Stock began trading on Nasdaq on December 5, 1998.
(2) CKS Group's fiscal year ends the last Sunday in November of each year. The
information set forth above is presented based on calendar year quarters.
On September 1, 1998, the last full trading day prior to the public
announcement of the execution and delivery of the Reorganization Agreement,
the closing prices on Nasdaq were $14.44 per share of USWeb Common Stock and
$14.13 per share of CKS Group Common Stock. On November 16, 1998, the closing
prices on Nasdaq were $18.00 per share of USWeb Common Stock and $25.94 per
share of CKS Group Common Stock.
Because the Exchange Ratio is fixed, changes in the market price of USWeb
Common Stock will affect the market value of the USWeb Common Stock to be
received by stockholders of CKS Group in the CKS Merger. USWeb stockholders
and CKS Group stockholders are urged to obtain current market quotations for
USWeb Common Stock and CKS Group Common Stock prior to the USWeb Special
Meeting and CKS Group Special Meeting, respectively.
Neither USWeb nor CKS Group has paid cash dividends. USWeb and CKS Group
currently intend that the Combined Company will retain earnings for
development of its business and not distribute earnings to stockholders as
dividends for the foreseeable future. The declaration and payment by the
Combined Company of any future dividends and the amount thereof will depend
upon the Combined Company's results of operations, financial condition, cash
requirements, future prospects, limitations imposed by credit agreements or
senior securities and other factors deemed relevant by the Combined Company
Board.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages as of
November 16, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Robert Shaw(1).......... 50 Chairman, Chief Executive Officer and Director
Joe Firmage(1).......... 28 Chief Strategist and Director
Tobin Corey............. 38 President and Director
Carolyn Aver............ 39 Executive Vice President, Chief Financial
Officer and Secretary
Sheldon Laube........... 48 Executive Vice President and Chief Technology
Officer
Kurt Garbe.............. 38 Vice President and Chief Operating Officer,
Professional Services Division
Bob Wise................ 37 Vice President and Chief Operating Officer,
Electronic Services Division
Jeffrey Ballowe(2)...... 41 Director
James Daley............. 62 Director
James Heffernan......... 57 Director
Robert Hoff(2)(3)....... 46 Director
Mark Kvamme............. 37 Director*
Joseph Marengi.......... 44 Director
Gary Rieschel(3)........ 41 Director
Barry Rubenstein........ 55 Director
Thomas Suiter........... 44 Director*
Klaus Schwab............ 59 Director
</TABLE>
- ---------------------
* Mr. Kramme and Mr. Suiter, who are currently directors of CKS Group, are
CKS Group's nominees for directors of the Combined Company.
(1) Mr. Firmage resigned as Chairman and Chief Executive Officer of USWeb in
November 1998, when Mr. Shaw was appointed as Chief Executive Officer of
USWeb.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
Mr. Robert Shaw joined USWeb in November 1998 as Chief Executive Officer and
a director. Prior to joining USWeb, Mr. Shaw served as Executive Vice
President of Worldwide Consulting Services and Vertical Markets of Oracle
Corporation since February 1997, and Senior Vice President of Worldwide
Applications and Services of Oracle Corporation from August 1995 to January
1997. From June 1992 to July 1995, Mr. Shaw served as Senior Vice President of
Global Services of Oracle Corporation. Prior to joining Oracle Corporation,
Mr. Shaw served as a Vice President of the West Coast Information Systems
group of Booz-Allen & Hamilton from June 1989 to June 1992.
Mr. Joseph Firmage co-founded USWeb in December 1995 and served as its
Chairman and Chief Executive Officer from that time until November 1998.
Thereafter, Mr. Firmage continued as a director and was appointed Chief
Strategist of USWeb. From August 1994 to December 1995, Mr. Firmage served as
a Vice President of Strategic Planning of the Systems Group of Novell. Prior
to joining Novell, Mr. Firmage founded Serius Corporation ("Serius"), where he
served as Chief Executive Officer from 1989 through 1993, when Serius was sold
to Novell.
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Mr. Tobin Corey co-founded the Company in December 1995 and has served as
its President since June 1996 and as a Director since April 1998. Prior to
June 1996, Mr. Corey served as its Executive Vice President, Marketing. From
1994 to December 1995, Mr. Corey served as Vice President of Marketing for the
NetWare Products Division of Novell. From 1991 through 1994, Mr. Corey served
as Director of Marketing for the Desktop Division of Novell.
Ms. Carolyn Aver joined the Company in May 1998 as the Company's Executive
Vice President, Chief Financial Officer and Secretary. From May 1997 to May
1998, Ms. Aver was Vice President and Chief Financial Officer of BackWeb
Technologies, an Internet technology company. Prior to joining BackWeb
Technologies, Ms. Aver acted as Vice President and Chief Financial Officer of
ParcPlace-Digitalk from March 1993 to May 1997. Ms. Aver was also employed by
AutoDesk, Inc. from October 1984 to March 1993 where she served in various
capacities including Controller, Chief Financial Officer and Vice President,
Finance.
Mr. Sheldon Laube co-founded the Company and has served as its Executive
Vice President and Chief Technology Officer since January 1996. From July 1995
through January 1996, Mr. Laube served as Chief Technology Officer for Novell.
Prior to joining Novell, Mr. Laube was employed by Price Waterhouse LLP as a
partner and served as Director of Information and Technology from 1986 to May
1995.
Mr. Kurt Garbe joined USWeb in October 1997 as Executive Partner, Client
Services--Western Region. Mr. Garbe became Vice President and Chief Operating
Officer, Professional Services Division in October 1998. Prior to joining
USWeb, Mr. Garbe served for several months as Vice President, Business
Development of Animation Science, a developer of animation and computer
graphics software. Prior to joining Animation Science, Mr. Garbe served as
General Manager and Vice President of Worldwide Professional Services at
Synopsys, Inc., a provider of electronic design and automation tools from
September 1995 to June 1997. Prior to joining Synopsys, Mr. Garbe was Vice
President and Partner at Gemini Consulting from 1991 to 1995, prior to which
he spent four years at Booz-Allen & Hamilton in the Information Industry
Practice.
Mr. Bob Wise joined USWeb in October 1997 as Executive Partner, Client
Services--Eastern Region. In October 1998, Mr. Wise became Vice President and
Chief Operating Officer, Electronic Services Division. Prior to joining USWeb,
Mr. Wise served as Vice President of Worldwide Consulting at Novell from
May 1996 to October 1997. Prior to joining Novell, Mr. Wise co-founded
USConnect, a network of systems integrators in January 1996 and served as its
Chief Executive Officer until May 1996. Mr. Wise has a Bachelors of Science in
Computer Science from the University of Puget Sound.
Mr. Jeffrey Ballowe has served as a Director of the Company since February
1996. From March 1996 to December 1997, Mr. Ballowe served as President of the
Ziff-Davis Interactive Media and Development Group. Prior to March 1996,
Mr. Ballowe served as President of the Ziff-Davis Interactive Media Group in
1995 and as President of the Ziff-Davis Marketing and Development Group in
1994. He became Group Vice President of the Ziff-Davis Business Media Group in
1993 and Vice President of the Ziff-Davis Worldwide Network of Direct
Publications in 1991.
Mr. James Daley has served as a Director of USWeb since July 1998. Mr. Daley
held a variety of management and senior leadership roles during more than 35
years of service at Price Waterhouse ("PW"), one of the world's largest
professional services firms. Most notably, Mr. Daley served as the firm's co-
chairman and its chief operating officer from 1988 to 1995, during which time
PW's Management Consulting Practice experienced substantial growth and the
firm's technology infrastructure successfully implemented Lotus Notes. He
graduated with honors from Ohio University with a Bachelor's degree in
Business Administration.
Mr. James Heffernan co-founded the Company in December 1995 and has served
as a Director since that time. Since May 1998 Mr. Heffernan has also served as
a consultant to the Company. From December 1995 to May 1998, Mr. Heffernan
served as the Company's Executive Vice President, Chief Financial Officer and
Secretary. From May 1993 to July 1994, he worked as an independent consultant
and
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then joined Interlink Computer Sciences, Inc. in July 1994 as Chief Financial
Officer, where he served until January 1996. From March 1992 to May 1993, Mr.
Heffernan served as Chief Financial Officer and Chief Operating Officer of
Serius. Mr. Heffernan has also served as an officer of several other
technology companies, including Software Publishing Corp., Zital Inc. and
Measurex Corp. Mr. Heffernan is a director of Savoir Technology Group, Inc.
Mr. Robert Hoff has served as a Director of the Company since February 1996.
He has been a general partner of Crosspoint Venture Partners, a private
venture capital investment company, since September 1983. Mr. Hoff also serves
as a director of PairGain Technologies, Inc. and Onyx Acceptance Corporation.
Mr. Mark Kvamme joined CKS Group in 1989 as a Partner and since 1991 has
served as the Chairman of its Board of Directors and Chief Executive Officer.
Prior to joining CKS Group, Mr. Kvamme served as Vice President of Marketing
for Pillar Corporation. From September 1986 to January 1989, Mr. Kvamme was
International Marketing Manager for Wyse Technology, Inc., a terminal and
personal computer manufacturer. Before joining Wyse, Mr. Kvamme founded and
served as President and Chief Executive Officer of International Solutions,
Inc., a global distributor of hardware and software products, from 1984 to
1986. From 1980 to 1984, Mr. Kvamme held various management positions in
international sales and marketing and in product development at Apple
Computer, as well as being one of the initial managers of Apple France.
Mr. Kvamme holds a B.A. in French Economics and Literature from the University
of California at Berkeley.
Mr. Joseph Marengi has served as a Director of USWeb since August 1998. Mr.
Marengi currently serves as senior vice president and group general manager
for Dell Computer Corporation, a personal computer manufacturer. Prior to
joining Dell, Mr. Marengi served as president and chief operating officer for
Novell, Inc., a network software company. He joined Novell in 1989 through the
acquisition of Excelan and quickly moved through successive promotions
including executive vice president of worldwide sales and field operations. As
executive vice president, he was directly responsible for setting up the major
account, licensing and consulting programs, and for overseeing the company's
international expansion. Mr. Marengi earned a bachelor's degree in public
administration from the University of Massachusetts, Boston, and a master's
degree in management from the University of Southern California, Los Angeles.
Mr. Gary Rieschel has served as a Director of the Company since March 1996.
Mr. Rieschel has been a Senior Vice President of SOFTBANK Holdings since
January 1996. Prior to January 1996, Mr. Rieschel served as Vice President of
Marketing for nCube from September 1994 to December 1995; as Director of
Channel Sales for Cisco Systems from July 1993 to October 1994; and as General
Manager, Asia for Sequent Computer from January 1989 to July 1993. Mr.
Rieschel is a director of Concentric Networks and several privately held
companies.
Mr. Barry Rubenstein has served as a Director of the Company since May 1997.
Mr. Rubenstein is President, a director and a shareholder of InfoMedia
Associates, Ltd. which is a General Partner of the 21st Century Partnerships.
Mr. Rubenstein is also Chief Executive Officer of Wheatley Partners, L.L.C.,
the General Partner of Wheatley Foreign Partners, L.P. Seneca Ventures and
Woodland Venture Fund, each of which is an investment partnership. Prior to
his experience as an investor, Mr. Rubenstein served as the founder of several
technology companies, including Applied Digital Data Systems, Inc. and
Cheyenne Software, Inc. Mr. Rubenstein also serves as a director of
Infonautics, Inc., The Milbrook Press, Inc. and Source Media Inc.
Mr. Klaus Schwab has served as Director of USWeb since June 1998. Mr. Schwab
is president of the World Economic Forum, an international membership
organization integrating leaders from business, government and academia into a
partnership committed to improving the state of the world. He also serves as
vice-chairman of the UN Committee for Development Planning and is a board
member of the Earth Council, the Foundation Board of the UNESCO's World
Foundation for AIDS Research and Prevention, as well as a member of the Board
of Trustees of the Peres Center for Peace. Mr. Schwab has been a professor of
Business Policy at the University of Geneva since 1972. He studied at the
Swiss Federal Institute of Technology in
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Zurich; the University of Fribourg; and at Harvard University. Degrees include
doctorates in Mechanical Engineering and Economics (summa cum laude).
Mr. Thomas Suiter joined CKS Group in 1991 as Chief Creative Officer, and
has served as a member of its Board of Directors since that time. Mr. Suiter
held the position of President, CKS Partners from May 1996 to November 1997.
Before joining the Company, Mr. Suiter was World Wide Creative Director of
Landor Associates from 1985 to 1991. Prior to joining Landor, Mr. Suiter was
Director of Creative Services of Apple Computer from 1984 to 1985 and Creative
Director from 1982 to 1984 where he and his group were responsible for Apple's
corporate identity and the marketing communication materials for the MacIntosh
and Apple II product lines. Mr. Suiter attended San Diego State University and
the Art Center College of Design, Pasadena, California.
Executive officers of the Company are appointed by the Board of Directors
and serve at the discretion of the Company's Board. There are no family
relationships among any of the directors or executive officers of the Company.
BOARD COMMITTEES
The Board of Directors has established an audit committee and a compensation
committee. The audit committee, consisting of Mr. Ballowe and Mr. Hoff,
recommends the selection of independent auditors to the Board of Directors,
reviews the scope and results of the audit and other services provided by the
Company's independent accountants, and reviews the Company's accounting
practices and its systems of internal accounting controls (the "Audit
Committee").
The compensation committee, consisting of Mr. Hoff and Mr. Rieschel, reviews
and approves the salaries, bonuses and other compensation payable to the
Company's executive officers and administers and makes recommendations
concerning the Company's employee benefit plans (the "Compensation
Committee").
DIRECTOR COMPENSATION
The Company reimburses its directors for all out-of-pocket expenses incurred
in the performance of their duties as directors of the Company. The Company
currently does not pay fees to its directors for attendance at meetings. The
Company also grants stock options to directors. See "--Employee Benefit
Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee of the Company serves as a member of
the board of directors or compensation committee of any entity that has one or
more executive officers serving as a member of the Company's Board of
Directors or Compensation Committee. See "Certain Transactions" for a
description of transactions between the Company and entities affiliated with
members of the Compensation Committee.
MANAGEMENT CONTINUITY AGREEMENTS
The Company has entered into Management Continuity Agreements with each of
Messrs. Firmage, Corey, Heffernan and Laube. Pursuant to the agreements with
each of Messrs. Firmage, Corey and Heffernan, if the Company (a) terminates
his employment without cause at any time more than 60 days before or more than
18 months after a "change in control" (as defined in the agreement), the
Company shall provide severance pay to him equal to his 12 months' base
compensation or (b) if the Company terminates his employment or he voluntarily
terminates his employment at any time 60 days or less before or within 18
months after a change in control, the Company shall provide him severance pay
equal to the greater of his base compensation for the year immediately
preceding or the year coinciding with the year of payment of such severance
pay. In either case, the Company shall also provide health insurance coverage
to the extent
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provided immediately prior to his termination until the earlier of 12 months
following such termination or the date that he receives health insurance
coverage from another employer. In the event of a change of control, the
Company shall provide a release of all repurchase rights over unvested stock
and an acceleration of the vesting period for any unvested options. In the
event that he is terminated as a result of death or disability (regardless of
whether there is a change in control), any repurchase rights of the Company
with respect to 50% of the shares that he holds shall lapse and options that
he holds shall become vested as to an additional 50% of the shares subject to
such options. The term of each of the agreements is for the period of each of
Mr. Corey's, Mr. Heffernan's and Mr. Laube's at will employment.
Pursuant to the agreement with Mr. Laube, if the Company terminates his
employment without cause (a) at any time more than 60 days before or more than
18 months after a "change in control" (as defined in the agreement), the
Company shall provide severance pay equal to his 12 months' base compensation
or (b) at any time 60 days or less before or within 18 months after a change
in control, the Company shall provide severance pay equal to the greater of
his base compensation for the year immediately preceding or the year
coinciding with the year of payment of such severance pay. In either case, the
Company shall also provide health insurance coverage to the extent provided
immediately prior to his termination until the earlier of 12 months following
such termination or the date that he receives health insurance coverage from
another employer. In the event of a change of control, the Company shall
provide a release of all repurchase rights over unvested stock and an
acceleration of the vesting period for any unvested options. In the event that
he is terminated as a result of death or disability (regardless of whether
there is a change in control), any repurchase rights of the Company with
respect to 50% of the shares that he holds shall lapse and options that he
holds shall become vested as to an additional 50% of the shares subject to
such options. In the event that he is terminated for good business reasons
during the initial two-year period, he is entitled to receive severance pay
equal to 24 months' base compensation together with a release of all
repurchase rights over unvested stock and an acceleration of the vesting
period for any unvested options (as defined in the agreement). In addition to
his base compensation of $260,000, he is entitled to receive a quarterly bonus
of $25,000 so long as he is employed by the Company.
On November 3, 1998, USWeb extended an offer of employment to Robert Shaw to
become Chairman of the Board and Chief Executive Officer of USWeb, and Mr.
Shaw accepted the offer on November 4, 1998. Pursuant to the offer, if USWeb
terminates Mr. Shaw's employemnt without cause at any time within one year
after the commencement of his employment with USWeb USWeb shall provide
severance pay equal to the higher of the base salary for the then remaining
period of employment or one year's base salary. If Mr. Shaw's employment
terminates without cause during the first year of his employment with USWeb,
Mr. Shaw's option to purchase 1,200,000 shares of USWeb Common Stock shall be
vested pro ratably.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation, the Company's Bylaws, Section
145 of the Delaware General Corporation Law and the form of indemnification
agreement entered into between the Company and certain of its directors and
officers, subject to certain conditions, authorize the Company to indemnify,
or indemnify by their terms, as the case may be, the directors and officers of
the Company against certain liabilities and expenses incurred by such persons
in connection with claims made by reason of their being such a director or
officer.
The Company has obtained directors' and officers' insurance providing
indemnification for certain of the Company's directors, officers, affiliates,
partners or employees for certain liabilities.
The Company has entered into agreements to indemnify its directors and
executive officers, in addition to indemnification provided for in the
Company's Bylaws. These agreements, among other things, indemnify the
Company's directors and executive officers for certain expenses (including
attorneys' fees), judgments, fines and settlement amounts incurred by any such
person in any action or proceeding, including any action by or in the right of
the Company, arising out of such person's services as a director or executive
officer of the
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Company, any subsidiary of the Company or any other company or enterprise to
which the person provides services at the request of the Company. The Company
believes that these provisions and agreements are necessary to attract and
retain qualified directors and executive officers.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification is
expected to be required or permitted.
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 and the SEC
rules and regulations thereunder by issuing false and misleading statements
about CKS Group's operations, revenues and earnings which allegedly inflated
CKS Group's reported revenues, earnings and stock price. The complaint further
alleges that those who purchased CKS Group's stock 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.
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EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
by the Company during the fiscal years ended December 31, 1996 and 1997 to the
Company's Chief Executive Officer and each of the Company's four other
executive officers (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------ ------------
SECURITIES
UNDERLYING OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION COMPENSATION
- --------------------------- ---- ---------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Joseph Firmage(1)........ 1997 $ 200,000 $ -- 105,000 $ -- $ 168(4)
Chairman and Chief 1996 200,000(2) -- -- 115,216(3) 140(4)
Executive Officer and
Director
Tobin Corey.............. 1997 200,000 -- 105,000 -- 139,230(6)
President 1996 197,307(5) 5,582 -- 48,787(3) 193(4)
James Heffernan(7)....... 1997 200,000 -- 60,000 -- 1,571(4)
Executive Vice 1996 191,667(5) -- -- -- 1,313(4)
President, Chief
Financial Officer,
Secretary and Director
Sheldon Laube............ 1997 259,992 100,000 30,000 -- 816(4)
Executive Vice President 1996 241,886(5) 100,000 -- -- 508(4)
and Chief Technology
Officer
Kenneth Campbell(8)...... 1997 126,641 -- -- -- 668(4)
Executive Vice 1996 220,000 -- -- -- 840(4)
President, Affiliate
Operations
</TABLE>
- ---------------------
(1) Mr. Firmage resigned as Chairman and Chief Executive Officer of USWeb in
November 1998, when Robert Shaw was appointed as Chief Executive Officer
of USWeb. Mr. Shaw's annual salary is $700,000. Mr. Firmage is a director
of USWeb and is Chief Strategist of USWeb.
(2) Does not include $16,666 earned in 1995 but not paid until 1996.
(3) Consists of payments made in reimbursement for relocation expenses for Mr.
Firmage and Mr. Corey.
(4) Consists of life insurance premiums paid on behalf of Mr. Firmage, Mr.
Corey, Mr. Heffernan, Mr. Laube and Mr. Campbell.
(5) The annual base salaries for Mr. Corey, Mr. Heffernan and Mr. Laube are
$200,000, $200,000 and $260,000, respectively. The figures listed
represent payment for actual employment during 1996, which was slightly
less than 12 months.
(6) Consists of $230 of life insurance premiums paid on behalf of Mr. Corey
and $139,000 of loan forgiveness. See "Certain Transactions."
(7) Mr. Heffernan resigned as Executive Vice President, Chief Financial
Officer and Secretary in May 1998, when Carolyn Aver was appointed to
these positions. Ms. Aver's annual salary is $200,000. Mr. Heffernan will
end his service as a director in connection with the proposed USWeb/CKS
Merger.
(8) Mr. Campbell resigned from the Company effective July 29, 1997. See
"Certain Transactions" for a description of the terms of the Company's
agreement with Mr. Campbell. The annual base salary for Mr. Campbell was
$220,000. The figure listed represents payment for actual employment
during 1997, which was slightly less than seven months.
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OPTION GRANTS AND EXERCISES IN LAST FISCAL YEAR
The following table sets forth the stock options granted during the fiscal
year ended December 31, 1997 to each of the Named Executive Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS (1)
-------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE
UNDERLYING GRANTED TO APPRECIATION FOR
OPTIONS EMPLOYEES IN EXERCISE OPTION TERM (3)
GRANTED FISCAL PRICE EXPIRATION ---------------------
NAME (#)(1) YEAR (2) ($/SH.) DATE 5% ($) 10% ($)
- ---- ---------- ------------ -------- ---------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Joseph Firmage(4)....... 105,000 6.4% $9.75 11/13/07 $ 643,831 $ 1,631,594
Tobin Corey............. 105,000 6.4% $9.75 11/13/07 $ 643,831 $ 1,631,594
James Heffernan(5)...... 60,000 3.7% $9.75 11/13/07 $ 367,903 $ 932,339
Sheldon Laube........... 30,000 1.8% $9.75 11/13/07 $ 183,952 $ 466,170
Kenneth Campbell(5)..... -- -- -- -- -- --
</TABLE>
- ---------------------
(1) These options were granted under the Company's 1996 Equity Compensation
Plan (the "1996 Equity Plan"). Options granted under the 1996 Equity Plan
generally have a ten-year term and become exercisable in annual 25%
increments commencing on the first anniversary of the original grant date,
with full exercisability occurring on the fourth anniversary date. The per
share exercise price is the estimated fair market value of the Company's
Common Stock on the date of grant. The 1996 Equity Plan provides for the
automatic acceleration of vesting of all outstanding options (such that
they become exercisable in full) in the event of a "change in control," as
defined in the 1996 Equity Plan.
(2) Based on options to purchase an aggregate of 1,635,653 shares granted to
employees during 1997 under the 1996 Equity Plan.
(3) Potential realizable value is based on an assumption that the stock price
appreciates at the annual rate shown (compounded annually) from the date
of grant until the end of the ten-year option term. These numbers are
calculated based on requirements promulgated by the SEC and do not reflect
the Company's estimate of its future stock price.
(4) Mr. Firmage resigned as Chairman and Chief Executive Officer in November
1998, when Robert Shaw was appointed to these positions.
(5) Mr. Heffernan resigned as Executive Vice President, Chief Financial
Officer and Secretary in May 1998, when Carolyn Aver was appointed to
these positions. Mr. Heffernan will end his service as a director in
connection with the proposed Merger. Mr. Campbell resigned from USWeb
effective July 29, 1997. See "Certain Transactions" for a description of
the terms of USWeb's agreement with Mr. Campbell.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END VALUES
The following table sets forth, for each of the Named Officers, information
with respect to stock options exercised during the fiscal year ended December
31, 1997 and stock options held at fiscal year end:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-
UNDERLYING UNEXERCISED THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR END (#) AT FISCAL YEAR END ($) (2)
ACQUIRED ON VALUE ----------------------------------- --------------------------------
NAME EXERCISE (#) REALIZED ($) (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ---------------- -------------- ----------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Joseph Firmage(3)....... -- -- -- 105,000 -- --
Tobin Corey............. -- -- -- 105,000 -- --
James Heffernan......... -- -- -- 60,000 -- --
Sheldon Laube........... -- -- -- 30,000 -- --
Kenneth Campbell........ -- -- -- -- -- --
</TABLE>
- ---------------------
(1) Market value of underlying securities on the exercise date minus the
exercise price.
(2) Market value of underlying securities at December 31, 1997 minus the
exercise price.
(3) Mr. Firmage resigned as Chairman and Chief Executive Officer in November
1998, when Robert Shaw was appointed to these positions.
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EMPLOYEE BENEFIT PLANS
1996 Stock Option Plan
The Company's 1996 Stock Option Plan (the "1996 Plan") was adopted by the
Board of Directors in December 1995 and approved by the stockholders in
December 1996. The 1996 Plan will terminate in December 2005 unless terminated
earlier by the Board of Directors. The 1996 Plan provides for grants of
options to employees and consultants (including officers and directors) of the
Company and its subsidiaries. A total of 600,000 shares of Common Stock were
reserved for issuance pursuant to the 1996 Plan. The 1996 Plan may be
administered by the Board of Directors or by a committee appointed by the
Board, in a manner that satisfies the legal requirements relating to the
administration of stock plans under all applicable laws (the "Administrator").
The 1996 Plan is currently administered by the Board of Directors. The Company
does not intend to issue any additional options under the 1996 Plan.
The exercise price of options granted under the 1996 Plan is determined by
the Administrator. With respect to incentive stock options granted under the
1996 Plan, the exercise price must be at least equal to the fair market value
per share of the Common Stock on the date of grant, and the exercise price of
any incentive stock option granted to a participant who owns more than 10% of
the voting power of all classes of the Company's outstanding capital stock
must be equal to at least 110% of fair market value of the Common Stock on the
date of grant. The maximum term of an option granted under the 1996 Plan may
not exceed ten years from the date of grant (five years in the case of a
participant who owns more than 10% of the voting power of all classes of the
Company's outstanding capital stock). In the event of termination of an
optionee's employment or consulting arrangement, an option may only be
exercised, to the extent vested as of the date of termination, for a period
not to exceed 90 days (12 months, in the case of termination as a result of
death or disability) following the date of termination. Options granted under
the 1996 Plan are not generally transferable by the optionee, and may be
exercised during the life of the optionee only by the optionee.
The 1996 Plan provides that in the event of a merger of the Company with or
into another corporation, or a sale of substantially all of the Company's
assets, each option shall be assumed or an equivalent option substituted for
by the successor corporation. If the outstanding options are not assumed or
substituted for by the successor corporation, the optionee shall have the
right to exercise the option as to all of the optioned stock, including shares
as to which it would not otherwise be exercisable. If an option becomes
exercisable in full in the event of a merger or sale of assets, the
Administrator shall notify the optionee that the option shall be fully
exercisable for a period of 15 days from the date of such notice, and the
option will terminate upon the expiration of such period.
The 1996 Plan provides that in the event of a proposed dissolution or
liquidation, the Administrator may provide for the optionee to have the right
to exercise the option as to all of the optioned stock, including shares as to
which it would not otherwise be exercisable. If the Administrator makes an
option exercisable in full in the event of a proposed dissolution or
liquidation, the Administrator shall notify the optionee that the option shall
be fully exercisable until 10 days prior to such transaction. To the extent
the option has not been exercised, such option will terminate immediately
prior to the consummation of such proposed action.
As of October 20, 1998, the Company had outstanding options to purchase
42,792 shares of Common Stock under the 1996 Plan having a weighted average
exercise price of $0.74 per share. As of October 20, 1998, options to purchase
an aggregate of 370,774 shares of Common Stock under the 1996 Plan had
been exercised.
1996 Equity Compensation Plan
The Company's 1996 Equity Compensation Plan (the "1996 Equity Plan")
provides for the granting to employees of incentive stock options within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), and for the granting to employees and consultants of nonstatutory
stock options and stock purchase rights ("SPRs"). The 1996 Equity Plan was
approved by the Board of Directors in October
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<PAGE>
1996 and by the stockholders in December 1996 and amended in September and
November 1997 and May 1998. Unless terminated sooner by the Board of
Directors, the 1996 Equity Plan will terminate automatically in December 2006.
A total of 7,000,000 shares of Common Stock, plus annual increases equal to
the lesser of (i) 400,000 shares, (ii) 4% of the outstanding shares, or (iii)
a lesser amount determined by the Board of Directors are currently reserved
for issuance pursuant to the 1996 Equity Plan.
The 1996 Equity Plan may be administered by the Board of Directors or a
committee of the Board (the "Administrator"), which Administrator shall, in
the case of options intended to qualify as "performance-based compensation"
within the meaning of Section 162(m) of the Code, consist of two or more
"outside directors" within the meaning of Section 162(m) of the Code. The
Administrator has the power to determine the terms of the options or SPRs
granted, including the exercise price, the number of shares subject to each
option or SPR, the exercisability thereof and the form of consideration
payable upon such exercise. In addition, the Committee has the authority to
amend, suspend or terminate the 1996 Equity Plan, provided that no such action
may impair the rights of any optionee under the 1996 Equity Plan unless
mutually agreed. Notwithstanding the foregoing, no existing employee, director
or consultant may be granted options to purchase more than an aggregate of
150,000 shares of Common Stock in any fiscal year and no newly hired employee,
director or consultant may be granted options to purchase more than an
aggregate of 300,000 shares of Common Stock in any fiscal year. The 1996
Equity Plan also provides for certain non-employee directors to receive a one-
time initial option grant of 25,000 shares that becomes exercisable over 48
months so long as the individual remains a director and for all non-employee
directors to receive option grants for 7,000 shares that become exercisable
over 12 months upon their reelection each year.
Unless otherwise determined by the Administrator, options and SPRs granted
under the 1996 Equity Plan are not generally transferable by the optionee, and
each option or SPR is exercisable during the lifetime of the optionee only by
such optionee. Options granted under the 1996 Equity Plan must generally be
exercised within three months of the end of the optionee's status as an
employee or consultant of the Company, or within 12 months after such
optionee's termination by death or disability, but in no event later than the
expiration of the option's ten year term. In the case of SPRs, unless the
Committee determines otherwise, the restricted stock purchase agreement
pursuant to which the SPR is exercised shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's employment with the Company for any reason (including death or
disability). The purchase price for shares repurchased pursuant to such
restricted stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Administrator. The exercise price of all incentive stock options granted under
the 1996 Equity Plan must be at least equal to the fair market value of the
Common Stock on the date of grant. The exercise price of nonstatutory stock
options and SPRs granted under the 1996 Equity Plan is determined by the
Administrator, but with respect to nonstatutory stock options intended to
qualify as "performance-based compensation" within the meaning of Section
162(m) of the Code, the exercise price must at least be equal to the fair
market value of the Common Stock on the date of grant. With respect to any
participant who owns stock possessing more than 10% of the voting power of all
classes of the Company's outstanding capital stock, the exercise price of any
incentive stock option granted must equal at least 110% of the fair market
value on the grant date and the term of such incentive stock option must not
exceed five years. The term of all other options granted under the 1996 Equity
Plan may not exceed ten years.
The 1996 Equity Plan provides that in the event of a merger of the Company
with or into another corporation, a sale of substantially all of the Company's
assets or a like transaction involving the Company, each option shall be
assumed or an equivalent option substituted by the successor corporation. If
the outstanding options are not assumed or substituted as described in the
preceding sentence, the optionee shall have the right to exercise the option
or SPR as to all of the optioned stock, including shares as to which it would
not otherwise be exercisable. If an option or SPR becomes exercisable in full
in the event of a merger or sale of assets, the Administrator shall notify the
optionee that the option or SPR shall be fully exercisable for a period of 15
days from the date of such notice, and the option or SPR will terminate upon
the expiration of such period.
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<PAGE>
The 1996 Equity Plan provides that in the event of a proposed dissolution or
liquidation, the Administrator may provide for the optionee to have the right
to exercise the option or SPR as to all of the optioned stock, including
shares as to which it would not otherwise be exercisable. If the Administrator
makes an option or SPR exercisable in full in the event of a proposed
dissolution or liquidation, the Administrator shall notify the optionee that
the option or SPR shall be fully exercisable until 10 days prior to such
transaction. To the extent the option or SPR has not been exercised, such
option or SPR will terminate immediately prior to the consummation of such
proposed action.
As of October 20, 1998, the Company had outstanding options to purchase
4,403,137 shares of Common Stock under the 1996 Equity Plan having a weighted
average exercise price of $14.11 per share. As of October 20, 1998, 76,079
options to purchase shares of Common Stock under the 1996 Equity Plan had been
exercised.
1997 Acquisition Stock Option Plan
The Company's 1997 Acquisition Stock Option Plan (the "1997 Plan") was
approved by the Board of Directors in February 1997 and amended in July and
November 1997 and May 1998. The 1997 Plan provides for the grant of incentive
stock options, within the meaning of Section 422 of the Code, to employees
(including officers and employee directors) and for the grant of nonstatutory
stock options and SPRs to employees, directors and consultants. Unless
terminated sooner by the Board of Directors, the 1997 Plan will terminate
automatically in February 2007. A total of 20,000,000 shares of Common Stock,
plus annual increases equal to the lesser of (i) 400,000 shares, (ii) 4% of
the outstanding shares, or (iii) a lesser amount determined by the Board of
Directors, are currently reserved for issuance pursuant to the 1997 Plan.
The 1997 Plan may be administered by the Board of Directors or a committee
of the Board (the "Administrator"). The Administrator has the power to
determine the terms of the options or SPRs granted, including the exercise
price of the option or SPR, the number of shares subject to each option or
SPR, the exercisability thereof and the form of consideration payable upon
such exercise. In addition, the Administrator has the authority to amend,
suspend or terminate the 1997 Plan, provided that such action may not impair
the rights of any optionee under the 1997 Plan unless mutually agreed.
Options and SPRs granted under the 1997 Plan are generally not transferable
by the optionee, and each option or SPR is exercisable during the lifetime of
the optionee only by such optionee. Options granted under the 1997 Plan must
generally be exercised within three months after the end of optionee's status
as an employee, director or consultant of the Company, or within 12 months
after such optionee's termination by death or disability, but in no event
later than the expiration of the option's ten year term.
In the case of SPRs, unless the Administrator determines otherwise, the
restricted stock purchase agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's employment with the Company for any reason (including death or
disability). The purchase price for shares repurchased pursuant to the
restricted stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Administrator.
The exercise price of all incentive stock options granted under the 1997
Plan must be at least equal to the fair market value of the Common Stock on
the date of grant. The exercise price of nonstatutory stock options and SPRs
granted under the 1997 Plan is determined by the Administrator, but with
respect to nonstatutory stock options intended to qualify as "performance-
based compensation" within the meaning of Section 162(m) of the Code, the
exercise price must at least be equal to the fair market value of the Common
Stock on the date of grant. With respect to any participant who owns stock
possessing more than 10% of the voting power of all classes of the outstanding
capital stock of the Company, its parent or any subsidiary, the exercise price
of any incentive stock option granted must equal at least 110% of the fair
market value on the grant date and the term of such incentive stock option
must not exceed five years. The term of all other options granted under the
1997 Plan may not exceed ten years.
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<PAGE>
The 1997 Plan provides that in the event of a merger of the Company with or
into another corporation, or a sale of substantially all of the Company's
assets, each option and SPR shall be assumed or an equivalent option
substituted for by the successor corporation. If the outstanding options or
SPRs are not assumed or substituted for by the successor corporation, the
optionee shall have the right to exercise the option or SPR as to all of the
optioned stock, including shares as to which it would not otherwise be
exercisable. If an option or SPR becomes exercisable in full in the event of a
merger or sale of assets, the Administrator shall notify the optionee that the
option or SPR shall be fully exercisable for a period of 15 days from the date
of such notice, and the option or SPR will terminate upon the expiration of
such period.
The 1997 Plan provides that in the event of a proposed dissolution or
liquidation, the Administrator may provide for the optionee to have the right
to exercise the option or SPR as to all of the optioned stock, including
shares as to which it would not otherwise be exercisable. If the Administrator
makes an option or SPR exercisable in full in the event of a proposed
dissolution or liquidation, the Administrator shall notify the optionee that
the option or SPR shall be fully exercisable until 15 days prior to such
transaction. To the extent the option or SPR has not been exercised, such
option or SPR will terminate immediately prior to the consummation of such
proposed action.
As of October 20, 1998, the Company had outstanding options to purchase
11,019,244 shares of Common Stock under the 1997 Plan having a weighted
average exercise price of $13.37 per share. As of October 20, 1998, 1,566,596
options to purchase shares of Common Stock under the 1997 Plan had been
exercised.
1997 Employee Stock Purchase Plan
The Company's 1997 Employee Stock Purchase Plan (the "ESPP") was adopted by
the Board of Directors in September 1997 and amended in May 1998. A total of
3,000,000 shares of Common Stock has been reserved for issuance under the
ESPP, plus annual increases equal to the lesser of (i) 50,000 shares, (ii) 4%
of the outstanding shares on such date or (iii) a lesser amount determined by
the Board of Directors.
The ESPP, which is intended to qualify under Section 423 of the Code,
contains consecutive, overlapping, 24-month offering periods. Each offering
period includes four six-month purchase periods. The offering periods
generally start on the first trading day on or after May 1 and November 1 of
each year, except for the first such offering period which commences on the
first trading day on or after the effective date of this Offering and ends on
the last trading day on or before October 31, 1999.
Employees are eligible to participate if they are customarily employed by
the Company or any participating subsidiary for at least 20 hours per week and
more than five months in any calendar year. However, no employee may be
granted an option to purchase under the ESPP who (i) immediately after grant
owns stock possessing 5% or holds equivalent outstanding options or more of
the total combined voting power or value of all classes of the capital stock
of the Company, or (ii) whose rights to purchase stock under all employee
stock purchase plans of the Company accrues at a rate which exceeds $25,000
worth of stock for each calendar year. The ESPP permits participants to
purchase Common Stock through payroll deductions of up to 15% of the
participant's "compensation." Compensation is defined as the participant's
base straight time gross earnings, overtime and commissions but excludes
payments for shift premium, incentive compensation, incentive payments,
bonuses and other compensation. The maximum number of shares a participant may
purchase during a single purchase period is 2,500 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of Common Stock at the end of each purchase period. The price of stock
purchased under the ESPP is 85% of the lower of the fair market value of the
Common Stock at the beginning of the offering period or at the end of the
purchase period. In the event the fair market value at the end of a purchase
period is less than the fair market value at the beginning of the offering
period, the participants will be withdrawn from the current offering period
following exercise and automatically re-enrolled in a new offering period. The
new offering period will use the lower fair market value as of the first date
of the new offering period to determine the purchase price for future purchase
periods. Participants may end their participation at any time during an
offering period, and
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<PAGE>
they will be paid their payroll deductions to date. Participation ends
automatically upon termination of employment with the Company.
Rights granted under the ESPP are generally not transferable by a
participant unless otherwise provided under the ESPP. The ESPP provides that,
in the event of a merger of the Company with or into another corporation or a
sale of substantially all of the Company's assets, each outstanding option may
be assumed or substituted for by the successor corporation. If the successor
corporation refuses to assume or substitute for the outstanding options, the
offering period then in progress will be shortened and a new exercise date
will be set. The ESPP will terminate by its own terms in September 2007. The
Board of Directors has the authority to amend or terminate the ESPP, except
that no such action may adversely affect any outstanding rights to purchase
stock under the ESPP.
Assumed Company Options
As of August 30, 1998, the Company had outstanding options for 532,636
shares of Common Stock that were assumed in connection with acquisitions and
have a weighted average exercise price of $4.82 per share.
Affiliate Warrant Program
In June 1996, the Company established the Affiliate Warrant Program (the
"Program") with the intent of attracting new Affiliates and to create
performance incentives for such Affiliates. Under the Program, each Affiliate
that signed an Affiliate agreement on or before March 31, 1997 was granted a
warrant to purchase shares of the Company's Common Stock upon execution of the
Affiliate agreement and earns additional warrants to purchase shares of Common
Stock at the rate of one share of Common Stock per $50 of Affiliate adjusted
gross revenue, as defined. The exercise price of all warrants issued and
issuable to an individual Affiliate was set at the time of signing of the
Affiliate agreement. Warrants vest 25% after one year and then ratably each
month over the following 36 month period. Warrants are exercisable for a
maximum period of five years from the effective date of the Affiliate
agreement. Warrants may not be exercised prior to the earlier of the closing
of this offering or any acquisition of the Company. A total of 333,333 shares
of Common Stock has been reserved for issuance under the Program, and the
Company does not intend to increase this amount. As of October 20, 1998, the
Company had issued warrants under the program to purchase an aggregate of
295,168 shares of Common Stock at a weighted average exercise price of $2.38
per share. See Note 10 to Consolidated Financial Statements.
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<PAGE>
CERTAIN TRANSACTIONS
Since its inception, the Company has issued, in private placement
transactions, shares of Preferred Stock as follows: 6,172,833 shares of Series
A Preferred Stock at $1.62 per share, 3,103,333 shares of Series B Preferred
Stock at $2.01 per share and 2,818,193 shares of Series C Preferred Stock at
$6.21 per share. In connection with the issuance of Series C Preferred Stock,
the Company issued warrants (the "Series C Warrants") to purchase an aggregate
of 704,549 shares of Series C Preferred Stock at an exercise price of $7.50
per share. Each such share of Preferred Stock converted into one share of
Common Stock upon the closing of the Company's initial public offering in
December 1997. The holders of such shares of converted Preferred Stock are
entitled to certain registration rights with respect to the Common Stock
issued upon conversion thereof. See "Description of Capital Stock--
Registration Rights." The following table sets forth the number of shares of
Preferred Stock, Series C Warrants and Common Stock purchased by the Company's
directors, five percent stockholders and their respective affiliates:
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES C COMMON
INVESTOR PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK WARRANTS STOCK
-------- --------------- --------------- --------------- -------- -------
<S> <C> <C> <C> <C> <C>
Crosspoint Venture
Partners (1)........... 1,233,333 -- 48,309 12,077 500,000
SOFTVEN No. 2 Investment
Enterprise
Partnership (2)........ 4,625,000 3,103,333 -- -- --
21st Century
Communications
Partners, L.P. (3)..... -- -- 805,153 201,288 --
The Cutler Group (4).... 308,333 -- 24,892 6,223 958,982
</TABLE>
- ---------------------
(1) Robert Hoff, a general partner of Crosspoint Venture Partners, serves on
the Company's Board of Directors.
(2) Jeffrey Ballowe and Gary Rieschel, Executive Managing Director of SOFTBANK
Holdings, an affiliate of SOFTVEN No. 2 Investment Enterprise Partnership,
serve on the Company's Board of Directors.
(3) Includes 545,893 shares of Series C Preferred Stock and warrants to
purchase 136,473 shares of Series C Preferred Stock held by 21st Century
Communications Partners, L.P., 185,668 shares of Series C Preferred Stock
and warrants to purchase 46,417 shares of Series C Preferred Stock held by
21st Century Communications T-E Partners, L.P., and 73,591 shares of
Series C Preferred Stock and warrants to purchase 18,398 shares of Series
C Preferred Stock held by 21st Century Communications Foreign Partners,
L.P., each of which is an affiliate of 21st Century Communications
Partners, L.P., a general partnership of which Barry Rubenstein, who
serves on the Company's Board of Directors, is a general partner. Mr.
Rubenstein disclaims beneficial ownership of such shares.
(4) Includes 24,892 shares of Series C Preferred Stock, 533,333 shares of
Common Stock and warrants to purchase 6,223 shares of Series C Preferred
Stock held by Storie Partners, an affiliate of The Cutler Group. Frank
Cutler, principal of The Cutler Group, has a shared ownership interest in
these shares and warrants. Also includes 8,982 shares of Common Stock held
by Frank Cutler, principal of the Cutler Group.
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<PAGE>
In December 1995, the Company entered into Restricted Stock Purchase
Agreements with each of Joseph Firmage, Tobin Corey, James Heffernan and
Kenneth Campbell. In January 1996, the Company entered a Restricted Stock
Purchase Agreement with Sheldon Laube. Pursuant to these Restricted Stock
Purchase Agreements, Messrs. Firmage, Corey, Heffernan, Laube and Campbell
acquired the number of shares of the Company's Common Stock set forth opposite
their names in the table below:
<TABLE>
<CAPTION>
SHARES OF COMMON
EXECUTIVE OFFICER STOCK ACQUIRED
----------------- ----------------
<S> <C>
Joseph Firmage.......................................... 1,779,993
Tobin Corey............................................. 932,360
James Heffernan......................................... 762,549
Sheldon Laube........................................... 762,549
Kenneth Campbell........................................ 762,549
</TABLE>
The shares of Common Stock subject to the Restricted Stock Purchase
Agreements were issued in exchange for cash. The Restricted Stock Purchase
Agreements provide the Company the right to repurchase at the original
purchase price all shares of Common Stock not released from such right of
repurchase, and 1/48th of the shares issued under the Restricted Stock
Purchase Agreements are released from the Company's right of repurchase each
month after the date of purchase. Further, the Company retains a right of
first refusal to purchase any shares issued pursuant to a Restricted Stock
Purchase Agreement until 90 days after the effective date of this offering.
The Company has entered into indemnification agreements with each of its
directors and executive officers. These agreements require the Company to
indemnify such individuals for certain liabilities to which they may be
subject as a result of their affiliation with the Company, to the fullest
extent allowed by Delaware law. See "Management--Limitation on Liability and
Indemnification Matters."
The Company has entered into Management Continuity Agreements with Messrs.
Firmage, Corey, Heffernan and Laube. See "Management--Employment Agreements."
In January 1996, the Company extended a loan of $70,000 (with interest
accruing at 5% per annum) to Tobin Corey, to cover the expenses of Mr. Corey's
relocation to California from Utah (the "Corey Loan"). In July 1997, the
Company forgave the Corey Loan, together with accrued interest and a tax
gross-up, for a total amount forgiven of $139,000.
In August 1997, the Company entered into a General Release Agreement with
Kenneth Campbell (the "Campbell Release Agreement"). Pursuant to the terms of
the Campbell Release Agreement, Mr. Campbell shall receive an amount equal to
his base salary of $220,000, payable semimonthly over the 12 month period
beginning August 1, 1997. In addition, on Mr. Campbell's termination date, the
Company paid Mr. Campbell $15,229, an amount equal to the value of his accrued
and unused vacation. Further, pursuant to the terms of the Campbell Release
Agreement, the Company accelerated vesting of certain shares of Common Stock
held by Mr. Campbell so that, as of the date of the Campbell Release
Agreement, Mr. Campbell held 413,047 shares. The Company repurchased the
remaining 349,502 shares of Common Stock held by Mr. Campbell at a price of
$0.0003 per share.
In November 1997, the Company granted the following options to executive
officers pursuant to the 1996 Equity Plan: 105,000 shares to Joseph Firmage,
105,000 shares to Tobin Corey, 60,000 shares to James Heffernan and 30,000
shares to Sheldon Laube. Each option has an exercise price of $9.75 per share
and becomes exercisable over 36 to 60 months.
In November 1998, USWeb granted an option to Robert Shaw to purchase
1,200,000 shares of USWeb Common Stock having an exercise price of $10 per
share that vests and becomes exercisable as to 25% of the shares subject to
the option one year after commencement of his employment with USWeb and as of
1/48th of the shares subject to the option each month thereafter until vested
in full.
During 1998, USWeb received approximately $300,000 from International Space
Sciences Organization, Inc. ("ISSO"), a research and information dissemination
organization for Web-related consulting, design and hosting services. Joseph
Firmage, a director of USWeb, is the Chief Executive Officer and sole director
of ISSO.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of USWeb Common Stock as of October 20, 1998 for (i) each
person or entity who is known by USWeb to beneficially own more than 5% of the
outstanding USWeb Common Stock, (ii) each of USWeb's directors, (iii) each
USWeb Named Executive Officer and (iv) all directors and executive officers of
USWeb as a group:
<TABLE>
<CAPTION>
DIRECTORS, USWEB NAMED PRO FORMA PRO FORMA
EXECUTIVE OFFICERS, 5% NUMBER OF SHARES PERCENT OF NUMBER OF SHARES PERCENT OF SHARES
STOCKHOLDERS AND ALL BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED BENEFICIALLY OWNED
USWEB EXECUTIVE OFFICERS PRIOR TO THE CKS BENEFICIALLY POST CKS POST CKS
AND DIRECTORS AS A GROUP MERGER(1) OWNED (1)(2) MERGER(1) MERGER(1)(2)
- ------------------------ ------------------ ------------ ------------------ ------------------
<S> <C> <C> <C> <C>
SOFTVEN No. 2 Investment
Enterprise Partnership. 5,458,324 12.01% 5,458,324 7.94%
24-1
Nihonbashi-Hakozakicho
Chuo-Ku
Tokyo, 103 Japan
Gary Rieschel (3) ...... 5,458,324 12.01 5,458,324 7.94
Barry Rubenstein (4).... 2,723,802 5.95 2,723,802 3.75
Robert Hoff (5) ........ 1,543,719 3.40 1,543,719 2.24
Crosspoint Venture Part-
ners (5)............... 1,543,719 3.40 1,543,719 2.24
Joseph Firmage (6)...... 816,866 1.79 816,866 1.19
Tobin Corey (7) ........ 610,772 1.34 610,772 *
Sheldon Laube (8) ...... 562,449 1.24 562,449 *
Jeffrey Ballowe (9)..... 44,167 * 44,167 *
James Heffernan ........ 396,609 * 396,609 *
James Daley (10) ....... 35,000 * 35,000 *
Joseph Marengi (11) .... 30,000 * 30,000 *
Klaus Schwab (12) ...... 25,000 * 25,000 *
Carolyn Aver (13) ...... 300,000 * 300,000 *
Kurt Garbe (14)......... 254,833 * 254,833 *
Robert Wise (15)........ 237,524 * 237,524 *
Mark Kvamme (16)(17).... -- * 2,331,506 3.39
Thomas Suiter (16)(18).. -- * 1,712,753 2.49
Robert Shaw (19)........ -- -- -- --
All executive officers
and directors as a
group (14 persons)
(16 persons pro forma). 13,039,065(18) 27.78%(20) 17,083,323(19) 24.28%(21)
</TABLE>
- ---------------------
* less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of Common Stock subject to options or warrants held by
that person that are currently exercisable or exercisable within 60 days
of October 20, 1998 are deemed outstanding. Such shares, however, are not
deemed outstanding for the purposes of computing the percentage ownership
of each other person. Except as indicated in the footnotes to this table
and pursuant to applicable community property laws, each stockholder
named in the table above has sole voting and investment power with
respect to the shares set forth opposite such stockholder's name.
(2) Percentage beneficial ownership prior to the CKS Merger is based on
45,451,382 shares of USWeb Common Stock outstanding as of October 20,
1998. Pro forma percentage beneficial ownership is based on an estimate
of 68,758,294 shares of the Combined Company Common Stock outstanding.
Such number is derived by adding the number of shares of USWeb Common
Stock outstanding on
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<PAGE>
October 20, 1998 to the product of the Exchange Ratio of 1.5 and the
15,537,941 shares of CKS Group Common Stock outstanding on October 20,
1998.
(3) Consists of 5,458,324 shares of USWeb Common Stock held by SOFTVEN No. 2
Investment Enterprise Partnership. Gary Rieschel, Executive Managing
Director of SOFTBANK Holdings, an affiliate of SOFTVEN No. 2 Investment
Enterprise Partnership, serves on the USWeb Board. Mr. Rieschel disclaims
beneficial ownership of such shares.
(4) Includes 359,436 shares and warrants to purchase 136,473 shares held by
21st Century Communications Partners, L.P., 122,229 shares and warrants
to purchase 46,417 shares held by 21st Century Communications T-E
Partners, L.P., 48,489 shares and warrants to purchase 18,398 shares held
by 21st Century Communications Foreign Partners, L.P., 1,533,489 shares
and warrants to purchase 110,710 shares held by Wheatley Partners, L.P.,
140,321 shares and warrants to purchase 10,062 shares held by Wheatley
Foreign Partners, L.P. and 163,155 shares held by Woodland Partners.
Mr. Rubenstein is President of InfoMedia Associates, Ltd., a general
partner of 21st Century Communications Partners, L.P., 21st Century
Communications T-E Partners, L.P. and 21st Century Communications Foreign
Partners, L.P. Mr. Rubenstein is also a member and CEO of Wheatley
Partners, LLC, a general partner of Wheatley Partners, L.P., Wheatley
Foreign Partners, L.P. and Woodland Partners. Mr. Rubenstein disclaims
beneficial ownership of such shares.
(5) Includes warrants to purchase 12,077 shares held by Crosspoint Venture
Partners. Mr. Hoff is a general partner of Crosspoint Venture Partners.
Mr. Hoff disclaims beneficial ownership of all such shares.
(6) Includes 105,000 shares representing options exercisable for USWeb Common
Stock within 60 days, which if exercised before being fully vested, are
subject to repurchase by the Company.
(7) Includes 105,000 shares representing options exercisable for USWeb Common
Stock within 60 days, which if exercised before being fully vested, are
subject to repurchase by the Company.
(8) Includes 30,000 shares representing options exercisable for USWeb Common
Stock within 60 days, which if exercised before being fully vested, are
subject to repurchase by the Company.
(9) Includes options exercisable within 60 days for 40,000 shares of USWeb
Common Stock, which if exercised before being fully vested, are subject
to repurchase by the Company.
(10) Represents options exercisable within 60 days for 35,000 shares of USWeb
Common Stock, which if exercised before being fully vested, are subject
to repurchase by the Company.
(11) Represents options exercisable within 60 days for 30,000 shares of USWeb
Common Stock, which if exercised before being fully vested, are subject
to repurchase by the Company.
(12) Represents options exercisable within 60 days for 25,000 shares of USWeb
Common Stock, which if exercised before being fully vested, are subject
to repurchase by the Company.
(13) Represents options exercisable within 60 days for 300,000 shares of USWeb
Common Stock, which if exercised before being fully vested, are subject
to repurchase by the Company.
(14) Includes options exercisable within 60 days representing 250,000 shares
of USWeb Common Stock, which if exercised before being fully vested are
subject to repurchase by the Company.
(15) Includes options exercisable within 60 days representing 233,333 shares
of USWeb Common Stock, which if exercised before being fully vested are
subject to repurchase by the Company.
(16) Mr. Kvamme and Mr. Suiter, currently executive officers of CKS Group,
will become upon completion of the Merger executive officers and
directors of USWeb.
(17) Includes options to purchase 60,000 shares of the Combined Company's
Common Stock, which are exercisable within 60 days.
(18) Includes options to purchase 45,000 shares of the Combined Company's
Common Stock, which are exercisable within 60 days.
(19) Mr. Shaw became Chief Executive Officer and a director of USWeb in
November 1998.
(20) See notes (2)-(13) above.
(21) See notes (2)-(13) and (17)-(18) above.
100
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company and certain
provisions of the Company's Certificate of Incorporation and Bylaws is a
summary and is qualified in its entirety by the provisions of the Certificate
of Incorporation and Bylaws.
The authorized capital stock of the Company is 101,000,000 shares,
consisting of 100,000,000 shares of Common Stock, par value $0.001 per share,
and 1,000,000 shares of undesignated Preferred Stock, par value $0.001 per
share. The Company is also requesting its stockholders to consider and approve
an amendment to the USWeb Certificate to increase the number of authorized
shares of Common Stock by 100,000,000 shares to 200,000,000 shares. See
"Information Regarding Proposed Merger with CKS Group--Special Meeting of
Stockholders of USWeb."
COMMON STOCK
As of October 20, 1998 there were 45,451,382 shares of Common Stock
outstanding held of record by approximately 853 stockholders.
The holders of Common Stock are entitled to one vote per share held of
record on all matters submitted to a vote of the stockholders. The
stockholders do not have a right to take action by written consent nor may
they cumulate votes in connection with the election of directors subject to
preferences that may be applicable to any then outstanding Preferred Stock
holders of Common Stock are entitled to receive ratably such dividends as may
be declared by the Board of Directors out of funds legally available therefor.
In the event of a liquidation, dissolution or winding up of the Company,
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities and the liquidation preferences of any
outstanding shares of Preferred Stock, if any. The Common Stock has no
preemptive rights, conversion rights or other subscription rights. There are
no redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are, and all shares of Common Stock to be
outstanding upon completion of the offering will be, fully paid and
nonassessable. The rights of holders of Common Stock are subject to, and may
be adversely affected by, the rights of any series of Preferred Stock which
the Company may issue in the future.
PREFERRED STOCK
The Company has 1,000,000 shares of undesignated Preferred Stock authorized,
none of which were issued or outstanding as of September 28, 1998. The Board
of Directors has the authority to issue 1,000,000 shares of Preferred Stock in
one or more series, and to fix the rights, designations, preferences,
privileges, qualifications and restrictions thereof, including dividend
rights, conversion rights, voting rights, rights and terms of redemption,
liquidation preferences and sinking fund terms, any or all of which may be
greater than the rights of the Common Stock without any further action by the
stockholders. The issuance of Preferred Stock could adversely affect the
voting power of holders of Common Stock and the likelihood that such holders
will receive dividend payments and payments upon liquidation. Such issuance
could have the effect of decreasing the market price of the Common Stock. The
issuance of Preferred Stock may have the effect of delaying, deterring or
preventing a change in control of the Company with any further action by the
stockholders. The Company has no present plans to issue any shares of
Preferred Stock.
WARRANTS
As of October 20, 1998, the Company had warrants outstanding to purchase
3,032,476 shares of its Common Stock at a weighted average exercise price per
share of $17.84.
No fractional shares of Common Stock will be issued in connection with the
exercise of warrants. In the event a holder of warrant fails to exercise the
warrants prior to their expiration, the warrants will expire and the holder
thereof will have no further rights with respect to such warrants.
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A holder of warrants will not have any rights, privileges or liabilities as
a stockholder of the Company prior to exercise of the warrants. The Company is
required to keep available a sufficient number of authorized shares of Common
Stock to permit exercise of the warrants.
The exercise price of the warrants and the number of shares issuable upon
exercise of the warrants will be subject to adjustment to protect against
dilution in the event of stock dividends, stock splits, combinations,
subdivisions and reclassifications. See "Management--Affiliate Warrant
Program."
REGISTRATION RIGHTS
The holders of approximately 14 million shares of Common Stock, including
approximately 2.9 million shares of Common Stock issuable upon the conversion
of outstanding warrants, are entitled to certain rights with respect to the
registration of such shares under the Securities Act. Under the terms of the
agreement between the Company and the holders of such registrable securities,
if the Company proposes to register any of its securities under the Securities
Act, either for its own account or for the account of other security holders
exercising registration rights, such holders are entitled to notice of such
registration and are entitled to include shares of such Common Stock therein.
Further, holders may require the Company to file additional registration
statements on Form S-3 at the Company's expense. These rights are subject to
certain conditions and limitations, among them the right of the underwriters
of an offering to limit the number of shares included in such registration in
certain circumstances.
CERTAIN ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF
INCORPORATION, BYLAWS AND DELAWARE LAW
General
Certain provisions of the Delaware General Corporation Law and the Company's
Certificate of Incorporation and Bylaws could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
to acquire, control of the Company. Such provisions could limit the price that
certain investors might be willing to pay in the future for shares of the
Company's Common Stock. These provisions of Delaware law and the Company's
Certificate of Incorporation and Bylaws may also have the effect of
discouraging or preventing certain types of transactions involving an actual
or threatened change of control of the Company (including unsolicited takeover
attempts), even though such a transaction may offer the Company's stockholders
the opportunity to sell their stock at a price above the prevailing market
price. The Certificate of Incorporation allows the Company to issue Preferred
Stock with rights senior to those of the Common Stock and other rights that
could adversely affect the interests of holders of Common Stock, which could
decrease the amount of earnings or assets available for distribution to the
holders of Common Stock or could adversely affect the rights and powers,
including voting rights, of the holders of Common Stock. In certain
circumstances, such issuance could have the effect of decreasing the market
price of the Common Stock, as well as having the anti-takeover effect
discussed above. See "Risk Factors--Effect of Certain Charter Provisions;
Antitakeover Effects of Certificate of Incorporation, Bylaws and Delaware
Law."
Delaware Takeover Statute
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which prohibits a Delaware corporation from engaging in a
"business combination" with certain persons ("Interested Stockholders") for
three years following the date any such person becomes an Interested
Stockholder. Interested Stockholders generally include (i) persons who are the
beneficial owners of 15% or more of the outstanding voting stock of the
corporation and (ii) persons who are affiliates or associates of the
corporation and who hold 15% or more of the corporation's outstanding voting
stock at any time within three years before the date on which such person's
status as an Interested Stockholder is determined. Subject to certain
exceptions, a business combination includes, among other things, (i) a merger
or consolidation, (ii) the sale, lease exchange, mortgage, pledge, transfer or
other disposition of assets having an aggregate market value equal to 10% or
more of either the aggregate market value of all assets of the corporation
determined on a
102
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consolidated basis or the aggregate market value of all the outstanding stock
of the corporation, (iii) any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the Interested
Stockholder, except pursuant to a transaction that effects a pro rata
distribution to all stockholders of the corporation, (iv) any transaction
involving the corporation that has the effect of increasing the proportionate
share of the stock of any class or series, or securities convertible into the
stock of any class or series, of the corporation that is owned directly or
indirectly by the Interested Stockholder, or (v) any receipt by the Interested
Stockholder of the benefit (except proportionately as a stockholder) of any
loans, advances, guarantees, pledges or other financial benefits provided by
or through the corporation.
Section 203 does not apply to a business corporation if (i) before a person
becomes an Interested Stockholder, the board of directors of the corporation
approves the transaction in which the Interested Stockholder became an
Interested Stockholder or approved the business combination, or (ii) upon
consummation of the transaction that resulted in the Interested Stockholder
becoming an Interested Stockholder, the Interested Stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commences, other than certain the affirmative vote of the holders
of at least two-thirds of the outstanding voting stock of the corporation not
owned by the Interested Stockholder.
Certificate of Incorporation and Bylaws
The Company's Bylaws also require that special meetings of the stockholders
of the Company may be called only by the Board of Directors, the Chief
Executive Officer of the Company or by any person or persons holding shares
representing at least 20% of the outstanding capital stock. The Company's
Bylaws also require advance written notice, which must be received by the
Secretary of the Company not less than 90 days prior to the meeting, by a
stockholder of a proposal or directors nomination which such stockholder
desires to present at an annual or special meeting of stockholders. The
Company's Certificate of Incorporation does not include a provision for
cumulative voting in the election of directors. Under cumulative voting, a
minority stockholder holding a sufficient number of shares may be able to
ensure the election of one or more directors. The absence of cumulative voting
may have the effect of limiting the ability of minority stockholders to effect
changes in the Board of Directors and, as a result, may have the effect of
deterring hostile takeover or delaying or preventing changes in control or
management of the Company.
The Company's Bylaws provide that the authorized number of directors may be
changed by an amendment to the Bylaws adopted by the Board of Directors or by
the stockholders. Vacancies in the Board of Directors may be filled either by
holders of a majority of the Company's voting stock or a majority of directors
in office, although less than a quorum. See "Risk Factors--Effect of Certain
Charter Provisions; Antitakeover Effects of Incorporation, Bylaws and Delaware
Law."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar of the USWeb Common Stock is ChaseMellon
Shareholder Services L.L.C., and its telephone number is (415) 743-1423.
103
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PLAN OF DISTRIBUTION
The Company will issue the Common Stock from time to time in connection with
acquisition by the Company of other businesses, assets or securities. It is
expected that the terms of the acquisitions involving the issuance of
securities covered by this Prospectus will be determined by direct
negotiations with the owners or controlling persons of the businesses, assets
or securities to be acquired by the Company. No underwriting discounts or
commissions will be paid in connection with the issuance of the Shares by the
Company, although finder's fees may be paid from time to time with respect to
specific mergers or acquisitions. Any person receiving such fees may be deemed
to be an underwriter within the meaning of the Securities Act.
RESTRICTIONS ON RESALE
The Common Stock offered hereby is registered under the Securities Act, but
this registration does not cover resale or distribution by the person who
receives Common Stock issued by the Company in its acquisitions. Affiliates of
entities acquired by the Company who do not become affiliates of the Company
may not resell Common Stock registered under the Registration Statement to
which this Prospectus relates except pursuant to an effective registration
statement under the Securities Act covering such shares, or in compliance with
Rule 145 promulgated under the Securities Act or another applicable exemption
from the registration requirements of the Securities Act. Generally, Rule 145
permits such affiliates to sell such shares immediately following the
acquisition in compliance with certain volume limitations and manner of sale
requirements. Under Rule 145, sales by such affiliates during any three-month
period cannot exceed the greater of (i) 1% of the shares of Common Stock of
the Company outstanding and (ii) the average weekly reported volume of trading
of such shares of Common Stock on all national securities exchanges during the
four calendar weeks preceding the proposed sale. These restrictions will cease
to apply under most other circumstances if the affiliate has held the Common
Stock for at least two years, provided that the person or entity is not then
an affiliate of the Company. Individuals who are not affiliates of the entity
being acquired and do not become affiliates of the Company will not be subject
to resale restrictions under Rule 145 and, unless otherwise contractually
restricted, may resell Common Stock immediately following the acquisition
without an effective registration statement under the Securities Act. The
ability of affiliates to resell shares of the Common Stock under Rule 145 will
be subject to the Company having satisfied its reporting requirements under
the Securities Exchange Act of 1934, as amended, for specified periods prior
to the time of sale.
LEGAL MATTERS
Certain legal matters with respect to the validity of the issuance of the
shares of Common Stock offered hereby will be passed upon for the Company by
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California.
104
<PAGE>
EXPERTS
The consolidated financial statements of USWeb Corporation at December 31,
1996 and 1997, and for the years then ended, have been included in this
Prospectus in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The consolidated financial statements of CKS Group, Inc. as of November 30,
1996 and 1997, and for each of the years in the three-year period ended
November 30, 1997, have been included herein and in the Registration Statement
in reliance upon the report of KPMG Peat Marwick LLP, independent auditors,
appearing elsewhere herein, and upon the authority of said firm as experts in
auditing and accounting.
The financial statements of McKinney & Silver as of December 31, 1995 and
1996 and for the years ended December 31, 1995 and 1996, not separately
presented in this Prospectus, have been audited by Ernst & Young LLP,
independent auditors whose report thereon appears herein. Such financial
statements, to the extent they have been included in the financial statements
of CKS Group, Inc., have been so included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
105
<PAGE>
USWEB CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
Overview.................................................................. F-5
Unaudited pro forma combined balance sheet as of September 30, 1998....... F-7
Unaudited pro forma combined statement of operations...................... F-8
Unaudited pro forma combined statement of operations--years ended December
31, 1995 and 1996........................................................ F-9
Unaudited pro forma combined statement of operations--year ended December
31, 1997................................................................. F-10
Unaudited pro forma combined statement of operations--nine months ended
September 30, 1997....................................................... F-11
Unaudited pro forma combined statement of operations--nine months ended
September 30, 1998....................................................... F-12
Notes to unaudited pro forma combined financial information............... F-13
USWEB CORPORATION
Report of Independent Accountants......................................... F-20
Consolidated Balance Sheet................................................ F-21
Consolidated Statement of Operations...................................... F-22
Consolidated Statement of Stockholders' Equity (Deficit).................. F-23
Consolidated Statement of Cash Flows...................................... F-24
Notes to Consolidated Financial Statements................................ F-25
USWEB SAN FRANCISCO (FORMERLY XCOM CORPORATION)
Report of Independent Accountants......................................... F-45
Balance Sheet............................................................. F-46
Statement of Operations................................................... F-47
Statement of Shareholders' Equity......................................... F-48
Statement of Cash Flows................................................... F-49
Notes to Financial Statements............................................. F-50
USWEB MILWAUKEE (FORMERLY FETCH INTERACTIVE, INC.)
Report of Independent Accountants......................................... F-53
Balance Sheet............................................................. F-54
Statement of Operations................................................... F-55
Statement of Stockholders' Deficit........................................ F-56
Statement of Cash Flows................................................... F-57
Notes to Financial Statements............................................. F-58
USWEB LA METRO (FORMERLY NEWLINK CORPORATION)
Report of Independent Accountants......................................... F-62
Balance Sheet............................................................. F-63
Statement of Operations................................................... F-64
Statement of Shareholders' Equity......................................... F-65
Statement of Cash Flows................................................... F-66
Notes to Financial Statements............................................. F-67
USWEB ATLANTA (FORMERLY INTERNETOFFICE, LLC)
Report of Independent Accountants......................................... F-70
Balance Sheet............................................................. F-71
Statement of Operations................................................... F-72
Statement of Stockholders' Equity......................................... F-73
Statement of Cash Flows................................................... F-74
Notes to Financial Statements............................................. F-75
USWEB DC (FORMERLY INFOPRENEURS INC.)
Report of Independent Accountants......................................... F-78
Consolidated Balance Sheet................................................ F-79
</TABLE>
F-1
<PAGE>
USWEB CORPORATION
INDEX TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
USWEB DC (FORMERLY INFOPRENEURS INC.--CONT.)
Consolidated Statement of Operations...................................... F-80
Consolidated Statement of Stockholders' Deficit........................... F-81
Consolidated Statement of Cash Flows...................................... F-82
Notes to Consolidated Financial Statements................................ F-83
USWEB PITTSBURGH (FORMERLY ELECTRONIC IMAGES, INC.)
Report of Independent Accountants......................................... F-86
Balance Sheet............................................................. F-87
Statement of Operations................................................... F-88
Statement of Shareholders' Equity......................................... F-89
Statement of Cash Flows................................................... F-90
Notes to Financial Statements............................................. F-91
USWEB CHICAGO METRO (FORMERLY MULTIMEDIA MARKETING & DESIGN INC.)
Report of Independent Accountants......................................... F-96
Balance Sheet............................................................. F-97
Statement of Operations................................................... F-98
Statement of Shareholders' Equity......................................... F-99
Statement of Cash Flows................................................... F-100
Notes to Financial Statements............................................. F-101
USWEB HOLLYWOOD (FORMERLY KANDH, INC.)
Report of Independent Accountants......................................... F-103
Balance Sheet............................................................. F-104
Statement of Operations................................................... F-105
Statement of Shareholders' Equity......................................... F-106
Statement of Cash Flows................................................... F-107
Notes to Financial Statements............................................. F-108
USWEB HOLLYWOOD (FORMERLY DREAMMEDIA, INC.)
Report of Independent Accountants......................................... F-109
Balance Sheet............................................................. F-110
Statement of Operations................................................... F-111
Statement of Shareholders' Equity......................................... F-112
Statement of Cash Flows................................................... F-113
Notes to Financial Statements............................................. F-114
USWEB MARIN (FORMERLY INTERNET CYBERNAUTICS, INC.)
Report of Independent Accountants......................................... F-116
Balance Sheet............................................................. F-117
Statement of Operations................................................... F-118
Statement of Shareholders' Equity (Deficit)............................... F-119
Statement of Cash Flows................................................... F-120
Notes to Financial Statements............................................. F-121
USWEB LONG ISLAND (FORMERLY SYNERGETIX SYSTEMS INTEGRATION, INC.)
Report of Independent Accountants......................................... F-126
Balance Sheet............................................................. F-127
Statement of Operations................................................... F-128
Statement of Shareholders' Equity......................................... F-129
</TABLE>
F-2
<PAGE>
USWEB CORPORATION
INDEX TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
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<S> <C>
USWEB LONG ISLAND (FORMERLY SYNERGETIX SYSTEMS INTEGRATION, INC.--CONT.)
Statement of Cash Flows.................................................. F-130
Notes to Financial Statements............................................ F-131
USWEB DETROIT (FORMERLY ONLINE MARKETING COMPANY)
Report of Independent Accountants........................................ F-135
Balance Sheet............................................................ F-136
Statement of Operations.................................................. F-137
Statement of Shareholders' Equity (Deficit).............................. F-138
Statement of Cash Flows.................................................. F-139
Notes to Financial Statements............................................ F-140
USWEB SAN MATEO (FORMERLY ZENDATTA, INC.)
Report of Independent Accountants........................................ F-143
Balance Sheet............................................................ F-144
Statement of Operations.................................................. F-145
Statement of Shareholders' Equity........................................ F-146
Statement of Cash Flows.................................................. F-147
Notes to Financial Statements............................................ F-148
USWEB LA CENTRAL (FORMERLY W3-DESIGN)
Report of Independent Accountants........................................ F-150
Balance Sheet............................................................ F-151
Statement of Operations.................................................. F-152
Statement of Shareholders' Equity........................................ F-153
Statement of Cash Flows.................................................. F-154
Notes to Financial Statements............................................ F-155
USWEB HOUSTON (FORMERLY USWEB-APEX, INC.)
Report of Independent Accountants........................................ F-158
Combined Balance Sheet................................................... F-159
Combined Statement of Operations......................................... F-160
Combined Statement of Shareholders' Equity............................... F-161
Combined Statement of Cash Flows......................................... F-162
Notes to Combined Financial Statements................................... F-163
USWEB NEW YORK CENTRAL (FORMERLY REACH NETWORKS, INC.)
Report of Independent Accountants........................................ F-165
Consolidated Balance Sheet............................................... F-166
Consolidated Statement of Operations..................................... F-167
Consolidated Statement of Stockholders' Equity (Deficit)................. F-168
Consolidated Statement of Cash Flows..................................... F-169
Notes to Consolidated Financial Statements............................... F-170
INTER.LOGIC.STUDIOS, INC.
Report of Independent Accountants........................................ F-177
Balance Sheet............................................................ F-178
Statement of Operations.................................................. F-179
Statement of Shareholders' Equity........................................ F-180
Statement of Cash Flows.................................................. F-181
Notes to Financial Statements............................................ F-182
</TABLE>
F-3
<PAGE>
USWEB CORPORATION
INDEX TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
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<S> <C>
QUEST INTERACTIVE MEDIA, INC.
Report of Independent Accountants......................................... F-185
Balance Sheet............................................................. F-186
Statement of Operations................................................... F-187
Statement of Shareholders' Deficit........................................ F-188
Statement of Cash Flows................................................... F-189
Notes to Financial Statements............................................. F-190
ENSEMBLE CORPORATION
Report of Independent Accountants......................................... F-193
Balance Sheet............................................................. F-194
Statement of Operations................................................... F-195
Statement of Shareholders' Equity......................................... F-196
Statement of Cash Flows................................................... F-197
Notes to Financial Statements............................................. F-198
IKONIC INTERACTIVE, INC.
Report of Independent Accountants......................................... F-203
Balance Sheet............................................................. F-204
Statement of Operations................................................... F-205
Statement of Shareholders' Deficit........................................ F-206
Statement of Cash Flows................................................... F-207
Notes to Financial Statements............................................. F-208
USWEB SAN JOSE
Report of Independent Accountants......................................... F-213
Balance Sheet............................................................. F-214
Statement of Operations................................................... F-215
Statement of Shareholder's Equity (Deficit)............................... F-216
Statement of Cash Flows................................................... F-217
Notes to Financial Statements............................................. F-218
GRAY PEAK TECHNOLOGIES, INC.
Report of Independent Accountants......................................... F-221
Balance Sheet............................................................. F-222
Statement of Operations................................................... F-223
Statement of Changes in Stockholders' Equity (Deficit).................... F-224
Statement of Cash Flows................................................... F-225
Notes to Financial Statements............................................. F-226
CKS GROUP, INC.
Reports of Independent Auditors........................................... F-233
Consolidated Balance Sheets............................................... F-235
Consolidated Statements of Income......................................... F-236
Consolidated Statements of Stockholders' Equity........................... F-237
Consolidated Statements of Cash Flows..................................... F-238
Notes to Consolidated Financial Statements................................ F-239
</TABLE>
F-4
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
On September 1, 1998, USWeb Corporation ("USWeb") entered into an agreement
to merge with CKS Group, Inc. ("CKS Group") in a transaction to be accounted
for as a pooling of interests. Under terms of the agreement, all issued and
outstanding shares of CKS Group will be exchanged for shares of USWeb Common
Stock on a ratio whereby each share of CKS Group Common Stock will be
exchanged for 1.5 shares of USWeb Common Stock.
During the period from March 16, 1997 to September 30, 1998, USWeb completed
the acquisitions of thirty-three Internet consulting services firms in various
transactions accounted for as purchases. Collectively, the companies acquired
through September 30, 1998 accounted for as purchases are referred to herein
as the "Acquired Entities." The aggregate purchase price of the Acquired
Entities was approximately $262.1 million.
The acquisition prices of the Acquired Entities were allocated, on an
entity-by-entity basis, to the assets acquired, including tangible and
intangible assets and liabilities assumed based upon the fair values of such
assets and liabilities on the dates of the acquisitions. Approximately $15.1
million of the aggregate purchase was allocated to identified net tangible
assets consisting primarily of cash, accounts receivable, property and
equipment, and accounts payable. The historical carrying amounts of such
assets approximated their fair values on the dates of acquisition.
Approximately $37.8 million of the acquisition price was allocated to in-
process technology. Because such in-process technology had not reached the
stage of technological feasibility at the acquisition dates and had no
alternative future use, these amounts were immediately charged to operations.
Approximately $12.2 million of the aggregate purchase price was allocated to
existing technology and is being amortized over the estimated useful life of
six months. Approximately $128.9 million of the purchase price was allocated
to workforce in-place and is being amortized over its estimated useful life of
twelve to forty-two months. The purchase price in excess of identified
tangible and intangible assets, in the amount of $68.1 million, was allocated
to goodwill. As a result of the rapid technological changes occurring in the
Internet industry, goodwill resulting from these acquisitions is being
amortized, on an entity-by-entity basis, over the respective estimated useful
lives of twelve to thirty-six months. As a result of the intense competition
for qualified Internet professionals and related turnover of workforce,
recorded workforce in-place is being amortized, on an entity-by-entity basis,
over its estimated useful life of forty-two months.
Between January 31, 1997 and June 17, 1997, CKS Group acquired two entities
in the advertising industry under separate transactions that were accounted
for as pooling of interests. The aggregate consideration for these
transactions was 1,082,399 shares of CKS Group Common Stock. Accordingly, the
historical financial statements of CKS Group for all periods have been
restated to give retroactive effect to these acquisitions.
During the period from August 1, 1996 to March 12, 1997, CKS Group acquired
four entities in the advertising industry under separate transactions that
were accounted for as purchases. The total acquisition prices of the acquired
companies were allocated, on an entity-by-entity basis, to the assets
acquired, including tangible and intangible assets and liabilities assumed
based upon their fair values on the dates of the acquisitions. Approximately
$3.5 million of the aggregate purchase was allocated to identified net
tangible assets consisting primarily of cash, accounts receivable, property
and equipment, and accounts payable. The historical carrying amounts of such
assets approximated their fair values on the dates of acquisition. The
purchase price in excess of identified tangible assets, in the amount of $24.4
million, was allocated to goodwill. Such goodwill is considered by CKS Group
management to be primarily associated with its customer base, brand
recognition, and workforce in place. Consistent with similar mergers within
the advertising industry, goodwill is being amortized, on an entity-by-entity
basis, over its estimated useful life of twenty years. The results of
operations of the four entities acquired by CKS Group are included in the
consolidated results of operations of CKS Group from the dates of their
respective acquisitions.
The accompanying unaudited pro forma combined balance sheet gives effect to
the Merger of USWeb and CKS Group, as if such transactions occurred on
September 30, 1998. The unaudited pro forma combined
F-5
<PAGE>
balance sheet combines the unaudited consolidated balance sheet of USWeb as of
September 30, 1998, the unaudited consolidated balance sheet of CKS Group as
of August 31, 1998.
The accompanying unaudited pro forma combined statement of operations
presents the results of operations of USWeb for the years ended December 31,
1996 and 1997 and the nine-month periods ended September 30, 1997 and 1998,
combined with the statement of operations of CKS Group for the three years
ended November 30, 1997, and the nine-month periods ended August 31, 1997 and
1998, as if USWeb and CKS Group had merged at the beginning of such periods.
Additionally, the pro forma combined statement of operations reflects the
acquisition by USWeb of the Acquired Entities as if such entities had been
acquired on January 1, 1997.
The operating results of USWeb and CKS Group for any period are not
necessarily indicative of the results for any subsequent period.
F-6
<PAGE>
USWEB CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
(NOTE 4) PRO FORMA
USWEB CKS GROUP ADJUSTMENTS COMBINED
---------- ---------- ----------- ---------
(RESTATED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.. $ 23,810 $ 29,817 $ -- $ 53,627
Short-term investments..... 29,842 17,323 -- 47,165
Accounts receivable, net... 34,361 54,025 -- 88,386
Deferred income taxes...... -- 1,736 -- 1,736
Other current assets....... 5,743 2,802 -- 8,545
--------- -------- -------- ---------
Total current assets..... 93,756 105,703 -- 199,459
Property and equipment,
net....................... 11,624 5,867 -- 17,491
Intangible assets, net..... 144,941 34,925 -- 179,866
Deferred income taxes...... -- 6,472 -- 6,472
Other assets............... 4,099 -- -- 4,099
--------- -------- -------- ---------
$ 254,420 $152,967 $ -- $ 407,387
========= ======== ======== =========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable........... $ 4,879 $ 36,052 $ -- $ 40,931
Accrued expenses........... 20,924 5,926 18,000 (A) 44,850
Deferred revenue........... 990 3,485 -- 4,475
Debt and leases, current... 2,398 704 -- 3,182
Income taxes payable....... -- 1,218 -- 1,218
--------- -------- -------- ---------
Total current
liabilities............. 29,191 47,465 18,000 94,656
Lease obligations, non-
current..................... 2,005 766 -- 2,771
--------- -------- -------- ---------
31,196 48,231 18,000 97,427
--------- -------- -------- ---------
Stockholders' equity:
Common Stock............... 41 15 -- 56
Additional paid-in capital. 406,859 82,599 -- 489,458
Retained earnings
(deficit)................. (183,676) 22,122 18,000 (A) (179,554)
--------- -------- -------- ---------
Total stockholders'
equity ................. 223,224 104,736 (18,000) 309,960
--------- -------- -------- ---------
$ 254,420 $152,967 $ -- $ 407,387
========= ======== ======== =========
</TABLE>
See accompanying notes to Pro Forma Combined Financial Information
F-7
<PAGE>
USWEB CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- --------------------
1995 1996 1997 1997 1998
------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Services................. $43,656 $64,569 $ 165,914 $ 120,357 $ 173,387
Other.................... -- 1,820 403 304 443
------- ------- --------- --------- ---------
Total revenues......... 43,656 66,389 166,317 120,661 173,830
------- ------- --------- --------- ---------
Cost of revenues:
Services................. 28,842 41,115 109,182 77,508 112,040
Other.................... -- 208 1,294 1,180 700
Provision for loss on
contract................ -- -- -- -- 2,094
Stock compensation....... -- -- 20,992 15,744 15,744
------- ------- --------- --------- ---------
Total cost of revenues. 28,842 41,323 131,468 94,432 130,578
------- ------- --------- --------- ---------
Gross Profit 14,814 25,066 34,849 26,229 43,252
------- ------- --------- --------- ---------
Operating expenses:
Marketing, sales and sup-
port.................... 932 14,963 35,008 24,309 23,669
General and administra-
tive.................... 7,304 12,633 39,315 28,734 34,759
Acquired technology...... -- -- 34,980 34,980 --
Stock compensation....... -- -- 38,588 28,941 35,227
Amortization of intangi-
ble assets.............. -- 74 101,065 79,130 52,016
------- ------- --------- --------- ---------
Total operating ex-
penses................ 8,236 27,670 248,956 196,094 145,671
------- ------- --------- --------- ---------
Income (loss) from opera-
tions..................... 6,578 (2,604) (214,107) (169,865) (102,419)
Interest income............ 385 2,612 2,528 1,602 3,907
Interest expense........... (89) (341) (1,080) (688) (903)
Impairment of investment... -- -- (4,000) (4,000) --
------- ------- --------- --------- ---------
Income (loss) before income
taxes..................... 6,874 (333) (216,159) (172,951) (99,415)
Provision for income tax-
es--Note 3................ 2,823 5,108 5,635 4,845 5,210
------- ------- --------- --------- ---------
Net income (loss)--Note 3.. $ 4,051 $(5,441) $(222,294) $(177,796) $(104,625)
======= ======= ========= ========= =========
Pro forma net income (loss)
per share:
Basic.................... $ 0.29 $ (0.25) $ (5.24) $ (4.46) $ (1.61)
======= ======= ========= ========= =========
Diluted.................. $ 0.24 $ (0.25) $ (5.24) $ (4.46) $ (1.61)
======= ======= ========= ========= =========
Weighted average shares:
Basic.................... 13,764 21,803 42,448 39,891 65,137
======= ======= ========= ========= =========
Diluted.................. 16,898 21,803 42,448 39,891 65,137
======= ======= ========= ========= =========
</TABLE>
See accompanying notes to Pro Forma Combined Financial Information
F-8
<PAGE>
USWEB CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1996
------------------------------ -------------------------------
CKS GROUP USWEB/CKS CKS GROUP USWEB/CKS
USWEB PRO FORMA PRO FORMA USWEB PRO FORMA PRO FORMA
HISTORICAL (NOTE 3) COMBINED HISTORICAL (NOTE 3) COMBINED
---------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Services............... $ -- $43,656 $43,656 $ -- $ 64,569 $ 64,569
Other.................. -- -- -- 1,820 -- 1,820
------- ------- ------- -------- -------- --------
Total revenues........ -- 43,656 43,656 1,820 64,569 66,389
------- ------- ------- -------- -------- --------
Cost of revenues:
Services............... -- 28,842 28,842 -- 41,115 41,115
Other.................. -- -- -- 208 -- 208
------- ------- ------- -------- -------- --------
Total cost of reve-
nues................. -- 28,842 28,842 208 41,115 41,323
------- ------- ------- -------- -------- --------
Gross profit............ -- 14,814 14,814 1,612 23,454 25,066
------- ------- ------- -------- -------- --------
Operating expenses:
Marketing, sales and
support............... -- 932 932 12,764 2,199 14,963
General and administra-
tive.................. -- 7,304 7,304 2,813 9,820 12,633
Amortization of intan-
gible assets.......... -- -- -- -- 74 74
------- ------- ------- -------- -------- --------
Total operating ex-
penses............... -- 8,236 8,236 15,577 12,093 27,670
------- ------- ------- -------- -------- --------
Income (loss) from oper-
ations................. -- 6,578 6,578 (13,965) 11,361 (2,604)
Interest income......... -- 385 385 215 2,397 2,612
Interest expense........ -- (89) (89) (58) (283) (341)
------- ------- ------- -------- -------- --------
Income (loss) before
income taxes........... -- 6,874 6,874 (13,808) 13,475 (333)
Provision for income
taxes--Note 3.......... -- 2,823 2,823 -- 5,108 5,108
------- ------- ------- -------- -------- --------
Net income (loss)--Note
3...................... $ -- $ 4,051 $ 4,051 $(13,808) $ 8,367 $ (5,441)
======= ======= ======= ======== ======== ========
Pro forma net income
(loss) per share:
Basic.................. $ -- $ 0.44 $ 0.29 $ (10.35) $ 0.61 $ (0.25)
======= ======= ======= ======== ======== ========
Diluted................ $ -- $ 0.36 $ 0.24 $ (10.35) $ 0.58 $ (0.25)
======= ======= ======= ======== ======== ========
Weighted average shares:
Basic.................. -- 9,176 13,764 (B) 1,334 13,646 21,803 (B)
======= ======= ======= ======== ======== ========
Diluted................ -- 11,265 16,898 (B) 1,334 14,435 21,803 (B)
======= ======= ======= ======== ======== ========
</TABLE>
See accompanying notes to Pro Forma Combined Financial Information
F-9
<PAGE>
USWEB CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
USWEB
----------------------------------------------------------
(F) CKS GROUP USWEB/CKS
ACQUIRED (C) PRO FORMA PRO FORMA
HISTORICAL ENTITIES ELIMINATIONS ADJUSTMENTS PRO FORMA (NOTE 3) COMBINED
---------- -------- ------------ ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Services............... $ 18,366 $ 71,803 $(18,366) $ (913)(E) $ 70,890 $ 95,024 $ 165,914
Other.................. 912 -- -- (509)(E) 403 -- 403
-------- -------- -------- --------- --------- -------- ---------
Total revenues....... 19,278 71,803 (18,366) (1,422) 71,293 95,024 166,317
-------- -------- -------- --------- --------- -------- ---------
Cost of revenues:
Services............... 13,468 50,299 (13,468) (1,050)(E) 49,249 59,933 109,182
Other.................. 1,294 -- -- -- 1,294 -- 1,294
Stock compensation .... 2,420 -- (2,420) 20,992 (D) 20,992 -- 20,992
-------- -------- -------- --------- --------- -------- ---------
Total cost of reve-
nues................ 17,182 50,299 (15,888) 19,942 71,535 59,933 131,468
-------- -------- -------- --------- --------- -------- ---------
Gross profit............ 2,096 21,504 (2,478) (21,364) (242) 35,091 34,849
-------- -------- -------- --------- --------- -------- ---------
Operating expenses:
Marketing, sales and
support............... 20,672 13,895 (2,261) -- 32,306 2,702 35,008
General and administra-
tive.................. 10,271 14,867 (3,291) -- 21,847 17,468 39,315
Acquired technology ... 9,472 -- (9,472) 34,980 (D) 34,980 -- 34,980
Stock compensation .... 6,698 -- (6,698) 38,588 (D) 38,588 -- 38,588
Amortization of intan-
gible assets.......... 9,476 -- (9,476) 97,578 (D) 97,578 3,487 101,065
-------- -------- -------- --------- --------- -------- ---------
Total operating ex-
penses.............. 56,589 28,762 (31,198) 171,146 225,299 23,657 248,956
-------- -------- -------- --------- --------- -------- ---------
Income (loss) from oper-
ations................. (54,493) (7,258) 28,720 (192,510) (225,541) 11,434 (214,107)
Interest income......... 233 182 (1) -- 414 2,114 2,528
Interest expense........ (76) (479) 40 -- (515) (565) (1,080)
Impairment of Invest-
ment................... (4,000) -- -- -- (4,000) -- (4,000)
-------- -------- -------- --------- --------- -------- ---------
Income (loss) before in-
come taxes............. (58,336) (7,555) 28,759 (192,510) (229,642) 12,983 (216,659)
Provisions for income
taxes-Note 3........... -- -- -- -- -- 5,635 5,635
-------- -------- -------- --------- --------- -------- ---------
Net income (loss)-Note
3...................... $(58,336) $ (7,555) $ 28,759 $(192,510) $(229,642) $ 7,348 $(222,294)
======== ======== ======== ========= ========= ======== =========
Pro forma net income
(loss) per share:
Basic.................. $ (7.98) $ (11.20) $ 0.50 $ (5.24)
======== ========= ======== =========
Diluted................ $ (7.98) $ (11.20) $ 0.47 $ (5.24)
======== ========= ======== =========
Weighted average shares:
Basic.................. 7,312 20,498 14,633 42,448 (B)
======== ========= ======== =========
Diluted................ 7,312 20,498 15,590 42,448 (B)
======== ========= ======== =========
</TABLE>
See accompanying notes to Pro Forma Combined Financial Information
F-10
<PAGE>
USWEB CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
USWEB
----------------------------------------------------------
(F) CKS GROUP, USWEB/CKS
ACQUIRED (C) INC. PRO FORMA
HISTORICAL COMPANIES ELIMINATIONS ADJUSTMENTS PRO FORMA HISTORICAL COMBINED
---------- --------- ------------ ----------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Services............... $ 7,868 $49,614 $(7,868) $ -- $ 49,614 $70,473 $ 120,357
Other.................. 808 -- -- (504)(E) 304 -- 304
-------- ------- ------- --------- --------- ------- ---------
Total revenues....... 8,676 49,614 (7,868) (504) 49,918 70,743 120,661
-------- ------- ------- --------- --------- ------- ---------
Cost of revenues:
Services............... 6,196 34,472 (6,196) (319)(E) 34,153 43,355 77,508
Other.................. 1,180 -- -- -- 1,180 -- 1,180
Stock compensation..... 966 -- (966) 15,744 (D) 15,744 -- 15,744
-------- ------- ------- --------- --------- ------- ---------
Total cost of
revenues............ 8,342 34,472 (7,162) 15,425 51,077 43,355 94,432
-------- ------- ------- --------- --------- ------- ---------
Gross profit............ 334 15,142 (706) (15,929) (1,159) 27,388 26,229
-------- ------- ------- --------- --------- ------- ---------
Operating expenses:
Marketing, sales and
support............... 14,119 9,742 (1,472) -- 22,389 1,920 24,309
General and
administrative........ 7,027 11,405 (1,994) -- 16,438 12,296 28,734
Acquired in-process
technology............ 6,726 -- (6,726) 34,980 (D) 34,980 -- 34,980
Stock compensation..... 3,500 -- (3,500) 28,941 (D) 28,941 -- 28,941
Amortization of
intangible assets..... 4,321 -- (4,321) 75,948 (D) 75,948 3,182 79,130
-------- ------- ------- --------- --------- ------- ---------
Total operating
expenses............ 35,693 21,147 (18,013) 139,869 178,696 17,398 196,094
-------- ------- ------- --------- --------- ------- ---------
Income (loss) from
operations............. (35,359) (6,005) 17,307 (155,798) (179,855) 9,990 (169,865)
Interest income......... 165 133 (5) -- 293 1,309 1,602
Interest expense........ (76) (324) 33 -- (367) (321) (688)
Impairment of
investment............. (4,000) -- -- -- (4,000) -- (4,000)
-------- ------- ------- --------- --------- ------- ---------
Income (loss) before
income taxes........... (39,270) (6,196) 17,335 (155,798) (183,929) 10,978 (172,951)
Provision for income
taxes--Note 3.......... -- -- -- -- -- 4,845 4,845
-------- ------- ------- --------- --------- ------- ---------
Net income (loss)--Note
3...................... $(39,270) $(6,196) $17,335 $(155,798) $(183,929) $ 6,133 $(177,796)
======== ======= ======= ========= ========= ======= =========
Pro forma Basic and in-
come (loss) per share.. $ (8.10) $ (10.18) $ 0.42 $ (4.46)
======== ========= ======= =========
Weighted average shares
outstanding............ 4,845 18,076 14,543 39,891 (B)
======== ========= ======= =========
Pro forma Diluted net
income (loss)
per share.............. $ (8.10) $ (10.18) $ 0.39 $ (4.46)
======== ========= ======= =========
Weighted average to
shares outstanding..... 4,845 18,076 15,705 39,891 (B)
======== ========= ======= =========
</TABLE>
See accompanying notes to Pro Forma Combined Financial Information
F-11
<PAGE>
USWEB CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
USWEB
-----------------------------------------------------------
(F) USWEB/CKS
ACQUIRED (C) CKS GROUP PRO FORMA
HISTORICAL ENTITIES ELIMINATIONS ADJUSTMENTS PRO FORMA HISTORICAL COMBINED
---------- -------- ------------ ----------- --------- ---------- ---------
(RESTATED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Services............... $ 72,643 $27,271 $ (9,393) $ -- $ 90,521 $82,866 $ 173,387
Other.................. 443 -- -- -- 443 -- 443
--------- ------- -------- --------- --------- ------- ---------
Total revenues....... 73,086 27,271 (9,393) -- 90,964 82,866 173,830
--------- ------- -------- --------- --------- ------- ---------
Cost of revenues:
Services............... 46,705 18,893 (6,506) -- 59,092 52,948 112,040
Other.................. 700 -- -- -- 700 -- 700
Provision for loss on
contract.............. 2,094 -- -- -- 2,094 -- 2,094
Stock compensation..... 9,415 -- (9,415) 15,744 (D) 15,744 -- 15,744
--------- ------- -------- --------- --------- ------- ---------
Total cost of
revenues............ 58,914 18,893 (15,921) 15,744 77,630 52,948 130,578
--------- ------- -------- --------- --------- ------- ---------
Gross profit............ 14,172 8,378 6,528 (15,744) 13,334 29,916 43,252
--------- ------- -------- --------- --------- ------- ---------
Operating expenses:
Marketing, sales and
support............... 17,903 5,561 (1,492) -- 21,972 1,697 23,669
General and
administrative........ 15,691 4,956 (1,420) -- 19,227 15,532 34,759
Acquired in-process
technology............ 25,508 -- (25,508) -- -- -- --
Stock compensation..... 23,962 -- (23,962) 35,227 (D) 35,227 -- 35,227
Amortization of
intangible assets..... 44,539 -- (44,539) 50,779 (D) 50,779 1,237 52,016
--------- ------- -------- --------- --------- ------- ---------
Total operating
expenses............ 127,603 10,517 (96,921) 86,006 127,205 18,466 145,671
--------- ------- -------- --------- --------- ------- ---------
Income (loss) from
operations............. (113,431) (2,139) 103,449 (101,750) (113,871) 11,452 (102,419)
Interest income......... 2,230 141 -- -- 2,371 1,536 3,907
Interest expense........ (331) (230) 36 -- (525) (378) (903)
Impairment of
investment............. -- -- -- -- -- -- --
--------- ------- -------- --------- --------- ------- ---------
Income (loss) before
income taxes........... (111,532) (2,228) 103,485 (101,750) (112,025) 12,610 (99,415)
Provision for income
taxes.................. -- -- -- -- -- 5,210 5,210
--------- ------- -------- --------- --------- ------- ---------
Net income (loss)....... $(111,532) $(2,228) $103,485 $(101,750) $(112,025) $ 7,400 $(104,625)
========= ======= ======== ========= ========= ======= =========
Net income (loss) per
share:
Basic.................. $ (3.23) $ (2.66) $ 0.48 $ (1.61)
========= ========= ======= =========
Diluted................ $ (3.23) $ (2.66) $ 0.45 $ (1.61)
========= ========= ======= =========
Weighted average shares:
Basic.................. 34,521 42,119 15,345 65,137 (B)
========= ========= ======= =========
Diluted................ 34,521 42,119 16,335 65,137 (B)
========= ========= ======= =========
</TABLE>
See accompanying notes to Pro Forma Combined Financial Information
F-12
<PAGE>
USWEB CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
NOTE 1--PERIODS PRESENTED
USWeb's fiscal year ends on December 31. CKS Group's fiscal year ends on
November 30. The accompanying unaudited pro forma combined statement of
operations information gives effect to the merger of USWeb and CKS Group as if
such merger occurred as of the beginning of the earliest year presented. The
accompanying unaudited pro forma combined statement of operations information
also gives effect to the acquisition by USWeb of thirty-three Internet
consulting business, acquired between March 17, 1997 and August 17, 1998, as
if such acquisitions occurred on January 1, 1997. USWeb was incorporated on
December 5, 1995 and had no significant operations during the period from its
date of incorporation through the year ended December 31, 1995. Certain
immaterial transactions, which occurred between USWeb's date of incorporation
and December 31, 1995, have been included in the results of operations for the
year ended December 31, 1996. The pro forma combined statement of operations
for the year ended December 31, 1995 reflects the results of operations of CKS
for the fiscal year ended November 30, 1995. The pro forma combined statement
of operations for the year ended December 31, 1996, reflects the results of
operations of USWeb for the year ended December 31, 1996, combined with the
results of operations of CKS Group for the fiscal year ended November 30,
1996. The pro forma combined statement of operations for the year ended
December 31, 1997, reflects the results of operations of USWeb for the year
ended December 31, 1997, combined with the results of operations of CKS Group
for the fiscal year ended November 30, 1997, and the results of operations of
the Acquired Entities for their respective years ended December 31, 1997. The
pro forma combined statement of operations for the nine-month periods ended
September 30, 1997 and 1998, reflect the results of operations of USWeb for
the nine-month periods ended September 30, 1997 and 1998, combined with the
results of operations of CKS Group for the nine-month periods ended August 31,
1997 and 1998, and the results of operations of the Acquired Entities for
their respective nine-month periods ended September 30, 1997 and 1998.
The pro forma combined balance sheet as of September 30, 1998, combines the
assets, liabilities and stockholders' equity of USWeb at September 30, 1998
with the assets, liabilities and stockholders' equity of CKS Group as of
August 31, 1998.
NOTE 2--CONFORMING ADJUSTMENTS
The historical statement of operations information of CKS Group for the
three years ended November 30, 1997, and for the nine-month periods ended
August 31, 1997 and 1998, has been reclassified to conform to USWeb's
accounting policies and basis of presentation. Such reclassifications included
the netting of certain production revenues and related costs, which were
separately disclosed in CKS Group's historical financial statements, and the
classification of certain costs between operating expense categories. The
effect of netting certain production revenues and related costs was to
decrease both revenues and cost of revenues by $14.7 million, $23.6 million,
$38.6 million, $29.2 million and 35.8 million for the years ended December 31,
1995, 1996 and 1997 and the nine-month periods ended September 30, 1997 and
1998, respectively.
NOTE 3--CKS GROUP PRO FORMA STATEMENT OF OPERATIONS
CKS Group's statement of operations for the years ended December 31, 1995,
1996 and 1997 and the nine-month period ended September 30, 1997 represents
its historical results except for the provision for income taxes and net
income. The provision for income taxes represents the pro forma provision for
income taxes of CKS Group for the years ended December 31, 1995, 1996 and 1997
and the nine-month period ended September 30, 1997. In January 1997 CKS Group
acquired, in a transaction accounted for as a pooling of interests, a
partnership whose earnings were taxed at the individual partner level;
therefore no provision for income taxes had been recorded for income
attributable to the partnership. The pro forma income tax provision of CKS
Group, and the resulting pro forma net income of CKS Group, is presented as if
the partnership had been a C corporation fully subject to income taxes for all
periods presented. The pro forma provision for income taxes relates solely to
the taxable income generated by CKS Group during the periods presented.
F-13
<PAGE>
USWEB CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION--(CONTINUED)
NOTE 4. --THE FOLLOWING ADJUSTMENTS WERE APPLIED TO THE HISTORICAL FINANCIAL
STATEMENTS OF USWEB, CKS GROUP AND THE ACQUIRED ENTITIES TO ARRIVE
AT THE UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION.
(A) To record the accrual of estimated costs resulting from the merger of
USWeb and CKS Group. It is anticipated that USWeb will incur charges to
operations related to the Merger currently estimated to be $18.0 million,
principally in the quarter in which the Merger is consummated. These charges
include direct transaction costs, primarily for financial advisory and legal
fees, and costs associated with combining operations of the two companies. The
estimated charge is reflected in the unaudited pro forma combined balance
sheet data, but is not reflected in the unaudited pro forma combined statement
of operations data. This charge is a preliminary estimate only and is subject
to change.
Estimated transaction, merger and integration costs include the following:
<TABLE>
<S> <C>
Merger Costs:
Financial Advisory Fees.................................... $12,000,000
Legal and Accounting Professional Fees..................... 2,000,000
Financial Printer Fees..................................... 300,000
Shareholder Costs.......................................... 200,000
Various filing fees........................................ 200,000
Integration Costs:
Lease termination costs.................................... 2,350,000
Write off of fixed assets.................................. 750,000
Other...................................................... 200,000
-----------
Total.................................................... $18,000,000
===========
</TABLE>
Actual amounts ultimately incurred could differ from estimated amounts due
to movements in the Company's stock price, which affects the amount of fees to
be paid to financial advisors, the actual time incurred by professional
advisors, including attorneys and accountants, as well as negotiations between
the Company and its vendors, including landlords. Additionally, the amounts
shown above do not include other integration costs expected to be incurred
which do not qualify for inclusion in the above amounts under existing
authoritative literature. Such costs are expected to include costs associated
with severance, moving and integrating facilities and other related non-
recurring charges. To date the Company has not identified employees or
positions to be eliminated or relocated, nor has the Company determined what
benefits will be provided to any terminated employees. Accordingly, the
Company has not estimated the amount of such additional integration costs.
Such costs will be recognized when incurred in accordance with EITF 94-3.
(B) Basic and diluted weighted average shares outstanding were calculated
based upon the pro forma basic and diluted shares weighted average outstanding
of USWeb for each respective period, increased by the historical basic and
diluted shares weighted average shares outstanding of CKS Group for each
respective period, as adjusted for the 1.5 to 1 exchange ratio. The number of
shares included in CKS's historical diluted net income per share computation
includes the dilutive effect of potential common stock associated with stock
options. Because the Company is in a net loss position on a pro forma combined
basis for the years ended December 31, 1997 and 1996 and for the nine months
ended September 30, 1997 and 1998, inclusion of potential common stock in the
computation of pro forma net loss per share is anti-dilutive; therefore, the
potential common stock is excluded from the share amounts, and pro forma net
loss per share is the same for both basic and dilutive.
F-14
<PAGE>
(C) To eliminate items of income and expense related to the Acquired
Entities which are included in the consolidated results of operations of USWeb
from the date of respective acquisition to December 31, 1997 and September 30,
1998, respectively.
(D) To adjust the amortization expense associated with intangible assets, to
record stock compensation, and to record the charges for acquired in-process
technology to reflected such amounts in the pro forma combined statement of
operations as if the acquisitions of the Acquired Entities which occurred
during the respective period presented had occurred as of the beginning of
such period.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER
YEAR ENDED 30,
DECEMBER 31, ---------------
1997 1997 1998
------------ ------- -------
<S> <C> <C> <C>
Acquired in-process technology as if all
companies had been acquired on January 1, 1997.. $34,980 $34,980 $ --
======= ======= =======
Amortization of intangible assets, as if all
companies had been acquired on January 1, 1997:
Amortization of acquired technology............ $11,058 $11,058 $ --
Amortization of workforce in place............. 63,810 47,857 33,746
Amortization of goodwill....................... 22,710 17,033 17,033
------- ------- -------
$97,578 $75,948 $50,779
======= ======= =======
Stock Compensation, as if all companies had been
acquired on January 1, 1997:
Allocated to cost of revenues.................. $20,992 $15,744 $15,744
Allocated to operating expenses................ 38,588 28,941 35,227
------- ------- -------
$59,580 $44,685 $50,971
======= ======= =======
</TABLE>
Acquired in-process technology represents the fair value of in-process
technology at the date of the respective acquisitions that had not reached the
stage of technological feasibility and had no alternative future use.
Accordingly, such amounts were written off on the date of acquisition which,
for the purposes of the unaudited pro forma financial statements, has been
assumed to be January 1, 1997.
Amortization of intangible assets includes amortization of identified
intangible assets including acquired technology, workforce in place and
goodwill over their respective lives as if each acquisition had occurred on
January 1, 1997. Acquired technology is amortized over its estimated useful
life of six months. Workforce in-place results is amortized over its estimated
useful life of twelve to forty-two months. Goodwill is amortized over its
estimated useful lives of from one to three years.
Stock compensation represents the vested portion of stock bonuses to be paid
to certain employees of the acquired companies. Such bonuses vest over a
thirty-six month period. Stock compensation represents the vested portion of
such bonuses as if each of the companies had been acquired on January 1, 1997.
Stock compensation is allocated between costs of revenues and operating
expenses based upon the related classification of the employees entitled to
receive such bonuses.
(E) To eliminate intercompany revenues and related expenses associated with
the Acquired Entities that had previously been Affiliates of USWeb.
F-15
<PAGE>
(F) The following tables combine, for the year ended December 31, 1997 and
the nine-month periods ended September 30, 1997 and 1998:
(i) the historical results of operations of USWeb for each respective
period with
(ii) the historical results of operations of the Acquired entities for
the period prior to their acquisition date.
The total of these combined amounts ("Total pro forma before adjustments")
is adjusted in the unaudited pro forma combined statement of operations to
eliminate the portion of revenues, cost of revenues, and operating expenses
included in such total for the periods subsequent to the Acquired Entities'
acquisition date through the end of the respective periods presented. The
resulting amounts presented in the unaudited pro forma combined statement of
operations reflect the results of operations of USWeb and the results of
operations of the Acquired Entities as if each acquisition had occurred on
January 1, 1997, or the date of inception, if later.
F-16
<PAGE>
USWEB CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS INFORMATION
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
REVENUES COST OF REVENUES
---------------------- -------------------------------
STOCK
COMPEN- GROSS
SERVICES OTHER TOTAL SERVICES OTHER SATION TOTAL PROFIT
-------- ----- ------- -------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
USWeb Historical... $18,366 $912 $19,278 $13,468 $1,294 $2,420 $17,182 $ 2,096
------- ---- ------- ------- ------ ------ ------- -------
Acquired Entities:
XCom Corp......... 274 -- 274 59 -- -- 59 215
Fetch Interac-
tive.............. 608 -- 608 515 -- -- 515 93
NewLink Corp...... 203 -- 203 59 -- -- 59 144
InterNetOffice,
LLC............... 392 -- 392 252 -- -- 252 140
Infopreneurs
Inc............... 331 -- 331 218 -- -- 218 113
Electronic Im-
ages, Inc......... 2,896 -- 2,896 2,115 -- -- 2,115 781
Multimedia Mar-
keting & Design
Inc. ............. 327 -- 327 226 -- -- 226 101
K&H, Inc.......... 338 -- 338 80 -- -- 80 258
DreamMedia, Inc... 684 -- 684 266 -- -- 266 418
Internet Cybernautics,
Inc............... 2,427 -- 2,427 1,575 -- -- 1,575 852
Synergetix Systems
Intregration,
Inc............... 647 -- 647 466 -- -- 466 181
Online Marketing
Company........... 426 -- 426 314 -- -- 314 112
Zendatta, Inc..... 1,072 -- 1,072 651 -- -- 651 421
W3-design......... 1,657 -- 1,657 869 -- -- 869 788
USWeb--Apex,
Inc............... 835 -- 835 487 -- -- 487 348
Reach Networks,
Inc............... 2,041 -- 2,041 827 -- -- 827 1,214
Inter.logic.studios
inc. ............. 1,712 -- 1,712 808 -- -- 808 904
Quest Interactive
Media, Inc. ...... 717 -- 717 352 -- -- 352 365
Ensemble Corp..... 6,745 -- 6,745 4,408 -- -- 4,408 2,337
Ikonic Interac-
tive, Inc......... 9,598 -- 9,598 5,184 -- -- 5,184 4,414
USWeb San Jose.... 811 -- 811 407 -- -- 407 404
Gray Peak Technologies,
Inc. ............. 2,532 -- 2,532 2,728 -- -- 2,728 (196)
Utopia, Inc. ..... 1,585 -- 1,585 3,079 -- -- 3,079 (1,494)
Xplora Ltd. ...... 1,973 -- 1,973 1,022 -- -- 1,022 951
Kallista, Inc. ... 1,633 -- 1,633 1,347 -- -- 1,347 286
Tucker Network
Technologies,
Inc. ............. 4,798 -- 4,798 3,006 -- -- 3,006 1,792
Metrix Communica-
tions, Inc. ...... 2,856 -- 2,856 1,992 -- -- 1,992 864
Other entities.... 3,319 -- 3,319 3,519 -- -- 3,519 (200)
------- ---- ------- ------- ------ ------ ------- -------
Subtotal Acquired
Entities........ 53,437 -- 53,437 36,831 -- -- 36,831 16,606
------- ---- ------- ------- ------ ------ ------- -------
Pro forma amounts
before
adjustments....... $71,803 $912 $72,715 $50,299 $1,294 $2,420 $54,013 $18,702
======= ==== ======= ======= ====== ====== ======= =======
<CAPTION>
OPERATING EXPENSES
---------------------------------------------------------
GENERAL ACQUIRED AMORTIZA- INCOME
MARKETING, AND IN-PROCESS STOCK TION OF (LOSS)
SALES AND ADMINI- TECHNO- COMPEN- INTANGIBLE FROM
SUPPORT STRATIVE LOGY SATION ASSETS TOTAL OPERATIONS
---------- -------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
USWeb Historical... $20,672 $10,271 $9,472 $6,698 $9,476 $56,589 $(54,493)
---------- -------- ---------- ------- ---------- ------- ----------
Acquired Entities:
XCom Corp......... 70 86 -- -- -- 156 59
Fetch Interac-
tive.............. 168 151 -- -- -- 319 (226)
NewLink Corp...... 14 9 -- -- -- 23 121
InterNetOffice,
LLC............... 31 64 -- -- -- 95 45
Infopreneurs
Inc............... 85 77 -- -- -- 162 (49)
Electronic Im-
ages, Inc......... 150 400 -- -- -- 550 231
Multimedia Mar-
keting & Design
Inc. ............. 47 25 -- -- -- 72 29
K&H, Inc.......... 110 -- -- -- -- 110 148
DreamMedia, Inc... 43 181 -- -- -- 224 194
Internet Cybernautics,
Inc............... 1,286 1,335 -- -- -- 2,621 (1,769)
Synergetix Systems
Intregration,
Inc............... 42 57 -- -- -- 99 82
Online Marketing
Company........... 64 90 -- -- -- 154 (42)
Zendatta, Inc..... 99 214 -- -- -- 313 108
W3-design......... 383 536 -- -- -- 919 (131)
USWeb--Apex,
Inc............... 71 108 -- -- -- 179 169
Reach Networks,
Inc............... 142 608 -- -- -- 750 464
Inter.logic.studios
inc. ............. 134 202 -- -- -- 336 568
Quest Interactive
Media, Inc. ...... 373 62 -- -- -- 435 (70)
Ensemble Corp..... 590 951 -- -- -- 1,541 796
Ikonic Interac-
tive, Inc......... 2,241 2,424 -- -- -- 4,665 (251)
USWeb San Jose.... 222 173 -- -- -- 395 9
Gray Peak Technologies,
Inc. ............. 1,253 559 -- -- -- 1,812 (2,008)
Utopia, Inc. ..... 1,023 912 -- -- -- 1,935 (3,429)
Xplora Ltd. ...... 234 612 -- -- -- 846 105
Kallista, Inc. ... 90 92 -- -- -- 182 104
Tucker Network
Technologies,
Inc. ............. 71 270 -- -- -- 341 1,451
Metrix Communica-
tions, Inc. ...... 591 967 -- -- -- 1,558 (694)
Other entities.... 4,268 3,702 -- -- -- 7,970 (8,170)
---------- -------- ---------- ------- ---------- ------- ----------
Subtotal Acquired
Entities........ 13,895 14,867 -- -- -- 28,762 (12,156)
---------- -------- ---------- ------- ---------- ------- ----------
Pro forma amounts
before
adjustments....... $34,567 $25,138 $9,472 $6,698 $9,476 $85,351 $(66,649)
========== ======== ========== ======= ========== ======= ==========
</TABLE>
F-17
<PAGE>
USWEB CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS INFORMATION
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
REVENUES COST OF REVENUES
---------------------- -------------------------------
STOCK
COMPEN- GROSS
SERVICES OTHER TOTAL SERVICES OTHER SATION TOTAL PROFIT
-------- ----- ------- -------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
USWeb Historical. $ 7,868 $808 $ 8,676 $ 6,196 $1,180 $966 $ 8,342 $ 334
------- ---- ------- ------- ------ ---- ------- -------
Acquired Enti-
ties:
XCom Corp....... 274 -- 274 59 -- -- 59 215
Fetch
Interactive..... 608 -- 608 515 -- -- 515 93
NewLink Corp.... 203 -- 203 59 -- -- 59 144
InterNetOffice, LLC. 392 -- 392 252 -- -- 252 140
Infopreneurs
Inc............. 331 -- 331 218 -- -- 218 113
Electronic Images, Inc.. 2,896 -- 2,896 2,115 -- -- 2,115 781
Multimedia Marketing &
Design Inc. .... 327 -- 327 226 -- -- 226 101
K&H, Inc. ...... 188 -- 188 73 -- -- 73 115
DreamMedia,
Inc............. 380 -- 380 257 -- -- 257 123
Internet Cybernautics,
Inc............. 2,426 -- 2,426 1,575 -- -- 1,575 851
Synergetix Systems
Intregration,
Inc. ........... 646 -- 646 466 -- -- 466 180
Online Marketing
Company......... 426 -- 426 314 -- -- 314 112
Zendatta, Inc. . 1,072 -- 1,072 725 -- -- 725 347
W3-design....... 1,653 -- 1,653 754 -- -- 754 899
USWeb--
Apex, Inc. ..... 735 -- 735 404 -- -- 404 331
Reach Networks, Inc. . 1,741 -- 1,741 724 -- -- 724 1,017
Inter.logic.studios inc. . 930 -- 930 549 -- -- 549 381
Quest Interactive Media,
Inc. ........... 391 -- 391 240 -- -- 240 151
Ensemble Corp... 4,800 -- 4,800 2,906 -- -- 2,906 1,894
Ikonic Interactive, Inc.. 8,022 -- 8,022 4,349 -- -- 4,349 3,673
USWeb San Jose.. 527 -- 527 246 -- -- 246 281
Gray Peak Technologies,
Inc............. 1,291 -- 1,291 1,362 -- -- 1,362 (71)
Utopia, Inc. ... 1,333 -- 1,333 2,606 -- -- 2,606 (1,273)
Xplora Ltd. .... 1,259 -- 1,259 606 -- -- 606 653
Kallista, Inc. . 1,111 -- 1,111 814 -- -- 814 297
Tucker Network
Technologies, Inc. . 3,554 -- 3,554 2,107 -- -- 2,107 1,447
Metrix Communications,
Inc. ........... 1,696 -- 1,696 1,262 -- -- 1,262 434
Other entities.. 2,534 -- 2,534 2,493 -- -- 2,493 41
------- ---- ------- ------- ------ ---- ------- -------
Subtotal Acquired
Entities...... 41,746 -- 41,746 28,276 -- -- 28,276 13,470
------- ---- ------- ------- ------ ---- ------- -------
Pro forma amounts
before
adjustments...... $49,614 $808 $50,422 $84,472 $1,180 $966 $36,618 $13,804
======= ==== ======= ======= ====== ==== ======= =======
<CAPTION>
OPERATING EXPENSES
---------------------------------------------------------
GENERAL ACQUIRED AMORTIZA- INCOME
MARKETING, AND IN-PROCESS STOCK TION OF (LOSS)
SALES AND ADMINI- TECHNO- COMPEN- INTANGIBLE FROM
SUPPORT STRATIVE LOGY SATION ASSETS TOTAL OPERATIONS
---------- -------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
USWeb Historical. $14,119 $ 7,027 $6,726 $3,500 $4,321 $35,693 $(35,359)
---------- -------- ---------- ------- ---------- ------- ----------
Acquired Enti-
ties:
XCom Corp....... 70 86 -- -- -- 156 59
Fetch
Interactive..... 168 151 -- -- -- 319 (226)
NewLink Corp.... 14 9 -- -- -- 23 121
InterNetOffice, LLC. 31 64 -- -- -- 95 45
Infopreneurs
Inc............. 85 77 -- -- -- 162 (49)
Electronic Images, Inc.. 150 400 -- -- -- 550 231
Multimedia Marketing &
Design Inc. .... 47 25 -- -- -- 72 29
K&H, Inc. ...... 100 -- -- -- -- 100 15
DreamMedia,
Inc............. 35 41 -- -- -- 76 47
Internet Cybernautics,
Inc............. 1,286 1,335 -- -- -- 2,621 (1,770)
Synergetix Systems
Intregration,
Inc. ........... 41 58 -- -- -- 99 81
Online Marketing
Company......... 64 89 -- -- -- 153 (41)
Zendatta, Inc. . 100 209 -- -- -- 309 38
W3-design....... 343 478 -- -- -- 821 78
USWeb--
Apex, Inc. ..... 61 96 -- -- -- 157 174
Reach Networks, Inc. . 118 481 -- -- -- 599 418
Inter.logic.studios inc. . 98 108 -- -- -- 206 175
Quest Interactive Media,
Inc. ........... 104 38 -- -- -- 142 9
Ensemble Corp... 444 1,070 -- -- -- 1,514 380
Ikonic Interactive, Inc.. 1,737 1,878 -- -- -- 3,615 58
USWeb San Jose.. 98 91 -- -- -- 189 92
Gray Peak Technologies,
Inc............. 367 281 -- -- -- 648 (719)
Utopia, Inc. ... 834 628 -- -- -- 1,462 (2,735)
Xplora Ltd. .... 123 461 -- -- -- 584 69
Kallista, Inc. . 70 72 -- -- -- 142 155
Tucker Network
Technologies, Inc. . 44 196 -- -- -- 240 1,207
Metrix Communications,
Inc. ........... 393 723 -- -- -- 1,116 (682)
Other entities.. 2,717 2,260 -- -- -- 4,977 (4,936)
---------- -------- ---------- ------- ---------- ------- ----------
Subtotal Acquired
Entities...... 9,742 11,405 -- -- -- 21,147 (7,677)
---------- -------- ---------- ------- ---------- ------- ----------
Pro forma amounts
before
adjustments...... $28,861 $18,432 $6,726 $3,500 $4,321 $56,840 $(43,036)
========== ======== ========== ======= ========== ======= ==========
</TABLE>
F-18
<PAGE>
USWEB CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS INFORMATION
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
REVENUES COST OF REVENUES
---------------------- ----------------------------------------
PROVISION
FOR LOSS STOCK
ON COMPEN- GROSS
SERVICES OTHER TOTAL SERVICES OTHER CONTRACT SATION TOTAL PROFIT
-------- ----- ------- -------- ----- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
USWeb Historical... $72,643 $443 $73,086 $46,705 $700 $2,094 $9,415 $58,914 $14,172
------- ---- ------- ------- ---- ------ ------ ------- -------
Acquired Entities:
Inter.logic.studios
inc............... 614 -- 614 305 -- -- -- 305 309
Quest Interactive
Media, Inc. ...... 257 -- 257 133 -- -- -- 133 124
Ensemble Corp..... 1,983 -- 1,983 1,215 -- -- -- 1,215 768
Ikonic Interactive,
Inc............... 2,242 -- 2,242 1,160 -- -- -- 1,160 1,082
USWeb San Jose.... 333 -- 333 304 -- -- -- 304 29
Gray Peak
Technologies,
Inc. ............. 3,564 -- 3,564 3,939 -- -- -- 3,939 (375)
Utopia, Inc....... 254 -- 254 41 -- -- -- 41 213
Xplora Ltd........ 982 -- 982 499 -- -- -- 499 483
Kallista, Inc..... 598 -- 598 281 -- -- -- 281 317
Tucker Network
Technologies,
Inc............... 3,159 -- 3,159 1,948 -- -- -- 1,948 1,211
Metrix
Communications,
Inc............... 2,864 -- 2,864 1,773 -- -- -- 1,773 1,091
Other entities.... 1,028 -- 1,028 789 -- -- -- 789 239
------- ---- ------- ------- ---- ------ ------ ------- -------
Subtotal
Acquired
Entities........ 17,878 -- 17,878 12,387 -- -- -- 12,387 5,491
------- ---- ------- ------- ---- ------ ------ ------- -------
Pro forma amounts
before adjustments. $90,521 $443 $90,964 $59,092 $700 $2,094 $9,415 $71,301 $19,663
======= ==== ======= ======= ==== ====== ====== ======= =======
<CAPTION>
OPERATING EXPENSES
----------------------------------------------------------
GENERAL ACQUIRED AMORTIZA- INCOME
MARKETING, AND IN-PROCESS STOCK TION OF (LOSS)
SALES AND ADMINI- TECHNO- COMPEN- INTANGIBLE FROM
SUPPORT STRATIVE LOGY SATION ASSETS TOTAL OPERATIONS
---------- -------- ---------- ------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
USWeb Historical... $17,903 $15,691 $25,508 $23,962 $44,539 $127,603 $(113,431)
---------- -------- ---------- ------- ---------- -------- -----------
Acquired Entities:
Inter.logic.studios
inc............... 71 71 -- -- -- 142 167
Quest Interactive
Media, Inc. ...... 92 92 -- -- -- 184 (60)
Ensemble Corp..... 154 304 -- -- -- 458 310
Ikonic Interactive,
Inc............... 437 473 -- -- -- 910 172
USWeb San Jose.... 58 65 -- -- -- 123 (94)
Gray Peak
Technologies,
Inc. ............. 1,756 926 -- -- -- 2,682 (3,057)
Utopia, Inc....... 650 434 -- -- -- 1,084 (871)
Xplora Ltd........ 142 217 -- -- -- 359 124
Kallista, Inc..... 24 24 -- -- -- 48 269
Tucker Network
Technologies,
Inc............... 130 180 -- -- -- 310 901
Metrix
Communications,
Inc............... 415 575 -- -- -- 990 101
Other entities.... 140 175 -- -- -- 315 (76)
---------- -------- ---------- ------- ---------- -------- -----------
Subtotal
Acquired
Entities........ 4,069 3,536 -- -- -- 7,605 (2,114)
---------- -------- ---------- ------- ---------- -------- -----------
Pro forma amounts
before adjustments. $21,972 $19,227 $25,508 $23,962 $44,539 $135,208 $(115,545)
========== ======== ========== ======= ========== ======== ===========
</TABLE>
F-19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of USWeb Corporation
In our opinion, the accompanying consolidated balance sheet, and the related
consolidated statements of operations, of stockholders' equity (deficit) and
of cash flows present fairly, in all material respects, the financial position
of USWeb Corporation and its subsidiaries at December 31, 1996 and 1997, and
the results of their operations and their cash flows for each of the years
then ended, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
San Jose, California
January 20, 1998
F-20
<PAGE>
USWEB CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1996 1997 1998
-------- -------- -------------
(RESTATED)
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 3,220 $ 44,145 $ 23,810
Short-term investments.................... -- -- 29,842
Accounts receivable, net.................. 137 7,903 34,361
Other current assets...................... 54 657 5,743
-------- -------- ---------
Total current assets.................... 3,411 52,705 93,756
Property and equipment, net................. 1,084 6,202 11,624
Intangible assets, net...................... -- 19,019 144,941
Investment in affiliate..................... 2,850 -- --
Other assets................................ 137 1,324 4,099
-------- -------- ---------
$ 7,482 $ 79,250 $ 254,420
======== ======== =========
LIABILITIES, MANDATORILY REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................... $ 906 $ 2,923 $ 4,879
Accrued expenses.......................... 2,190 7,997 20,924
Deferred revenue ......................... -- 470 990
Debt and lease obligations, current....... 242 799 2,398
-------- -------- ---------
Total current liabilities............... 3,338 12,189 29,191
Lease obligations, non-current.............. 436 372 2,005
-------- -------- ---------
3,774 12,561 31,196
-------- -------- ---------
Commitments and contingencies (Notes 1 and
11)
Mandatorily Redeemable Convertible Preferred
Stock (Note 7)............................. 16,200 -- --
-------- -------- ---------
Stockholders' equity (deficit):
Preferred Stock, $0.001 par value,
1,000,000 shares authorized;
no shares issued and outstanding......... -- -- --
Common Stock, $0.001 par value,
100,000,000 shares authorized;
6,381,000, 33,811,085 and 44,668,981
shares issued
and outstanding.......................... 2 29 41
Additional paid-in capital................ 2,714 138,804 406,859
Note receivable........................... (1,400) -- --
Accumulated deficit....................... (13,808) (72,144) (183,676)
-------- -------- ---------
Total stockholders' equity (deficit).... (12,492) 66,689 223,224
-------- -------- ---------
$ 7,482 $ 79,250 $ 254,420
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-21
<PAGE>
USWEB CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------ --------------------
1996 1997 1997 1998
-------- -------- -------- ----------
(RESTATED)
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Services............................ $ -- $ 18,366 $ 7,868 $ 72,643
Other............................... 1,820 912 808 443
-------- -------- -------- ---------
Total revenues.................... 1,820 19,278 8,676 73,086
-------- -------- -------- ---------
Cost of revenues:
Services............................ -- 13,468 6,196 46,705
Other............................... 208 1,294 1,180 700
Provision loss on contract.......... -- -- -- 2,094
Stock compensation (Note 9)......... -- 2,420 966 9,415
-------- -------- -------- ---------
Total cost of revenues............ 208 17,182 8,342 58,914
-------- -------- -------- ---------
Gross profit.......................... 1,612 2,096 334 14,172
-------- -------- -------- ---------
Operating expenses:
Marketing, sales and support........ 12,764 20,672 14,119 17,903
General and administrative.......... 2,813 10,271 7,027 15,691
Acquired in-process technology (Note
1)................................. -- 9,472 6,726 25,508
Stock compensation (Notes 9 and 12). -- 6,698 3,500 23,962
Amortization of intangible assets
(Note 1)........................... -- 9,476 4,321 44,539
-------- -------- -------- ---------
Total operating expenses.......... 15,577 56,589 35,693 127,603
-------- -------- -------- ---------
Loss from operations.................. (13,965) (54,493) (35,359) (113,431)
Interest income....................... 215 233 165 2,230
Interest expense...................... (58) (76) (76) (331)
Impairment of investee carried at
cost................................. -- (4,000) (4,000) --
-------- -------- -------- ---------
Net loss.............................. $(13,808) $(58,336) $(39,270) $(111,532)
======== ======== ======== =========
Net loss per share:
Basic and diluted (Note 2).......... $ (10.35) $ (7.98) $ (8.10) $ (3.23)
======== ======== ======== =========
Weighted average shares outstanding
(Note 2)........................... 1,334 7,312 4,845 34,521
======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-22
<PAGE>
USWEB CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL ACCUMU- STOCKHOLDERS'
------------------ PAID-IN NOTE LATED EQUITY
SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT (DEFICIT)
---------- ------ ---------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of Common
Stock.................. 5,000,000 $ -- $ 1 $ -- $ -- $ 1
Issuance of Common Stock
for trade name rights.. 66,667 -- -- -- -- --
Conversion of notes
payable into
Common Stock........... 500,000 1 499 -- -- 500
Issuance of Common Stock
for note receivable.... 533,333 1 1,999 (2,000) -- --
Collection of note
receivable............. -- -- -- 600 -- 600
Exercise of stock
options................ 281,000 -- 30 -- -- 30
Issuance of Affiliate
warrants............... -- -- 169 -- -- 169
Stock compensation
expense................ -- -- 16 -- -- 16
Net loss................ -- -- -- -- (13,808) (13,808)
---------- ----- -------- ------- --------- --------
Balance December 31,
1996................... 6,381,000 2 2,714 (1,400) (13,808) (12,492)
Exercise of stock
options................ 103,079 -- 500 -- -- 500
Common Stock issued for
acquired businesses.... 7,949,683 8 41,384 -- -- 41,392
Issuance of Common
Stock, net ............ 7,638,889 7 51,202 -- -- 51,209
Conversion of
Mandatorily Redeemable
Convertible Preferred
Stock.................. 12,094,359 12 32,478 -- -- 32,490
Repurchase of Common
Stock.................. (355,925) -- -- -- -- --
Issuance of Affiliate
warrants............... -- -- 150 -- -- 150
Collection of note
receivable............. -- -- -- 1,400 -- 1,400
Stock compensation
expense................ -- -- 10,376 -- -- 10,376
Net loss................ -- -- -- -- (58,336) (58,336)
---------- ----- -------- ------- --------- --------
Balance December 31,
1997................... 33,811,085 29 138,804 -- (72,144) 66,689
Common Stock issued for
acquired businesses
(Unaudited)............ 7,517,143 8 177,396 -- -- 177,404
Options assumed through
acquisitions........... -- -- 11,860 -- -- 11,860
Issuance of Common
Stock, net (Unaudited)
....................... 1,791,655 2 32,481 -- -- 32,483
Exercise of stock
options and warrants... 1,570,401 2 10,541 -- -- 10,543
Repurchase of Common
Stock (Unaudited)...... (21,353) -- (617) -- -- (617)
Issuance of warrants
(Unaudited)............ -- -- 9,156 -- -- 9,156
Stock compensation
expense (Unaudited).... -- -- 27,238 -- -- 27,238
Net loss (Unaudited).... -- -- -- -- (111,532) (111,532)
---------- ----- -------- ------- --------- --------
Balance September 30,
1998 (Unaudited)....... 44,668,931 $ 41 $406,859 $ -- $(183,676) $223,224
========== ===== ======== ======= ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-23
<PAGE>
USWEB CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------ --------------------
1996 1997 1997 1998
-------- -------- -------- ----------
(UNAUDITED)
(RESTATED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................ $(13,808) $(58,336) $(39,270) $(111,532)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization......... 263 1,464 776 3,167
Provision for doubtful accounts....... -- 819 700 381
Provision for loss on contract........ -- -- -- 2,094
Stock, option and warrant costs and
expenses............................. 185 10,376 5,873 33,524
Discounted sale of Common Stock....... -- 1,250 -- --
Amortization of intangible assets..... -- 9,476 4,321 44,539
Acquired in-process technology........ -- 9,472 6,726 25,508
Impairment of investee carried at
cost................................. -- 4,000 4,000 --
Changes in assets and liabilities:
Accounts receivable.................. (137) (4,080) (2,209) (16,440)
Other current assets................. (54) (187) (394) (3,241)
Other assets......................... (137) (690) (118) (1,889)
Accounts payable..................... 906 177 (297) (1,173)
Accrued expenses..................... 2,190 2,194 3,328 (3,983)
Deferred revenues.................... -- 470 -- (202)
-------- -------- -------- ---------
Net cash used in operating
activities......................... (10,592) (23,595) (16,564) (29,247)
-------- -------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment... (1,059) (3,335) (1,663) (5,104)
Cash received from acquisitions, net of
cash used.............................. -- 1,129 (1,150) 959
Purchase of investment in affiliate..... (2,850) (1,150) 968 --
Purchase of short-term investments...... -- -- -- (62,241)
Proceeds from activities/sales of short-
term investments....................... -- -- -- 32,399
-------- -------- -------- ---------
Net cash used in investing
activities......................... (3,909) (3,356) (1,845) (33,987)
-------- -------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of
Mandatorily Redeemable
Convertible Preferred Stock............ 16,200 16,290 16,288 --
Proceeds from issuance of Common Stock.. 31 50,459 -- 41,959
Proceeds from bank borrowings........... -- 2,000 -- --
Repayment of bank borrowings............ -- (2,000) -- --
Proceeds from issuance of notes payable. 500 -- -- --
Proceeds from collection of note
receivable............................. 600 1,400 1,400 --
Proceeds from capital lease financing... 599 431 -- 2,570
Principal payments on capital lease..... (209) (704) (560) (1,630)
-------- -------- -------- ---------
Net cash provided by financing
activities......................... 17,721 67,876 17,128 42,899
-------- -------- -------- ---------
Increase in cash and cash equivalents.... 3,220 40,925 (1,281) (20,335)
Cash and cash equivalents, beginning of
period.................................. -- 3,220 3,220 --
-------- -------- -------- ---------
Cash and cash equivalents, end of period. $ 3,220 $ 44,145 $ 1,939 $ (20,335)
======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-24
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1--THE COMPANY:
USWeb Corporation ("USWeb" or the "Company") was incorporated in Utah on
December 6, 1995 ("inception") and reincorporated in Delaware on December 2,
1997. Through a nationwide network of wholly-owned subsidiaries and franchised
Affiliates, the Company provides Internet professional services including
strategy consulting, analysis and design, technology development,
implementation and integration, audience development and maintenance.
During the year ended December 31, 1997, the Company recognized the
acquisition of all the outstanding stock of nineteen businesses, including
certain franchised Affiliates, ("Acquired Entities") in separate transactions
in exchange for shares of the Company's Common Stock. The Acquired Entities as
of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
COMMON RECOGNIZED
EFFECTIVE SHARES PURCHASE
ACQUIRED ENTITY DATE ISSUED PRICE
- --------------- ------------------ --------- ----------
<S> <C> <C> <C>
XCom Corporation..................................... March 16, 1997 383,209 $ 1,609
Cosmix Corporation................................... April 1, 1997 119,774 503
Fetch Interactive, Inc. ............................. April 1, 1997 464,838 1,397
NewLink Corporation.................................. April 1, 1997 425,700 1,537
InterNetOffice, LLC.................................. May 1, 1997 510,646 1,578
NetWORKERS Corporation............................... May 1, 1997 135,415 569
Infopreneurs Inc. ................................... June 1, 1997 1,008,169 3,173
Netphaz Corporation.................................. June 1, 1997 235,205 776
Electronic Images, Inc. ............................. July 1, 1997 1,665,525 6,205
Multimedia Marketing & Design Inc. .................. July 24, 1997 332,536 1,397
KandH, Inc. ......................................... August 29, 1997 151,624 1,023
DreamMedia, Inc. .................................... August 29, 1997 359,094 2,424
Internet Cybernautics, Inc .......................... September 29, 1997 447,183 4,025
Synergetix Systems Integration, Inc. ................ September 30, 1997 151,716 1,365
Online Marketing Company............................. September 30, 1997 95,730 861
Zendatta, Inc. ...................................... September 30, 1997 176,360 1,587
W3-design............................................ November 5, 1997 410,274 3,473
USWeb--Apex, Inc. ................................... November 5, 1997 365,029 3,285
Reach Networks, Inc. ................................ November 13, 1997 511,656 4,605
--------- -------
7,949,683 $41,392
========= =======
</TABLE>
The acquisitions have been accounted for using the purchase method of
accounting, and accordingly, the recognized purchase price has been allocated
to the tangible and identifiable intangible assets acquired and liabilities
assumed on the basis of their fair values on the acquisition dates.
Approximately $3,425 of the aggregate recognized purchase price was allocated
to net tangible assets consisting primarily of cash, accounts receivable,
property and equipment and accounts payable. The historical carrying amounts
of such net assets approximated their fair values. Approximately $9,472 was
allocated to in-process technology and was immediately charged to operations
because such in-process technology had not reached the stage of technological
feasibility at the acquisition dates and had no alternative future use.
Approximately $3,610 was allocated to existing technology and is being
amortized over its estimated useful life of six months. Approximately $24,885
was allocated to workforce in-place and is being amortized over its estimated
useful life of one to two years. See Note 2.
F-25
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The acquisitions of the Acquired Entities have been primarily structured as
tax free exchanges of stock, therefore, the differences between the recognized
fair values of the acquired assets, including intangible assets, and their
historical tax bases is not deductible for income tax purposes.
The fair value of the Company's Common Stock issued as consideration for the
acquisitions was determined, based upon a number of considerations. For
acquisitions recognized through July 24, 1997, the fair value of the Company's
Common Stock was estimated to be $4.20 per share, determined primarily by
reference to the $15,811 amount allocated to 2,818,193 shares of Series C
Mandatorily Redeemable Convertible Preferred Stock (excluding approximately
$1,690 allocated to detachable warrants to acquire 704,549 shares of Series C
Mandatorily Redeemable Convertible Preferred Stock). See Note 7. For
acquisitions recognized from August 29, 1997 through November 13, 1997, the
fair value of the Company's Common Stock was estimated to be $6.75 to $9.00
per share based upon a number of factors, including growth in the Company's
business and the private sale, in October, 1997, of 222,222 shares of Common
Stock to an independent third party at a price of $9.00 per share. See Note 8.
The various purchase agreements require that fifty percent of the shares
issuable at the acquisition dates be placed in escrow for a period of twelve
months. The shares placed in escrow will either be issued to the previous
owners of the acquired entities or returned to the Company based upon the
results of the purchase price adjustments, as defined for each Acquired
Entity. The Company has excluded from the recognized purchase price
calculations approximately 818,500 shares that it estimates are not probable
of issuance at the end of the respective escrow periods. Additionally, the
purchase price adjustment for each Acquired Entity allows for the issuance of
additional stock-based consideration in the event an Acquired Entity's
valuation calculated at the six and twelve month dates following the
acquisition increases. The number of additional shares that are potentially
issuable at the completion of the six and twelve month valuation periods is
not presently known, however, management estimates that approximately 418,000
additional shares are probable of issuance at the completion of the respective
valuation periods. Any purchase price changes resulting from such adjustments
will be recognized at the then fair value of the shares as adjustments to
goodwill and will be amortized over the remaining period of expected benefit.
As of December 31, 1997, no adjustments have been made to the escrow shares
for any acquisition.
The terms of the signed definitive agreements for each acquisition provide
for the transfer of effective control of the target entity on dates that
precede the legal consummation of the transaction and physical exchange of
consideration. On the designated effective dates, the Company (1) assumes
effective control and the risks and rewards of ownership including the rights
to all revenues and responsibility for all operating costs and expenses,
(2) the target company employees become employees of the Company and (3) the
terms of purchase price adjustment provisions become effective. For business
acquisitions recognized through December 31, 1997, the purchase accounting
effects and operating results of transactions occurring between the designated
effective dates and the legal closing dates were not material.
F-26
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following unaudited pro forma consolidated amounts give effect to these
acquisitions as if they occurred on January 1, 1996, and on January 1, 1997
(or date of inception, if later).
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------
1996 1997
---------- -----------
(UNAUDITED)
<S> <C> <C>
Revenues.............................................. $ 19,765 $ 34,812
Net loss.............................................. (57,069) (84,939)
Net loss per share:
Basic and diluted.................................... $ (9.24) $ (8.04)
Weighted average shares outstanding.................. 6,175,000 10,571,000
</TABLE>
Prior to June 30, 1997 the Company had invested $4,000 for less than 20%
investment in Utopia, Inc. ("Utopia") an Internet consulting company located
in Boston, Massachusetts. The Company's investment was accounted for on the
cost basis. Through June 30, 1997 Utopia had incurred significant losses, was
experiencing significant cash flow deficits and had a net asset deficiency.
During June 1997, the Company determined that it was unlikely that the Company
would recover any of its investment in Utopia and, accordingly, recorded an
impairment loss equal to the carrying amount of its investment.
On October 9, 1997, the Company entered into a non-binding term sheet to
purchase specified assets of Utopia. Under the preliminary terms of the
arrangement, the Company would acquire selected computer hardware and software
assets and would agree to enter at will employment agreements with most Utopia
employees. In addition, the Company would obtain all rights and
responsibilities relating to specified Utopia customer contracts effective
October 1, 1997. In consideration for the acquired net assets the Company
would agree to assume a note payable to Utopia's former majority shareholder
in the amount of $3,000. The Company has determined that the acquisition, if
consummated, will be accounted for as an acquisition of a business. The
Company will account for the acquisition using the purchase method of
accounting, and, accordingly, the purchase price will be allocated to the
various assets, including intangible assets acquired and liabilities assumed
on the basis of their fair values at the date of acquisition. Substantially
all of the purchase price is expected to be allocated to goodwill and will be
amortized over its estimated useful life of one year.
The note payable to be assumed by the Company would be payable in cash on
October 1, 1998 and would bear interest at a referenced prime rate plus 1%.
Beginning ninety days subsequent to the closing of the Company's public
offering, the note would be convertible, at the option of the holder, into
restricted shares of the Company's Common Stock based upon the fair value of
such stock at the conversion date.
The purchase price consideration would be subject to adjustment at six and
twelve month intervals subsequent to the closing, based upon the standard
valuation formula used in the Company's acquisition program. The increase in
value, if any, attributable to the period subsequent to the closing would be
payable in shares of and options to purchase shares of the Company's Common
Stock.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the
F-27
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
Principles of Consolidation
The accompanying financial statements, include the consolidated accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
The Company's financial statements as of December 31, 1995 and for the
period from December 6, 1995 ("Inception") through December 31, 1995 reflect
immaterial transactions; such activities have been included in the 1996
financial statements to facilitate presentation.
Cash, Cash Equivalents and Short-Term Investments
The Company invests its excess cash in debt instruments of the U.S.
Government, its agencies, and in high-quality corporate issuers. All highly
liquid instruments with an original maturity of three months or less are
considered cash equivalents, those with original maturities greater than three
months and current maturities less than twelve months from the balance sheet
date are considered short-term investments.
At September 30, 1998, short-term investments in marketable securities were
classified as available-for-sale and consisted of 76% corporate debt
securities, 2% debt securities of the U.S. Government and its agencies and 22%
foreign debt securities. At September 30, 1998, the fair value of the
investments approximated cost. Fair value is determined based upon the quoted
market prices of the securities as of the balance sheet date (unaudited).
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three years. Leasehold improvements are amortized using the
straight-line method over the shorter of the estimated useful lives of the
assets or the remaining lease term, not to exceed five years.
Intangible Assets
Goodwill resulting from the acquisition of Internet technology businesses is
estimated by management to be primarily associated with the acquired workforce
and technological know how. Accordingly, a significant portion of the purchase
price of each acquisition has been allocated to workforce in-place. As a
result of the rapid technological changes occurring in the Internet industry
and the intense competition for qualified Internet professionals, recorded
goodwill is amortized on the straight-line basis over the estimated periods of
benefit, which range from one to two years. For certain acquisitions where the
Company expects to issue additional shares at the end of the 12 month purchase
price adjustment periods, amortization rates have been increased to reflect
amortization of the total expected consideration based upon the estimated fair
value of the incremental shares at the end of the purchase price adjustment
periods.
At each balance sheet date, the Company assesses the value of recorded
goodwill for possible impairment based upon a number of factors, including
turnover of the acquired workforce and the undiscounted value of expected
future operating cash flows in relation to its net investment in each
subsidiary. Since inception, the Company has not recorded any provisions for
possible impairment of intangible assets.
F-28
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Completed technologies obtained through acquisition or merger are
capitalized and amortized on the straight-line basis over the estimated period
of benefit of six months.
Costs of in-process technology acquired prior to the achievement of
technological feasibility determined using the working model approach, and any
costs associated with internally developed proprietary technologies prior to
the achievement of technological feasibility determined using the working
model approach are expensed in the period incurred.
Investments
Investments where the Company has an equity interest of less than 20% and
does not have the ability to exert significant influence are accounted for
using the cost method. At each balance sheet date, the Company assesses the
value recorded for cost-based investments and recognizes any identified
impairment.
Revenue Recognition
The Company derives its revenues from consulting service agreements
(including both fixed price and time and materials agreements), initial
franchise fees, monthly royalties from Affiliates and hosting service fees.
The initial franchise fee was waived for the first ten Affiliates and was set
at $25 for the next 40 Affiliates and $50 thereafter. The Company last entered
into a franchise agreement in March 1997 and does not expect to enter into any
additional franchise agreements.
Service revenues are recognized over the period of each engagement using
primarily the percentage of completion method using labor hours incurred as
the measure of progress towards completion. Provisions for contract
adjustments and losses are recorded in the period such items are identified.
Unearned revenues represent the amount of cash received in advance of services
being performed.
Revenues from Affiliates are included in Other Revenues and are recognized
in accordance with Statement of Financial Accounting Standards No. 45,
"Accounting for Franchise Fee Revenue." Initial franchise fees, including area
franchise sales which do not depend significantly on the number of individual
franchises to be established, are recognized when all obligations required by
the franchise agreement have been substantially performed and no other
material conditions or obligations exist. Initial franchise fees are
recognized as received because all obligations required by the franchise
agreement are substantially performed concurrently with the signing of the
franchise agreement. Monthly royalties are determined by aggregating a five
percent royalty and a two percent marketing promotion fee, each of which is
calculated based on each Affiliate's adjusted gross revenues, as defined, and
are recognized as the fees are earned and become receivable from the
Affiliate.
Revenues from web-site hosting services are included in Other Revenues, have
been insignificant to date and are recognized monthly as services are
provided.
Advertising Costs
Advertising costs are expensed as incurred in accordance with Statement of
Position 93-7, "Reporting on Advertising Costs." Advertising costs for the
years ended December 31, 1996 and 1997 totaled $3,223 and $4,060,
respectively.
Affiliate Warrants
The fair value of warrants granted to Affiliates upon the execution of a
franchise agreement are measured at the grant date using the Black-Scholes
formula and are recognized when material, over the three year
F-29
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
vesting period as a cost of revenues. The fair value of warrants to be granted
upon the achievement of future Affiliate revenues (AGR Warrants) are measured
on the date such warrants are earned using the Black-Scholes formula. When
material, the fair value of AGR Warrants is charged to cost of revenues over
the three year vesting period beginning with the month such warrants are
earned. The exercise price of all warrants issued and issuable to an
individual Affiliate is fixed at the time of signing of the related franchise
agreement. Warrant
costs in excess of the present value of expected future franchise fees and
royalties, less any direct costs, would be recognized immediately. See Note
10--Affiliate Warrant Program.
Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of APB No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB No. 25, compensation cost
is recognized based on the difference, if any, on the date of grant between
the fair value of the Company's stock and the amount an employee must pay to
acquire the stock.
Income Taxes
Income taxes are accounted for using an asset and liability approach which
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The measurement of current and deferred tax liabilities and assets
are based on provisions of the enacted tax law; the effects of future changes
in tax laws or rates are not anticipated. The measurement of deferred tax
assets is reduced, if necessary, by the amount of any tax benefits that, based
on available evidence, are not expected to be realized.
Net Loss Per Share and Supplemental Pro Forma Net Loss Per Share
The Company computes net loss per share in accordance with the provisions of
SFAS No. 128, "Earnings Per Share" and SEC Staff Accounting Bulletin No. 98.
Under SFAS No. 128 and SAB No. 98, basic net loss per share is computed by
dividing the net loss for the period by the weighted average number of common
shares outstanding during the period. The weighted average shares used to
compute basic net loss per share include outstanding shares of Common Stock
from the date of issuance and shares vested under stock bonus arrangements
computed for each period by dividing cumulative amortization of deferred
compensation expense by the weighted average price of the Company's Common
Stock during the period. The computation excludes (i) for the year ended
December 31, 1997, 2,051,000 equivalent acquisition-related shares held in
escrow ("Acquisition Shares"), (ii) for the years ended December 31, 1996 and
1997, 4,286,000 and 2,830,000, respectively, of equivalent shares of Common
Stock subject to repurchase rights ("Restricted Shares") and (iii) for the
years ended December 31, 1996 and 1997, 5,375,000 and 10,278,000,
respectively, of equivalent shares of Mandatorily Redeemable Convertible
Preferred Stock ("Preferred Stock") prior to their conversion into Common
Stock on December 5, 1997. In addition, the calculation of diluted net loss
per share excludes Common Stock issuable upon exercise of employee stock
options and upon exercise of outstanding warrants, as their effect in all
periods presented is antidilutive.
In future periods, the weighted average shares used to compute basic and
diluted earnings per share are expected to include (i) Acquisition Shares as
they are released from escrow, generally 12 months from the date of
acquisition, and (ii) Restricted Shares as the repurchase rights lapse over
the remaining restriction period. In addition, the weighted average shares
used to compute diluted earnings per share will include the incremental shares
of Common Stock relating to outstanding options and warrants to the extent
such incremental shares are dilutive. The Company believes that the
Acquisition Shares are probable of issuance
F-30
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
and that the remaining purchase rights on Restricted Shares will lapse upon
the continued employment by the owners of such shares. The following table
presents the unaudited supplemental pro forma net loss per share giving effect
to the inclusion of the Acquisition Shares and Restricted Shares in the
determination of weighted average shares outstanding. Such supplemental pro
forma net loss per share should not be considered in isolation or as a
substitute for other information prepared in accordance with generally
accepted accounting principles:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1996 1997
--------- ----------
(UNAUDITED)
<S> <C> <C>
Supplemental pro forma net loss per share:
Net loss................................................. $(13,808) $ (58,336)
Net loss per share:
Basic and diluted....................................... $ (2.46) $ (4.78)
Weighted average shares outstanding..................... 5,620,000 12,193,000
</TABLE>
Reverse Stock Split
In December 1997, the Board of Directors approved a one-for-three reverse
stock split of the outstanding shares of Common Stock. All share and per share
information have been retroactively adjusted to reflect the reverse stock
split.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. The Company limits its exposure to credit loss by
depositing its cash and cash equivalents with high credit quality financial
institutions. The Company believes the risk with respect to trade receivables
is mitigated, to some extent, by the fact that the Company's customer base is
geographically dispersed and is highly diversified. The Company has not
experienced any significant credit losses to date.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The adoption of the both
statements are 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 and is currently assessing the impact of the disclosure
provisions of the new pronouncements.
The Company complies with the provisions of Emerging Issues Task Force Issue
No. 96-18 ("EITF 96-18") with respect to stock options granted to non-
employees who are consultants to the Company. EITF 96-18 requires variable
plan accounting with respect to such non-employee stock options, whereby
compensation associated with such options is measured on the date such options
vest, and incorporates the current fair market value of the Company's Common
Stock into the option valuation model. Compensation expenses associated with
such non-employee stock options granted to date have not been significant.
F-31
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Interim Results (Unaudited)
The accompanying interim financial statements as of September 30, 1998 and
for the nine months ended September 30, 1997 and 1998 are unaudited. In the
opinion of management, the unaudited interim financial statements have been
prepared on the same basis as the annual financial statements and reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly the financial position as of September 30, 1998 and the results
of the Company's operations and its cash flows for the nine months ended
September 30, 1997 and 1998. The financial data and other information
disclosed in these notes to condensed consolidated financial statements
related to these periods are unaudited. The results for the nine months ended
September 30, 1998 are not necessarily indicative of the results to be
expected for the year ending December 31, 1998.
NOTE 3--SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
-------------- ----------------
1996 1997 1997 1998
------ ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Supplemental disclosures:
Cash paid for interest.................... $ 58 $ 76 $ 52 $ 243
Non-cash financing and investing activities:
Common Stock issued for note receivable... 2,000 -- -- --
Notes payable converted into Common Stock. 500 -- -- --
Equipment acquired through capital lease.. 288 578 -- --
Common Stock issued for acquisitions...... -- 40,263 29,330 190,179
Common Stock issued for services.......... -- 1,250 -- --
Assumption of liabilities for acquisition. -- -- -- 4,976
Issuance of warrants...................... -- -- -- 9,156
</TABLE>
F-32
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 4--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1996 1997 1998
------ -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Accounts receivable, net:
Accounts receivable....................... $ 137 $ 8,722 $ 38,759
Less: allowance for doubtful accounts..... -- (819) (4,398)
------ -------- --------
$ 137 $ 7,903 $ 34,361
====== ======== ========
Property and equipment, net:
Computers and equipment................... $1,149 $ 6,490 $ 13,926
Furniture and fixtures.................... 124 834 1,609
Leasehold improvements.................... 74 605 983
------ -------- --------
1,347 7,929 16,518
Less: accumulated depreciation and amorti-
zation................................... (263) (1,727) (4,894)
------ -------- --------
$1,084 $ 6,202 $ 11,624
====== ======== ========
Intangible assets, net:
Goodwill.................................. $ -- $ -- $ 68,130
Purchased technology...................... -- 3,610 11,058
Workforce in-place........................ -- 24,885 119,767
------ -------- --------
-- 28,495 198,955
Less: accumulated amortization............ -- (9,476) (54,014)
------ -------- --------
$ -- $ 19,019 $144,941
====== ======== ========
Accrued expenses:
Compensation and benefits................. $ 549 $ 1,900 $ 7,936
Accrued financing costs................... -- 1,450 --
Marketing costs........................... 1,271 1,155 1,883
Professional fees......................... -- 466 2,738
Other..................................... 370 3,026 8,367
------ -------- --------
$2,190 $ 7,997 $ 20,924
====== ======== ========
</TABLE>
NOTE 5--NOTES PAYABLE:
In January 1996, the Company received $500 in exchange for unsecured
convertible promissory notes. The notes were part of a bridge financing
arrangement associated with the Series A financing, were payable on demand and
bore interest at 6% per annum. The notes were repayable, at the option of the
holder, by the issuance of the Company's Common or Preferred Stock. In
February 1996 in connection with the Series A financing, the holder exercised
its conversion option and the notes were extinguished through the issuance of
500,000 shares of the Company's Common Stock.
On October 6, 1997, the Company entered into a credit facility with a bank
that allows the Company to borrow up to a maximum of $3,000 to finance various
equipment purchases. Advances accrue interest at the bank's prime lending rate
plus 1% (9.5% at December 31, 1997) and are repayable over a thirty-six month
period. As of December 31, 1997, borrowings outstanding under the credit
facility approximated $431. The credit facility is secured by the assets of
the Company and expires on September 29, 2001. In addition, the bank requires
the Company to comply with certain financial covenants relating to
profitability and cash flow ratios; the Company was in compliance with all
covenants at December 31, 1997.
F-33
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
In November 1997, the Company obtained a bridge loan facility from a bank.
Under the terms of the facility the Company borrowed $2,000 (the maximum
amount available), which was secured by substantially all of the Company's
assets. The loan accrued interest at the bank's prime rate plus 1%. On
December 10, 1997, the Company repaid the outstanding amount, plus interest of
$14.
NOTE 6--INCOME TAXES:
No provision for income taxes has been recognized for the years ended
December 31, 1997 and 1996, as the Company incurred net operating losses for
income tax purposes and has no carryback potential.
Deferred tax assets of approximately $17,000 at December 31, 1997, consist
primarily of federal and state net operating loss carryforwards. Based on a
number of factors, including the lack of a history of profits and the fact
that the Company competes in a developing market that is characterized by
rapidly changing technology, management believes that there is sufficient
uncertainty regarding the realization of deferred tax assets such that a full
valuation allowance has been provided.
The Company's various acquisitions have been structured as tax free stock
exchanges, therefore, the differences between the historical bases and the
fair value recognized by the Company, including intangible assets, are not
deductible for income tax purposes.
At December 31, 1997, the Company had federal and state net operating loss
carryforwards of approximately $42,000 and $26,000, respectively, available to
reduce future taxable income, which expire in varying amounts through 2012.
The Company's ability to utilize net operating loss carryforwards and tax
credits are subject to limitations as set forth in applicable federal and
state tax laws. As specified in the Internal Revenue Code, an ownership change
of more than 50% by a combination of the Company's significant stockholders
during any three-year period would result in certain limitations on the
Company's ability to utilize its net operating loss and credit carryforwards.
NOTE 7--MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
At December 31, 1996, a total of 9,329,500 shares of Mandatorily Redeemable
Convertible Preferred Stock were authorized for issuance, of which 6,226,167
and 3,103,333 shares were designated as Series A and Series B, respectively.
In 1996, the Company issued 6,172,833 shares of Series A and 3,103,333 shares
of Series B Mandatorily Redeemable Convertible Preferred Stock ("Series A" and
"Series B") for cash at $1.62 and $2.01 per share, respectively. In 1997, the
Company authorized an additional 3,400,000 shares of Mandatorily Redeemable
Convertible Preferred Stock designated as Series C and issued 2,818,193 shares
of Series C Mandatorily Redeemable Convertible Preferred Stock ("Series C")
for cash at $6.21 per share. Holders of Series A, Series B and Series C were
entitled to receive noncumulative dividends at the annual rate of $0.10, $0.12
and $0.37 per share, respectively, or, if greater (as determined on an as-
converted basis), an amount equal to that paid on the outstanding shares of
Common Stock, when, as and if declared by the Board of Directors. No such
dividends were declared. In the event of liquidation (but not upon a merger,
sale or acquisition of the Company), holders of Series A, Series B and Series
C were entitled to a per share distribution in preference to holders of Common
Stock equal to the original issue price of $1.62, $2.01, and $6.21,
respectively, plus any declared but unpaid dividends. On December 5, 1997, the
Company completed its initial public offering of its Common Stock. At that
time, all of the Company's Mandatorily Redeemable Convertible Preferred Stock
outstanding was converted into an aggregate of 12,094,359 shares of Common
Stock.
F-34
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 8--STOCKHOLDERS' EQUITY:
Preferred Stock
The Company is authorized to issue 100,000,000 shares of $.001 par value
Common Stock and 1,000,000 shares of $.001 par value Preferred Stock, and the
Board of Directors has the authority to issue the undesignated Preferred Stock
in one or more series and to fix the rights, preferences, privileges and
restrictions thereof.
Common Stock
During 1996, 5,000,000 shares of Common Stock were purchased by the
Company's five founders ("the Founders Shares"). In the event that any one of
the founders ceased to be an employee of the Company, the Company had the
right to repurchase ("the Repurchase Right"), at the original purchase price,
a declining percentage of the shares issued. During August 1997, a Company
Founder terminated his employment. In connection with the termination the
Company accelerated the vesting of 111,205 shares of Founder's Stock and
accordingly recognized a charge in the amount of $1,080. Additionally, 349,502
shares of unvested Founder's Stock were repurchased by the Company at their
original issuance price of $.0003 per share. In the event of a change in
control of the Company, the Founders Shares shall become immediately vested in
full and the Repurchase Rights shall lapse.
On September 30, 1997, the Company sold 222,222 shares of Common Stock in a
private transaction to an independent third party in exchange for a note
receivable in the amount of $2,000. On October 14, 1997, the note receivable
was collected in full.
On December 5, 1997, the Company completed its initial public offering of
5,750,000 shares of its Common Stock. Net proceeds to the Company aggregated
approximately $38,309. In addition, the Company sold 1,666,666 shares of
Common Stock to Intel Corporation in a private placement that closed
contemporaneously with the Offering. Net proceeds to the Company aggregated
approximately $9,650. In connection with the discounted sale of Common Stock
to Intel Corporation, the Company recognized a $1,250 non-cash charge that is
included in marketing, sales and support expense.
Warrants
In connection with the lease of its facility in January 1996, the Company
issued warrants to purchase 20,000 shares of Series A at $1.62 per share. Upon
completion of the Company's initial public offering, these warrants were
exchanged for warrants to purchase Common Stock. The fair value of the
warrants was not material on the date of grant. The warrants are exercisable
at any time prior to their expiration in February 2006. No warrants had been
exercised at December 31, 1997.
In connection with a master lease agreement in May 1996, the Company issued
warrants to purchase 33,333 shares of Series A at $1.62 per share. Upon
completion of the Company's initial public offering, these warrants were
exchanged for warrants to purchase Common Stock. The fair value of the
warrants was not material on the date of grant. The warrants are exercisable
at any time prior to their expiration in May 2001. No warrants had been
exercised at December 31, 1997.
In July 1996, the Company issued warrants to purchase 18,055 shares of
Common Stock at $0.90 per share to an individual employed as a consultant to
the Company. The fair value of the warrants was not material on the date of
grant. The warrants are exercisable at any time prior to their expiration in
July 2001. No warrants had been exercised at December 31, 1997.
F-35
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
In December 1996, the Company issued warrants to purchase 33,333 shares of
Common Stock at $3.75 per share to an individual employed as a consultant to
the Company. The fair value of the warrants was not material on the date of
grant. The warrants are exercisable at any time prior to their expiration in
December 2001. No warrants had been exercised at December 31, 1997.
In connection with the issuance of the Series C shares, the Company issued
warrants to purchase a total of 704,549 shares of Series C at $7.50 per share.
Upon completion of the Company's initial public offering, these warrants were
exchanged for warrants to purchase Common Stock. The warrants are exercisable
at any time prior to their expiration in May 2000. Approximately $1,690 of the
proceeds received from the issuance of Series C were allocated to the Series C
warrants. The accretion of the amount allocated to the Series C warrants for
the year ended December 31, 1997 was immaterial. No warrants had been
exercised at December 31, 1997.
NOTE 9--STOCK-BASED COMPENSATION:
At December 31, 1997, the Company has three stock-based compensation plans,
which are described below. The Company applies APB No. 25 and related
Interpretations and SFAS No. 123 with respect to grants to other than
employees in accounting for its plans. During the period from June through
October 1996, the Company granted options to purchase an aggregate of 98,667
shares of Common Stock at exercise prices ranging from $0.30 to $0.90 per
share and recorded $165 of unearned compensation relating to such options.
This amount is being amortized over the four-year vesting period of the
related options. Had compensation cost for the Company's three stock-based
compensation plans been determined based on the minimum and fair values at the
grant dates for awards under those plans consistent with the methods
prescribed by SFAS No. 123, the Company's net loss and net loss per share
would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1996 1997
--------- --------
<S> <C> <C>
Net Loss:
As reported.............................................. $(13,808) $(58,336)
Pro forma................................................ (13,815) (59,281)
Net loss per share:
Basic and diluted, as reported........................... $ (10.35) $ (7.98)
Basic and diluted, pro forma............................. (10.36) (8.11)
</TABLE>
STOCK OPTION PLANS
1996 Stock Option Plan
The Company has reserved an aggregate of 600,000 shares of Common Stock for
issuance under its 1996 Stock Option Plan (the "1996 Plan"). The 1996 Plan
provides for grants of options to employees and consultants (including
officers and directors) of the Company, its parent and its subsidiaries.
The exercise price of options granted under the 1996 Plan is determined by
the 1996 Plan Administrator, as defined. With respect to incentive stock
options granted under the 1996 Plan, the exercise price must be at least equal
to the fair market value per share of the Common Stock on the date of grant,
and the exercise price of any incentive stock option granted to a participant
who owns more than 10% of the voting power of all classes of the Company's
outstanding capital stock must be equal to at least 110% of fair market value
of the Common Stock on the date of grant.
F-36
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Each option outstanding under the 1996 Plan may be exercised in whole or in
part at any time. Exercised but unvested shares are subject to repurchase by
the Company. Options generally vest, assuming continued service by the
optionee as an employee or consultant, at the rate of 25% of the shares
subject to the option on the first anniversary of the commencement of vesting
date and 1/48th of the shares each month thereafter, such that all shares
under the option vest in full four years from the date of commencement of
vesting, assuming continued service as an employee or consultant. Options
outstanding under the 1996 Plan generally have a term of ten years.
1996 Equity Compensation Plan
The Company's 1996 Equity Compensation Plan (the "1996 Equity Plan")
provides for the granting to employees of incentive stock options, and for the
granting to employees and consultants of nonstatutory stock options and stock
purchase rights ("SPRs"). A total of 2,000,000 shares of Common Stock are
currently reserved for issuance pursuant to the 1996 Equity Plan.
The 1996 Equity Plan Administrator, as defined, has the power to determine
the terms of the options or SPRs granted, including the exercise price, the
number of shares subject to each option or SPR, the exercisability thereof,
and the form of consideration payable upon such exercise.
Each option outstanding under the 1996 Equity Plan may be exercised in whole
or in part at any time. Exercised but unvested shares are subject to
repurchase by the Company. Options generally vest, assuming continued service
by the optionee as an employee or consultant, at the rate of 25% of the shares
subject to the option on the first anniversary of the commencement of vesting
date and 1/48th of the shares each month thereafter, such that all shares
under the option vest in full four years from the date of commencement of
vesting, assuming continued service as an employee or consultant. Options
outstanding under the 1996 Equity Plan generally have a term of ten years.
The restricted stock purchase agreement pursuant to which the SPR is
exercised shall grant the Company a repurchase option exercisable upon the
voluntary or involuntary termination of the purchaser's employment with the
Company for any reason (including death or disability).
The repurchase option shall lapse at a rate determined by the 1996 Equity
Plan Administrator. The exercise price of all incentive stock options granted
under the 1996 Equity Plan must be at least equal to the fair market value of
the Common Stock on the date of grant. The exercise price of nonstatutory
stock options and SPRs granted under the 1996 Equity Plan is determined by the
1996 Equity Plan Administrator, but with respect to nonstatutory stock options
intended to qualify as "performance-based compensation", the exercise price
must at least be equal to the fair market value of the Common Stock on the
date of grant. With respect to any participant who owns stock possessing more
than 10% of the voting power of all classes of the Company's outstanding
capital stock, the exercise price of any incentive stock option granted must
equal at least 110% of the fair market value on the grant date and the term of
such incentive stock option must not exceed five years. The term of all other
options granted under the 1996 Equity Plan may not exceed ten years. As of
December 31, 1997, no SPRs had been granted.
1997 Acquisition Stock Option Plan
The Company's 1997 Acquisition Stock Option Plan (the "1997 Plan") provides
for the grant of incentive stock options to employees (including officers and
employee directors) and for the grant of nonstatutory stock options and SPRs
to employees, directors and consultants. A total of 10,000,000 shares of
Common Stock, plus annual increases equal to the lesser of (i) 400,000 shares,
(ii) 5% of the outstanding shares, or (iii) a lesser amount determined by the
Board of Directors, are currently reserved for issuance pursuant to the 1997
Plan.
F-37
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The 1997 Plan Administrator, as defined, has the power to determine the
terms of the options or SPRs granted, including the exercise price of the
option or SPR, the number of shares subject to each option or SPR, the
exercisability thereof, and the form of consideration payable upon such
exercise.
The restricted stock purchase agreement pursuant to which the SPR is
exercised shall grant the Company a repurchase option exercisable upon the
voluntary or involuntary termination of the purchaser's employment with the
Company for any reason (including death or disability). The repurchase option
shall lapse at a rate determined by the Administrator.
The exercise price of all incentive stock options granted under the 1997
Plan must be at least equal to the fair market value of the Common Stock on
the date of grant. The exercise price of nonstatutory stock options and SPRs
granted under the 1997 Plan is determined by the 1997 Plan Administrator, but
with respect to nonstatutory stock options intended to qualify as
"performance-based compensation", the exercise price must at least be equal to
the fair market value of the Common Stock on the date of grant. With respect
to any participant who owns stock possessing more than 10% of the voting power
of all classes of the outstanding capital stock of the Company, its parent and
its subsidiaries, the exercise price of any incentive stock option granted
must equal at least 110% of the fair market value on the grant date and the
term of such incentive stock option must not exceed five years. The term of
all other options granted under the 1997 Plan may not exceed ten years. As of
December 31, 1997, no SPRs had been granted.
Fair Value Estimates
For purposes of complying with the disclosure provisions of SFAS No. 123,
prior to the Company's initial public offering in December 1997, the fair
value of each option grant was determined on the date of grant using the
minimum value method. Subsequent to the offering, the fair value was
determined using the Black-Scholes option pricing model. Except for the
volatility assumption, which was only used under the Black-Scholes model, the
following weighted-average assumptions were used for grants during the years
ended December 31, 1996 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1996 1997
------- ---------
<S> <C> <C>
Dividend yield................................................ 0.0% 0.0%
Volatility.................................................... 0.0% 60.0%
Risk-free interest rate....................................... 6.1% 6.0%-6.2%
Expected life................................................. 4 years 4 years
</TABLE>
F-38
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
A summary of the status of the Company's three fixed stock option plans as
of December 31, 1996 and 1997, and changes during the years then ended is
presented below:
<TABLE>
<CAPTION>
1996 1997
------------------------ -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
FIXED STOCK OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------------------- -------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning
of period............... -- $ -- 234,833 1.84
Granted.................. 567,500 .83 9,559,746 8.11
Exercised................ (281,000) .10 (103,079) 4.85
Canceled................. (51,667) .22 (199,097) 6.21
-------- ---------
Outstanding at end of pe-
riod.................... 234,833 1.84 9,492,403 8.03
======== =========
Options exercisable at
end of period........... 234,833 2,698,610
======== =========
Weighted-average minimum
and fair values of
options granted during
the period.............. $ .07 $ 1.47
======== =========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- --------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$.03.................... 4,688 8.1 years $ .03 4,688 $ .03
$.30.................... 69,167 8.4 years .30 69,167 .30
$.90.................... 29,167 8.7 years .90 29,167 .90
$3.75................... 9,834 8.8 years 3.75 9,834 3.75
$6.75 to $9.75.......... 9,379,547 9.2 years 8.12 2,585,754 8.51
--------- ---------
9,492,403 2,698,610
========= =========
</TABLE>
Acquisition Stock Bonus Plan
During the year ended December 31, 1997, the Company agreed to issue bonuses
contingent on future employment that are payable only in shares of Common
Stock to employees previously employed by Acquired Entities (each a "New
Employee").
Under the agreements, the stock bonuses vest over a thirty-six month period
from the date of first employment by the Company and will be paid at the
conclusion of the vesting period. However, to the extent that a New Employee's
status as an employee is terminated, the New Employee will be entitled only to
the vested portion of the stock bonus and such bonus shall become due and
payable upon such New Employee's termination. The aggregate stock bonus for
awards through December 31, 1997, totaled $62,118, and will be paid in shares
of Common Stock at the fair market value of the Common Stock at the date of
issuance. Stock bonus awards are recognized as compensation expense over the
thirty-six month vesting periods and comprise stock compensation expense in
the accompanying consolidated financial statements. Stock compensation
recorded related to vested stock bonuses aggregated $9,118 and $27,091
(unaudited) for the year ended December 31, 1997, and the nine months ended
September 30, 1998, respectively. Of these amounts, $2,420 and $9,415,
respectively, have been recorded in cost of revenues, with the remainder
recorded in operating expenses.
F-39
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Employee Stock Purchase Plan
In September 1997, the Board of Directors approved the 1997 Employee Stock
Purchase Plan (the "Purchase Plan"). A total of 1,000,000 shares of Common
Stock have been reserved for issuance under this plan. Terms of the plan
permit eligible employees to purchase Common Stock through payroll deductions
of up to 15% of the employee's compensation. Amounts deducted and accumulated
by the participant are used to purchase shares of the Company's Common Stock
at 85% of the lower of the fair value of the Common Stock at the beginning or
the end of the offering period, as defined. During the year ended December 31,
1997, the weighted average fair value of rights granted under the Plan was
$2.86 per share. There were no shares issued under the Purchase Plan during
1997.
NOTE 10--AFFILIATE WARRANT PROGRAM:
In June 1996, the Company adopted the Affiliate Warrant Program (the
"Program") with the intent of attracting new Affiliates to the USWeb network
and to create performance incentives for such Affiliates. Under the Program,
each Affiliate was granted a warrant to purchase a fixed number of shares of
the Company's Common Stock upon execution of the franchise agreement (a
"Signing Warrant") and earns warrants ("AGR Warrants") to purchase additional
shares of Common Stock at the rate of one share of Common Stock per fifty
dollars of Affiliate adjusted gross revenue, as defined. The exercise price of
all warrants issued and issuable to an individual Affiliate was set at the
time of signing of the franchise agreement. Warrants vest 25% after one year
and then ratably each month over the remaining thirty-six month period.
Warrants are exercisable for a maximum period of five years from the effective
date of the Affiliate agreement. Warrants may not be exercised prior to the
earlier of the closing of an initial public offering of the Company's Common
Stock or an acquisition of the Company. A total of 333,333 shares of Common
Stock have been reserved for issuance under the Program. No Signing Warrants
are available for grant after March 31, 1997. However, all Affiliates entering
into an Affiliate agreement prior to of such date will continue to be entitled
to AGR Warrants upon generating qualifying revenues until such time when no
warrants remain available for grant.
During the years ended December 31, 1996 and 1997, the Company issued
Signing Warrants to purchase shares of Common Stock, AGR Warrants to purchase
shares of Common Stock and recognized costs estimated using the Black-Scholes
formula as follows:
<TABLE>
<CAPTION>
DESCRIPTION 1996 1997
----------- -------------- --------------
<S> <C> <C>
Signing Warrants............................... 106,834 shares 4,000 shares
AGR Warrants................................... 17,918 shares 138,532 shares
Estimated cost................................. $167 $150
</TABLE>
F-40
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 11--COMMITMENTS AND CONTINGENCIES:
The Company and its subsidiaries lease facilities under non-cancelable
operating leases which expire through 2011. The leases provide for escalating
monthly payments which are being charged to operations ratably over the lease
terms. In addition to the minimum lease payments, the Company is responsible
for property taxes, insurance and certain other operating costs. The Company
also leases certain equipment under long-term lease agreements that are
classified as capital leases. These capital leases terminate at various dates
through January 2002.
Total equipment acquired under capitalized leases was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
----- ------
<S> <C> <C>
Computers and equipment....................................... $ 702 $1,234
Furniture and fixtures........................................ 108 154
----- ------
810 1,388
Less: accumulated depreciation................................ (214) (877)
----- ------
$ 596 $ 511
===== ======
</TABLE>
The Company has a master lease agreement with a leasing company which
expires in 1999. The agreement provides a line of credit of $600 for capital
equipment purchases. At December 31, 1997, approximately $1 was available
under this agreement for equipment purchases.
Future minimum lease payments under all non-cancelable operating and capital
leases as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER OPERATING CAPITAL
31, LEASES LEASES
----------- --------- -------
<S> <C> <C>
1998..................................................... $ 2,556 $ 466
1999..................................................... 2,505 309
2000..................................................... 2,297 30
2001..................................................... 2,080 10
2002..................................................... 1,775 1
Thereafter............................................... 6,857 --
------- -----
Total minimum payments.................................... $18,070 816
=======
Less: amount representing interest........................ (76)
-----
Present value of capital lease obligations................ 740
Less: current portion..................................... (368)
-----
Lease obligations, long-term.............................. $ 372
=====
</TABLE>
Rent expense under operating leases totaled $278 and $1,429 for the years
ended December 31, 1996 and 1997, respectively.
F-41
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 12--SUBSEQUENT EVENTS (UNAUDITED)
Strategic Alliances
In May 1998, the Company entered into a strategic alliance with NBC
Multimedia, Inc., (NBC) to expand production capabilities for NBC's
interactive properties and services. As part of the strategic alliance, the
Company was awarded a multi-year contract, where revenues earned under the
contract are expected to approximate $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 shares (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.
Restatement
The accompanying restated unaudited consolidated balance sheet as of
September 30, 1998, and the accompanying restated unaudited consolidated
statement of operations for the nine month period 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 12). 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 of
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 for 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.
F-42
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
CKS 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 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' shareholders, is expected to close in the
Company's fourth quarter.
Acquisitions
During the period from January 1, 1998 to August 17, 1998, the Company
recognized the acquisition of all the outstanding stock of InnoMate Online
Marketing GMBH, Inter.logic.studios, inc., Quest Interactive Media, Inc.,
Ensemble Corporation, Ikonic Interactive, Inc., Xplora Limited, Kallista,
Inc., USWeb San Jose, Gray Peak Technologies, Inc., Nutley Systems, Inc.
(nSET), Advanced Video Communications, Tucker Network Technologies, Inc., and
Metrix Communications, Inc. in separate transactions in exchange for a total
of 8,524,689 shares of the Company's Common Stock and the assumption of
certain stock options for an aggregate purchase price of $196,336, excluding
acquisition expenses. Additionally, the Company recognized the acquisition of
Utopia (see Note 1) whereby the Company acquired various assets in exchange
for the assumption by the Company of specified liabilities and payment of a
promissory note for an aggregate purchase price of $4,976. With respect to the
acquisitions of Gray Peak Technologies, Inc. and Ikonic
Interactive, Inc., outstanding vested stock options of these acquired entities
were exchanged for options to purchase the Company's common stock. In these
transactions, the value of such options was determined using the Black-Scholes
option pricing model and included in the determination of purchase price.
The acquisitions will be accounted for using the purchase method of
accounting, and accordingly, the purchase price will be allocated to the
tangible and identifiable intangible assets acquired liabilities assumed on
the basis of their fair values. Approximately $8,917 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 approximate their
fair values. Approximately $25,509 was allocated to in-process technology and
will be immediately charged to operations because such in-process technology
have not reached the stage of technological feasibility at the acquisition
dates and have no alternative future use. Approximately $7,448 was allocated
to existing technology and will be amortized over its estimated useful life of
one year. Approximately $11,200 of the purchase price was allocated to
workforce in place and will be amortized over its estimated useful life of
forty-two months. The purchase price in excess of identified tangible and
intangible assets and liabilities assumed in the amount of $148,238 was
allocated to goodwill and will be amortized over its estimated useful life of
one to two years.
Follow-on Offering and Share Authorization
On April 7, 1998, the Company completed a follow-on offering whereby the
Company sold 1,581,216 shares of Common Stock. Net proceeds to the Company
from the follow-on offering aggregated approximately $31,151, after deducting
underwriters' discount and expenses of the offering. In addition, various
option and warrant holders who participated as selling stockholders in the
offering exercised 387,118 stock options and 56,547 common stock warrants. Net
proceeds to the Company from the exercise of stock options and common stock
warrants aggregated approximately $2,698.
F-43
<PAGE>
USWEB CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
On April 20, 1998, the Company's Board of Directors authorized an additional
5,000,000, 10,000,000 and 2,000,000 shares of Common Stock for issuance under
the 1996 Equity Plan, 1997 Plan, and the Purchase Plan, respectively.
Litigation
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
the USWeb 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 be the name of the
combined companies 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 substantial merit and intends to defend itself vigorously against
the claims made.
In November 1998, the Company entered into an employment arrangement with an
individual who will serve as the Company's Chief Executive Officer. As part of
the employment agreement, the Company granted the individual options to
purchase 1.2 million shares of the Company's Common Stock with an exercise
price of $10.00 per share. The aggregate difference between the exercise price
of the options and the fair market value of the Common Stock, approximating
$8.3 million, will be recognized ratably as an operating expense over the four
year vesting period of the related options.
F-44
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
USWeb San Francisco
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of USWeb San Francisco (formerly
XCom Corporation) at December 31, 1996 and the results of its operations and
its cash flows for the year ended December 31, 1996, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
San Jose, California
September 17, 1997
F-45
<PAGE>
USWEB SAN FRANCISCO
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $281,000
Accounts receivable.............................................. 194,000
Other current assets............................................. 41,000
--------
Total current assets........................................... 516,000
Property and equipment, net........................................ 37,000
--------
$553,000
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................. $ 62,000
Accrued expenses................................................. 118,000
Unearned revenues................................................ 63,000
Current portion of notes payable................................. 37,000
--------
Total current liabilities...................................... 280,000
Notes payable, long-term portion................................... 170,000
--------
450,000
--------
Commitments and contingencies (Note 5)
Shareholders' equity:
Preferred Stock: no par value, 1,000,000 shares authorized;
340,000 shares issued and outstanding........................... --
Common Stock: no par value, 500,000 shares authorized;
285,000 shares issued and outstanding........................... 26,000
Retained earnings................................................ 77,000
--------
Total shareholders' equity..................................... 103,000
--------
$553,000
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-46
<PAGE>
USWEB SAN FRANCISCO
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Revenues........................................................... $1,042,000
Cost of revenues................................................... 502,000
----------
Gross profit..................................................... 540,000
----------
Operating expenses:
Marketing, sales and support..................................... 251,000
General and administrative....................................... 148,000
----------
Total operating expenses....................................... 399,000
----------
Income before income taxes......................................... 141,000
Provision for income taxes......................................... (64,000)
----------
Net income......................................................... $ 77,000
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-47
<PAGE>
USWEB SAN FRANCISCO
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK TOTAL
----------------- --------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT EARNINGS EQUITY
--------- ------- ------- ------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... -- $ -- -- $ -- $ -- $ --
Issuance of Preferred
Stock to Founders...... 340,000 -- -- -- -- --
Issuance of Common Stock
to Founders............ -- -- 270,000 16,000 -- 16,000
Issuance of Common Stock
for cash and other net
assets................. -- -- 15,000 10,000 -- 10,000
Net Income.............. -- -- -- -- 77,000 77,000
--------- ----- ------- ------- ------- --------
Balance at December 31,
1996................... 340,000 $ -- 285,000 $26,000 $77,000 $103,000
========= ===== ======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-48
<PAGE>
USWEB SAN FRANCISCO
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................ $ 77,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................................... 13,000
Changes in assets and liabilities:
Accounts receivable............................................ (156,000)
Other current assets........................................... (44,000)
Accounts payable............................................... 12,000
Accrued expenses............................................... 118,000
Unearned revenues.............................................. 63,000
---------
Net cash provided by operating activities..................... 83,000
---------
CASH FLOWS USED IN INVESTING ACTIVITIES FOR
THE ACQUISITION OF PROPERTY AND EQUIPMENT......................... (13,000)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock............................ 4,000
Proceeds from note payable........................................ 207,000
---------
Net cash provided by financing activities..................... 211,000
---------
Net increase in cash and cash equivalents.......................... 281,000
Cash and cash equivalents at beginning at period................... --
---------
Cash and cash equivalents at end of period......................... $ 281,000
=========
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITY:
Issuance of Common Stock for net assets........................... $ 22,000
=========
SUPPLEMENTAL INFORMATION:
Cash paid for income taxes........................................ $ 7,000
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-49
<PAGE>
USWEB SAN FRANCISCO
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
USWeb San Francisco (the "Company"), formerly XCom Corporation, specializes
in electronic marketing on the Internet. The Company is a full service
developer of Internet and intranet sites, offering services in four areas:
website design, hosting, promotion and training. The Company was incorporated
in California on May 25, 1995 and recognized immaterial financing and
operating transactions from that date through December 31, 1995, which have
been included in the Company's financial statements for the year ended
December 31, 1996.
During June 1996, the Company entered into a franchise agreement with USWeb
Corporation ("USWeb") to be a part of USWeb's Affiliate network, which
included the San Francisco, CA and New York, NY locations. The relationship
with USWeb provided for increased marketing presence, technical support and
centralized hosting facilities.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenues from consulting service agreements and
hosting service fees.
Service revenues from fixed-price agreements are recognized over the period
of each engagement under the percentage of completion method using labor hours
incurred as a measure of progress towards completion. Provisions for contract
adjustments and losses are recorded in the period such items are identified.
Unearned revenues represent the amount of revenues received in advance of
services being performed. Revenues from time and materials agreements and
hosting services are recognized and billed as the services are provided.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Significant Customers
During the year ended December 31, 1996, sales to one customer accounted for
13% of revenue. Approximately 22% of accounts receivable at December 31, 1996
was due from two customers.
Other Assets
Franchise fees paid to USWeb are amortized to cost of revenues over two
years. Accumulated amortization as of December 31, 1996 totaled $3,000.
F-50
<PAGE>
USWEB SAN FRANCISCO
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three years.
Income Taxes
Income taxes are accounted for using an asset and liability approach which
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The measurement of current and deferred tax liabilities and assets
are based on provisions of the enacted tax law; the effects of future changes
in tax laws or rates are not anticipated. The measurement of deferred tax
assets is reduced, if necessary, by the amount of any tax benefits that, based
on available evidence, are not expected to be realized.
Fair Value of Financial Instruments
The Company's financial instruments, including cash equivalents, notes and
accounts payable and accrued expenses, have carrying amounts which approximate
fair value due to the relatively short maturity of these instruments.
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Property and equipment, net:
Computers and equipment..................................... $ 45,000
Furniture and fixtures...................................... 2,000
--------
47,000
Less: Accumulated depreciation.............................. (10,000)
--------
$ 37,000
========
Accrued expenses:
Accrued income taxes........................................ $ 57,000
Accrued payroll............................................. 43,000
Other....................................................... 18,000
--------
$118,000
========
</TABLE>
NOTE 3--RELATED PARTY TRANSACTIONS:
At December 31, 1996, the Company had non-interest bearing notes payable to
three of its employees totaling $15,000. Additionally, notes payable to
relatives of the shareholders and employees of the Company totaled $42,000 at
December 31, 1996. On December 18, 1996, the Company signed a promissory note
from a private investor in the amount of $150,000. The note is payable no
later than one year from the date of execution. Interest accrues at a
specified interest rate (8.25% at December 31, 1996).
NOTE 4--INCOME TAXES:
Income tax expense for the year ended December 31, 1996 totaled $64,000 and
was composed of federal income taxes of $48,000 and various state and
municipal income taxes of $16,000. Taxes payable at
F-51
<PAGE>
USWEB SAN FRANCISCO
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1996 totaled $57,000. The Company had no significant deferred tax
assets or liabilities at December 31, 1996. The Company's effective tax rate
for the year ended December 31, 1996 differed from the expected federal tax
rate primarily as a result of state and local income taxes.
NOTE 5--COMMITMENTS AND CONTINGENCIES:
Royalties
Under the terms of its franchise agreement with USWeb, the Company is
required to pay royalties to USWeb based upon a stipulated percentage of
adjusted gross revenue, as defined. Royalties for the year ended December 31,
1996 totaled $45,000 and are included in cost of revenues.
Operating Leases
Rent expense under month-to-month rental agreements for the year ended
December 31, 1996 totaled $20,000. In March 1997, the Company entered into
noncancelable operating leases for new office facilities which expire in 2002,
require the payment of insurance and maintenance and have required rental
payments of approximately $120,000 per year.
Future minimum lease payments related to office facilities and equipment
under noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDED OPERATING
DECEMBER 31, LEASES
------------ ---------
<S> <C>
1997.......................................................... $151,000
1998.......................................................... 148,000
1999.......................................................... 139,000
2000.......................................................... 122,000
2001.......................................................... 121,000
--------
Total minimum lease payments.................................. $681,000
========
</TABLE>
NOTE 6--CONVERTIBLE PREFERRED STOCK:
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 1,000,000 shares of convertible Preferred Stock. During 1996 the
Company issued 340,000 shares to the Founders. Compensation expense related to
the issuance of the shares was not material.
NOTE 7--COMMON STOCK:
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 500,000 shares of Common Stock. During the year ended December 31,
1996, the Company issued 270,000 shares of Common Stock to the Founders and
sold 15,000 shares to a third party in exchange for cash and assets valued at
$10,000. Compensation expense related to the issuance of shares to the
Founders was not material.
NOTE 8--SUBSEQUENT EVENTS:
On March 16, 1997, USWeb reached an agreement to acquire all of the
Company's outstanding shares of Common Stock and Preferred Stock, at which
time the Company became a wholly owned subsidiary of USWeb.
F-52
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of USWeb Milwaukee
In our opinion, the accompanying balance sheet and the related statements of
operations, of stockholders' deficit and of cash flows present fairly, in all
material respects, the financial position of USWeb Milwaukee (formerly Fetch
Interactive, Inc.) at June 30, 1996, and the results of its operations and its
cash flows for the year ended June 30, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
San Jose, California
September 12, 1997
F-53
<PAGE>
USWEB MILWAUKEE
BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1996 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 7,000 $ 30,000
Accounts receivable................................ 139,000 271,000
Costs in excess of billings........................ 22,000 23,000
Other current assets............................... 20,000 138,000
----------- -----------
Total current assets............................. 188,000 462,000
Property and equipment, net.......................... 160,000 138,000
----------- -----------
$ 348,000 $ 600,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable................................... $ 96,000 $ 152,000
Accrued expenses................................... 23,000 281,000
Unearned revenue................................... 65,000 142,000
Notes payable...................................... 1,277,000 1,548,000
Current portion of capital lease obligations....... 79,000 86,000
----------- -----------
Total current liabilities........................ 1,540,000 2,209,000
Capital lease obligations, long-term portion......... 114,000 94,000
----------- -----------
1,654,000 2,303,000
----------- -----------
Commitments and contingencies (Note 6)
Stockholders' deficit:
Common Stock: no par value, 2,500 shares
authorized;
1,179 shares issued and outstanding...............
Additional paid-in capital......................... 218,000 218,000
Accumulated deficit................................ (1,524,000) (1,921,000)
----------- -----------
Total stockholders' deficit...................... (1,306,000) (1,703,000)
----------- -----------
$ 348,000 $ 600,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE>
USWEB MILWAUKEE
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED MARCH 31,
JUNE 30, ----------------------
1996 1996 1997
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Revenues................................... $1,745,000 $1,190,000 $1,927,000
Cost of revenues........................... 1,179,000 810,000 1,583,000
---------- ---------- ----------
Gross profit............................. 566,000 380,000 344,000
---------- ---------- ----------
Operating expenses:
Marketing, sales and support............. 292,000 173,000 355,000
General and administrative............... 359,000 242,000 282,000
---------- ---------- ----------
Total operating expenses............... 651,000 415,000 637,000
---------- ---------- ----------
Loss from operations....................... (85,000) (35,000) (293,000)
Interest expense-related party............. (132,000) (102,000) (104,000)
---------- ---------- ----------
Net loss................................... $ (217,000) $ (137,000) $ (397,000)
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-55
<PAGE>
USWEB MILWAUKEE
STATEMENT OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
--------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT DEFICIT DEFICIT
------ -------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at June 30, 1995............ 1,179 $218,000 $(1,307,000) $(1,089,000)
Net loss............................ (217,000) (217,000)
----- -------- ----------- -----------
Balance at June 30, 1996............ 1,179 218,000 (1,524,000) (1,306,000)
Net loss (Unaudited)................ (397,000) (397,000)
----- -------- ----------- -----------
Balance at March 31, 1997
(Unaudited)........................ 1,179 $218,000 $(1,921,000) $(1,703,000)
===== ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-56
<PAGE>
USWEB MILWAUKEE
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED MARCH 31,
JUNE 30, --------------------
1996 1996 1997
---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................... $(217,000) $(137,000) $(397,000)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization............... 68,000 47,000 50,000
Changes in assets and liabilities:
Accounts receivable......................... (103,000) (143,000) (132,000)
Costs in excess of billings................. (5,000) 17,000 (1,000)
Other current assets........................ 16,000 14,000 (118,000)
Accounts payable............................ 71,000 79,000 56,000
Accrued expenses............................ 8,000 7,000 258,000
Unearned revenue............................ 50,000 (15,000) 77,000
--------- --------- ---------
Net cash used in operating activities..... (112,000) (131,000) (207,000)
--------- --------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES FOR
THE ACQUISITION OF PROPERTY AND EQUIPMENT.... (52,000) (32,000) (28,000)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable...... 228,000 211,000 271,000
Repayment of notes payable................... (32,000) (32,000) --
Principal payments on capital leases......... (49,000) (30,000) (13,000)
--------- --------- ---------
Net cash provided by financing activities. 147,000 149,000 258,000
--------- --------- ---------
Net (decrease) increase in cash and cash
equivalents.................................. (17,000) (14,000) 23,000
Cash and cash equivalents at beginning of
period....................................... 24,000 24,000 7,000
--------- --------- ---------
Cash and cash equivalents at end of period.... $ 7,000 $ 10,000 $ 30,000
========= ========= =========
SUPPLEMENTAL NONCASH INVESTING AND FINANCING
ACTIVITY:
Property and equipment acquired under capital
leases...................................... $ 121,000 $ 34,000 $ --
========= ========= =========
SUPPLEMENTAL INFORMATION:
Cash paid for interest....................... $ 136,000 $ 102,000 $ 104,000
========= ========= =========
Cash paid for income taxes................... $ -- $ -- $ --
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-57
<PAGE>
USWEB MILWAUKEE
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
USWeb Milwaukee (the "Company"), formerly Fetch Interactive, Inc., was
incorporated in Wisconsin on June 19, 1970 and is principally engaged in
providing computer consulting, multimedia and data processing services to
customers located throughout the United States.
During September 1996, the Company entered into a franchise agreement with
USWeb Corporation ("USWeb"), to become a part of USWeb's affiliate network.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenues from consulting service agreements, hosting
service fees and data processing.
Service revenues from fixed-price agreements are recognized over the period
of each engagement under the percentage of completion method using labor hours
incurred as a measure of progress towards completion. Provisions for contract
adjustments and losses are recorded in the period such items are identified.
Costs in excess of billings represents the costs of services performed in
advance of related billings. Unearned revenues represent the amount of
revenues received in advance of services being performed. Revenues from time
and materials agreements, hosting services and data processing are recognized
and billed as the services are provided.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Significant Customers
During the year ended June 30, 1996, sales to two customers accounted for
27% and 23% of revenues. Approximately 50% of accounts receivable at June 30,
1996 was due from three customers.
Other Assets
Franchise fees paid to USWeb are amortized to cost of revenues over two
years. Accumulated amortization as of March 31, 1997 totaled $2,000.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three years. Leasehold improvements are amortized using the
straight-line method over the shorter of the estimated useful lives of the
assets or the remaining lease term, not to exceed five years.
F-58
<PAGE>
USWEB MILWAUKEE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
The Company's financial instruments, including cash equivalents, accounts
receivable, accounts payable and accrued expenses, have carrying amounts which
approximate fair value due to the relatively short maturity of these
instruments.
Income Taxes
Income taxes are accounted for using an asset and liability approach which
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The measurement of current and deferred tax liabilities and assets
are based on provisions of the enacted tax law; the effects of future changes
in tax laws or rates are not anticipated. The measurement of deferred tax
assets is reduced, if necessary, by the amount of any tax benefits that, based
on available evidence, are not expected to be realized.
Interim Financial Information
The accompanying financial statements as of March 31, 1997 and for the nine
months ended March 31, 1996 and 1997 are unaudited. In the opinion of
management, the unaudited interim financial statements have been prepared on
the same basis as the annual financial statements and reflect all adjustments,
which include only normal recurring adjustments, necessary to present fairly
the financial position as of March 31, 1997, and the results of the Company's
operations and its cash flows for the nine months ended March 31, 1996 and
1997. The financial data and other information disclosed in these notes to
financial statements related to these periods are unaudited. The results for
the nine months ended March 31, 1997 are not necessarily indicative of the
results to be expected for the year ended June 30, 1997.
NOTE 2--PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1996 1997
--------- -----------
(UNAUDITED)
<S> <C> <C>
Computers and equipment............................... $ 521,000 $ 540,000
Furniture and fixtures................................ 219,000 228,000
Leasehold improvements................................ 110,000 110,000
--------- ---------
850,000 878,000
Less: Accumulated depreciation and amortization....... (690,000) (740,000)
--------- ---------
$ 160,000 $ 138,000
========= =========
</TABLE>
NOTE 3--NOTES PAYABLE:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1996 1997
---------- -----------
(UNAUDITED)
<S> <C> <C>
Demand note payable to the Company's majority
stockholder, bearing interest at 10%................ $ 702,000 $ 973,000
Demand note payable to a member of the immediate
family of the Company's majority stockholder,
bearing interest at 9.4%............................ 375,000 375,000
Demand note payable to a third party, bearing
interest at 9.5%.................................... 200,000 200,000
---------- ----------
$1,277,000 $1,548,000
========== ==========
</TABLE>
F-59
<PAGE>
USWEB MILWAUKEE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4--RELATED PARTY TRANSACTIONS:
During 1996, approximately 27% of the Company's revenues were derived from
services to one company that is owned by the Company's majority stockholder.
Additionally, at June 30, 1996, two notes payable were outstanding to related
parties (see Note 3). Interest expense to related parties during fiscal 1996
was approximately $101,000.
NOTE 5--INCOME TAXES:
No provision for federal and state income taxes has been recognized as the
Company has incurred a net operating loss for the year ended June 30, 1996. At
June 30, 1996, the Company had approximately $1,186,000 of federal net
operating loss carryforwards which expire in varying amounts through 2011
available to offset future taxable income. Under the Tax Reform Act of 1986,
the amounts of and benefits from net operating loss carryforwards may be
impaired or limited in certain circumstances. Events which may cause
limitations in the amount of net operating losses that the Company may utilize
in any one year include, but are not limited to, a cumulative ownership change
of more than 50%, as defined, over a three year period.
Deferred tax assets, aggregating approximately $403,000 at June 30, 1996,
consist primarily of net operating loss carryforwards and book reserves and
accrued expenses which are not currently deductible for tax purposes. The
Company has provided a full valuation allowance on recorded deferred tax
assets because of the uncertainty regarding realization based upon the weight
of currently available information.
NOTE 6--COMMITMENTS AND CONTINGENCIES:
Royalties
Under the terms of its franchise agreement with USWeb, the Company is
required to pay royalties to USWeb based upon a stipulated percentage of
adjusted gross revenue, as defined. Royalties for the nine months ended March
31, 1997 totaled $14,000 and are included in cost of revenues.
Operating Leases
The Company leases its office facilities under a noncancelable operating
lease which expires on April 30, 2007. The lease requires payment of property
taxes, insurance, maintenance and utilities. Rent expense for the year ended
June 30, 1996 totaled $74,000.
F-60
<PAGE>
USWEB MILWAUKEE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under capital and noncancelable operating
leases, as of June 30, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED CAPITAL OPERATING
JUNE 30, LEASES LEASES
---------- -------- ----------
<S> <C> <C>
1997.................................................. $ 98,000 $ 148,000
1998.................................................. 84,000 159,000
1999.................................................. 35,000 162,000
2000.................................................. 6,000 149,000
2001.................................................. -- 147,000
Thereafter............................................ -- 869,000
-------- ----------
Total minimum lease payments........................... 223,000 $1,634,000
==========
Less: amount representing interest..................... 30,000
--------
Present value of capitalized lease obligations......... 193,000
Less: current portion.................................. 79,000
--------
Long-term portion of capitalized lease obligations..... $114,000
========
</TABLE>
Property and equipment under capital lease is as follows:
<TABLE>
<CAPTION>
JUNE 30,
1996
---------
<S> <C>
Computer equipment................................................ $ 177,000
Furniture and fixtures............................................ 38,000
---------
215,000
Less: Accumulated depreciation.................................... (113,000)
---------
$ 102,000
=========
</TABLE>
NOTE 7--SUBSEQUENT EVENTS:
On April 1, 1997, USWeb reached an agreement to acquire all of the Company's
outstanding shares of Common Stock, at which time the Company became a wholly
owned subsidiary of USWeb.
Immediately prior to the agreement date, notes payable and related accrued
interest payable totaling $1,548,000 were converted into equity.
F-61
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
USWeb LA Metro
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of USWeb LA Metro (formerly NewLink
Corporation) at December 31, 1996 and the results of its operations and its
cash flows for the year ended December 31, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
San Jose, California
September 17, 1997
F-62
<PAGE>
USWEB LA METRO
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 60,000 $ 12,000
Accounts receivable................................. 95,000 110,000
Other current assets................................ 33,000 39,000
-------- --------
Total current assets.............................. 188,000 161,000
Property and equipment, net........................... 13,000 22,000
-------- --------
$201,000 $183,000
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 6,000 $ 6,000
Accrued expenses.................................... 51,000 10,000
Unearned revenue.................................... -- 6,000
-------- --------
Total current liabilities......................... 57,000 22,000
Notes payable......................................... 14,000 --
-------- --------
71,000 22,000
-------- --------
Commitments and contingencies (Note 3)
Shareholders' equity:
Common Stock: $1.00 par value, 10,000 shares
authorized;
10,000 shares issued and outstanding............... 10,000 10,000
Additional paid-in capital.......................... 80,000 80,000
Retained earnings................................... 40,000 71,000
-------- --------
Total shareholders' equity........................ 130,000 161,000
-------- --------
$201,000 $183,000
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-63
<PAGE>
USWEB LA METRO
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED MARCH 31,
DECEMBER 31, -----------------
1996 1996 1997
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Revenues........................................ $560,000 $168,000 $203,000
Cost of revenues................................ 135,000 32,000 59,000
-------- -------- --------
Gross profit.................................. 425,000 136,000 144,000
-------- -------- --------
Operating expenses:
Marketing, sales and support.................. 38,000 7,000 14,000
General and administrative.................... 28,000 4,000 9,000
-------- -------- --------
Total operating expenses.................... 66,000 11,000 23,000
-------- -------- --------
Income from operations.......................... 359,000 125,000 121,000
Interest income, net............................ -- -- 1,000
-------- -------- --------
Income before income taxes...................... 359,000 125,000 122,000
Provision for income taxes...................... (1,000) -- (3,000)
-------- -------- --------
Net income...................................... $358,000 $125,000 $119,000
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-64
<PAGE>
USWEB LA METRO
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1995....................... 1,000 $ 1,000 $ 8,000 $ 9,000 $ 18,000
Issuance of Common Stock to
Founders................... 9,000 9,000 72,000 -- 81,000
Shareholder distribution.... -- -- -- (327,000) (327,000)
Net income.................. -- -- -- 358,000 358,000
------ ------- ------- --------- ---------
Balance at December 31,
1996....................... 10,000 10,000 80,000 40,000 130,000
Shareholder distribution
(Unaudited)................ -- -- -- (88,000) (88,000)
Net income (Unaudited)...... -- -- -- 119,000 119,000
------ ------- ------- --------- ---------
Balance at March 31, 1997
(Unaudited)................ 10,000 $10,000 $80,000 $ 71,000 $ 161,000
====== ======= ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-65
<PAGE>
USWEB LA METRO
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED MARCH 31,
DECEMBER 31, -------------------
1996 1996 1997
------------ -------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................. $ 358,000 $125,000 $ 119,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization.............. 7,000 -- 3,000
Changes in assets and liabilities:
Accounts receivable....................... (95,000) -- (15,000)
Other current assets...................... (24,000) (7,000) (8,000)
Accounts payable.......................... (3,000) (4,000) --
Accrued expenses.......................... 44,000 (4,000) (41,000)
Unearned revenue.......................... -- -- 6,000
--------- -------- ---------
Net cash provided by operating
activities............................. 287,000 110,000 64,000
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment....... (57,000) -- (10,000)
--------- -------- ---------
Net cash provided by (used in) investing
activities............................. 57,000 -- (10,000)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Shareholder distribution.................... (265,000) (14,000) (88,000)
Shareholder loan proceeds................... 11,000 -- --
Repayment of notes payable.................. -- -- (14,000)
Proceeds from issuance of Common Stock...... 81,000 -- --
--------- -------- ---------
Net cash used in financing activities... (173,000) (14,000) (102,000)
--------- -------- ---------
Net increase (decrease) in cash and cash
equivalents................................. 57,000 96,000 (48,000)
Cash and cash equivalents at beginning of
period...................................... 3,000 3,000 60,000
--------- -------- ---------
Cash and cash equivalents at end of period... $ 60,000 $ 99,000 $ 12,000
========= ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-66
<PAGE>
USWEB LA METRO
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
USWeb LA Metro (the "Company"), formerly NewLink Corporation, was formed to
provide professional consulting services relating to Internet and intranet
technologies. The Company was incorporated in California on July 25, 1995 and
later elected an S Corporation tax status effective January 1, 1996.
During July, 1996, the Company entered into a franchise agreement with USWeb
Corporation ("USWeb") to become part of USWeb's Affiliate network.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenues from consulting service agreements and
hosting service fees.
Service revenues from fixed-price agreements are recognized over the period
of each engagement under the percentage of completion method using labor hours
incurred as a measure of progress towards completion. Provisions for contract
adjustments and losses are recorded in the period such items are identified.
Unearned revenues represent the amount of revenues received in advance of
services being performed. Revenues from time and materials agreements and
hosting services are recognized and billed as the services are provided.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Concentration of Credit Risk
The Company is potentially subject to a concentration of credit risk from
its trade receivables, as a significant portion is due from one major
customer. The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. As of December 31, 1996 and for the
year then ended, one customer accounted for 92% of the Company's accounts
receivable balance and 94% of the Company's total revenues, respectively.
Other Assets
Franchise fees paid to USWeb are amortized to cost of revenues over two
years. Accumulated amortization as of December 31, 1996 totaled $2,000.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three years.
F-67
<PAGE>
USWEB LA METRO
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company has elected to be taxed as an S Corporation, pursuant to the
Internal Revenue Code. This election provides for all profits or losses to be
recognized in the shareholders' personal income tax returns. The provision for
income taxes represents a 1.5% franchise tax imposed by the State of
California.
The December 31, 1996 current provision for income taxes represents
applicable state franchise taxes. The California S Corporation provisions
require the payment of a 1.5% franchise tax on taxable income for the year
ended December 31, 1996.
Fair Value of Financial Instruments
The Company's financial instruments, including cash equivalents, other
current assets, accounts payable, and accrued expenses, have carrying amounts
which approximate fair value due to the relatively short maturity of these
instruments.
Interim Financial Information
The accompanying financial statements as of March 31, 1997 and for the three
months ended March 31, 1996 and 1997 are unaudited. In the opinion of
management, the unaudited interim financial statements have been prepared on
the same basis as the annual financial statements and reflect all adjustments,
which include only normal recurring adjustments, necessary to present fairly
the financial position as of March 31, 1997, and the results of the Company's
operations and its cash flows for the three months ended March 31, 1997. The
financial data and other information disclosed in these notes to financial
statements at March 31, 1997 and for the period then ended are unaudited. The
results for the three months ended March 31, 1997 are not necessarily
indicative of the results to be expected for the year ending December 31,
1997.
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Property and equipment, net:
Computers and equipment........................... $13,000 $19,000
Furniture and fixtures............................ 1,000 5,000
------- -------
14,000 24,000
Less: Accumulated depreciation...................... (1,000) (2,000)
------- -------
$13,000 $22,000
======= =======
Accrued expenses:
Payroll........................................... $49,000 $ 5,000
Other............................................. 2,000 5,000
------- -------
$51,000 $10,000
======= =======
</TABLE>
F-68
<PAGE>
USWEB LA METRO
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3--COMMITMENTS AND CONTINGENCIES:
Royalties
Under the terms of its franchise agreement with USWeb, the Company is
required to pay royalties to USWeb based upon a stipulated percentage of
adjusted gross revenue, as defined. Royalties for the year ended December 31,
1996 totaled $10,000 and are included in cost of revenues.
Operating Leases
The Company leases its office facilities under noncancelable operating
leases which expire in 1997. Rent expense for the year ended December 31, 1996
and the three month period ended March 31, 1997 totaled $5,000 and $2,000,
respectively.
Future minimum lease payments under noncancelable operating as of December
31, 1996 total $6,000.
NOTE 4--COMMON STOCK:
The Company's Articles of Incorporation authorize the Company to issue
10,000 shares of $1 par value Common Stock. During the year ended December 31,
1996, the Company sold a total of 9,000 shares of Common Stock to the Founder
of the Company and two other current owners.
During 1996 the company made distributions to a shareholding, totaling
$327,000. This distribution included $62,000 of property and equipment.
NOTE 5--SUBSEQUENT EVENTS:
On April 1, 1997, USWeb reached an agreement to acquire all of the Company's
outstanding shares of Common Stock, at which time the Company became a wholly
owned subsidiary of USWeb.
F-69
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
USWeb Atlanta
In our opinion, the accompanying balance sheet and the related statements of
operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of USWeb Atlanta (formerly
InterNetOffice, LLC) at December 31, 1996 and the results of its operations
and its cash flows for the period from May 7, 1996 (inception) through
December 31, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
Price Waterhouse LLP
San Jose, California
September 18, 1997
F-70
<PAGE>
USWEB ATLANTA
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 11,000 $ 48,000
Accounts receivable................................. 75,000 148,000
Other current assets................................ 7,000 18,000
-------- --------
Total current assets.............................. 93,000 214,000
Property and equipment, net........................... 10,000 18,000
-------- --------
$103,000 $232,000
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 26,000 $102,000
Related party payable............................... 76,000 52,000
Accrued expenses.................................... -- 17,000
-------- --------
Total current liabilities......................... 102,000 171,000
-------- --------
Commitments and contingencies (Note 4)
Stockholders' equity:
Common Stock: no par value, 841,507 shares
authorized; 525,000 and 841,507 shares issued and
outstanding........................................ 1,000 1,000
Retained earnings................................... -- 60,000
-------- --------
Total stockholders' equity........................ 1,000 61,000
-------- --------
$103,000 $232,000
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-71
<PAGE>
USWEB ATLANTA
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 7, 1996
(INCEPTION) THREE MONTHS
THROUGH ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
Revenues.............................................. $224,000 $276,000
Cost of revenues...................................... 198,000 167,000
-------- --------
Gross profit......................................... 26,000 109,000
-------- --------
Operating expenses:
Marketing, sales and support......................... 8,000 10,000
General and administrative........................... 18,000 39,000
-------- --------
Total operating expenses.......................... 26,000 49,000
-------- --------
Net income............................................ $ -- $ 60,000
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-72
<PAGE>
USWEB ATLANTA
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
-------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------- ------ -------- -------------
<S> <C> <C> <C> <C>
Issuance of Common Stock.................. 525,000 $1,000 $ -- $ 1,000
------- ------ ------- -------
Balance at December 31, 1996.............. 525,000 1,000 -- 1,000
Issuance of Common Stock (Unaudited)...... 316,507 -- -- --
Net income (Unaudited).................... -- -- 60,000 60,000
------- ------ ------- -------
Balance at March 31, 1997 (Unaudited)..... 841,507 $1,000 $60,000 $61,000
======= ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-73
<PAGE>
USWEB ATLANTA
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 7, 1996
(INCEPTION) THREE MONTHS
THROUGH ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ -- $ 60,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization........................ 1,000 --
Changes in assets and liabilities:
Accounts receivable................................. (75,000) (73,000)
Other current assets................................ (7,000) (11,000)
Accounts payable.................................... 26,000 76,000
Related party payable............................... 76,000 (24,000)
Accrued expenses.................................... -- 17,000
-------- --------
Net cash provided by operating activities............. 21,000 45,000
-------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES FOR THE
ACQUISITION OF PROPERTY AND EQUIPMENT................ (11,000) (8,000)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES FROM THE
ISSUANCE OF COMMON STOCK............................. 1,000 --
-------- --------
Net increase in cash and cash equivalents............. 11,000 37,000
Cash and cash equivalents at beginning of period...... -- 11,000
-------- --------
Cash and cash equivalents at end of period............ $ 11,000 $ 48,000
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-74
<PAGE>
USWEB ATLANTA
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
USWeb Atlanta (the "Company"), formerly InterNetOffice, LLC, was
incorporated in Georgia as a limited liability company on May 7, 1996 for the
purpose of providing Internet development and consulting services. Following
the Company's formation, the Company entered into a franchise agreement with
USWeb Corporation ("USWeb") and in June 1996 began operating as a franchisee
under that agreement.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenues from consulting service agreements and
hosting service fees.
Service revenues from fixed-price agreements are recognized over the period
of each engagement under the percentage of completion method using labor hours
incurred as a measure of progress towards completion. Provisions for contract
adjustments and losses are recorded in the period such items are identified.
Revenues from time and materials agreements and hosting services are
recognized and billed as the services are provided.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Significant Customers
During the year ended December 31, 1996, sales to one customer accounted for
64% of revenues. Approximately 77% of accounts receivable at December 31, 1996
were due from two customers.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three years. Leasehold improvements are amortized using the
straight-line method over the shorter of the estimated useful lives of the
assets or the remaining lease term, not to exceed five years.
Advertising Costs
Advertising costs are expensed as incurred in accordance with Statement of
Position 93-7, "Reporting on Advertising Costs." Advertising costs for the
period from May 7, 1996 (inception) through December 31, 1996 and the three
months ended March 31, 1997 totaled $3,000 and $1,000, respectively.
F-75
<PAGE>
USWEB ATLANTA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company has elected to be taxed as a limited liability company (LLC),
pursuant to the Internal Revenue Code. This election provides for all profits
and losses to be recognized in the shareholders' personal income tax returns.
Accordingly, no provision for income taxes has been recorded in the
accompanying financial statements.
Fair Value of Financial Instruments
The Company's financial instruments, including cash equivalents, related
party receivables and payables, accounts payable and accrued expenses, have
carrying amounts which approximate fair value due to the relatively short
maturity of these instruments.
Interim Financial Information
The accompanying financial statements as of March 31, 1997 and for the three
months ended March 31, 1997 are unaudited. In the opinion of management, the
unaudited interim financial statements have been prepared on the same basis as
the annual financial statements and reflect all adjustments, which include
only normal recurring adjustments, necessary to present fairly the financial
position as of March 31, 1997, and the results of the Company's operations and
its cash flows for the three months ended March 31, 1997. The financial data
and other information disclosed in these notes to financial statements at
March 31, 1997 and for the three months then ended are unaudited. The results
for the three months ended March 31, 1997 are not necessarily indicative of
the results to be expected for the year ending December 31, 1997.
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Property and equipment, net:
Computers and equipment........................... $ 4,000 $12,000
Furniture and fixtures............................ 7,000 6,000
Leasehold improvements............................ -- 1,000
------- -------
11,000 19,000
Less: Accumulated depreciation and amortization... (1,000) (1,000)
------- -------
$10,000 $18,000
======= =======
Accrued expenses:
Payroll and related expenses...................... $ -- $8,000
Other............................................. -- 9,000
------- -------
$ -- $17,000
======= =======
</TABLE>
NOTE 3--RELATED PARTY TRANSACTIONS:
During the period from May 7, 1996 (inception) through December 31, 1996,
the Company shared office space and had all personnel functions performed by a
related party, NetOffice, Inc. The office space and all related costs were
allocated between the companies based on a relative square-footage space
formula. In the opinion of management, the formula represents a reasonable
allocation of expenses to the Company.
At December 31, 1996, approximately $76,000 of the Company's trade payables
were payable to a related party, and less than $1,000 of receivables were due
from a related party.
F-76
<PAGE>
USWEB ATLANTA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of related party transactions for the period
December 31, 1996:
<TABLE>
<S> <C>
Personnel related expense........................................ $140,000
========
Rent expense..................................................... $ 27,000
========
Equipment and other facilities expense........................... $ 38,000
========
</TABLE>
NOTE 4--COMMITMENTS AND CONTINGENCIES:
Royalties
Under the terms of its franchise agreement with USWeb, the Company was
required to pay royalties to USWeb based upon a stipulated percentage of
adjusted gross revenue, as defined. Royalties for the year ended December 31,
1996 totaled $15,000 and are included in cost of revenues.
Operating Leases
The Company has no material operating leases at March 31, 1997. Rent expense
for the period from May 7, 1996 (inception) through December 31, 1996 and the
three months ended March 31, 1997 totaled $27,000 and $10,000, respectively.
NOTE 5--COMMON STOCK:
The Company's Articles of Incorporation, as amended, authorized the Company
to issue Common Stock, no par value. During the period from May 7, 1996
(inception) through December 31, 1996 and the three months ended March 31,
1997, the Company issued 525,000 and 316,507 shares, respectively, of Common
Stock to the founders of the Company, employees and other nonrelated parties.
A portion of the shares sold are subject to a right of repurchase by the
Company which lapses generally over a four year period from the earlier of
grant date or employee hire date, as applicable. At March 31, 1997, there were
316,507 shares subject to repurchase. Compensation expense related to share
issuances was not material for the year ended December 31, 1996 or for the
three months ended March 31, 1997.
NOTE 6--SUBSEQUENT EVENTS:
On May 1, 1997, USWeb reached an agreement to acquire all of the Company's
outstanding shares of Common Stock, at which time the Company became a wholly
owned subsidiary of USWeb.
F-77
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
USWeb DC
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' deficit and of cash
flows present fairly, in all material respects, the financial position of
USWeb DC (formerly Infopreneurs Inc.) and its subsidiary at December 31, 1996
and the results of their operations and their cash flows for the period from
June 30, 1996 (inception) through December 31, 1996, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
San Jose, California
September 18, 1997
F-78
<PAGE>
USWEB DC
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash................................................ $ 206,000 $ 3,000
Accounts receivable................................. -- 157,000
Other current assets................................ 24,000 57,000
--------- ---------
Total current assets.............................. 230,000 217,000
Property and equipment, net........................... 3,000 60,000
--------- ---------
$ 233,000 $ 277,000
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.................................... $ 16,000 $ 119,000
Accrued expenses.................................... -- 5,000
Customer deposits................................... -- 60,000
Line of credit...................................... 93,000 85,000
Notes payable....................................... 169,000 150,000
--------- ---------
Total current liabilities......................... 278,000 419,000
--------- ---------
Stockholders' deficit:
Common stock: no par value, 3,000 shares authorized;
2,060 and 2,076 shares issued and outstanding...... 150,000 165,000
Accumulated deficit................................. (195,000) (307,000)
--------- ---------
Total stockholders' deficit....................... (45,000) (142,000)
--------- ---------
$ 233,000 $ 277,000
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-79
<PAGE>
USWEB DC
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 3, 1996
(INCEPTION) THREE MONTHS
THROUGH ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
Revenues.............................................. $ 26,000 $ 184,000
Cost of revenues...................................... 45,000 160,000
--------- ---------
Gross profit (loss)................................. (19,000) 24,000
--------- ---------
Operating expenses:
Marketing, sales and support........................ 72,000 72,000
General and administrative.......................... 99,000 63,000
--------- ---------
Total operating expenses.......................... 171,000 135,000
--------- ---------
Loss from operations.................................. (190,000) (111,000)
Interest expense...................................... (5,000) (1,000)
--------- ---------
Net loss.............................................. $(195,000) $(112,000)
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-80
<PAGE>
USWEB DC
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
--------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT DEFICIT DEFICIT
------ -------- ----------- -------------
<S> <C> <C> <C> <C>
Common Stock issued to Founders...... 1,980 $ -- $ -- $ --
Common Stock issued for notes
payable............................. 20 -- -- --
Common Stock issued for cash......... 60 150,000 -- 150,000
Net loss............................. -- -- (195,000) (195,000)
----- -------- --------- ---------
Balance at December 31, 1996......... 2,060 150,000 (195,000) (45,000)
Conversion of debt to equity
(Unaudited)......................... 6 15,000 -- 15,000
Issuance of Restricted Stock
(Unaudited)......................... 10 -- -- --
Net loss (Unaudited)................. -- -- (112,000) (112,000)
----- -------- --------- ---------
Balance at March 31, 1997
(Unaudited)......................... 2,076 $165,000 $(307,000) $(142,000)
===== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-81
<PAGE>
USWEB DC
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 3, 1996
(INCEPTION) THREE MONTHS
THROUGH ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................ $(195,000) $(112,000)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization...................... 1,000 6,000
Changes in assets and liabilities:
Accounts receivable............................... -- (157,000)
Other current assets.............................. (25,000) (34,000)
Accounts payable.................................. 16,000 103,000
Accrued expenses.................................. -- 5,000
Customer deposits................................. -- 60,000
--------- ---------
Net cash used in operating activities........... (203,000) (129,000)
--------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES FOR THE
ACQUISITION OF PROPERTY AND EQUIPMENT............... (3,000) (62,000)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock.............. 150,000 --
Proceeds from note payable.......................... 213,000 --
Advances on line of credit.......................... 93,000 85,000
Repayment of notes payable.......................... (44,000) (4,000)
Repayment of advances on line of credit............. -- (93,000)
--------- ---------
Net cash provided by (used in) financing
activities..................................... 412,000 (12,000)
--------- ---------
Net increase (decrease) in cash...................... 206,000 (203,000)
Cash at beginning of period.......................... -- 206,000
--------- ---------
Cash at end of period................................ $ 206,000 $ 3,000
========= =========
NONCASH FINANCING ACTIVITIES:
Conversion of debt to equity........................ $ -- $ 15,000
========= =========
SUPPLEMENTAL INFORMATION:
Cash paid for interest.............................. $ 5,000 $ 1,000
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-82
<PAGE>
USWEB DC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
USWeb DC (the "Company"), formerly Infopreneurs Inc., and its subsidiary
USWeb DC, Inc., were incorporated in Delaware on June 3, 1996 and September
13, 1996, respectively. The Company provides Internet and intranet consulting,
web site development, and hosting services. The Company had two franchise
agreements with USWeb Corporation ("USWeb"): USWeb DC and USWeb Philadelphia.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenues from consulting service agreements and
hosting service fees.
Service revenues from fixed-price agreements are recognized over the period
of each engagement under the percentage of completion method using labor hours
incurred as a measure of progress towards completion. Provisions for contract
adjustments and losses are recorded in the period such items are identified.
Revenues from time and materials agreements and hosting services are
recognized and billed as the services are provided.
Significant Customers
During the period from June 3, 1996 (inception) through December 31, 1996,
sales to three customers accounted for 49%, 30%, and 21% of total revenues.
Other Assets
Franchise fees paid to USWeb are amortized to cost of revenues over two
years. Accumulated amortization as of December 31, 1996 totaled $1,000.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three years.
Advertising Costs
Advertising costs are expensed as incurred in accordance with Statement of
Position 93-7, "Reporting on Advertising Costs." Advertising costs for the
period from June 3, 1996 (inception) through December 31, 1996 and for the
three months ended March 31, 1997 totaled $8,000 and $19,000, respectively.
Principles of Consolidation
The accompanying consolidated financial statements include the consolidated
accounts of the Company and it wholly owned subsidiary. All significant
intercompany transactions and balances have been eliminated in consolidation.
F-83
<PAGE>
USWEB DC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
The Company's financial instruments, including notes payable and accounts
payable, have carrying amounts which approximate fair value due to the
relatively short maturity of these instruments.
Income Taxes
Income taxes are accounted for using an asset and liability approach which
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The measurement of current and deferred tax liabilities and assets
are based on provisions of the enacted tax law; the effects of future changes
in tax laws or rates are not anticipated. The measurement of deferred tax
assets is reduced, if necessary, by the amount of any tax benefits that, based
on available evidence, are not expected to be realized.
Interim Financial Information
The accompanying financial statements as of March 31, 1997 and for the three
months ended March 31, 1997 are unaudited. In the opinion of management, the
unaudited interim financial statements have been prepared on the same basis as
the annual financial statements and reflect all adjustments, which include
only normal recurring adjustments, necessary to present fairly the financial
position as of March 31, 1997, and the results of the Company's operations and
its cash flows for the three months ended March 31, 1997. The financial data
and other information disclosed in these notes to financial statements at
March 31, 1997 and for the period then ended are unaudited. The results for
the three months ended March 31, 1997 are not necessarily indicative of the
results to be expected for the year ending December 31, 1997.
NOTE 2--PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Computers and equipment............................. $3,000 $64,000
Furniture and fixtures.............................. -- 1,000
Leasehold improvements.............................. -- --
------ -------
3,000 65,000
Less: Accumulated depreciation and amortization..... -- (5,000)
------ -------
$3,000 $60,000
====== =======
</TABLE>
NOTE 3--DEBT:
During June 1996, the Company negotiated a line of credit with a bank in the
amount of $100,000 and a working capital loan in the amount of $48,000. Both
were personally guaranteed by the founders of the Company and were secured by
substantially all the assets of the Company. During the period from June 3,
1996 (inception) through December 31, 1996, the Company was advanced $93,000
on the line of credit. Interest on borrowings under the line of credit and
working capital loan accrue at 10% per annum. Prior to December 31, 1996, the
Company repaid $44,000 of principal on the working capital loan plus accrued
interest. During January 1997, the Company repaid the outstanding balance of
$93,000, plus accrued interest, upon the expiration of the line of credit.
During April 1997, the Company renegotiated its working capital loan in the
amount of $48,000 and expiring April 15, 2000. The loan is secured by the
fixed assets acquired with the proceeds of the loan funds and requires the
Company to maintain compliance with certain covenants. As of September 18,
1997, the Company had repaid $34,000 of the principal amount, plus accrued
interest.
F-84
<PAGE>
USWEB DC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During September 1996, the Company obtained a $15,000 demand loan used for
the acquisition of the Philadelphia franchise. In connection with the loan, 20
shares of no par value common stock were granted to the lender. The allocation
of proceeds to the shares of common stock and resulting non-cash interest
expense were not material to the period ended December 31, 1996 or the three
months ended March 31, 1997.
During December 1996, the Company obtained a loan from a related party in
the amount of $150,000, which is payable one year from the date of execution.
The loan was secured by the Company's outstanding common stock. Interest
accrues at a specified prime rate (8.25% at December 31, 1996). The note
payable plus accrued interest was paid by USWeb Corporation in August 1997.
NOTE 4--INCOME TAXES:
No provision for federal and state income taxes has been recognized as the
Company has incurred net operating losses from June 3, 1996 (inception)
through December 31, 1996. At December 31, 1996, the Company had approximately
$194,000 of federal net operating loss carryforwards which expire in 2011
available to offset future taxable income. Under the Tax Reform Act of 1986,
the amounts of and benefits from net operating loss carryforwards may be
impaired or limited in certain circumstances. Events which may cause
limitations in the amount of net operating losses that the Company may utilize
in any one year include, but are not limited to, a cumulative ownership change
of more than 50%, as defined, over a three year period.
Deferred tax assets, aggregating approximately $75,000 at December 31, 1996,
consist primarily of net operating loss carryforwards. The Company has
provided a full valuation allowance on the deferred tax assets because of the
uncertainty regarding realization based upon the weight of currently available
information.
NOTE 5--COMMON STOCK:
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 3,000 shares of no par value Common Stock. During the period from
June 3, 1996 (inception) through December 31, 1996, the Company issued a total
of 2,000 shares of Common Stock to the Founders and affiliates of the Company
and sold 60 shares of Common Stock to a related party. Compensation expense
related to share issuances for the period ended December 31, 1996 and the
three months ended March 31, 1997 was not material.
NOTE 6--SUBSEQUENT EVENTS:
Equity transactions
During February 1997, the following equity transactions occurred: ten shares
of restricted common stock were granted to an employee, which vest on the
earlier of a change in control in the Company or February 14, 1998, and the
outstanding debt of $15,000 incurred in connection with the acquisition of the
Philadelphia franchise from USWeb was converted into 6 shares of common stock.
During May 1997, the Company sold 24 shares of common stock for $156,000. In
connection with the sale of such shares, the Company agreed to repurchase the
shares at their original issue price if the Company had not completed its then
anticipated merger with USWeb on or prior to September 30, 1997.
Acquisition
On June 1, 1997, USWeb reached an agreement to acquire all of the Company's
outstanding shares of Common Stock, at which time the Company became a wholly
owned subsidiary of USWeb.
F-85
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
USWeb Pittsburgh
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of USWeb Pittsburgh (formerly
Electronic Images, Inc.) at January 31, 1996 and 1997, and the results of its
operations and its cash flows for the years ended January 31, 1996 and 1997,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
San Jose, California
September 18, 1997
F-86
<PAGE>
USWEB PITTSBURGH
BALANCE SHEET
<TABLE>
<CAPTION>
JANUARY 31,
--------------------- APRIL 30,
1996 1997 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 251,000 $ 578,000 $ 24,000
Accounts receivable, net.................. 712,000 662,000 1,232,000
Costs in excess of billings............... 84,000 76,000 151,000
Deferred income taxes..................... 51,000 42,000 42,000
Other current assets...................... 13,000 50,000 16,000
---------- ---------- ----------
Total current assets.................... 1,111,000 1,408,000 1,465,000
Note receivable--affiliate.................. 187,000 -- 134,000
Property and equipment, net................. 570,000 989,000 950,000
Other assets................................ -- 36,000 90,000
---------- ---------- ----------
$1,868,000 $2,433,000 $2,639,000
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................... $ 187,000 $ 160,000 $ 86,000
Accrued expenses.......................... 204,000 244,000 410,000
Current portion of note payable........... -- 85,000 85,000
---------- ---------- ----------
Total current liabilities............... 391,000 489,000 581,000
Note payable--long term portion............. -- 272,000 249,000
Note payable--affiliate..................... -- 17,000 --
---------- ---------- ----------
391,000 778,000 830,000
Commitments (Note 5)
Shareholders' equity:
Common Stock: $1.00 par value, 10,000
shares authorized; 5,000, 5,263 and 5,263
shares issued and outstanding............ 5,000 5,000 5,000
Additional paid-in capital................ 45,000 130,000 130,000
Note receivable from shareholder.......... -- (63,000) (62,000)
Retained earnings......................... 1,427,000 1,583,000 1,736,000
---------- ---------- ----------
Total shareholders' equity.............. 1,477,000 1,655,000 1,809,000
---------- ---------- ----------
$1,868,000 $2,433,000 $2,639,000
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-87
<PAGE>
USWEB PITTSBURGH
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
JANUARY 31, APRIL 30,
---------------------- ----------------------
1996 1997 1996 1997
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues.................... $5,664,000 $5,996,000 $1,822,000 $1,504,000
Cost of revenues............ 4,111,000 4,719,000 1,114,000 1,042,000
---------- ---------- ---------- ----------
Gross profit.............. 1,553,000 1,277,000 708,000 462,000
---------- ---------- ---------- ----------
Operating expenses:
Marketing, sales and sup-
port..................... 212,000 302,000 49,000 75,000
General and administra-
tive..................... 809,000 689,000 159,000 124,000
---------- ---------- ---------- ----------
Total operating ex-
penses................. 1,021,000 991,000 208,000 199,000
---------- ---------- ---------- ----------
Income from operations...... 532,000 286,000 500,000 263,000
Interest expense, net....... (1,000) (14,000) (4,000) (6,000)
Other income................ 5,000 -- -- --
---------- ---------- ---------- ----------
Income before income taxes.. 536,000 272,000 496,000 257,000
Income tax provision........ 218,000 116,000 211,000 104,000
---------- ---------- ---------- ----------
Net income.................. $ 318,000 $ 156,000 $ 285,000 $ 153,000
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-88
<PAGE>
USWEB PITTSBURGH
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTE
COMMON STOCK RECEIVABLE ADDITIONAL TOTAL
------------- FROM PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT SHAREHOLDER CAPITAL EARNINGS EQUITY
------ ------ ----------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 31,
1995................... 5,000 $5,000 $ -- $ 45,000 $1,109,000 $1,159,000
Net income.............. -- -- -- -- 318,000 318,000
----- ------ -------- -------- ---------- ----------
Balance at January 31,
1996................... 5,000 5,000 -- 45,000 1,427,000 1,477,000
----- ------ -------- -------- ---------- ----------
Issuance of Common Stock
for note receivable
from shareholder....... 263 -- (85,000) 85,000 -- --
Payment on note
receivable from
shareholder............ -- -- 22,000 -- -- 22,000
Net income.............. -- -- -- -- 156,000 156,000
----- ------ -------- -------- ---------- ----------
Balance at January 31,
1997................... 5,263 5,000 (63,000) 130,000 1,583,000 1,655,000
----- ------ -------- -------- ---------- ----------
Payment on note
receivable from
shareholder
(Unaudited)............ -- -- 1,000 -- -- 1,000
Net income (Unaudited).. -- -- -- -- 153,000 153,000
----- ------ -------- -------- ---------- ----------
Balance as of April 30,
1997 (Unaudited)....... 5,263 $5,000 $(62,000) $130,000 $1,736,000 $1,809,000
===== ====== ======== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-89
<PAGE>
USWEB PITTSBURGH
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JANUARY 31, APRIL 30,
------------------------ --------------------
1996 1997 1996 1997
----------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income..................... $ 318,000 $ 156,000 $ 285,000 $ 153,000
Adjustments to reconcile net
income to net cash provided by
(used in) operating
activities:
Depreciation and amortization. 223,000 414,000 87,000 123,000
Deferred income taxes......... -- 9,000 -- --
Changes in assets and
liabilities:
Accounts receivable.......... (198,000) 50,000 (265,000) (570,000)
Costs in excess of billings.. (4,000) 8,000 (54,000) (75,000)
Other current assets......... (12,000) (37,000) 2,000 34,000
Other assets................. -- (36,000) -- (54,000)
Accounts payable............. 83,000 (27,000) (106,000) (74,000)
Accrued expenses............. 36,000 40,000 284,000 166,000
----------- ----------- --------- ---------
Net cash provided by (used
in) operating activities... 446,000 577,000 233,000 (297,000)
----------- ----------- --------- ---------
CASH FLOWS USED IN INVESTING
ACTIVITIES FOR THE ACQUISITION
OF PROPERTY AND EQUIPMENT...... (480,000) (833,000) (170,000) (84,000)
----------- ----------- --------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments on note
payable....................... -- (43,000) -- (23,000)
Change in note
receivable/payable--affiliate. 281,000 204,000 (281,000) (151,000)
Proceeds from issuance of note
payable....................... -- 400,000 -- --
Payments received on note
receivable from shareholder... -- 22,000 -- 1,000
----------- ----------- --------- ---------
Net cash provided by (used
in) financing activities... 281,000 583,000 (281,000) (173,000)
----------- ----------- --------- ---------
Net increase (decrease) in cash
and cash equivalents........... 247,000 327,000 (218,000) (554,000)
Cash and cash equivalents at
beginning of period............ 4,000 251,000 251,000 578,000
----------- ----------- --------- ---------
Cash and cash equivalents at end
of period...................... $ 251,000 $ 578,000 $ 33,000 $ 24,000
=========== =========== ========= =========
SUPPLEMENTAL NONCASH INVESTING
AND FINANCING ACTIVITY:
Issuance of common stock for
shareholder
note receivable............... $ -- $ 85,000 $ -- $ --
=========== =========== ========= =========
CASH PAID DURING THE PERIOD FOR:
Interest....................... $ 1,000 $ 16,000 $ -- $ 7,000
=========== =========== ========= =========
Income taxes................... $ 171,000 $ 182,000 $ 75,000 $ 19,000
=========== =========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-90
<PAGE>
USWEB PITTSBURGH
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USWeb Pittsburgh (the "Company"), formerly Electronic Images, Inc., was
incorporated in Pennsylvania on December 24, 1987 and is engaged in full
service digital design and multi-media production specializing in digital
media communications. The Company, through June 30, 1997, was a majority owned
subsidiary of Unicorn Creative Services, Ltd. (the "Parent"). See Note 9.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenues from consulting service agreements.
Service revenues from fixed-price development agreements are recognized
under the completed-contract method whereby income is recognized only when the
contract is substantially completed and all costs and related revenues are
deferred in the balance sheet until that time. Provisions for agreement
adjustments and losses are recorded in the period such items are identified.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Significant Customers
During the year ended January 31, 1996, sales to two customers accounted for
56% and 22% of revenues. During the year ended January 31, 1997, sales to two
customers accounted for 58% and 15% of revenues. Approximately 85% and 71% of
accounts receivable at January 31, 1996 and 1997, respectively, was due from
one customer.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three years. Leasehold improvements are amortized using the
straight-line method over the shorter of the estimated useful lives of the
assets or the remaining lease term, not to exceed five years.
Fair Value of Financial Instruments
The Company's financial instruments, including cash equivalents, notes and
accounts payable and accrued expenses, have carrying amounts which approximate
fair value due to the relatively short maturity of these instruments.
F-91
<PAGE>
USWEB PITTSBURGH
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
Income taxes are accounted for using an asset and liability approach which
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The measurement of current and deferred tax liabilities and assets
are based on provisions of the enacted tax law; the effects of future changes
in tax laws or rates are not anticipated. The measurement of deferred tax
assets is reduced, if necessary, by the amount of any tax benefits that, based
on available evidence, are not expected to be realized.
Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of APB No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB No. 25, compensation cost
is recognized based on the difference, if any, on the date of grant between
the fair value of the Company's stock and the amount an employee must pay to
acquire the stock.
Interim Financial Information
The accompanying balance sheet as of April 30, 1997 and the statements of
operations and of cash flows for the three-month periods ended April 30, 1996
and 1997, are unaudited. In the opinion of management, these statements have
been prepared on the same basis as the audited financial statements and
include all adjustments, consisting only of normal recurring adjustments,
necessary for the fair presentation of the results of the interim periods. The
financial data and other information disclosed in these notes to financial
statements related to these periods are unaudited. The results for the three
months ended April 30, 1997 are not necessarily indicative of the results to
be expected for the year ending January 31, 1998.
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
JANUARY 31,
--------------------- APRIL 30,
1996 1997 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Property and equipment:
Computers and equipment.................. $1,222,000 $2,016,000 $2,095,000
Furniture and fixtures................... 166,000 204,000 204,000
Leasehold improvements................... 150,000 151,000 156,000
---------- ---------- ----------
1,538,000 2,371,000 2,455,000
Less: accumulated depreciation........... 968,000 1,382,000 1,505,000
---------- ---------- ----------
$ 570,000 $ 989,000 $ 950,000
========== ========== ==========
Accrued expenses:
Payroll and related expenses............. $ -- $ 30,000 $ 8,000
Income taxes............................. 128,000 22,000 103,000
Payables under customer rebate program... 70,000 190,000 297,000
Other.................................... 6,000 2,000 2,000
---------- ---------- ----------
$ 204,000 $ 244,000 $ 410,000
========== ========== ==========
</TABLE>
F-92
<PAGE>
USWEB PITTSBURGH
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3--RELATED PARTY TRANSACTIONS:
In July 1996, the Company issued 263 shares of Common Stock to an officer
upon exercise of stock options in exchange for two promissory notes. The first
note, for $60,000 is due on January 31, 1999 and accrues interest at the rate
of 5.88% per year. The second note, for $25,000 is due on June 30, 2001 and
accrues interest at the rate of 6.58% per year. The shares are subject to
repurchase by the Company, at the Company's then book value per share, if the
officer's employment is terminated.
The Company provides services to various customers who are members in the
parent consolidated group. Revenue from these companies totaled approximately
$1,263,000 and $1,441,000 for the years ended January 31, 1996 and 1997,
respectively. Revenue from these companies for the three months ended April
30, 1996 and 1997 totaled approximately $617,000 and $443,000, respectively.
The Parent provides services to its consolidated group and allocates
expenses incurred to its members. Expenses allocated to the Company during the
years ended January 31, 1996 and 1997 totaled $469,000 and $381,000,
respectively, and were included in general and administrative expenses.
NOTE 4--INCOME TAXES:
The Company files separate company tax returns. The provision for income
taxes consists of the following for the years ended January 31, 1996 and 1997
and the three months ended April 30, 1996 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
JANUARY 31, ENDED APRIL 30,
----------------- -----------------
1996 1997 1996 1997
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current:
Federal................................ $164,000 $ 81,000 $176,000 $ 87,000
State.................................. 54,000 26,000 35,000 17,000
-------- -------- -------- --------
218,000 107,000 211,000 104,000
-------- -------- -------- --------
Deferred:
Federal................................ -- 2,000 -- --
State.................................. -- 7,000 -- --
-------- -------- -------- --------
-- 9,000 -- --
-------- -------- -------- --------
Income Tax Provision..................... $218,000 $116,000 $211,000 $104,000
======== ======== ======== ========
</TABLE>
A reconciliation of the statutory federal income tax rate to the effective
income tax rate follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
JANUARY 31, APRIL 30,
------------- ---------------
1996 1997 1996 1997
----- ----- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Statutory rate............................ 34% 34% 34% 34%
State income taxes, net of federal bene-
fit...................................... 7% 7% 7% 7%
Nondeductible expense and other........... -- 2% -- --
----- ----- ------ ------
Effective income tax rate................. 41% 43% 41% 41%
===== ===== ====== ======
</TABLE>
F-93
<PAGE>
USWEB PITTSBURGH
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets consists of the following as of January 31, 1996 and
1997 and April 30, 1997:
<TABLE>
<CAPTION>
JANUARY 31,
--------------- APRIL 30,
1996 1997 1997
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Depreciation and amortization.................. $35,000 $25,000 $25,000
Reserves not currently deductible.............. 16,000 17,000 17,000
------- ------- -------
Total deferred tax assets........................ $51,000 $42,000 $42,000
======= ======= =======
</TABLE>
NOTE 5--COMMITMENTS:
Operating Leases
The Company leases its office facilities under noncancelable operating
leases which expire in 2001. The leases require payment of property taxes,
insurance, maintenance and utilities. The Company also has operating lease
agreements relating to certain equipment which expire at various dates. Rent
expense for the years ended January 31, 1996 and 1997 and the six month period
ended April 30, 1997 totaled $252,000, $192,000 and $41,000, respectively.
Future minimum lease payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED OPERATING
DECEMBER 31, LEASES
------------ ---------
<S> <C>
1998............................................................. $145,000
1999............................................................. 135,000
2000............................................................. 124,000
2001............................................................. 106,000
--------
Total minimum lease payments..................................... $510,000
========
</TABLE>
NOTE 6--NOTES PAYABLE:
Effective February 1, 1996, the Company entered into a bank loan which bears
interest at the prime interest rate, plus 0.25% per annum. The bank's prime
interest rate was 8.25% at January 31, 1997. There was $357,000 and $334,000
outstanding under the loan, at January 31, 1997 and April 30, 1997. In May
1997, the bank loan was converted into a five year term loan bearing interest
at the bank's prime interest rate, plus 2.25% per annum. The bank loan was
obtained as part of a credit facility of the Parent's consolidated group and
is secured by property and equipment. The term loan requires principal
payments of $85,000 per year with the balance due in 2002. The term loan was
repaid in full in September 1997.
NOTE 7--COMMON STOCK:
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 10,000 shares of $1 par value Common Stock. During the year ended
January 31, 1997, the Company sold 263 shares of Common Stock to an employee
of the Company. See Note 3.
NOTE 8--STOCK OPTION PLAN:
In June 1996, the Company adopted the Electronic Images, Inc. Corporate
Stock Purchase Plan (the "Plan"). The Plan provides for the granting of non-
qualified stock options to employees as determined by the Company's Board of
Directors.
F-94
<PAGE>
USWEB PITTSBURGH
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company made one grant of options under this Plan to a single employee
during the year ended January 31, 1997. The option was immediately exercised
as described in Note 3. There were no option grants under the Plan during the
three months ended April 30, 1997. Had compensation cost for the grant of
options been determined based on the fair value at the grant dates consistent
with the method prescribed by SFAS No. 123, the Company's net income would not
reflect a material change.
NOTE 9--SUBSEQUENT EVENTS:
On July 1, 1997, USWeb reached an agreement to acquire all of the Company's
outstanding shares of common stock, at which time the Company became a wholly
owned subsidiary of USWeb.
NOTE 10--RETIREMENT PLANS:
The Company has elected to contribute $34,000 and $1,000 to an Employee
Stock Ownership Plan ("ESOP") for the years ended January 31, 1996 and 1997,
respectively. The plan was established by the Parent in 1984 and includes the
stock of the Parent.
During the year ended January 31, 1997, the Company established a defined
contribution 401(k) plan (the "Plan") for substantially all of its employees.
Under the Plan, employees may contribute up to 10% of their gross wages. The
Company will, at its discretion, match a percentage of the employee
contribution. For the year ended January 31, 1997 the Company elected to
contribute $30,000 to the Plan.
F-95
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
USWeb Chicago Metro
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of USWeb Chicago Metro (formerly
Multimedia Marketing & Design Inc.) at December 31, 1996, and the results of
its operations and its cash flows for the year ended December 31, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
San Jose, California
October 31, 1997
F-96
<PAGE>
USWEB CHICAGO METRO
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 36,000 $110,000
Accounts receivable ................................. 142,000 6,000
Other current assets................................. 5,000 --
-------- --------
Total current assets............................... 183,000 116,000
Property and equipment, net............................ 70,000 71,000
Other assets........................................... 1,000 --
-------- --------
$254,000 $187,000
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 24,000 $27,000
Payroll taxes payable................................ 19,000 3,000
Deferred revenue..................................... 9,000 22,000
-------- --------
Total current liabilities.......................... 52,000 52,000
Loan from shareholder.................................. -- 48,000
-------- --------
52,000 100,000
-------- --------
Commitments (Note 3)
Shareholders' equity:
Common Stock: no par value, 1,500 shares authorized;
1 share issued and outstanding....................... -- --
Retained earnings.................................... 202,000 87,000
-------- --------
Total shareholders' equity......................... 202,000 87,000
-------- --------
$254,000 $187,000
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-97
<PAGE>
USWEB CHICAGO METRO
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, ----------------
1996 1996 1997
------------ ------- --------
(UNAUDITED)
<S> <C> <C> <C>
Revenues......................................... $602,000 $98,000 $327,000
Cost of revenues................................. 256,000 47,000 226,000
-------- ------- --------
Gross profit................................... 346,000 51,000 101,000
-------- ------- --------
Operating expenses:
Marketing, sales and support................... 97,000 7,000 47,000
General and administrative..................... 70,000 18,000 25,000
-------- ------- --------
Total operating expenses..................... 167,000 25,000 72,000
-------- ------- --------
Income from operations........................... 179,000 26,000 29,000
Interest income ................................. -- -- 1,000
-------- ------- --------
Net income....................................... $179,000 $26,000 $ 30,000
======== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-98
<PAGE>
USWEB CHICAGO METRO
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ ------ --------- -------------
<S> <C> <C> <C> <C>
Balance at December 31,
1995................... 1 $-- $ 41,000 $ 41,000
Distribution to share-
holder................. -- -- (18,000) (18,000)
Net income.............. -- -- 179,000 179,000
--- --- --------- ---------
Balance at December 31,
1996................... 1 -- 202,000 202,000
--- --- --------- ---------
Distribution to
shareholder
(Unaudited)............ -- -- (145,000) (145,000)
Net income (Unaudited).. -- -- 30,000 30,000
--- --- --------- ---------
Balance as of June 30,
1997 (Unaudited)....... 1 $-- $ 87,000 $ 87,000
=== === ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-99
<PAGE>
USWEB CHICAGO METRO
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTH
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, -------------------
1996 1996 1997
------------ -------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income.................................. $ 179,000 $ 26,000 $ 30,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.............. 22,000 9,000 18,000
Changes in assets and liabilities:
Accounts receivable....................... (136,000) (6,000) 136,000
Other current assets...................... (5,000) -- 5,000
Other assets.............................. (2,000) -- 1,000
Accounts payable.......................... 22,000 7,000 3,000
Payroll taxes payable..................... 19,000 (1,000) (16,000)
Deferred revenue.......................... 9,000 13,000 13,000
--------- -------- ---------
Net cash provided by operating
activities.............................. 108,000 48,000 190,000
--------- -------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES FOR
THE ACQUISITION OF
PROPERTY AND EQUIPMENT...................... (62,000) (38,000) (19,000)
--------- -------- ---------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Payments on loan from shareholder........... (24,000) (15,000) --
Distribution to shareholder................. (18,000) -- (145,000)
Proceeds from issuance of note payable to
shareholder................................ -- -- 48,000
--------- -------- ---------
Net cash used in financing activities.... (42,000) (15,000) (97,000)
--------- -------- ---------
Net increase (decrease) in cash and cash
equivalents................................. 4,000 (5,000) 74,000
Cash and cash equivalents at beginning of
period...................................... 32,000 32,000 36,000
--------- -------- ---------
Cash and cash equivalents at end of period... $ 36,000 $ 27,000 $ 110,000
========= ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-100
<PAGE>
USWEB CHICAGO METRO
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USWeb Chicago Metro (the "Company"), formerly Multimedia Marketing & Design
Inc., was incorporated in Illinois on April 7, 1995, and is a professional
services firm providing companies with a single source for Internet and
Internet solutions. See Note 5.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenues from consulting service agreements and
hosting service fees.
Service revenues from fixed-price development agreements are recognized over
the period of each engagement under the percentage of completion method using
labor hours incurred as a measure of progress towards completion. Provisions
for agreement adjustments and losses are recorded in the period such items are
identified. Deferred revenue represents the amount of revenues received in
advance of services being performed. Revenues from time and materials
agreements and hosting services are recognized and billed as the services are
provided.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Significant Customers
During the year ended December 31, 1996, sales to three customers accounted
for 21%, 14% and 14% of revenues. Approximately 53%, 11% and 10% of accounts
receivable at December 31, 1996, was due from three customers.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three years.
Fair Value of Financial Instruments
The Company's financial instruments, including cash equivalents, accounts
receivable, accounts payable and loans from shareholder, have carrying amounts
which approximate fair value due to the relatively short maturity of these
instruments.
F-101
<PAGE>
USWEB CHICAGO METRO
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company elected to be taxed as on S Corporation pursuant to the Internal
Revenue Code. This election provides for all profits or losses to be
recognized in the tax returns of the shareholder.
Interim Financial Information
The accompanying balance sheet as of June 30, 1997 and the statements of
operations and of cash flows for the six-month periods ended June 30, 1996 and
1997, are unaudited. In the opinion of management, these statements have been
prepared on the same basis as the audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for
the fair presentation of the results of the interim periods. The financial
data and other information disclosed in these notes to financial statements
related to these periods are unaudited. The results for the six months ended
June 30, 1997 are not necessarily indicative of the results to be expected for
the year ending December 31, 1997.
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Property and equipment:
Computers and equipment........................... $90,000 $104,000
Furniture and fixtures............................ 7,000 12,000
------- --------
97,000 116,000
Less: accumulated depreciation.................... 27,000 45,000
------- --------
$70,000 $ 71,000
======= ========
</TABLE>
NOTE 3--COMMITMENTS:
Operating Leases
The Company leases its office facilities under noncancelable operating
leases which expire in 1999. Rent expense for the year ended December 31, 1996
and the six month periods ended June 30, 1996 and 1997 totaled $14,000,
$1,000, and $13,000, respectively.
Future minimum lease payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED OPERATING
DECEMBER 31, LEASES
------------ ---------
<S> <C>
1997............................................................. $26,000
1998............................................................. 26,000
1999............................................................. 13,000
-------
Total minimum lease payments..................................... $65,000
=======
</TABLE>
NOTE 4--COMMON STOCK:
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 1,500 shares of no par value Common Stock.
NOTE 5--SUBSEQUENT EVENTS:
On July 1, 1997, USWeb reached an agreement to acquire all of the Company's
outstanding shares of common stock, at which time the Company became a wholly
owned subsidiary of USWeb.
F-102
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
USWeb Hollywood
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of USWeb Hollywood (formerly KandH,
Inc.) at August 29, 1997 and the results of its operations and its cash flows
for the period from March 5, 1997 (Inception) to August 29, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
San Jose, California
October 31, 1997
F-103
<PAGE>
USWEB HOLLYWOOD
(formerly KandH, Inc.)
BALANCE SHEET
<TABLE>
<CAPTION>
AUGUST 29,
1997
----------
<S> <C>
ASSETS
Current assets:
Cash............................................................ $ 11,000
Accounts receivable............................................. 123,000
--------
$134,000
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 21,000
Income tax payable.............................................. 2,000
--------
Total current liabilities..................................... 23,000
--------
Shareholders' equity:
Common Stock: $1.00 par value, 1,000 shares authorized,
issued and outstanding......................................... 1,000
Shareholder note receivable..................................... (1,000)
Retained earnings............................................... 111,000
--------
Total shareholders' equity.................................... 111,000
--------
$134,000
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-104
<PAGE>
USWEB HOLLYWOOD
(formerly KandH, Inc.)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 5, 1997
(INCEPTION)
THROUGH
AUGUST 29,
1997
-------------
<S> <C>
Revenues....................................................... $339,000
Cost of revenues............................................... 154,000
--------
Gross profit................................................. 185,000
--------
Operating expenses:
Marketing, sales and support................................. 64,000
General and administrative................................... 8,000
--------
Total operating expenses................................... 72,000
--------
Income from operations before taxes............................ 113,000
Provision for income taxes..................................... 2,000
--------
Net income..................................................... $111,000
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-105
<PAGE>
USWEB HOLLYWOOD
(formerly KandH, Inc.)
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTE
COMMON STOCK RECEIVABLE TOTAL
------------- FROM RETAINED SHAREHOLDERS'
SHARES AMOUNT SHAREHOLDER EARNINGS EQUITY
------ ------ ----------- -------- -------------
<S> <C> <C> <C> <C> <C>
Issuance of Common Stock....... 1,000 $1,000 $(1,000) $ -- $ --
Net income..................... -- -- -- 111,000 111,000
----- ------ ------- -------- --------
Balance at August 29, 1997..... 1,000 $1,000 $(1,000) $111,000 $111,000
===== ====== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-106
<PAGE>
USWEB HOLLYWOOD
(formerly KandH, Inc.)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 5, 1997
(INCEPTION)
THROUGH
AUGUST 29,
1997
-------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................... $ 111,000
Adjustments to reconcile net income to net cash
used in operating activities:
Changes in assets and liabilities:
Accounts receivable......................................... (123,000)
Accounts payable............................................ 21,000
Income tax payable.......................................... 2,000
---------
Net cash used in operating activities..................... (100,000)
---------
Net increase in cash........................................... 11,000
Cash at beginning of period.................................... --
---------
Cash at end of period.......................................... $ 11,000
=========
SUPPLEMENTAL NONCASH FINANCING ACTIVITY:
Issuance of Common Stock for shareholder note receivable...... $ 1,000
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-107
<PAGE>
USWEB HOLLYWOOD
(formerly KandH, Inc.)
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
USWeb Hollywood (the "Company"), formerly KandH, Inc., was formed to provide
professional consulting services relating to Internet and intranet
technologies. The Company was incorporated in Florida on March 5, 1997 and
elected an S Corporation tax status.
Revenue Recognition
The Company derives its revenues from consulting service agreements.
Service revenues from fixed-price development agreements are recognized
under the completed-contract method whereby income is recognized only when the
contract is substantially completed and all costs and related revenues are
deferred in the balance sheet until that time. Provisions for agreement
adjustments and losses are recorded in the period such items are identified.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
For certain of the Company's financial instruments, including accounts
receivable and accounts payable, the carrying amounts approximate fair value
due to the relatively short maturity of these instruments.
Concentration of Credit Risk
The Company is potentially subject to a concentration of credit risk from
its trade receivables, as a significant portion is due from one major
customer. The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. As of August 29, 1997, one customer
accounted for 91% of the Company's accounts receivable balance and 43% of
total revenues.
Income Taxes
The Company has elected to be taxed as an S Corporation, pursuant to the
Internal Revenue Code. This election provides for all profits or losses to be
recognized in the shareholders' personal income tax returns. The provision for
income taxes represents a 1.5% franchise tax imposed by the State of
California.
The August 29, 1997 current provision for income taxes represents applicable
state franchise taxes. The California S Corporation provisions require the
payment of a 1.5% franchise tax on taxable income for the period ended August
29, 1997.
NOTE 2--COMMON STOCK:
The Company's Articles of Incorporation authorize the Company to issue 1,000
shares of $1.00 par value Common Stock. During the period from March 5, 1997
(Inception) through August 29, 1997, the Company sold 1,000 shares of Common
Stock to the founders of the Company.
NOTE 3--SUBSEQUENT EVENTS:
On August 29, 1997, USWeb reached an agreement to acquire all of the
Company's outstanding shares of Common Stock, at which time the Company became
a wholly owned subsidiary of USWeb.
F-108
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
USWeb Hollywood
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of USWeb Hollywood (formerly
DreamMedia, Inc.) at December 31, 1996 and the results of its operations and
its cash flows from April 3, 1996 (Inception) to December 31, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
San Jose, California
October 29, 1997
F-109
<PAGE>
USWEB HOLLYWOOD
(formerly DreamMedia, Inc.)
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash................................................ $ 21,000 $ 12,000
Accounts receivable................................. 36,000 63,000
Inventory........................................... -- 55,000
Other assets........................................ 12,000 36,000
-------- --------
Total current assets.............................. 69,000 166,000
Property and equipment, net........................... 163,000 158,000
-------- --------
$232,000 $324,000
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 6,000 $ 61,000
Accrued expenses.................................... 2,000 31,000
Amounts due to related party (Note 3)............... 129,000 91,000
-------- --------
Total current liabilities......................... 137,000 183,000
-------- --------
Commitments (Note 4)
Shareholders' equity:
Common Stock: $1.00 par value, 1,000 shares
authorized,
issued and outstanding ............................ 1,000 1,000
Retained earnings................................... 94,000 140,000
-------- --------
Total shareholders' equity.......................... 95,000 141,000
-------- --------
$232,000 $324,000
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-110
<PAGE>
USWEB HOLLYWOOD
(formerly DreamMedia, Inc.)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 3,
1996
(INCEPTION) SIX MONTHS
THROUGH ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Revenues.......................................... $204,000 $380,000
Cost of revenues.................................. 72,000 257,000
-------- --------
Gross profit.................................... 132,000 123,000
-------- --------
Operating expenses:
Marketing, sales and support.................... -- 35,000
General and administrative...................... 37,000 41,000
-------- --------
Total operating expenses...................... 37,000 76,000
-------- --------
Income from operations............................ 95,000 47,000
Provision for income taxes........................ 1,000 1,000
-------- --------
Net income........................................ $ 94,000 $ 46,000
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-111
<PAGE>
USWEB HOLLYWOOD
(formerly DreamMedia, Inc.)
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ ------ -------- -------------
<S> <C> <C> <C> <C>
Issuance of Common Stock for cash.......... 1,000 $1,000 $ -- $ 1,000
Net income................................. -- -- 94,000 94,000
----- ------ -------- --------
Balance at December 31, 1996............... 1,000 $1,000 94,000 95,000
Net income (Unaudited)..................... -- -- 46,000 46,000
----- ------ -------- --------
Balance at June 30, 1997 (Unaudited)....... 1,000 $1,000 $140,000 $141,000
===== ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-112
<PAGE>
USWEB HOLLYWOOD
(formerly DreamMedia, Inc.)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 3, 1996
(INCEPTION) SIX MONTHS
THROUGH ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------- -----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................... $ 94,000 $ 46,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation....................................... 33,000 34,000
Changes in assets and liabilities:
Accounts receivable............................... (36,000) (27,000)
Inventory......................................... -- (55,000)
Other assets...................................... (11,000) (24,000)
Accounts payable.................................. 6,000 55,000
Accrued expenses.................................. 2,000 29,000
--------- --------
Net cash provided by (used in) operating activi-
ties........................................... 88,000 58,000
--------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES FOR
ACQUISITION OF PROPERTY AND EQUIPMENT PURCHASES..... (196,000) (29,000)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock.............. 1,000 --
Due to related party................................ 128,000 (38,000)
--------- --------
Net cash provided by (used in) financing
activities..................................... 129,000 (38,000)
--------- --------
Net increase in cash................................. 21,000 (9,000)
Cash at beginning of period.......................... -- 21,000
--------- --------
Cash at end of period................................ $ 21,000 $ 12,000
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-113
<PAGE>
USWEB HOLLYWOOD
(formerly DreamMedia, Inc.)
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
USWeb Hollywood (the "Company"), formerly DreamMedia, Inc., was formed to
provide professional consulting services relating to Internet and intranet
technologies. The Company was incorporated in California on April 3, 1996 and
elected an S Corporation tax status. See Note 6.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenues from consulting service agreements.
Service revenues from fixed-price development agreements are recognized
under the completed-contract method whereby income is recognized only when the
contract is substantially completed and all costs and related revenues are
deferred in the balance sheet until that time. Provisions for agreement
adjustments and losses are recorded in the period such items are identified.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three years.
Fair Value of Financial Instruments
For certain of the Company's financial instruments, including accounts
receivable, inventory, other assets, accounts payable, accrued expenses and
due to related party, the carrying amounts approximate fair value due to the
relatively short maturity of these instruments.
Concentration of Credit Risk
The Company is potentially subject to a concentration of credit risk from
its trade receivables, as a significant portion is due from two major
customers. The Company performs ongoing credit evaluations of its customers
and generally does not require collateral. As of December 31, 1996 two
customers accounted for 99% of the Company's accounts receivable balance, and
79% of the Company's total revenues.
Income Taxes
The Company has been elected to be taxed as an S Corporation pursuant to the
Internal Revenue Code. This election provides for all profits or losses to be
recognized in the shareholders' personal income tax returns. The provision for
income taxes represents a 1.5% franchise tax imposed by the State of
California.
The December 31, 1996 current provision for income tax represents applicable
state franchise taxes. The California S Corporation provisions require the
payment of a 1.5% franchise tax on taxable income for the year ended December
31, 1996.
F-114
<PAGE>
USWEB HOLLYWOOD
(formerly DreamMedia, Inc.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Interim Financial Information
The accompanying financial statements as of June 30, 1997 and for the period
from April 3, 1996 (Inception) through June 30, 1996 and the six months ended
June 30, 1997 are unaudited. In the opinion of management, the unaudited
interim financial statements have been prepared on the same basis as the
annual financial statements and reflect all adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of the
results of the interim periods. The financial data and other information
disclosed in these notes to financial statements related to these periods are
unaudited. The results for the six months ended June 30, 1997 are not
necessarily indicative of the results to be expected for the year ending
December 31, 1997.
NOTE 2--PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Computer equipment................................ $174,000 $203,000
Furniture and fixtures............................ 22,000 22,000
-------- --------
Less: accumulated depreciation.................... (33,000) (67,000)
-------- --------
$163,000 $158,000
======== ========
</TABLE>
NOTE 3--RELATED PARTY TRANSACTIONS:
Shareholder Note Payable
In July 1996, the Company purchased furniture and equipment valued at
$196,000 from an affiliate in exchange for a note payable. The note accrued
interest at the rate of 6.5% per annum payable upon maturity. The balance plus
accrued interest was repaid in October 1997.
NOTE 4--COMMITMENTS:
Operating Leases
The Company leases its office facilities under month-to-month operating
leases. Rent paid for the year ended December 31, 1996 and for the six months
ended June 30, 1997 totaled $7,333 and $8,000, respectively.
NOTE 5--COMMON STOCK:
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 1,000 shares of $1.00 par value Common Stock. During the period from
April 3, 1996 (Inception) through December 31, 1996, the Company sold 1,000
shares of Common Stock to the founders of the Company.
NOTE 6--SUBSEQUENT EVENTS:
On August 29, 1997 USWeb reached an agreement to acquire all of the
Company's outstanding shares of Common Stock, at which time the Company became
a wholly owned subsidiary of USWeb.
F-115
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
USWeb Marin
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of USWeb Marin
(formerly Internet Cybernautics, Inc.) at December 31, 1995 and 1996, and the
results of its operations and its cash flows for the years ended December 31,
1995 and 1996, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
San Jose, California
October 17, 1997
F-116
<PAGE>
USWEB MARIN
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1995 1996 1997
-------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 1,000 $ 170,000 $ 122,000
Accounts receivable, net.................... 24,000 405,000 404,000
Costs in excess of billings................. -- -- 57,000
Other current assets........................ 5,000 14,000 17,000
-------- --------- ---------
Total current assets...................... 30,000 589,000 600,000
Property and equipment, net................... 7,000 49,000 331,000
Other assets.................................. -- -- 44,000
-------- --------- ---------
$ 37,000 $ 638,000 $ 975,000
======== ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................ $ 12,000 $ 40,000 $ 167,000
Accrued expenses............................ 34,000 309,000 595,000
Deferred revenues........................... -- 120,000 --
Short-term borrowings....................... -- -- 350,000
-------- --------- ---------
Total current liabilities................. 46,000 469,000 1,112,000
-------- --------- ---------
Commitments (Note 5)
Shareholders' equity:
Series A Preferred Stock: no par value,
5,500,00 shares
authorized; no shares issued or outstand-
ing........................................ -- -- --
Common Stock: No par value, 18,500,000
shares authorized; 1,169,632, 1,601,818 and
1,930,239 shares issued and
outstanding................................ 56,000 395,000 707,000
Additional paid-in capital.................. -- 471,000 471,000
Note receivable from shareholder............ -- (25,000) --
Deferred stock compensation................. -- (438,000) (390,000)
Accumulated deficit......................... (65,000) (234,000) (925,000)
-------- --------- ---------
Total shareholders' equity (deficit)...... (9,000) 169,000 (137,000)
-------- --------- ---------
$ 37,000 $ 638,000 $ 975,000
======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-117
<PAGE>
USWEB MARIN
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------- -------------------
1995 1996 1996 1997
-------- --------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues............................. $ 55,000 $ 970,000 $279,000 $1,591,000
Cost of revenues..................... 42,000 418,000 69,000 1,183,000
-------- --------- -------- ----------
Gross profit....................... 13,000 552,000 210,000 408,000
-------- --------- -------- ----------
Operating expenses:
Marketing, sales and support....... 27,000 180,000 92,000 373,000
General and administrative......... 51,000 541,000 61,000 726,000
-------- --------- -------- ----------
Total operating expenses......... 78,000 721,000 153,000 1,099,000
-------- --------- -------- ----------
Net income (loss).................... $(65,000) $(169,000) $ 57,000 $ (691,000)
======== ========= ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-118
<PAGE>
USWEB MARIN
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
NOTE TOTAL
COMMON STOCK ADDITIONAL RECEIVABLE DEFERRED SHAREHOLDERS'
------------------ PAID-IN FROM STOCK ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL SHAREHOLDER COMPENSATION DEFICIT (DEFICIT)
--------- -------- ---------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994................... -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of Common Stock
for cash............... 1,169,632 56,000 -- -- -- -- 56,000
Net loss................ -- -- -- -- -- (65,000) (65,000)
--------- -------- -------- -------- --------- --------- ---------
Balance at December 31,
1995................... 1,169,632 56,000 -- -- -- (65,000) (9,000)
Issuance of Common Stock
for cash............... 369,326 292,000 -- -- -- -- 292,000
Issuance of Common Stock
for services........... 30,552 22,000 -- -- -- -- 22,000
Issuance of Common Stock
for note receivable
from shareholder....... 32,308 25,000 -- (25,000) -- -- --
Deferred stock
compensation........... -- -- 471,000 -- (471,000) -- --
Amortization of deferred
stock compensation -- -- -- -- 33,000 -- 33,000
Net loss................ -- -- -- -- -- (169,000) (169,000)
--------- -------- -------- -------- --------- --------- ---------
Balance at December 31,
1996................... 1,601,818 395,000 471,000 (25,000) (438,000) (234,000) 169,000
Issuance of Common Stock
for cash (Unaudited)... 328,421 312,000 -- -- -- -- 312,000
Amortization of deferred
stock compensation
(Unaudited)............ -- -- -- -- 48,000 -- 48,000
Payment on note
receivable from
shareholder
(Unaudited)............ -- -- -- 25,000 -- -- 25,000
Net loss (Unaudited).... -- -- -- -- -- (691,000) (691,000)
--------- -------- -------- -------- --------- --------- ---------
Balance as of June 30,
1997 (Unaudited)....... 1,930,239 $707,000 $471,000 $ -- $(390,000) $(925,000) $(137,000)
========= ======== ======== ======== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-119
<PAGE>
USWEB MARIN
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------- -------------------
1995 1996 1996 1997
-------- --------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS USED IN OPERATING
ACTIVITIES:
Net income.......................... $(65,000) $(169,000) $ 57,000 $(691,000)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Stock Compensation................. -- 33,000 -- 48,000
Depreciation and amortization...... -- 6,000 2,000 38,000
Provision for doubtful accounts.... -- 30,000 -- 15,000
Noncash exchange for services...... -- 22,000 -- --
Changes in assets and liabilities:
Accounts receivable............... (24,000) (411,000) (76,000) (14,000)
Costs in excess of billings....... -- -- -- (57,000)
Other current assets.............. (5,000) (9,000) (5,000) (3,000)
Other assets...................... -- -- -- (44,000)
Accounts payable.................. 12,000 28,000 20,000 127,000
Accrued expenses.................. 34,000 275,000 (8,000) 286,000
Deferred revenues................. -- 120,000 -- (120,000)
-------- --------- -------- ---------
Net cash used in operating
activities...................... (48,000) (75,000) (10,000) (415,000)
-------- --------- -------- ---------
CASH FLOWS USED IN INVESTING
ACTIVITIES FOR THE ACQUISITION OF
PROPERTY AND EQUIPMENT.............. (7,000) (48,000) (12,000) (320,000)
-------- --------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Common Stock............ 56,000 292,000 64,000 312,000
Proceeds from short-term borrowing.. -- -- -- 350,000
Collection of note receivable from
shareholder........................ -- -- -- 25,000
-------- --------- -------- ---------
Net cash provided by financing
activities...................... 56,000 292,000 64,000 687,000
-------- --------- -------- ---------
Net increase (decrease) in cash and
cash equivalents.................... 1,000 169,000 42,000 (48,000)
Cash and cash equivalents at
beginning of period................. -- 1,000 1,000 170,000
-------- --------- -------- ---------
Cash and cash equivalents at end of
period.............................. $ 1,000 $ 170,000 43,000 122,000
======== ========= ======== =========
SUPPLEMENTAL NONCASH ACTIVITY:
Issuance of common stock for
shareholder
note receivable.................... $ -- $ 25,000 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-120
<PAGE>
USWEB MARIN
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USWeb Marin (the "Company"), formerly Internet Cybernautics, Inc., was
incorporated in Wyoming on August 17, 1995 and is engaged in full service
digital design and multi-media production specializing in digital media
communications. On July 9, 1997, the Company amended its articles of
incorporation and filed as a Delaware corporation. See Note 8.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenues from consulting service agreements.
Service revenues from fixed-price agreements are recognized over the period
of each engagement under the percentage of completion method using labor hours
incurred as a measure of progress towards completion. Provisions for agreement
adjustments and losses are recorded in the period such items are identified.
Deferred revenues represent the amount of revenues received in advance of
services being performed.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Significant Customers
During the year ended December 31, 1995, sales to four customers accounted
for 23%, 14%, 14% and 13%of revenues. During the year ended December 31, 1996,
sales to two customers accounted for 25% and 10% of revenues. Approximately
48% of accounts receivable at December 31, 1996 was due from one customer.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three years.
Fair Value of Financial Instruments
The Company's financial instruments, including cash equivalents, accounts
receivable, accounts payable, accrued expenses and short term borrowings, have
carrying amounts which approximate fair value due to the relatively short
maturity of these instruments.
F-121
<PAGE>
USWEB MARIN
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
Income taxes are accounted for using an asset and liability approach which
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The measurement of current and deferred tax liabilities and assets
are based on provisions of the enacted tax law; the effects of future changes
in tax laws or rates are not anticipated. The measurement of deferred tax
assets is reduced, if necessary, by the amount of any tax benefits that, based
on available evidence, are not expected to be realized.
Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of APB No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB No. 25, compensation cost
is recognized based on the difference, if any, on the date of grant between
the fair value of the Company's stock and the amount an employee must pay to
acquire the stock.
Interim Financial Information
The accompanying balance sheet as of June 30, 1997 and the statements of
operations and of cash flows for the six-month periods ended June 30, 1996 and
1997, are unaudited. In the opinion of management, these statements have been
prepared on the same basis as the audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for
the fair presentation of the results of the interim periods. The financial
data and other information disclosed in these notes to financial statements
related to these periods are unaudited. The results for the six months ended
June 30, 1997 are not necessarily indicative of the results to be expected for
the year ending December 31,1997.
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 30,
1995 1996 1997
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accounts receivable, net:
Accounts Receivable.......................... $24,000 $435,000 $449,000
Less: allowance for bad debt................. -- (30,000) (45,000)
------- -------- --------
$24,000 $405,000 $404,000
======= ======== ========
Property and equipment:
Equipment.................................... $ 6,000 $ 51,000 $352,000
Furniture and fixtures....................... 1,000 4,000 17,000
------- -------- --------
7,000 55,000 369,000
Less: accumulated depreciation............... -- (6,000) (38,000)
------- -------- --------
$ 7,000 $ 49,000 $331,000
======= ======== ========
Accrued expenses:
Payroll and related expenses................. $21,000 $142,000 $469,000
Customer Deposits............................ -- 99,000 --
Other........................................ 13,000 68,000 126,000
------- -------- --------
$34,000 $309,000 $595,000
======= ======== ========
</TABLE>
F-122
<PAGE>
USWEB MARIN
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3--SHORT-TERM BORROWINGS AND CREDIT FACILITY:
The Company maintains a working capital line of credit with a bank that
allows borrowings of up to 80 percent of eligible accounts receivable with a
maximum borrowing of $500,000. Borrowings under the line bear interest at 1.5
percent above the bank's prime rate (8.0 percent at June 30, 1997). At June
30, 1997, there was $350,000 of borrowings outstanding.
NOTE 4--INCOME TAXES:
The Company files separate company tax returns. For the years ended December
31, 1995 and 1996 and the six months ended June 30, 1996 and 1997 there was no
provision for income taxes recorded.
Deferred tax assets consist of the following as of December 31, 1995 and
1996 and June 30, 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1995 1996 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Depreciation and amortization............. $ -- $ 10,000 $ 15,000
Reserves not currently deductible......... -- 10,000 10,000
Loss carryforwards........................ 26,000 48,000 275,000
-------- -------- ---------
Gross deferred tax assets................. 26,000 68,000 300,000
Valuation allowance....................... (26,000) (68,000) (300,000)
-------- -------- ---------
$ -- $ -- $ --
======== ======== =========
</TABLE>
No deferred provision or benefit for income taxes has been recorded as the
Company is in a net deferred tax asset position for which a full valuation has
been provided as management believes that it is more likely than not, based on
available evidence, that the deferred tax assets will not be realized.
At June 30, 1997, the Company has federal net operating loss carryforwards
of approximately $925,000, which expire in 2010. The income tax benefit from
the utilization of net operating loss carryforwards may be limited in certain
circumstances including, but not limited to, cumulative stock ownership
changes of more than 50% over a three year period.
NOTE 5--COMMITMENTS:
Operating Leases
The Company leases its office facilities under noncancelable operating
leases which expire in 2000. The leases require payment of property taxes,
insurance, maintenance and utilities. The Company also has operating lease
agreements relating to certain equipment which expire at various dates. Rent
expense for the years ended December 31, 1995 and 1996 and the six month
periods ended June 30, 1996 and 1997 totaled $4,000, $27,000, $5,000 and
$46,000, respectively.
F-123
<PAGE>
USWEB MARIN
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED OPERATING
DECEMBER 31, LEASES
------------ ---------
<S> <C>
1997............................................................. $ 93,000
1998............................................................. 79,000
1999............................................................. 79,000
2000............................................................. 13,000
--------
Total minimum lease payments..................................... $264,000
========
</TABLE>
NOTE 6--COMMON STOCK AND CONVERTIBLE PREFERRED STOCK:
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 18,500,000 shares of no par value Common Stock and 5,500,000 shares
of Convertible Preferred Stock.
NOTE 7--STOCK OPTION PLAN:
In August 1995, the Company adopted the Combined Incentive and Nonstatutory
Stock Option Plan (the "Plan"). The Plan provides for the granting of non-
qualified stock options to employees as determined by the Company's Board of
Directors. Under the plan, options vest at a rate of 20% at the end of the
first year after grant and one forty-eighth ( 1/48th) percent each month
thereafter. Options expire seven years from the date granted.
During the year ended December 31, 1995 and the six month period ended June
30, 1996, respectively, no compensation costs were recognized in connection
with option grants. During the year ended December 31, 1996 the Company
granted options to certain employees with exercise prices below fair value, as
a result, compensation costs of $33,000 and $48,000 were recorded for the year
ended December 31, 1996 and the six month period ended June 30, 1997,
respectively. Had compensation cost for the Company's option plan been
determined based on the fair value at the grant dates, as described in SFAS
123, the Company's net income (loss) would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------- -----------------
1995 1996 1996 1997
-------- --------- ------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net income (loss):
As reported...................... $(65,000) $(169,000) $57,000 $(691,000)
======== ========= ======= =========
Pro forma........................ $(78,000) $(199,000) $42,000 $(704,000)
======== ========= ======= =========
</TABLE>
Under SFAS 123, the fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted average assumption used for grants:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------- -------------------
1995 1996 1996 1997
------ ------ ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Expected lives, in years........... 5.0 5.0 5.0 5.0
Risk free interest rates........... 6.0% 6.2% 6.1% 6.4%
Dividend yield..................... 0.0% 0.0% 0.0% 0.0%
Stock price volatility............. 0.0% 0.0% 0.0% 0.0%
</TABLE>
F-124
<PAGE>
USWEB MARIN
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE FAIR
SHARES PRICE VALUE
--------- --------- ---------
<S> <C> <C> <C>
Outstanding at December 31, 1994............. -- $ --
Granted.................................... 3,000,000 0.15 $0.02
--------- -----
Outstanding at December 31, 1995............. 3,000,000 0.15
Granted.................................... 1,180,173 0.21 0.05
--------- -----
Outstanding at December 31, 1996............. 4,180,173 0.17
Granted (Unaudited)........................ 40,000 0.95 0.26
--------- -----
Outstanding at June 30, 1997 (Unaudited)..... 4,220,173 $0.18
========= =====
</TABLE>
At June 30, 1997, 1,592,792 shares were exercisable and the options
outstanding had a weighted-average remaining contractual life of 5.5 years.
NOTE 8--SUBSEQUENT EVENTS:
In June 1997, the Company entered into a Common Stock Option Repurchase
Agreement with one of its former employees whereby the Company will pay
$150,000 for the purchase of all of the employee's vested options.
On July 9, 1997, the Company amended its articles of incorporation and filed
as Delaware corporation. Subsequent to this reincorporation, all issued and
outstanding shares of the Company's Common Stock were exchanged for an
equivalent number of Series A Preferred Stock in August 1997.
In July, 1997, the Company established a defined contribution 401(k) plan
(the "Plan") for substantially all of its employees. Under the Plan, employees
may contribute up to 10% of their gross wages. The Company will, at its
discretion, match a percentage of the employee contribution. To date the
Company has not declared a matching contribution.
On September 30, 1997, USWeb reached an agreement to acquire all of the
Company's outstanding shares of common stock, at which time the Company became
a wholly owned subsidiary of USWeb.
F-125
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
USWeb Long Island
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of USWeb Long Island (formerly
Synergetix Systems Integration, Inc.) at December 31, 1996, and the results of
its operations and its cash flows for the year ended December 31, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
San Jose, California
October 31, 1997
F-126
<PAGE>
USWEB LONG ISLAND
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash................................................ $ 42,000 $ 57,000
Accounts receivable, net............................ 178,000 190,000
Inventory........................................... 10,000 --
-------- --------
Total current assets.............................. 230,000 247,000
Property and equipment, net .......................... 15,000 12,000
Other assets, net..................................... 28,000 21,000
-------- --------
$273,000 $280,000
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 46,000 $124,000
Accrued expenses.................................... 61,000 98,000
Unearned revenue.................................... 17,000 9,000
Note payable ....................................... 98,000 --
Note payable--related party ........................ -- 23,000
-------- --------
Total liabilities................................. 222,000 254,000
-------- --------
Commitments (Note 6)
Shareholders' equity:
Common Stock: no par value, 200 shares authorized;
150 and 100 shares issued and outstanding at
December 31, 1996 and June 30, 1997, respectively.. 9,000 9,000
Treasury stock, at cost............................. -- (51,000)
Retained earnings................................... 42,000 68,000
-------- --------
Total shareholders' equity ....................... 51,000 26,000
-------- --------
$273,000 $280,000
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-127
<PAGE>
USWEB LONG ISLAND
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, ------------------
1996 1996 1997
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Revenues....................................... $818,000 $472,000 $431,000
Cost of revenues............................... 781,000 432,000 328,000
-------- -------- --------
Gross profit................................. 37,000 40,000 103,000
-------- -------- --------
Operating expenses:
Marketing, sales and support................. 43,000 21,000 27,000
General and administrative................... 49,000 21,000 39,000
-------- -------- --------
Total operating expenses................... 92,000 42,000 66,000
-------- -------- --------
Income (loss) from operations.................. (55,000) (2,000) 37,000
Interest expense, net.......................... 11,000 4,000 11,000
-------- -------- --------
Net income (loss).............................. $(66,000) $ (6,000) $ 26,000
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-128
<PAGE>
USWEB LONG ISLAND
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK TOTAL
------------- --------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT EARNINGS EQUITY
------ ------ ------ -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1996................... 150 $9,000 -- $ -- $108,000 $117,000
Net loss................ -- -- -- -- (66,000) (66,000)
--- ------ --- -------- -------- --------
Balance at December 31,
1996................... 150 9,000 -- -- 42,000 51,000
Purchase of treasury
stock (Unaudited)...... (50) -- 50 (51,000) -- (51,000)
Net income (Unaudited).. -- -- -- -- 26,000 26,000
--- ------ --- -------- -------- --------
Balance at June 30, 1997
(Unaudited)............ 100 $9,000 50 $(51,000) $ 68,000 $ 26,000
=== ====== === ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-129
<PAGE>
USWEB LONG ISLAND
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -------------------
1996 1996 1997
------------ -------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................... $(66,000) $ (6,000) $ 26,000
Adjustments to reconcile net income (loss)
to cash provided by (used in) operating
activities:
Depreciation and amortization.............. 13,000 5,000 11,000
Changes in operating assets and
liabilities:
Accounts receivable....................... 12,000 10,000 (12,000)
Inventory................................. (10,000) -- 10,000
Other assets.............................. (25,000) -- --
Accounts payable.......................... 46,000 27,000 78,000
Accrued expenses.......................... 24,000 22,000 37,000
Unearned revenue.......................... (22,000) (20,000) (8,000)
-------- -------- ---------
Net cash provided by (used in) operating
activities................................. (28,000) 38,000 142,000
-------- -------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES FOR
THE
ACQUISITION OF PROPERTY AND EQUIPMENT....... (13,000) (12,000) (1,000)
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable.................. 75,000 25,000 --
Repayment of note payable................... (8,000) (5,000) (98,000)
Repayment of note payable to related party.. -- -- (2,000)
Purchase of treasury stock from former
shareholder................................ -- -- (26,000)
-------- -------- ---------
Net cash provided (used in) by financing
activities................................ 67,000 20,000 (126,000)
-------- -------- ---------
Net increase in cash......................... 26,000 46,000 15,000
Cash at beginning of period.................. 16,000 16,000 42,000
-------- -------- ---------
Cash at end of period........................ $ 42,000 $ 62,000 $ 57,000
======== ======== =========
SUPPLEMENTAL NONCASH FINANCING ACTIVITY:
Issuance of note payable to former
shareholder................................ $ -- $ -- $ 25,000
======== ======== =========
CASH PAID DURING THE PERIOD FOR:
Interest.................................... $ 10,000 $ 4,000 $ 10,000
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-130
<PAGE>
USWEB LONG ISLAND
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT POLICIES:
The Company
USWeb Long Island (the "Company"), formerly Synergetix Systems Integration,
Inc., was incorporated in the state of New York on November 3, 1989. The
Company provides professional consulting services relating to software design
and integration and document imaging.
During September 1996, the Company entered into a franchise agreement with
USWeb Corporation ("USWeb") to become part of USWeb's affiliate network.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenues from consulting service agreements. Service
revenues from fixed-price agreements are recognized over the period of each
engagement under the percentage of completion method using labor hours
incurred as a measure of progress towards completion. Provisions for contract
adjustments and losses are recognized in the period such items are identified.
Unearned revenues represent the amount of revenues received in advance of
services being performed. Revenue from time and materials agreements are
recognized and billed as the services are rendered.
Inventory
Inventory, which consists principally of purchased computer hardware, is
stated at the lower of cost or market value, cost being determined on the
first-in, first-out method.
Other Assets
Franchise fees paid to USWeb are amortized to cost of revenues over two
years. Accumulated amortization totaled $3,000 and $10,000 as of December 31,
1996 and June 30, 1997, respectively.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated on a
straight-line basis over the estimated useful lives of three years for
computer equipment and seven years for office equipment.
Concentration of Credit Risk and Significant Customers
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash and trade receivables.
The Company places its cash with high quality financial institutions and, by
policy, limits the amount of credit exposure to any one institution.
Concentrations of credit risk exist with respect to trade receivables. The
Company performs periodic credit evaluations of its customers' financial
condition and does not require collateral or other security.
F-131
<PAGE>
USWEB LONG ISLAND
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The portion of total revenue that was derived from major customers was as
follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Customer A....................................... 17% --
Customer B....................................... 14% --
Customer C....................................... 12% --
Customer D....................................... -- 35%
Customer E....................................... -- 19%
Customer F....................................... -- 12%
</TABLE>
At December 31, 1996, Customer A represented 44% of net accounts receivable.
At June 30, 1997, Customers D and E represented 42% and 19%, respectively, of
net accounts receivable.
Fair Value of Financial Instruments
The Company's financial instruments, including cash, accounts receivable,
notes and accounts payable and accrued expenses, have carrying amounts which
approximate fair value due to the relatively short maturity of these
instruments.
Income Taxes
The Company has elected to be taxed as an S Corporation, pursuant to the
Internal Revenue Code. This election provides for all profits or losses to be
recognized in the shareholders' personal income tax returns.
Interim Financial Information
The accompanying balance sheet as of June 30, 1997 and the statements of
operations and of cash flows for the six-month periods ended June 30, 1996 and
1997, are unaudited. In the opinion of management, these statements have been
prepared on the same basis as the audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for
the fair presentation of the results of the interim periods. The financial
data and other information disclosed in these notes to financial statements
related to these periods are unaudited. The results for the six months ended
June 30, 1997 are not necessarily indicative of the results to be expected for
the year ending December 31, 1997.
NOTE 2--PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Computers and equipment.......................... $26,000 $27,000
Furniture and fixtures........................... 12,000 12,000
------- -------
38,000 39,000
Less: accumulated depreciation................... (23,000) (27,000)
------- -------
$15,000 $12,000
======= =======
</TABLE>
Depreciation expense was $10,000 for the year ended December 31, 1996 and
$4,000 for the six months ended June 30, 1997, respectively.
F-132
<PAGE>
USWEB LONG ISLAND
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3--ACCRUED EXPENSES:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Payroll and related taxes........................ $17,000 $23,000
Other............................................ 44,000 75,000
------- -------
Total........................................ $61,000 $98,000
======= =======
</TABLE>
Included in other accrued expenses are credit card liabilities of $29,000
and $61,000 at December 31, 1996 and June 30, 1997, respectively. Interest on
these liabilities accrue at an annual rate ranging from 6% to 18%.
NOTE 4--NOTE PAYABLE:
The Company has a line of credit with its lender for $100,000. Borrowings
under this line bear interest at prime plus 3.75% and are collateralized by
the personal assets of a shareholder. Interest expense for the year ended
December 31, 1996 and for the six months ended June 30, 1997 totaled $3,000
and $4,000, respectively.
In May 1997, the Company repaid and closed its $100,000 line of credit with
its lender.
NOTE 5--NOTE PAYABLE - RELATED PARTY:
In May 1997, the Company repurchased 50 shares of common stock from a
stockholder for $51,000, consisting of $26,000 in cash and a promissory note
of $25,000. The promissory note is payable in twelve equal monthly
installments of approximately $2,000 commencing June 1997. Interest accrues at
an annual rate of 8.5%. This note was repaid in September 1997.
NOTE 6--COMMITMENTS:
Royalties
Under the terms of its franchise agreement with USWeb, the Company is
required to pay royalties to USWeb based upon a stipulated percentage of
adjusted gross revenue, as defined. Royalty expense for the six months ended
June 30, 1997 totaled $24,000 and is included in cost of revenues. There was
no royalty expense for the year ended December 31, 1996.
Operating Leases
The Company leases a car and an office facility under noncancelable
operating leases which expire in January 1998 and November 1999, respectively.
Future minimum lease payments under these leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1997........................................................... $ 42,000
1998........................................................... 39,000
1999........................................................... 36,000
--------
$117,000
========
</TABLE>
F-133
<PAGE>
USWEB LONG ISLAND
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Rent expense for the year ended December 31, 1996 and the for six month
period ended June 30, 1997 totaled $36,000, and $18,000, respectively.
NOTE 7--SUBSEQUENT EVENTS:
On September 30, 1997, the Company and US Web reached an agreement whereby
USWeb agreed to acquire all of outstanding shares of the Company's common
stock, at which time the Company became a wholly owned subsidiary of US Web.
In September 1997, the Company issued two unsecured promissory notes of
$99,000 and $26,000 respectively, in exchange for accounts payable, to
investors who are related to a stockholder of the Company. These notes are
non-interest bearing and are due in December 1997.
F-134
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
USWeb Detroit
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of USWeb Detroit
(formerly Online Marketing Company, Inc.) at December 31, 1996, and the
results of its operations and its cash flows for the year ended December 31,
1996, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
San Jose, California
October 24, 1997
F-135
<PAGE>
USWEB DETROIT
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $16,000 $ --
Accounts receivable, net............................ 38,000 77,000
------- --------
Total current assets.............................. 54,000 77,000
Property and equipment, net........................... 36,000 37,000
Other assets.......................................... 1,000 4,000
------- --------
$91,000 $118,000
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................... $33,000 $ 79,000
Accrued expenses.................................... 9,000 16,000
Note payable--affiliates............................ 10,000 10,000
Current portion of capital lease obligation ........ 7,000 7,000
------- --------
Total current liabilities......................... 59,000 112,000
Capital lease obligation, net of current portion...... 12,000 8,000
------- --------
71,000 120,000
------- --------
Commitments (Note 4)
Shareholders' equity (deficit):
Common Stock: $1.00 par value, 60,000 shares
authorized; 3,000 shares issued and outstanding.... 3,000 3,000
Retained earnings (accumulated deficit)............. 17,000 (5,000)
------- --------
Total shareholders' equity (deficit) ............. 20,000 (2,000)
------- --------
$91,000 $118,000
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-136
<PAGE>
USWEB DETROIT
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, -----------------
1996 1996 1997
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Revenues....................................... $476,000 $218,000 $306,000
Cost of revenues............................... 264,000 100,000 230,000
-------- -------- --------
Gross profit................................. 212,000 118,000 76,000
-------- -------- --------
Operating expenses:
Marketing, sales and support................. 96,000 43,000 40,000
General and administrative................... 113,000 35,000 57,000
-------- -------- --------
Total operating expenses................... 209,000 78,000 97,000
-------- -------- --------
Income (loss) from operations.................. 3,000 40,000 (21,000)
Interest expense, net.......................... (2,000) -- (1,000)
-------- -------- --------
Net income (loss).............................. $ 1,000 $ 40,000 $(22,000)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-137
<PAGE>
USWEB DETROIT
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
RETAINED TOTAL
COMMON STOCK EARNINGS SHAREHOLDERS'
------------- (ACCUMULATED EQUITY
SHARES AMOUNT DEFICIT) (DEFICIT)
------ ------ ------------ -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995.......... 3,000 $3,000 $ 16,000 $ 19,000
Net income............................ -- -- 1,000 1,000
----- ------ -------- --------
Balance at December 31, 1996.......... 3,000 3,000 17,000 20,000
Net loss (Unaudited).................. -- -- (22,000) (22,000)
----- ------ -------- --------
Balance as of June 30, 1997 (Unau-
dited)............................... 3,000 $3,000 $ (5,000) $ (2,000)
===== ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-138
<PAGE>
USWEB DETROIT
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, ------------------
1996 1996 1997
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 1,000 $ 40,000 $(22,000)
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization................ 8,000 3,000 8,000
Provision for doubtful accounts.............. 8,000 -- --
Changes in assets and liabilities:
Accounts receivable......................... (26,000) (41,000) (39,000)
Other current assets........................ (1,000) -- --
Other assets................................ 1,000 (2,000) (3,000)
Accounts payable............................ 28,000 12,000 46,000
Accrued expenses............................ 9,000 6,000 7,000
-------- -------- --------
Net cash provided by (used in) operating
activities................................ 28,000 18,000 (3,000)
-------- -------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES FOR THE
ACQUISITION OF PROPERTY AND EQUIPMENT......... (22,000) (15,000) (9,000)
-------- -------- --------
CASH FLOWS USED IN FINANCING ACTIVITIES FOR THE
PRINCIPAL PAYMENTS ON CAPITAL LEASE OBLIGATION
.............................................. (4,000) -- (4,000)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents................................... 2,000 3,000 (16,000)
Cash and cash equivalents at beginning of
period........................................ 14,000 14,000 16,000
-------- -------- --------
Cash and cash equivalents at end of period..... $ 16,000 $ 17,000 $ --
======== ======== ========
SUPPLEMENTAL NONCASH INVESTING AND FINANCING
ACTIVITY:
Acquisition of property and equipment under
capital lease obligation..................... $ 23,000 $ 23,000 $ --
======== ======== ========
CASH PAID DURING THE PERIOD FOR:
Interest...................................... $ 1,000 $ -- $ 1,000
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-139
<PAGE>
USWEB DETROIT
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USWeb Detroit (the "Company"), formerly Online Marketing Company, Inc., was
incorporated in Michigan on June 9, 1995, and is engaged in full service
internet technology integration specializing in web page and intranet design,
production and maintenance, primarily in the Metro-Detroit area. The Company,
through September 30, 1997, was wholly owned by three shareholders. See Note
6.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenues from consulting service agreements and
hosting service fees.
Service revenues from fixed-price agreements are recognized over the period
of each engagement under the percentage of completion method using labor hours
incurred as a measure of progress towards completion. Provisions for contract
adjustments and losses are recorded in the period such items are identified.
Revenues from time and materials agreements and hosting services are
recognized and billed as the services are provided.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Significant Customers
During the year ended December 31, 1996, sales to one customer accounted for
10% of revenues. Approximately 10% of accounts receivable at December 31,
1996, was due from one customer.
Property and Equipment
Property and equipment are stated at cost. Assets held under capital leases
are recorded at the present value of the minimum lease payments at lease
inception. Depreciation and amortization is computed using the straight-line
method over the estimated useful lives of the assets, generally three years.
Fair Value of Financial Instruments
The Company's financial instruments, including cash equivalents, accounts
receivable, accounts payable, notes and lease obligations payable and accrued
expenses, have carrying amounts which approximate fair value due to the
relatively short maturity of these instruments.
F-140
<PAGE>
USWEB DETROIT
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company has elected to be taxed as an S Corporation, pursuant to the
Internal Revenue Code. This election provides for all profits or losses to be
recognized in the tax returns of its shareholders. Accordingly, no provision
for income tax is made in these financial statements.
Interim Financial Information
The accompanying balance sheet as of June 30, 1997 and the statements of
operations and of cash flows for the six-month periods ended June 30, 1996 and
1997, are unaudited. In the opinion of management, these statements have been
prepared on the same basis as the audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for
the fair presentation of the results of the interim periods. The financial
data and other information disclosed in these notes to financial statements
related to these periods are unaudited. The results for the six months ended
June 30, 1997 are not necessarily indicative of the results to be expected for
the year ending December 31, 1997.
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Accounts receivable, net:
Accounts receivable............................... $ 46,000 $ 77,000
Less: allowance for doubtful accounts............. (8,000) --
-------- --------
$ 38,000 $ 77,000
======== ========
Property and equipment, net:
Computers and equipment........................... $ 41,000 $ 47,000
Furniture and fixtures............................ 5,000 8,000
-------- --------
46,000 55,000
Less: accumulated depreciation.................... (10,000) (18,000)
-------- --------
$ 36,000 $ 37,000
======== ========
</TABLE>
NOTE 3--RELATED PARTY TRANSACTIONS:
In 1995, the Company borrowed $5,000 under a note payable to a shareholder
of the Company. The note was non-interest bearing, unsecured and payable upon
demand. Subsequent to year-end and concurrent with the US Web transaction in
September 1997, this note was converted to equity.
In 1995, the Company borrowed $5,000 under a note payable to a party related
to a shareholder of the Company. The note is non-interest bearing, unsecured
and payable on December 31, 1997.
NOTE 4--COMMITMENTS:
Operating Leases
The Company leases its office facilities and certain equipment under
noncancelable operating leases which expire in 1998 and 1999, respectively.
The leases require payment of property taxes, insurance, maintenance and
utilities. The Company also has operating lease agreements relating to certain
equipment which expire at various dates. Rent expense for the year ended
December 31, 1996 and the six month periods ended June 30, 1996 and 1997
totaled $32,000, $15,000, and $19,000, respectively.
F-141
<PAGE>
USWEB DETROIT
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED OPERATING
DECEMBER 31, LEASES
------------ ---------
<S> <C>
1997............................................................. $45,000
1998............................................................. 22,000
1999............................................................. 4,000
-------
Total minimum lease payments..................................... $71,000
=======
</TABLE>
Capital leases
In 1996, the Company leased certain computer equipment under a non-
cancelable capital lease with a remaining term in excess of one year. The
lease is personally guaranteed by an officer of the Company. Future minimum
lease commitments under the capital lease are as follows for years ending
December 31:
<TABLE>
<CAPTION>
YEAR ENDED CAPITAL
DECEMBER 31, LEASES
------------ -------
<S> <C>
1997.............................................................. $ 9,000
1998.............................................................. 8,000
1999.............................................................. 4,000
-------
Total minimum lease payments...................................... 21,000
Less: amount representing interest................................ (2,000)
-------
Present value of capital lease obligation......................... 19,000
Less: current portion............................................. (7,000)
-------
Long-term obligation at December 31, 1996......................... $12,000
=======
</TABLE>
The cost and related accumulated depreciation of assets under capital lease
was $23,000 and $5,000, respectively, at December 31, 1996.
NOTE 5--COMMON STOCK:
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 60,000 shares of $1 par value Common Stock.
NOTE 6--SUBSEQUENT EVENTS:
Subsequent events
In August 1997, the Company borrowed $55,000 under a note payable to a
shareholder of the Company. The note was non-interest bearing, unsecured and
payable on demand. Concurrent with the USWeb transaction on September 30,
1997, this note was converted to equity.
On September 30, 1997, USWeb reached an agreement to acquire all of the
Company's outstanding shares of common stock, at which time the Company became
a wholly owned subsidiary of USWeb.
F-142
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
USWeb San Mateo
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of USWeb San Mateo (formerly
Zendatta, Inc.) at December 31, 1996, and the results of its operations and
its cash flows for the year ended December 31, 1996, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
San Jose, California
October 15, 1997
F-143
<PAGE>
USWEB SAN MATEO
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $107,000 $ 60,000
Accounts receivable, net............................ 157,000 153,000
Costs in excess of billings......................... 19,000 36,000
-------- --------
Total current assets.............................. 283,000 249,000
Property and equipment, net........................... 74,000 65,000
Other assets.......................................... 6,000 32,000
-------- --------
$363,000 $346,000
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 21,000 $ 94,000
Accrued expenses.................................... 47,000 9,000
-------- --------
Total current liabilities......................... 68,000 103,000
-------- --------
Commitments (Note 3)
Shareholders' equity:
Common Stock: no par value, 1,000,000 shares autho-
rized; 2,000 shares issued and outstanding......... 20,000 20,000
Additional paid-in capital.......................... 14,000 --
Retained earnings................................... 261,000 223,000
-------- --------
Total shareholders' equity........................ 295,000 243,000
-------- --------
$363,000 $346,000
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-144
<PAGE>
USWEB SAN MATEO
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -----------------
1996 1996 1997
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Revenues........................................ $1,010,000 $367,000 $695,000
Cost of revenues................................ 663,000 166,000 513,000
---------- -------- --------
Gross profit.................................. 347,000 201,000 182,000
---------- -------- --------
Operating expenses:
Marketing, sales and support.................. 16,000 15,000 32,000
General and administrative.................... 74,000 23,000 138,000
---------- -------- --------
Total operating expenses.................... 90,000 38,000 170,000
---------- -------- --------
Income from operations.......................... 257,000 163,000 12,000
Income tax provision............................ 6,000 2,000 --
---------- -------- --------
Net income...................................... $ 251,000 $161,000 $ 12,000
========== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-145
<PAGE>
USWEB SAN MATEO
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995. 2,000 $20,000 $ 14,000 $ 10,000 $ 44,000
Net income................... -- -- -- 251,000 251,000
----- ------- -------- -------- --------
Balance at December 31, 1996. 2,000 20,000 14,000 261,000 295,000
----- ------- -------- -------- --------
Distribution to shareholders
(Unaudited)................. -- -- (14,000) (50,000) (64,000)
Net income (Unaudited)....... -- -- -- 12,000 12,000
----- ------- -------- -------- --------
Balance as of June 30, 1997
(Unaudited)................. 2,000 $20,000 $ -- $223,000 $243,000
===== ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-146
<PAGE>
USWEB SAN MATEO
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -------------------
1996 1996 1997
------------ --------- --------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income.................................. $ 251,000 $ 161,000 $ 12,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.............. 16,000 3,000 16,000
Changes in assets and liabilities:
Accounts receivable....................... (157,000) (174,000) 4,000
Costs in excess of billings............... (19,000) -- (17,000)
Other assets.............................. (5,000) -- (26,000)
Accounts payable.......................... 20,000 42,000 73,000
Accrued expenses.......................... 47,000 14,000 (38,000)
--------- --------- --------
Net cash provided by operating
activities.............................. 153,000 46,000 24,000
--------- --------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES FOR
THE ACQUISITION OF PROPERTY AND EQUIPMENT... (74,000) (31,000) (7,000)
--------- --------- --------
CASH FLOWS USED IN FINANCING ACTIVITIES FOR
THE DISTRIBUTION TO SHAREHOLDERS............ -- -- (64,000)
--------- --------- --------
Net increase (decrease) in cash and cash
equivalents................................. 79,000 15,000 (47,000)
Cash and cash equivalents at beginning of
period...................................... 28,000 28,000 107,000
--------- --------- --------
Cash and cash equivalents at end of period... $ 107,000 $ 43,000 $ 60,000
========= ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-147
<PAGE>
USWEB SAN MATEO
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USWeb San Mateo (the "Company"), formerly Zendatta, Inc., was incorporated
in California on October 30, 1995 and is engaged in software development and
consulting, specializing in enterprise applications for internet, intranet and
extranet environments. See Note 5.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenues from consulting service agreements.
Service revenues from fixed-price agreements are recognized over the period
of each engagement under the percentage of completion method using labor hours
incurred as a measure of progress towards completion. Provisions for contract
adjustments and losses are recorded in the period such items are identified.
Revenues from time and materials agreements and hosting services are
recognized and billed as the services are provided.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Significant Customers
During the year ended December 31, 1996, sales to four customers accounted
for 33%, 19%, 18% and 12% of revenues. Approximately 38%, 27% and 24% of
accounts receivable at December 31, 1996 was due from three customer.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three years.
Fair Value of Financial Instruments
The Company's financial instruments, including cash equivalents, accounts
receivable, accounts payable and accrued expenses, have carrying amounts which
approximate fair value due to the relatively short maturity of these
instruments.
Income Taxes
The Company has elected to be taxed as an S Corporation, pursuant to the
Internal Revenue Code. This election provides for all profits or losses to be
recognized in the shareholders' personal income tax returns. The provision for
income taxes represents 1.5% franchise tax imposed by the State of California.
F-148
<PAGE>
USWEB SAN MATEO
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Interim Financial Information
The accompanying balance sheet as of June 30, 1997 and the statements of
operations and of cash flows for the six-month periods ended June 30, 1996 and
1997, are unaudited. In the opinion of management, these statements have been
prepared on the same basis as the audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for
the fair presentation of the results of the interim periods. The financial
data and other information disclosed in these notes to financial statements
related to these periods are unaudited. The results for the six months ended
June 30, 1997 are not necessarily indicative of the results to be expected for
the year ending December 31, 1997.
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Property and equipment:
Computers and equipment........................... $ 90,000 $ 92,000
Furniture and fixtures............................ -- 5,000
-------- --------
90,000 97,000
Less: accumulated depreciation.................... (16,000) (32,000)
-------- --------
$ 74,000 $ 65,000
======== ========
Accrued expenses:
Payroll and related expenses...................... $ 41,000 $ 9,000
Income taxes...................................... 6,000 --
-------- --------
$ 47,000 $ 9,000
======== ========
</TABLE>
NOTE 3--COMMITMENTS:
Operating Leases
The Company leases its office facilities under noncancelable operating
leases which expire in 1997. The leases require payment of property taxes,
insurance, maintenance and utilities. Rent expense for the year ended December
31, 1996 and the six month periods ended June 30, 1996 and 1997 totaled
$33,000, $6,000 and $33,000, respectively.
Future minimum lease payments under noncancelable operating leases are
$64,000 for the year ended December 31, 1997.
NOTE 4--COMMON STOCK:
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 1,000,000 shares of no par value Common Stock.
NOTE 5--SUBSEQUENT EVENTS:
On September 30, 1997, USWeb reached an agreement to acquire all of the
Company's outstanding shares of common stock, at which time the Company became
a wholly owned subsidiary of USWeb.
F-149
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
USWeb LA Central
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of USWeb LA Central (formerly W3-
design) at March 31, 1996 and 1997 and the results of its operations and its
cash flows for the period from April 7, 1995 (Inception) to March 31, 1996 and
for the year ended March 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
San Jose, California
October 31, 1997
F-150
<PAGE>
USWEB LA CENTRAL
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31,
----------------- SEPTEMBER 30,
1996 1997 1997
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash......................................... $ 2,000 $ 9,000 $186,000
Accounts receivable.......................... 173,000 462,000 347,000
-------- -------- --------
Total current assets....................... 175,000 471,000 533,000
Property and equipment, net.................... 45,000 139,000 150,000
-------- -------- --------
$220,000 $610,000 $683,000
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................. $ 19,000 $ 15,000 $177,000
Accrued expenses............................. 9,000 17,000 3,000
Unearned revenue............................. -- 146,000 --
Loan from officer............................ -- 12,000 --
Income taxes payable......................... 9,000 49,000 83,000
-------- -------- --------
Total current liabilities.................. 37,000 239,000 263,000
Deferred income taxes.......................... 75,000 114,000 114,000
-------- -------- --------
112,000 353,000 377,000
-------- -------- --------
Commitments (Note 4)
Shareholders' equity:
Common stock; 10,000 shares authorized; 1,000
shares issued and outstanding............... 1,000 1,000 1,000
Additional paid-in capital................... 3,000 3,000 3,000
Retained earnings............................ 104,000 253,000 302,000
-------- -------- --------
Total shareholders' equity................. 108,000 257,000 306,000
-------- -------- --------
$220,000 $610,000 $683,000
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-151
<PAGE>
USWEB LA CENTRAL
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 7, 1995
(INCEPTION) SIX MONTHS ENDED
THROUGH MARCH YEAR ENDED SEPTEMBER 30,
31, MARCH 31, -------------------
1996 1997 1996 1997
------------- ---------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues.......................... $537,000 $1,438,000 $631,000 $1,282,000
Cost of revenues.................. 169,000 566,000 221,000 574,000
-------- ---------- -------- ----------
Gross profit.................... 368,000 872,000 410,000 708,000
Operating expenses:
Marketing, sales and support.... 76,000 311,000 138,000 263,000
General and administrative ex-
penses......................... 104,000 322,000 141,000 364,000
-------- ---------- -------- ----------
Total operating expenses...... 180,000 633,000 279,000 627,000
-------- ---------- -------- ----------
Income from operations............ 188,000 239,000 131,000 81,000
Interest income................... -- 3,000 1,000 1,000
-------- ---------- -------- ----------
Income before income taxes........ 188,000 242,000 132,000 82,000
Provision for income taxes........ 84,000 93,000 53,000 33,000
-------- ---------- -------- ----------
Net income........................ $104,000 $ 149,000 $ 79,000 $ 49,000
======== ========== ======== ==========
</TABLE>
See accompanying notes to financial statements.
F-152
<PAGE>
USWEB LA CENTRAL
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNTS CAPITAL EARNINGS EQUITY
------ ------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Issuance of Common Stock...... 1,000 $1,000 $3,000 $ -- $ 4,000
Net income.................... -- -- -- 104,000 104,000
----- ------ ------ -------- --------
Balance at March 31, 1996..... 1,000 1,000 3,000 104,000 108,000
Net income.................... -- -- -- 149,000 149,000
----- ------ ------ -------- --------
Balance at March 31, 1997..... 1,000 1,000 3,000 253,000 257,000
Net income (Unaudited)........ -- -- -- 49,000 49,000
----- ------ ------ -------- --------
Balance at September 30, 1997
(Unaudited).................. 1,000 $1,000 $3,000 $302,000 $306,000
===== ====== ====== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-153
<PAGE>
USWEB LA CENTRAL
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 7, 1995
(INCEPTION) SIX MONTHS ENDED
THROUGH YEAR ENDED SEPTEMBER 30,
MARCH 31, MARCH 31, -------------------
1996 1997 1996 1997
------------- ---------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVI-
TIES:
Net income....................... $ 104,000 $ 149,000 $ 79,000 $ 49,000
Adjustments to reconcile net
income to net cash provided by
operating activities:
Deferred income taxes.......... 75,000 39,000 -- --
Depreciation................... 8,000 37,000 17,000 25,000
Changes in operating assets and
liabilities:
Accounts receivable.......... (173,000) (289,000) (28,000) 115,000
Accounts payable............. 19,000 (4,000) 47,000 163,000
Accrued expenses............. 9,000 7,000 16,000 (14,000)
Billings in excess of fees
and expenditures............ -- 146,000 -- (146,000)
Income taxes payable......... 9,000 40,000 53,000 34,000
--------- --------- -------- ---------
Net cash provided by operating
activities.................... 51,000 125,000 184,000 226,000
--------- --------- -------- ---------
CASH FLOWS USED IN INVESTING
ACTIVITIES FOR THE ACQUISITION
OF PROPERTY AND EQUIPMENT....... (53,000) (130,000) (37,000) (37,000)
--------- --------- -------- ---------
CASH FLOWS PROVIDED BY FINANCING
ACTIVITIES:
Proceeds from issuance of common
stock........................... 1,000 -- -- --
Additional paid-in capital....... 3,000 -- -- --
Proceeds from officer loan....... -- 12,000 -- (12,000)
--------- --------- -------- ---------
Net cash provided by financing
activities.................... 4,000 12,000 -- (12,000)
--------- --------- -------- ---------
Net increase (decrease) in cash.. 2,000 7,000 147,000 177,000
Cash at beginning of period...... -- 2,000 2,000 9,000
--------- --------- -------- ---------
Cash at end of period............ $ 2,000 $ 9,000 $149,000 $ 186,000
========= ========= ======== =========
CASH PAID DURING THE PERIOD FOR:
Income taxes................... $ $ -- $ $
========= ========= ======== =========
</TABLE>
See accompanying notes to financial statements.
F-154
<PAGE>
USWEB LA CENTRAL
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY AND SIGNIFICANT ACCOUNTING POLICIES:
USWeb LA Central (the "Company"), formerly W3-design, was incorporated in
California on April 7, 1995 as a dedicated group of information architects who
build Web-based communities for major corporations in North America.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Concentration of Credit Risk
The Company is potentially subject to a concentration of credit risk from
its trade receivables, as a significant portion is due from two customers
totaling 85% and 28% at March 31, 1996 and 1997, respectively. The Company
performs ongoing credit evaluation of its customers and generally does not
require collateral. For the period from April 7, 1995 (Inception) through
March 31, 1996 and for the year ended March 31, 1997, five customers accounted
for 41% and 27% of the Company's total revenues, respectively.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three years.
Revenue Recognition
The Company derives its revenues from consulting service agreements.
Service revenues from fixed-price development agreements are recognized
under the completed-contract method whereby income is recognized only when the
contract is substantially completed and all costs and related revenues are
deferred in the balance sheet until that time. Provisions for agreement
adjustments and losses are recorded in the period such items are identified.
Unearned revenues represents the amount of revenues received in advance of
services being performed.
Income Taxes
Income taxes are accounted for using an asset and liability approach which
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The measurement of current and deferred tax liabilities and assets
are based on provisions of the enacted tax laws; the effects of future changes
in tax laws or rates are not anticipated. The measurement of deferred tax
assets is reduced, if necessary, by the amount of any tax benefits that, based
on available evidence, are not expected to be realized.
Fair Value of Financial Instruments
The Company's financial instruments, including accounts receivable, notes
and accounts payable, accrued expenses and billings in excess of fees and
expenditures have carrying amounts which approximate fair value due to the
relatively short maturity of these instruments.
F-155
<PAGE>
USWEB LA CENTRAL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Interim Financial Information
The accompanying balance sheet as of September 30, 1997 and the statements
of operations and of cash flows for the six-month periods ended September 30,
1996 and 1997, are unaudited. In the opinion of management, these statements
have been prepared on the same basis as the audited financial statements and
include all adjustments, consisting only of normal recurring adjustments,
necessary for the fair presentation of the results of the interim periods. The
financial data and other information disclosed in these notes to financial
statements related to these periods are unaudited. The results for the six
months ended September 30, 1997 are not necessarily indicative of the results
to be expected for the year ending March 31, 1998.
NOTE 2--PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
MARCH 31,
----------------- SEPTEMBER 30,
1996 1997 1997
------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Computers and equipment..................... $47,000 $152,000 $177,000
Furniture and fixtures...................... 6,000 32,000 43,000
------- -------- --------
53,000 184,000 220,000
Less: accumulated depreciation.............. (8,000) (45,000) (70,000)
------- -------- --------
$45,000 $139,000 $150,000
======= ======== ========
</TABLE>
NOTE 3--INCOME TAXES:
The Company files separate company tax returns. The provision for income
taxes consists of the following for the years ended March 31, 1996 and 1997
and the six months ended September 30, 1996 and 1997:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED SEPTEMBER
MARCH 31, 30,
--------------- ---------------
1996 1997 1996 1997
------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current:
Federal.................................... $ 8,000 $46,000 $45,000 $28,000
State...................................... 1,000 8,000 8,000 5,000
------- ------- ------- -------
9,000 54,000 53,000 33,000
------- ------- ------- -------
Deferred:
Federal.................................... 64,000 35,000 -- --
State...................................... 11,000 4,000 -- --
------- ------- ------- -------
75,000 39,000 -- --
------- ------- ------- -------
Income tax provision......................... $84,000 93,000 $53,000 $33,000
======= ======= ======= =======
</TABLE>
A reconciliation of the federal income tax rate to the effective tax rate
follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
MARCH 31, SEPTEMBER 30,
------------- ---------------
1996 1997 1996 1997
----- ----- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Statutory rate............................ 34% 34% 34% 34%
State income tax, net of federal benefit.. 7% 4% 6% 6%
Nondeductable expenses and other.......... 3% -- -- --
----- ----- ------ ------
Effective income tax rate................. 44% 38% 40% 40%
===== ===== ====== ======
</TABLE>
F-156
<PAGE>
USWEB LA CENTRAL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As of March 31, 1996 and 1997, the Company had total deferred tax
liabilities of $75,000 and $114,000, respectively, consisting primarily of a
conversion from the cash to accrual method of accounting.
NOTE 4--COMMITMENTS:
The Company maintains an executive office and an operating office in Culver
City, California and New York, New York, respectively, under month-to-month
operating leases. The Company is generally responsible for maintaining public
liability and property damage insurance on the leased property and is also
responsible for certain operating expenses and property taxes.
Rent expense for the period from April 7, 1995 (Inception) through March 31,
1996 and for the year ended March 31, 1997 and the six month period ended
September 30, 1997 totaled $15,000, $37,000, and $42,000, respectively.
NOTE 5--COMMON STOCK:
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 10,000 shares of $1 par value Common Stock. For the period from April
7, 1995 (Inception) through March 31, 1996, the Company sold 1,000 shares of
Common Stock to the founders of the Company.
NOTE 6--SUBSEQUENT EVENTS:
On October 1, 1997, USWeb reached an agreement to acquire all of the
Company's outstanding shares of Common Stock, at which time the Company became
a wholly owned subsidiary of USWeb.
F-157
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
USWeb Houston
In our opinion, the accompanying combined balance sheet and the related
combined statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of USWeb
Houston (formerly USWeb-Apex, Inc. and Apex Business Solutions, a sole
proprietorship) at September 30, 1997 and the results of their operations and
their cash flows from December 5, 1996 (Inception) to September 30, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
San Jose, California
November 4, 1997
F-158
<PAGE>
USWEB HOUSTON
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 19,000
Accounts receivable............................................. 175,000
Other current assets............................................ 3,000
--------
Total current assets.......................................... 197,000
Property and equipment, net....................................... 40,000
--------
$237,000
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 36,000
Accrued expenses................................................ 49,000
--------
Total current liabilities..................................... 85,000
--------
Commitments (Note 3)
Shareholders' equity:
Common Stock: $1.00 par value, 1,000 shares authorized,
issued and outstanding......................................... 1,000
Additional paid in capital...................................... 6,000
Retained earnings............................................... 145,000
--------
Total shareholders' equity.................................... 152,000
--------
$237,000
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-159
<PAGE>
USWEB HOUSTON
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 5, 1996
(INCEPTION) TO
SEPTEMBER 30,
1997
----------------
<S> <C>
Revenues....................................................... $820,000
Cost of revenues............................................... 407,000
--------
Gross profit................................................. 413,000
--------
Operating expenses:
Marketing, sales and support................................. 76,000
General and administrative................................... 192,000
--------
Total operating expenses................................... 268,000
--------
Net income..................................................... $145,000
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-160
<PAGE>
USWEB HOUSTON
COMBINED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Issuance of Common Stock to
Founders...................... 1,000 $1,000 $ -- $ -- $ 1,000
Contribution from shareholder.. -- -- 6,000 -- 6,000
Net income..................... -- -- 145,000 145,000
----- ------ ------ -------- --------
Balance at September 30, 1997.. 1,000 $1,000 $6,000 $145,000 $152,000
===== ====== ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-161
<PAGE>
USWEB HOUSTON
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 5, 1996
(INCEPTION) TO
SEPTEMBER 30,
1997
----------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................... $ 145,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization................................ 29,000
Changes in assets and liabilities:
Accounts receivable......................................... (175,000)
Other current assets........................................ (3,000)
Accounts payable............................................ 36,000
Accrued expenses............................................ 49,000
---------
Net cash provided by operating activities................. 81,000
---------
CASH FLOWS USED IN INVESTING ACTIVITIES FOR THE
ACQUISITION OF PROPERTY AND EQUIPMENT......................... (69,000)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock........................ 1,000
Proceeds from shareholder contribution........................ 6,000
---------
Net cash used in financing activities..................... 7,000
---------
Net increase in cash and cash equivalents...................... 19,000
Cash and cash equivalents at beginning of period............... --
---------
Cash and cash equivalents at end of period..................... $ 19,000
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-162
<PAGE>
USWEB HOUSTON
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
USWeb Houston (the "Company") is principally engaged in providing Internet
technology integration services.
Principles of Consolidation
USWeb Houston is comprised of the combined accounts of USWeb-Apex, Inc.
which was incorporated on December 15, 1996 and Apex Business Solutions, a
sole proprietorship. The sole shareholder of USWeb-Apex, Inc. also owns Apex
Business Solutions. (Note 6)
During December, 1996, the Company entered into a franchise agreement with
USWeb Corporation ("USWeb") to become part of USWeb's Affiliate network.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenues from consulting service agreements, web
development, and computer hardware and software sales.
Consulting service revenues are recognized and billed as services are
provided. Web development revenues are recognized upon contract completion
whereby income is recognized only when the contract is substantially completed
and all costs and related revenues are deferred in the balance sheet until
that time. Computer hardware and software sales revenues are recognized upon
delivery of goods. Provisions for agreement adjustments and losses are
recorded in the period such items are identified.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Concentration of Credit Risk
The Company is potentially subject to a concentration of credit risk from
its trade receivables, as a significant portion is due from three major
customers. The Company performs ongoing credit evaluations of its customers
and generally does not require collateral. As of September 30, 1997, these
customers accounted for 64% of the Company's accounts receivable balance and
14% of the Company's total revenues.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three years.
Income Taxes
USWeb-Apex, Inc. has elected to be taxed as an S Corporation, pursuant to
the Internal Revenue Code. This election provides for all profits or losses to
be recognized in the shareholders' personal income tax returns. Apex Business
Solutions is a sole proprietorship with all profits or losses recognized in
the owner's personal income tax returns.
F-163
<PAGE>
USWEB HOUSTON
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
Property and equipment, net:
Computers and equipment ..................................... $ 51,000
Furniture and fixtures....................................... 18,000
--------
69,000
Less: accumulated depreciation............................... (29,000)
--------
$ 40,000
========
Accrued expenses:
Payroll and related taxes.................................... $ 35,000
Franchise Fees............................................... 7,000
Sales Taxes.................................................. 7,000
--------
$ 49,000
========
</TABLE>
NOTE 3--COMMITMENTS:
Royalties
Under the terms of its franchise agreement with USWeb, the Company is
required to pay royalties to USWeb based upon a stipulated percentage of
adjusted gross revenue, as defined. Royalties from Inception to September 30,
1997 totaled $19,000 and are included in cost of revenues.
Operating Leases
The Company leases its office facilities under a noncancelable operating
lease which expires in November, 1997. Rent expense from Inception to
September 30, 1997 totaled $18,000. Future minimum lease payments under this
noncancelable operating lease as of September 30, 1997 total $4,000.
NOTE 4--COMMON STOCK:
The Company's Articles of Incorporation authorized the Company to issue
1,000 shares of $1 par value Common Stock. At Inception the Company sold a
total of 1,000 shares of Common Stock to the Founder of the Company.
NOTE 5--RELATED PARTY TRANSACTIONS:
The Company has performed services on behalf of another USWeb affiliate. The
transaction totaling $25,000 was accounted for at arms length with no special
terms.
NOTE 6--SUBSEQUENT EVENTS:
On October 29, 1997, USWeb reached an agreement to acquire all of the
Company's outstanding shares of Common Stock, at which time the Company became
a wholly owned subsidiary of USWeb.
F-164
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of USWeb New York Central
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of USWeb New York Central (formerly Reach Networks, Inc.)
and its subsidiaries at April 30, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from
operations and has a net capital deficiency that raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 1. The financial statements do not
include any adjustments that might result for the outcome of this uncertainty.
Price Waterhouse LLP
New York, New York
November 4, 1997
F-165
<PAGE>
USWEB NEW YORK CENTRAL
(FORMERLY REACH NETWORKS, INC.)
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
APRIL 30,
---------------------- JULY 31,
1996 1997 1997
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................ $ 40,160 $ 3,331 $ 8,896
Accounts receivable, net of allowance for
doubtful accounts of $92,336, $35,723
and $21,812, respectively............... 852,192 116,267 93,686
Unbilled costs and accrued earnings...... -- 38,000 111,704
Other receivables and prepayments ....... 90,979 21,954 42,204
---------- ----------- -----------
Total current assets.................. 983,331 179,552 256,490
Equipment, net............................ 964,864 425,843 394,973
Investment................................ 25,000 25,000 25,000
Other assets.............................. 16,997 16,559 17,560
---------- ----------- -----------
Total assets.......................... $1,990,192 $ 646,954 $ 694,023
========== =========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable......................... 1,593,559 1,703,334 1,823,830
Accrued expenses......................... 63,194 202,301 215,109
Deferred revenue......................... 25,000 51,667 122,723
Loans payable to stockholders............ 192,499 192,890 214,710
---------- ----------- -----------
Total current liabilities............. 1,874,252 2,150,192 2,376,372
Deferred tax liability.................... 1,460 -- --
Commitments (Note 9)
Stockholders' equity:
Preferred stock ($0.01 par value; 1,000
shares authorized, none issued and
outstanding)............................ -- -- --
Common stock ($0.01 par value; 20,000
shares authorized; 1,500 shares issued
and outstanding, respectively).......... 15 15 15
Additional paid-in capital............... 70,567 70,567 70,567
Retained earnings (accumulated deficit).. 43,898 (1,573,820) (1,752,931)
---------- ----------- -----------
Total stockholders' equity (deficit).. 114,480 (1,503,238) (1,682,349)
---------- ----------- -----------
Total liabilities and stockholders'
equity (deficit)..................... $1,990,192 $ 646,954 $ 694,023
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-166
<PAGE>
USWEB NEW YORK CENTRAL
(FORMERLY REACH NETWORKS, INC.)
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED APRIL 30, JULY 31,
----------------------- ---------------------
1996 1997 1996 1997
---------- ----------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues....................... $7,440,453 $ 6,465,099 $1,635,943 $ 567,583
Cost of revenues............... 5,024,629 4,683,703 1,178,556 431,910
---------- ----------- ---------- ---------
Gross Profit................. 2,415,824 1,781,396 457,387 135,673
---------- ----------- ---------- ---------
Operating expenses:
General and administrative... 1,662,554 1,779,733 342,481 203,590
Product development.......... 542,001 732,276 99,883 21,511
Selling and marketing........ 451,328 423,328 92,587 84,155
Product line discontinuance.. -- 454,654 -- --
---------- ----------- ---------- ---------
Total operating expenses... 2,655,883 3,389,991 534,951 309,256
---------- ----------- ---------- ---------
Loss from operations....... (240,059) (1,608,595) (77,564) (173,583)
---------- ----------- ---------- ---------
Other income (expense):
Interest income.............. 2,678 3,031 1,212 --
Interest expense............. (1,200) (10,694) (1,330) (5,528)
---------- ----------- ---------- ---------
Total other income (ex-
pense).................... 1,478 (7,663) (118) (5,528)
Loss before income taxes... (238,581) (1,616,258) (77,682) (179,111)
Provision (benefit) for income
taxes......................... (52,344) 1,460 -- --
---------- ----------- ---------- ---------
Net loss................... $ (186,237) $(1,617,718) $ (77,682) $(179,111)
========== =========== ========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-167
<PAGE>
USWEB NEW YORK CENTRAL
(FORMERLY REACH NETWORKS, INC.)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
AMOUNT
OUTSTANDING
ON RETAINED TOTAL
COMMON STOCK ADDITIONAL OFFICER STOCK EARNINGS SHAREHOLDERS'
------------- PAID PURCHASE (ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL AGREEMENT DEFICIT) (DEFICIT)
------ ------ ---------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 30,
1995................... 1,500 $15 $70,567 $(10,378) $ 230,135 $ 290,339
Forgiveness of amount
outstanding on officer
stock purchase
agreement.............. -- -- -- 10,378 -- 10,378
Net loss................ -- -- -- -- (186,237) (186,237)
----- --- ------- -------- ----------- -----------
Balance at April 30,
1996................... 1,500 15 70,567 -- 43,898 114,480
Net loss................ -- -- -- -- (1,617,718) (1,617,718)
----- --- ------- -------- ----------- -----------
Balance at April 30,
1997................... 1,500 15 70,567 -- (1,573,820) (1,503,238)
Net loss................ -- -- -- -- (179,111) (179,111)
----- --- ------- -------- ----------- -----------
Balance at July 31, 1997
(Unaudited)............ 1,500 $15 $70,567 $ -- $(1,752,931) $(1,682,349)
===== === ======= ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-168
<PAGE>
USWEB NEW YORK CENTRAL
(FORMERLY REACH NETWORKS, INC.)
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED APRIL 30, JULY 31,
---------------------- -------------------
1996 1997 1996 1997
--------- ----------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net cash flows from operating
activities
Net loss........................ $(186,237) $(1,617,718) $(77,682) $(179,111)
Adjustments to reconcile net
loss to net cash provided by
operating activities
Product line discontinuance... -- 360,154 -- --
Depreciation and amortization. 254,701 288,077 70,187 29,178
Provision for doubtful
accounts..................... 81,036 193,773 -- --
Stock grant compensation...... 10,378 -- -- --
Changes in operating assets
and liabilities
Accounts receivable......... (248,731) 542,152 (224,280) 22,581
Unbilled costs and accrued
earnings................... -- (38,000) -- (73,704)
Deferred taxes.............. 68,756 (1,460) (1,460) --
Other receivables and
prepayments................ (4,075) 69,025 11,678 (20,250)
Accounts payable............ 610,082 109,775 231,233 120,496
Accrued expenses............ (210,000) 139,107 87,122 12,808
Deferred revenue............ (211,576) 26,667 -- 71,056
Income taxes................ (143,062) -- -- --
Other assets................ 861 438 -- (1,001)
--------- ----------- -------- ---------
Net cash provided by (used in)
operating activities........... 22,133 71,990 96,798 (17,947)
--------- ----------- -------- ---------
Cash flows from investing
activities
Capital expenditures............ (406,915) (109,210) (19,174) 1,692
Purchase of investment.......... (25,000) -- -- --
--------- ----------- -------- ---------
Net cash used in investing
activities..................... (431,915) (109,210) (19,174) 1,692
--------- ----------- -------- ---------
Cash flows from financing
activities
Net increase (decrease) in
borrowings from stockholders... 170,109 391 (42,165) 21,820
--------- ----------- -------- ---------
Net cash provided by (used in)
financing activities........... 170,109 391 (42,165) 21,820
--------- ----------- -------- ---------
Net increase (decrease) in cash
and cash equivalents............. (239,673) (36,829) 35,459 5,565
Cash and cash equivalents,
beginning of period.............. 279,833 40,160 40,160 3,331
--------- ----------- -------- ---------
Cash and cash equivalents, end of
period........................... $ 40,160 $ 3,331 $ 75,619 $ 8,896
========= =========== ======== =========
Cash paid during the period for:
Interest........................ $ -- $ 6,394 $ -- $ --
========= =========== ======== =========
Income taxes.................... $ 33,240 $ 267 $ 267 $ --
========= =========== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-169
<PAGE>
USWEB NEW YORK CENTRAL
(FORMERLY REACH NETWORKS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, BUSINESS OF THE COMPANY AND BASIS OF PRESENTATION
USWeb New York Central (the "Company"), formerly Reach Networks, Inc., was
incorporated in 1993 under the laws of the State of Delaware and during 1993
merged with its predecessor, Reach Networks, Inc., a New York Corporation,
incorporated in 1988. The Company, a provider of communications software and
services, was primarily engaged in the development, marketing, licensing and
maintenance of private on-line networks based on Internet standards that were
targeted towards business organizations and associations. The Company
developed and maintained private on-line networks for customers in the United
States, Europe and Asia.
During 1997, the Company's management shifted the Company's product focus to
provide solutions to complex information flows through the use of Internet
technologies. During 1997 the Company began to derive significant revenues
from custom application and website development and design, systems
integration and support services including web/server hosting and management.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company has incurred significant
operating losses for the years ended April 30, 1996 and 1997. At April 30,
1997 the Company had an accumulated deficit of $1,573,820 and a working
capital deficit of $1,970,640. Such losses have primarily resulted from the
decreasing demand for private on-line networks and the transition by the
Company to becoming a provider of Internet solutions. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The Company's ability to continue as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations as they come
due. The Company has a pending merger agreement with USWeb Corporation
("USWeb") and a pending stock purchase agreement with unaffiliated parties and
it believes that when and if such arrangements are consummated will provide
sufficient funding to meet its planned business objectives (Note 11). These
financial statements do not include any adjustments relating to the
recoverability of the carrying amount of recorded assets or the amount of
liabilities that might result from the outcome of these uncertainties.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation
The consolidated financial statements include the accounts of Reach
Networks, Inc. and its wholly owned and majority-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated.
Losses of majority-owned subsidiaries are not allocated to minority interests
if such allocation results in the minority interest becoming negative. To
date, the Company's majority-owned subsidiaries have incurred cumulative
operating losses and no allocation of losses has been made in excess of the
original capital contributions of the minority interests.
Revenue recognition
License fees are recognized upon delivery of the Company's online network
products and the completion of all significant vendor obligations. Network
management and website hosting fees are recognized as services are performed.
Fees derived from long-term network or website management contracts are
recognized ratably over the life of the underlying contracts.
Communication fees received by the Company for providing network access as
well as incremental charges, which generally consist of faxing and mailing
services, are recognized upon performance of the service.
F-170
<PAGE>
USWEB NEW YORK CENTRAL
(FORMERLY REACH NETWORKS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Development fees from short-term projects to customize the Company's
proprietary software, custom software development on behalf of customers and
website development are recognized using the completed contract method. These
short-term projects were generally less than nine months in duration. The
Company records a current asset for network development projects in process on
the reporting date when the accumulated costs exceed related billings or a
current liability when the excess accumulated billings exceed related costs.
Unbilled costs and accrued earnings consist primarily of services performed
which were not billed at the end of the period.
Product development expenses
Software development costs are accounted for in accordance with Statement of
Financial Accounting Standards No. 86, ("SFAS No. 86"), "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed."
Software development costs incurred after the establishment of technological
feasibility are capitalized and amortized to cost of revenues on a straight-
line basis over the expected useful life of the software. Product development
costs incurred prior to the attainment of technological feasibility are
expensed as incurred. As of April 30, 1996 and 1997, the Company had no
capitalized software development costs.
Advertising costs
Advertising costs are expensed as incurred. Advertising costs included in
selling and marketing expenses were $90,498 for the year ended April 30, 1996.
No significant advertising costs were incurred subsequent to fiscal 1996.
Cash and cash equivalents
Cash equivalents consist of short-term, highly liquid investments, with
original maturities of less than three months when purchased and are stated at
cost. Interest is accrued as earned.
Equipment
Equipment is stated at cost. Depreciation and amortization are provided on
the straight-line method over the estimated useful lives of the respective
assets. Amortization of leasehold improvements is provided on the shorter of
the useful life of the improvement or the remaining lease term.
Income taxes
Income taxes are accounted for under the asset and liability method.
Deferred income taxes are recorded for temporary differences between financial
statement carrying amounts and the tax basis of assets and liabilities.
Deferred tax assets and liabilities reflect the tax rates expected to be in
effect for the years in which the differences are expected to reverse. A
valuation allowance is provided if it is more likely than not that some or all
of the deferred tax asset will not be realized.
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses, and loans payable to stockholders
approximate their fair values due to the relatively short maturity of these
investments.
F-171
<PAGE>
USWEB NEW YORK CENTRAL
(FORMERLY REACH NETWORKS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accounting estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Interim Financial Data
The unaudited financial data at July 31, 1997 and for the three months ended
July 31, 1996 and 1997 have been prepared by management and include all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the results of operations and cash flows. The results of
operations for the three months ended July 31, 1997 are not necessarily
indicative of the operating results to be expected for the entire year ending
April 30, 1998.
3. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF RISKS
The Company is dependent on a limited number of customers for a substantial
portion of its revenues. One customer accounted for approximately 39% and 34%
of revenues in 1996 and 1997, respectively and approximately 25% and 20% of
accounts receivable as of April 30, 1996 and 1997, respectively. In connection
with the discontinuation of its private on-line network products the Company
terminated service to such customer in 1998. A second customer, which
accounted for 29% and 14% of revenues in 1996 and 1997, respectively, and 24%
of accounts receivable as of April 30, 1996 did not renew its contract that
expired in March 1997. A third customer accounted for 10% of revenues in 1996
none of which was outstanding as of April 30, 1996. A fourth customer
accounted for 22% of revenues in 1997 and 28% of accounts receivable as of
April 30, 1997.
Financial instruments which potentially subject the Company concentrations
of credit risk are primarily cash, accounts receivable, accounts payable and
loans payable to stockholders. The Company generally does not require
collateral and its trade receivables are unsecured.
4. EQUIPMENT
Equipment is comprised of:
<TABLE>
<CAPTION>
ESTIMATED APRIL 30,
USEFUL LIFE --------------------- JULY 31,
(YEARS) 1996 1997 1997
----------- ---------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Network equipment and computers. 5 $1,144,965 $ 519,620 $ 517,928
Furniture and fixtures.......... 10 145,490 146,037 146,037
Software licenses............... 3 175,245 62,323 62,323
Leasehold improvements.......... 52,127 52,127 52,127
---------- --------- ---------
Total equipment............... 1,517,827 780,107 778,415
Less--accumulated depreciation
and amortization............... (552,963) (354,264) (383,442)
---------- --------- ---------
Net equipment................. $ 964,864 $ 425,843 $ 394,973
========== ========= =========
</TABLE>
F-172
<PAGE>
USWEB NEW YORK CENTRAL
(FORMERLY REACH NETWORKS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LOANS PAYABLE TO STOCKHOLDERS
The Company has loans payable to stockholders, who are also employees of the
Company, which represent amounts owed for funds loaned to the Company and
deferred salaries. Loans payable to stockholders are comprised as follows:
<TABLE>
<CAPTION>
APRIL 30,
----------------- JULY 31,
1996 1997 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Borrowings from stockholders...................... $168,298 $167,390 $180,390
Deferred salary................................... 23,001 20,000 28,792
Accrued interest.................................. 1,200 5,500 5,528
-------- -------- --------
$192,499 $192,890 $214,710
======== ======== ========
</TABLE>
During 1996 and 1997, the interest rate on loans from stockholders averaged
9% and 10%, respectively. Interest expense on loans payable to stockholders
amounted to $1,200 and $10,694 in 1996 and 1997, respectively.
6. INCOME TAXES
The (benefit) provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
APRIL 30, JULY 31,
----------------- ------------
1996 1997 1996 1997
--------- ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current
Federal....................................... $ (75,320) $ -- $ -- $ --
State and local............................... (45,780) -- -- --
--------- ------ ------ ------
(121,100) -- -- --
Deferred
Federal....................................... 68,756 1,460 -- --
State and local............................... -- -- -- --
--------- ------ ------ ------
(Benefit) provision for income taxes........ $ (52,344) $1,460 -- --
========= ====== ====== ======
</TABLE>
A reconciliation of the statutory federal income tax rate to the effective
income tax rate follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
APRIL 30, JULY 31,
-------------- ----------------
1996 1997 1996 1997
----- ----- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Statutory rate............................ (34)% (34)% (34)% (34)%
State income taxes, net of federal bene-
fit...................................... (13)% (13)% (13)% (13)%
Nondeductible expense and other........... 2 % (3)% -- --
Valuation Allowance....................... 24 % 50 % 47 % 47 %
----- ----- ------ ------
Effective income tax rate................. 21 % -- -- --
===== ===== ====== ======
</TABLE>
F-173
<PAGE>
USWEB NEW YORK CENTRAL
(FORMERLY REACH NETWORKS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes at April 30, 1996 and 1997 and July 31, 1997 consisted
of the following:
<TABLE>
<CAPTION>
APRIL 30,
------------------ JULY 31,
1996 1997 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current deferred tax assets
Allowance for doubtful accounts............... $31,544 $ 16,794 $ 10,251
Accrued expenses............................... -- 44,415 44,415
-------- -------- --------
31,544 61,209 54,666
Noncurrent deferred tax assets
Equipment write-off........................... -- 169,272 169,272
Net operating loss............................. 81,118 611,000 705,000
-------- -------- --------
81,118 780,272 874,272
-------- -------- --------
Noncurrent deferred tax liabilities.............. 57,460 125,490 130,396
-------- -------- --------
Net deferred tax asset........................... 55,202 715,991 798,542
Less: valuation allowance........................ 56,662 715,991 798,542
-------- -------- --------
Net deferred tax asset (liability)............. $ (1,460) $ -- $ --
======== ======== ========
</TABLE>
In consideration of the Company's losses during 1996 and 1997 and the
uncertainty of its ability to utilize deferred tax benefits in the future, the
Company has recorded a valuation allowance for deferred tax benefits in excess
of net operating loss amounts that can be carried back to prior years for
federal and state income tax purposes. The Company has net operating loss
carryforwards of approximately $1,300,000 and $1,500,000 at April 30, 1997 and
July 31, 1997, which begin to expire in 2011. These losses are subject to
limitation on future years utilization should certain ownership changes occur
(Note 11).
7. EMPLOYEE STOCK GRANTS AND ISSUANCES
In October 1993, the Company issued 150 shares of common stock to an officer
of the Company in return for a non-recourse promissory note in the principal
amount of $20,756. One-half the principal amount of the note was to be
automatically forgiven on each of the first and second anniversary dates of
the issuance date of the note, provided the officer continued to be an
employee. As of April 30, 1996, the note has been forgiven in its entirety and
the Company has recorded compensation expense of $10,378 in the year ending
April 30, 1996.
8. STOCK OPTION PLAN AND DEFINED CONTRIBUTION PLAN
Stock option plan
During 1995, the Company implemented an employee stock option plan whereby
options to purchase up to 100 shares of common stock may be granted to key
employees, directors and consultants. As of April 30, 1997 there have been no
options granted under the plan.
Defined contribution plan
Company employees may participate in an employee savings plan maintained by
the Company pursuant to Section 401(k) of the Internal Revenue Code ("IRC").
Eligible participants may contribute a percentage of their pretax salaries,
subject to certain IRC limitations. The plan provides for employer matching
contributions to be made at the discretion of the Company. There were no
discretionary amounts contributed to the plan during the years ended April 30,
1996 and 1997 and three months ended July 31, 1997.
F-174
<PAGE>
USWEB NEW YORK CENTRAL
(FORMERLY REACH NETWORKS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS
Network access agreement
Pursuant to a non-cancelable agreement expiring in fiscal 1998, the Company
committed to monthly minimum usage levels with its network access provider.
The annual minimum usage commitments amount to $600,000 and $150,000 in 1997
and 1998, respectively. The Company's actual network access usage
significantly exceeded the contractually required minimums for each of the
years ended April 30, 1996 and 1997. In May 1997, the Company and the network
access provider mutually agreed to terminate the agreement.
Leases
The Company leases its facilities and certain office equipment under non-
cancelable operating leases. Future rental payments on a fiscal year basis
under operating leases with initial terms in excess of one year are as
follows:
<TABLE>
<S> <C>
1998............................................................ $133,056
1999............................................................ 132,944
2000............................................................ 131,712
2001............................................................ 89,633
2002............................................................ --
--------
$487,345
========
</TABLE>
Rent expense approximated $157,900 and $189,000, for the years ended April
30, 1996 and 1997, respectively.
Employment contracts
The Company has entered into employment agreements with certain employees
and officers, who are also stockholders of the Company. The agreements provide
for payments, upon termination of the employee, of an amount equal to 50% of
the employee's annual base salary.
10. DISCONTINUED PRODUCT LINES
During 1997 the Company discontinued its private on-line network products
and services and abandoned the related network computer equipment and software
licenses having a net book value of $360,154. Approximately $7,361,000 and
$4,365,000 of the Company's revenues in 1996 and 1997 were generated from
private on-line network products and services.
The Company also terminated one of its employees, who instituted litigation
against the Company claiming breach of contract. In October of 1997 the
Company and the employee, who is a stockholder, entered into a settlement
agreement, which is contingent upon completion of the USWeb share exchange
(Note 11). The Company has accrued the costs associated with the pending
settlement as of April 30, 1997, which are expected to be less than $100,000.
Additionally, the Company discontinued development of a private on-line
network for the architectural industry in which the Company incurred
development and administrative expenses which are included in product
development and general and administration expenses, in the amount of $572,000
during the year ended April 30, 1997.
F-175
<PAGE>
USWEB NEW YORK CENTRAL
(FORMERLY REACH NETWORKS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. SUBSEQUENT EVENTS
In October 1997, the Company issued 265 shares of its common stock to
certain employees and consultants with immediate vesting in consideration of
current services being performed.
In October of 1997 the Company entered into a merger agreement with USWeb
whereby the stockholders of the Company will exchange their shares of common
stock for shares of USWeb and the Company will become a wholly-owned
subsidiary of USWeb. The closing of the share exchange is subject to certain
conditions, which can be waived by USWeb, including the attainment of a
specified working capital level. As of November 3, 1997 the Company has not
met the working capital requirement. The number of shares to be issued by
USWeb is subject to adjustment during the first year subsequent to the
completion of the share exchange based on the Company's performance. The
Company also entered into a stock purchase agreement during October 1997 with
unaffiliated third parties whereby the Company will issue and sell 793.82
shares of its common stock at a price of $1,259.73 per share, providing gross
proceeds of $1,000,000. The issuance and sale will be executed
contemporaneously with the closing of the USWeb share exchange.
During September of 1997, the Company entered into an agreement to sell a
subsidiary to a former employee which had developed a product for the digital
delivery of information over the Internet using a "push" technology. The
subsidiary had ceased operations in February 1997 and had generated minimal
revenue. The Company received a note, secured by the stock of the subsidiary,
in the principal amount of $500,000. The note is payable in four equal
quarterly installments commencing September 30, 1998.
F-176
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Inter.logic.studios, inc.
In our opinion, the accompanying balance sheet and the related statement of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Inter.logic.studios, inc. at
December 31, 1997, and the results of its operations and its cash flows for
the year in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
San Jose, California
March 24, 1998
F-177
<PAGE>
INTER.LOGIC.STUDIOS, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 87,000
Accounts receivable.............................................. 531,000
Deferred contract costs.......................................... 60,000
Prepaid expenses and other current assets........................ 13,000
Loan to employees................................................ 8,000
--------
Total current assets........................................... 699,000
Property and equipment, net........................................ 154,000
--------
$853,000
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................. $ 41,000
Deferred revenue................................................. 110,000
Notes payable, current portion................................... 36,000
Accrued expenses................................................. 2,000
--------
Total current liabilities...................................... 189,000
--------
Note payable, less current portion................................. 42,000
--------
Commitments (Note 4)
Shareholders' equity:
Common Stock, $0.01 par value, 6,000,000 shares authorized;
3,900,000 shares issued and outstanding......................... 2,000
Retained earnings................................................ 620,000
--------
Total shareholders' equity..................................... 622,000
--------
$853,000
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-178
<PAGE>
INTER.LOGIC.STUDIOS, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Revenues........................................................... $1,712,000
Cost of revenues................................................... 808,000
----------
Gross profit..................................................... 904,000
----------
Operating expenses:
Sales, general and administrative................................ 336,000
----------
Net income from operations 568,000
Interest expense, net.............................................. (3,000)
----------
Net income......................................................... $ 565,000
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-179
<PAGE>
INTER.LOGIC.STUDIOS, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
--------- ------ -------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996........... 3,900,000 $2,000 $226,000 $228,000
Distribution to shareholders........... -- -- (171,000) (171,000)
Net income............................. -- -- 565,000 565,000
--------- ------ -------- --------
Balance at December 31, 1997........... 3,900,000 $2,000 $620,000 $622,000
========= ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-180
<PAGE>
INTER.LOGIC.STUDIOS, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $ 565,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Loss on disposal of property and equipment...................... 4,000
Depreciation and amortization................................... 26,000
Changes in current assets and liabilities:
Accounts receivable............................................ (407,000)
Prepaid expenses and other current assets...................... (68,000)
Accounts payable............................................... 32,000
Deferred revenue............................................... 110,000
Accrued expenses............................................... 16,000
---------
Net cash provided by operating activities..................... 278,000
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans to employees............................................... (7,000)
Purchase of property and equipment............................... (98,000)
---------
Net cash used in investing activities......................... (105,000)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable...................................... 132,000
Repayment of notes payable....................................... (54,000)
Distributions to shareholders.................................... (171,000)
---------
Net cash used in financing activities......................... (93,000)
---------
Net increase in cash and cash equivalents......................... 80,000
Cash and cash equivalents at beginning of year.................... 7,000
---------
Cash and cash equivalents at end of year.......................... $ 87,000
=========
SUPPLEMENTAL DISCLOSURES:
Interest paid.................................................... $ 4,000
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-181
<PAGE>
INTER.LOGIC.STUDIOS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
Inter.logic.studios, inc., (the "Company"), was incorporated in Georgia on
September 5, 1995 and provides professional consulting services including
internet technology integration, web page and intranet design, production and
maintenance.
Use of estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue recognition
Service revenues from fixed-price development agreements are recognized
under the completed- contract method whereby income is recognized only when
the contract is substantially competed and all costs and related revenues are
deferred in the balance sheet until that time. Provisions for agreement
adjustments and losses are recorded in the period such items are identified.
Significant customers
At December 31, 1997, two customers accounted for 25% and 63% of total
accounts receivable, respectively, and 43% and 28% of revenue, respectively,
for the year ended December 31, 1997.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line basis over the estimated useful lives of the assets
respective assets, which range from five to seven years.
Income taxes
The Company has elected to be taxed as an S Corporation, pursuant to the
Internal Revenue Code. This election provides for all profits or losses to be
recognized in the shareholders' personal income tax returns.
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Property and equipment:
Computer equipment............................................ $181,000
Furniture and fixtures........................................ 24,000
Office equipment.............................................. 8,000
--------
213,000
Less: Accumulated depreciation and amortization............... (59,000)
--------
$154,000
========
</TABLE>
NOTE 3--NOTES PAYABLE:
During the year ended December 31, 1998, the Company borrowed $132,000 under
notes payable which bear interest at 10.5% and are secured by computer
equipment. The outstanding note payable balance of
F-182
<PAGE>
INTER.LOGIC.STUDIOS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
$78,000 at December 31, 1997 is due in monthly installments of principal and
interest of $3,000 through February 2000.
Principal and interest payments under this note payable are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1998.............................................................. $36,000
1999.............................................................. 36,000
2000.............................................................. 6,000
-------
$78,000
=======
</TABLE>
NOTE 4--COMMITMENTS:
Leases
The Company leases office space and equipment under noncancelable operating
leases with various expiration dates through 2003. Rent expense for the year
ended December 31, 1997 was $53,000. Future minimum lease payments under
noncancelable operating at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING OPERATING
DECEMBER 31, LEASES
------------ ---------
<S> <C>
1998............................................................ $105,000
1999............................................................ 36,000
2000............................................................ 4,000
2001............................................................ 4,000
2002............................................................ 4,000
Thereafter...................................................... 1,000
--------
Total minimum lease payments.................................... $154,000
========
</TABLE>
NOTE 5--SUBSEQUENT EVENTS:
Equity Transactions
On January 1, 1998 the Company amended its Articles of Incorporation to
increase the number of shares of Common Stock which the Company is authorized
to issue to 6,000,000 and decrease the par value of the Company's stock to
$0.01 per share. The Company declared a 2,600-for-one Common Stock dividend to
its shareholders. The financial statements have been retroactively restated to
reflect this stock dividend.
On January 31, 1998, the Company declared a dividend in the amount of
$124,000, which was paid during February 1998 and March 1998. The financial
statements have been retroactively restated to reflect this stock dividend.
Stock Option Plan
On January 1, 1998, the Company adopted a Stock Option Plan (the "Plan").
The Plan provides for the granting of stock options to employees and
consultants of the Company. The Company has reserved 400,000 shares of Common
Stock for issuance under the Plan.
F-183
<PAGE>
INTER.LOGIC.STUDIOS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The exercise price of options granted under the Plan is determined by the
Plan Administrator, as defined. With respect to incentive stock options
granted under the Plan, the exercise price must be at least equal to the fair
market value per share of the Common Stock on the date of grant, and the
exercise price of any incentive stock option granted to a participant who owns
more than 10% of the voting power of the Company's outstanding capital stock
must be equal to at least 110% of fair market value of the Common Stock on the
date of grant.
Options outstanding under the Plan have a term of ten years, except for
those issued to participants who own more than 10% of the voting power of the
Company's outstanding capital stock, which have a term of five years.
During February and March 1998, the Company granted 219,600 stock options
with exercise prices of $0.30 per share. These options automatically vested
upon completion of the Acquisition (see Acquisition below).
Note Payable
On March 19, 1998, the Company borrowed $25,000 under a bank loan which
bears interest at 10.5%. Principal and accrued interest on this loan are due
on April 20, 1998.
Acquisition
On March 24, 1998, the Company was acquired by USWeb Corporation ("USWeb")
whereby all of the Company's outstanding shares of Common Stock were exchanged
for 294,495 shares of USWeb Common Stock, at which time the Company became a
wholly owned subsidiary of USWeb.
F-184
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Quest Interactive Media, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' deficit and of cash flows present fairly, in all
material respects, the financial position of Quest Interactive Media, Inc. at
March 31, 1997 and January 31, 1998, and the results of its operations and its
cash flows for the year ended March 31, 1997 and the ten months ended January
31, 1998 in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
San Jose, California
March 27, 1998
F-185
<PAGE>
QUEST INTERACTIVE MEDIA, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, JANUARY 31,
1997 1998
--------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 3,000 $ --
Accounts receivable, net.............................. 65,000 123,000
--------- ---------
Total current assets................................ 68,000 123,000
Property and equipment, net............................. 15,000 32,000
--------- ---------
$ 83,000 $ 155,000
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable...................................... $ 49,000 $ 70,000
Accrued liabilities................................... 189,000 283,000
Current portion of notes payable...................... 5,000 5,000
Unearned revenue...................................... -- 42,000
Other current liabilities............................. 9,000 --
--------- ---------
Total current liabilities........................... 252,000 400,000
Notes payable........................................... 20,000 15,000
--------- ---------
272,000 415,000
--------- ---------
Shareholders' deficit:
Common Stock, no par value, 10,000 shares authorized;
5,600 shares issued and outstanding.................. -- --
Accumulated deficit................................... (189,000) (260,000)
--------- ---------
Total shareholders' deficit......................... (189,000) (260,000)
--------- ---------
$ 83,000 $ 155,000
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-186
<PAGE>
QUEST INTERACTIVE MEDIA, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
TEN MONTHS ENDED
YEAR ENDED JANUARY 31,
MARCH 31, ------------------
1997 1997 1998
---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Net revenues.................................... $286,000 $198,000 $481,000
Cost of net revenues............................ 154,000 112,000 236,000
-------- -------- --------
Gross profit.................................. 132,000 86,000 245,000
-------- -------- --------
Operating expenses:
General and administrative.................... 163,000 135,000 264,000
Marketing, sales and support.................. 17,000 15,000 51,000
-------- -------- --------
Total operating expenses.................... 180,000 150,000 315,000
-------- -------- --------
Loss from operations............................ (48,000) (64,000) (70,000)
Interest expense................................ 2,000 1,000 1,000
-------- -------- --------
Net loss........................................ $(50,000) $(65,000) $(71,000)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-187
<PAGE>
QUEST INTERACTIVE MEDIA, INC.
STATEMENT OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------- ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT DEFICIT DEFICIT
------ ------ ----------- -------------
<S> <C> <C> <C> <C>
Balance at March 31, 1996............... 5,600 $-- $(139,000) $(139,000)
Net loss................................ -- -- (50,000) (50,000)
----- --- --------- ---------
Balance at March 31, 1997............... 5,600 -- (189,000) (189,000)
Net loss................................ -- (71,000) (71,000)
----- --- --------- ---------
Balance at January 31, 1998............. 5,600 $-- $(260,000) $(260,000)
===== === ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-188
<PAGE>
QUEST INTERACTIVE MEDIA, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
TEN MONTHS ENDED
YEAR ENDED JANUARY 31,
MARCH 31, ------------------
1997 1997 1998
---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................... $(50,000) $(65,000) $(71,000)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization................. 5,000 5,000 8,000
Changes in current assets and liabilities:
Accounts receivable, net..................... (36,000) 8,000 (58,000)
Accounts payable............................. 30,000 20,000 21,000
Accrued liabilities.......................... 65,000 44,000 94,000
Unearned revenue............................. -- -- 42,000
Other current liabilities.................... -- -- (9,000)
-------- -------- --------
Net cash provided by operating activities... 14,000 12,000 27,000
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............. (18,000) (20,000) (25,000)
-------- -------- --------
Net cash used in investing activities....... (18,000) (20,000) (25,000)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of) note payable...... 7,000 10,000 (5,000)
-------- -------- --------
Net cash provided by (used in) financing
activities................................. 7,000 10,000 (5,000)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................... 3,000 2,000 (3,000)
Cash and cash equivalents at beginning of
period......................................... -- -- 3,000
-------- -------- --------
Cash and cash equivalents at end of period...... $ 3,000 $ 2,000 $ --
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMA-
TION:
Interest paid.................................. $ 2,000 $ 1,000 $ 1,000
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-189
<PAGE>
QUEST INTERACTIVE MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
Quest Interactive Media, Inc., (the "Company") provides web site design and
maintenance, database design and management and software customization
services to clients in the United States, primarily in the Southeast. The
Company was incorporated in Tennessee on March 27, 1995.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue recognition
Service revenues are recognized over the period of each engagement using
primarily the percentage-of-completion method using labor hours incurred as
the measure of progress towards completion. Provisions for contract
adjustments and losses are recorded in the period such items are identified.
Unearned revenues represent the amount of cash received in advance of services
being performed.
Interim financial information
The accompanying interim financial statements for the ten months ended
January 31, 1997 are unaudited. In the opinion of management, the unaudited
interim financial statements have been prepared on the same basis as the
annual financial statements, and reflect all adjustments which, include only
normal recurring adjustments, necessary to present fairly the results of the
Company's operations and its cash flows for the ten months ended January 31,
1997. The financial data and other information disclosed in these notes to
financial statements related to this period are unaudited.
Concentration of credit risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist principally of cash and accounts
receivable. The Company places its cash in a checking account with a high
quality financial institution. The Company performs ongoing credit evaluations
of its customers' financial condition and, generally, requires no collateral
from its customers. The Company maintains an allowance for doubtful accounts
receivable based upon the expected collectibility of accounts receivable.
The following table summarizes the revenues from customers in excess of 10%
of the total revenues:
<TABLE>
<CAPTION>
TEN MONTHS
ENDED
YEAR ENDED JANUARY 31,
MARCH 31, -------------
1997 1997 1998
---------- ----- -----
(UNAUDITED)
<S> <C> <C> <C>
Customer A........................................ 28% 26% 38%
Customer B........................................ 26% 28% --
Customer C........................................ 10% 14% --
Customer D........................................ 11% -- --
</TABLE>
F-190
<PAGE>
QUEST INTERACTIVE MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the receivable balances as a percentage of
total accounts receivable for the customers presented above:
<TABLE>
<CAPTION>
TEN MONTHS ENDED
YEAR ENDED JANUARY 31,
MARCH 31, ------------------
1997 1997 1998
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Customer A.................................. 44% -- 5%
Customer D.................................. 14% -- --
</TABLE>
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally 4 to 8 years.
Advertising
Advertising costs are expensed as incurred, in accordance with Statement of
Position 93-7, "Reporting on Advertising Costs." Advertising expense was
$43,000, $3,000 (unaudited) and $3,000 for the ten months ended January 31,
1998 and 1997, and the year ended March 31, 1997, respectively.
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
MARCH 31, JANUARY 31,
1997 1998
--------- -----------
<S> <C> <C>
Accounts receivable, net:
Accounts receivable................................. $ 67,000 $130,000
Less: Allowance for doubtful accounts............... (2,000) (7,000)
-------- --------
$ 65,000 $123,000
======== ========
Property and equipment, net:
Office equipment.................................... $ 25,000 $ 50,000
Less: Accumulated depreciation...................... (10,000) (18,000)
-------- --------
$ 15,000 $ 32,000
======== ========
Accrued liabilities:
Payroll and related expenses........................ $179,000 $273,000
Taxes payable....................................... 10,000 10,000
-------- --------
$189,000 $283,000
======== ========
</TABLE>
NOTE 3--RELATED PARTY TRANSACTIONS:
On May 1, 1995, the Company entered into a loan agreement with a related
party shareholder to raise capital in the amount of $25,000. The principal
amount plus accrued interest is due in five annual installments of $5,000
each, commencing April 30, 1997, with the final payment due on April 30, 2001.
Interest accrues at a rate of 6% per annum. The note is secured by 5,600
shares of the Company's Common Stock.
NOTE 4--INCOME TAXES:
No provision for income taxes has been recognized for the ten months ended
January 31, 1998 and 1997 (unaudited) or the year ended March 31, 1997, as the
Company incurred net operating losses for income tax purposes and has no
carryback ability. Deferred income taxes were not significant at January 31,
1998 or March 31, 1997.
F-191
<PAGE>
QUEST INTERACTIVE MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5--BORROWINGS:
Notes payable consists of amounts payable to a related party shareholder
which are secured by 5,000 shares of Common Stock as follows:
<TABLE>
<CAPTION>
MARCH 31, JANUARY 31,
1997 1998
--------- -----------
<S> <C> <C>
6% note; principal and interest payable annually;
matures April 30, 2001.............................. $25,000 $20,000
Less: current portion................................ 5,000 5,000
------- -------
$20,000 $15,000
======= =======
</TABLE>
Principal payments under notes payable are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
MARCH 31,
-----------
<S> <C>
1998.............................................................. $ 5,000
1999.............................................................. 5,000
2000.............................................................. 5,000
2001.............................................................. 5,000
-------
Total........................................................... $20,000
=======
</TABLE>
NOTE 6--COMMITMENTS:
Leases
The Company leases office space and equipment under noncancelable operating
and capital leases with various expiration dates through April 30, 2000. Rent
expense for the ten months ended January 31, 1998 and 1997, and March 31, 1997
was $18,000, $9,000 (unaudited) and $10,000, respectively. The terms of the
facility lease provide for rental payments on a graduated scale. The Company
recognizes rent expense on a straight-line basis over the lease period, and
has accrued for rent expense incurred but not paid.
Future minimum lease payments under noncancelable operating leases as of
January 31, 1998, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED OPERATING
MARCH 31, LEASES
---------- ---------
<S> <C>
1998............................................................ $ 7,000
1999............................................................ 42,000
2000............................................................ 41,000
2001............................................................ 10,000
--------
Total minimum lease payments.................................. $100,000
========
</TABLE>
NOTE 7--COMMON STOCK:
The Company's Articles of Incorporation authorize the Company to issue
10,000 shares of no par value Common Stock. At January 31, 1998 and March 31,
1997, 5,600 shares were outstanding. All outstanding shares are held by an
officer of the Company.
NOTE 8--SUBSEQUENT EVENTS:
On March 27, 1998 the Company was acquired by USWeb Corporation ("USWeb")
whereby all of the Company's outstanding shares of Common Stock were exchanged
for 73,624 shares of USWeb Common Stock, at which time the Company became a
wholly owned subsidiary of USWeb.
F-192
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Ensemble Corporation
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Ensemble Corporation at December
31, 1997, and the results of its operations and its cash flows for the year in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
San Jose, California
March 27, 1998
F-193
<PAGE>
ENSEMBLE CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 536,000
Accounts receivable, net......................................... 1,291,000
Inventory........................................................ 17,000
Shareholder loan................................................. 58,000
Prepaid expenses and other current assets........................ 9,000
----------
Total current assets........................................... 1,911,000
Property and equipment, net........................................ 549,000
Other assets....................................................... 20,000
----------
$2,480,000
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable..................................................... $ 10,000
Accounts payable................................................. 133,000
Accrued liabilities and taxes payable............................ 245,000
Unearned revenues................................................ 73,000
Capital lease obligations, current portion....................... 171,000
----------
Total current liabilities...................................... 632,000
Long-term liabilities:
Deferred taxes liabilities....................................... 332,000
Capital lease obligation, non-current............................ 223,000
----------
Total liabilities.............................................. 1,187,000
----------
Shareholders' equity:
Common Stock: $.001 par value, 10,000,000 shares authorized,
2,625,000 shares issued and outstanding at December 31, 1997 3,000
Additional paid-in-capital....................................... 72,000
Retained earnings................................................ 1,218,000
----------
Total shareholders' equity..................................... 1,293,000
----------
$2,480,000
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-194
<PAGE>
ENSEMBLE CORPORATION
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Net revenues....................................................... $6,745,000
Cost of net revenues............................................... 4,408,000
----------
Gross profit..................................................... 2,337,000
----------
Operating expenses:
Marketing, sales and support..................................... 590,000
General and administrative....................................... 951,000
----------
Total operating expenses....................................... 1,541,000
----------
Income from operations............................................. 796,000
Interest income.................................................... 12,000
Interest expense................................................... (28,000)
----------
Income before income taxes......................................... 780,000
Provision for income taxes......................................... (298,000)
----------
Net income......................................................... $ 482,000
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-195
<PAGE>
ENSEMBLE CORPORATION
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ------ ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1996..................... 2,625,000 $3,000 $72,000 $ 736,000 $ 811,000
Net income................ 482,000 482,000
--------- ------ ------- ---------- ----------
Balance at December 31,
1997..................... 2,625,000 $3,000 $72,000 $1,218,000 $1,293,000
========= ====== ======= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-196
<PAGE>
ENSEMBLE CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $ 482,000
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization................................... 204,000
Changes in assets and liabilities:
Accounts receivable............................................ (714,000)
Inventory...................................................... (9,000)
Prepaid expenses and other current assets...................... 78,000
Other assets................................................... (2,000)
Accounts payable............................................... (32,000)
Accrued liabilities and other payables......................... (53,000)
Unearned revenues.............................................. 73,000
Deferred tax liabilities....................................... 215,000
---------
Net cash provided by operating activities..................... 242,000
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............................... (128,000)
---------
Net cash used in investing activities......................... (128,000)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of note payable........................................ (11,000)
Repayment of shareholder......................................... 2,000
Principal payment on capital lease obligation.................... (134,000)
---------
Net cash used in financing activities......................... (143,000)
---------
Net decrease in cash and cash equivalents......................... (29,000)
Cash and cash equivalents at beginning of year.................... 564,000
---------
Cash and cash equivalents at end of year.......................... $ 535,000
=========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest........................................... $ 24,000
=========
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING ACTIVITIES:
Acquisition of equipment under capitalized leases................ $ 246,000
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-197
<PAGE>
ENSEMBLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
Ensemble Corporation (the "Company") was incorporated in 1991 in Texas. The
Company provides technology services in the South Central United States in the
areas of client/server applications, Internet/Intranet design and
implementations, back-office network and infrastructure implementations and
business technology planning.
The Company also recognizes revenues from Internet access, third-parties
software and hardware purchased and resold to clients. However, revenues from
such activities have been immaterial to date.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue recognition
The Company derives most of its revenues from consulting agreements. Service
revenues from fixed-price agreements are recognized over the period of each
engagement under the percentage-of-completion method using labor hours
incurred as a measure of progress towards completion. Provisions for contract
adjustments and losses are recorded in the period such items are identified.
Revenues from time-and-materials agreements are recognized and billed as the
services are provided. Unearned revenues represent the amount of revenues
received in advance of services being performed.
Cash equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The Company
deposits cash and cash equivalents with high credit quality financial
institutions.
Concentration of credit risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, cash equivalents and accounts
receivable. The Company limits its exposure to credit loss by depositing its
cash and cash equivalents with high credit quality financial institutions. The
Company's accounts receivable are derived from revenue earned from customers
located in the U.S. The Company performs ongoing credit evaluations of its
customers' financial condition and, generally, requires no collateral. The
Company maintains an allowance for doubtful accounts receivable based upon
their expected collectibility. The following customers accounted for more than
10% of total accounts receivable at December 31, 1997:
<TABLE>
<S> <C>
Company A................................................................ 19%
Company B................................................................ 13%
Company C................................................................ 11%
</TABLE>
Customer D accounted for 17% of total net revenues for the year ended
December 31, 1997.
The Company has also established a number of strategic relationships with
leading software companies including Microsoft and Borland. The loss of any of
these strategic relationships would deprive the Company of the opportunity to
gain early access to leading-edge technology and to cross-sell additional
services.
F-198
<PAGE>
ENSEMBLE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Inventory
Inventory includes hardware and software to be resold and is stated at the
lower of cost or market, cost being determined using the first-in, first-out
(FIFO) method. A reserve for excess or obsolete inventory is recorded when
quantities on hand exceed customer's requirements.
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB No. 25") and complies with
the disclosure provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation ("SFAS No. 123").
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three years.
Income taxes
Income taxes are accounted for using an asset and liability approach which
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The measurement of current and deferred tax liabilities and assets is
based on provisions of the enacted tax law; the effects of future changes in
tax laws or rate are not anticipated. The measurement of deferred tax assets
is reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized.
Fair value of financial instruments
The Company's financial instruments, including accounts receivable,
shareholder loan, notes and accounts payable, and capital lease obligations
have carrying amounts which approximate fair value due to the relatively short
maturity of these instruments.
NOTE 2--PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
PROPERTY AND EQUIPMENT, NET:
Computer equipment............................................ $ 157,000
Furniture and fixtures........................................ 177,000
Property and equipment acquired under capital leases.......... 607,000
Leasehold improvements........................................ 38,000
---------
979,000
Less: Accumulated depreciation and amortization............... (430,000)
---------
$ 549,000
=========
</TABLE>
F-199
<PAGE>
ENSEMBLE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3--RELATED PARTY TRANSACTIONS:
The Company internally developed certain computer game software beginning in
1994 through April 1996. In February 1996, a license agreement was executed
between the Company and Ensemble Studios Corporation, an affiliate of the
Company, for the exclusive use of the subject software by Ensemble Studios
Corporation. The entire fee of $265,000 received under this agreement was
recorded as revenue in 1996. In addition, during the year ended December 31,
1997, there were employees of Ensemble Studios Corporation who were on the
Company's payroll. The related expenses for these employees were reimbursed by
Ensemble Studios Corporation. Effective September 1997, these employees were
transferred to the payroll of Ensemble Studios Corporation.
In August 1996, the Company issued loans to two shareholders for $29,000
each. Interest is charged on the outstanding balance at 8% per annum and total
accrued interest for the year ended December 31, 1997 was $3,000. The maturity
date for these loans is August 1998. Under the Stock Purchase Agreement, dated
August 1996, both shareholders were issued 162,500 shares of Common Stock in
lieu of cash.
NOTE 4--INCOME TAXES:
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Current tax expense:
Federal....................................................... $ 73,000
State......................................................... 10,000
--------
83,000
--------
Deferred tax expense:
Federal....................................................... 189,000
State......................................................... 26,000
--------
215,000
--------
$298,000
========
</TABLE>
Deferred tax liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Depreciation.................................................... $ 3,000
Reserves and accruals........................................... 299,000
--------
$302,000
========
</TABLE>
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory income tax rate to pre-
tax income as follows:
<TABLE>
<S> <C>
Federal statutory rate................................................. 34.0%
State tax, net of federal impact....................................... 3.0%
Other.................................................................. 1.2%
-----
38.2%
=====
</TABLE>
F-200
<PAGE>
ENSEMBLE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5--BORROWINGS:
Line of credit
In January 1997, the Company entered into a line-of-credit agreement with a
bank, under which the bank committed to loan the Company up to $500,000.
Borrowings under the line bear interest at 1.5% over the bank's prime rate,
and are secured by eligible accounts receivable, as defined in the agreement.
The line of credit expired on January 6, 1998. As of December 31, 1997, there
is no balance outstanding under the line of credit.
Note payable
At December 31, 1997, the Company has a note payable to a bank which is
secured by computer equipment. The note bears interest at 2.0% over the bank's
prime rate and matures on January 2, 1999.
NOTE 6--COMMITMENTS:
Leases
The Company leases office space and equipment under noncancelable operating
and capital leases with various expiration dates through 2005. Rent expense
for the year ended December 31, 1997 was $325,000. The terms of the facility
lease provide for rental payments on a graduated scale. The Company recognizes
rent expense on a straight-line basis over the lease period, and has accrued
for rent expense incurred but not paid.
Future minimum lease payments under noncancelable operating and capital
leases, including lease commitments entered into subsequent to December 31,
1997, are as follows:
<TABLE>
<CAPTION>
YEARS ENDED CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
------------ -------- ----------
<S> <C> <C>
1998.................................................... $239,000 $ 331,000
1999.................................................... 150,000 458,000
2000.................................................... 59,000 532,000
2001.................................................... 23,000 578,000
2002.................................................... 7,000 605,000
Thereafter.............................................. -- 1,419,000
-------- ----------
Total minimum lease payments............................ 478,000 $3,923,000
==========
Less amount representing interest....................... (84,000)
--------
Present value of capitalized lease obligations.......... 394,000
Less current portion.................................... (171,000)
--------
Long term portion of capitalized lease obligations...... $223,000
========
</TABLE>
NOTE 7--STOCK OPTIONS:
In 1996, the Company adopted the Ensemble Corporation, Inc. Stock Option
Plan (the "Plan"). The Plan provides for the granting of stock options to
employees and consultants of the Company. Options granted under the Plan are
nonqualified stock options.
The plan is administered by the Board of Directors of the Company. Options
are granted at the discretion of the Board of Directors at option prices not
less than fair market value, as determined by the Board of Directors, at the
date of grant.
F-201
<PAGE>
ENSEMBLE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation." The information set forth below represents pro
forma net income as if the Company had accounted for its employee stock
options under the fair value method as prescribed by SFAS No. 123.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1997: no dividend yield, expected volatility of
0%, a risk-free interest rate of 6% and an expected life of five years for
each nonqualified stock option.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The pro
forma information for the Company is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Net income:
As reported................................................... $482,149
========
Pro forma..................................................... $463,319
========
</TABLE>
Stock options activity is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------- --------
<S> <C> <C>
Outstanding at December 31, 1996............................ -- --
Granted................................................... 185,446 $1.56
Exercised................................................. -- --
Canceled.................................................. -- --
-------
Outstanding at December 31, 1997............................ 185,446 $1.56
=======
</TABLE>
The following table summarizes information about stock options outstanding
and exercisable under the Plan as of December 31, 1997.
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
----------- -----------
<S> <C> <C>
Number of options................................... 185,446 46,362
Exercise price...................................... $ 1.56 $ 1.56
Weighted average continuing contractual life in
years.............................................. 4 4
Weighted average exercise price..................... $ 1.56 $ 1.56
</TABLE>
NOTE 8--EMPLOYEE BENEFIT PLANS:
The Company sponsors a 401(k) defined contribution plan covering all
employees. Contributions made by the Company are determined annually by the
Board of Directors. No employer contributions were made under this plan as of
December 31, 1997.
NOTE 9--SUBSEQUENT EVENTS:
The Company has renegotiated its lease agreements for office space effective
March 31, 1998. The future minimum lease payments under these agreements are
included in Note 6.
On March 27, 1998, the Company was acquired by USWeb Corporation ("USWeb")
whereby all of the Company's outstanding shares of Common Stock were exchanged
for 543,678 shares of USWeb Common Stock, at which time the Company became a
wholly owned subsidiary of USWeb.
F-202
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Ikonic Interactive, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' deficit and of cash flows present fairly, in all
material respects, the financial position of Ikonic Interactive, Inc. at
October 31, 1997 and January 31, 1998 and the results of their operations and
their cash flows for the year ended October 31, 1997 and the three months
ended January 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audit of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
Price Waterhouse LLP
San Jose, California
April 15, 1998
F-203
<PAGE>
IKONIC INTERACTIVE, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1997 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 454,000 $ 97,000
Accounts receivable................................ 521,000 1,078,000
Costs in excess of billings........................ 168,000 267,000
Other current assets............................... 12,000 19,000
----------- -----------
Total current assets............................. 1,155,000 1,461,000
Property and equipment, net.......................... 829,000 736,000
Other assets......................................... 94,000 94,000
----------- -----------
$ 2,078,000 $ 2,291,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable................................... $ 273,000 $ 195,000
Accrued expenses................................... 385,000 256,000
Deferred revenue................................... 96,000 521,000
Capital lease obligations, current portion......... 273,000 269,000
Loans payable...................................... 575,000 575,000
----------- -----------
Total current liabilities........................ 1,602,000 1,816,000
Capital lease obligations, long-term portion......... 206,000 148,000
Other liabilities.................................... 88,000 88,000
----------- -----------
1,896,000 2,052,000
----------- -----------
Commitments (Note 5)
Mandatorily Redeemable Convertible Preferred Stock... 3,517,000 3,587,000
----------- -----------
Shareholders' deficit:
Common stock, no par value; 50,000,000 shares au-
thorized; 10,917,800 and 10,922,800 shares issued
and outstanding................................... 257,000 258,000
Accretion of Preferred Stock to redemption value... (528,000) (598,000)
Accumulated deficit................................ (3,064,000) (3,008,000)
----------- -----------
Total shareholders' deficit...................... (3,335,000) (3,348,000)
----------- -----------
$ 2,078,000 $ 2,291,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-204
<PAGE>
IKONIC INTERACTIVE, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JANUARY 31,
OCTOBER 31, ----------------------
1997 1997 1998
----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Revenues................................... $10,236,000 $2,283,000 $1,942,000
Cost of revenues........................... 5,915,000 1,257,000 942,000
----------- ---------- ----------
Gross profit............................. 4,321,000 1,026,000 1,000,000
----------- ---------- ----------
Operating expenses:
General and administrative............... 2,588,000 538,000 507,000
Marketing, sales and support............. 1,989,000 400,000 359,000
Research and development................. 149,000 21,000 45,000
----------- ---------- ----------
Total operating expenses............... 4,726,000 959,000 911,000
----------- ---------- ----------
Net income (loss) from operations.......... (405,000) 67,000 89,000
Interest expense, net...................... 132,000 34,000 33,000
----------- ---------- ----------
Net income (loss).......................... $ (537,000) $ 33,000 $ 56,000
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-205
<PAGE>
IKONIC INTERACTIVE, INC.
STATEMENT OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
ACCRETION OF
PREFERRED
COMMON STOCK STOCK TO TOTAL
------------------- REDEMPTION ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT VALUE DEFICIT DEFICIT
---------- -------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at October 31,
1996................... 10,908,250 $254,000 $(267,000) $(2,527,000) $(2,540,000)
Accretion of Preferred
Stock to redemption
value.................. -- -- (261,000) -- (261,000)
Issuance of Common
Stock.................. 9,550 3,000 -- -- 3,000
Net loss................ -- -- -- (537,000) (537,000)
---------- -------- --------- ----------- -----------
Balance at October 31,
1997................... 10,917,800 257,000 (528,000) (3,064,000) (3,335,000)
Accretion of Preferred
Stock to redemption
value.................. -- -- (70,000) -- (70,000)
Issuance of Common
Stock.................. 5,000 1,000 -- -- 1,000
Net income.............. -- -- -- 56,000 56,000
---------- -------- --------- ----------- -----------
Balance at January 31,
1998................... 10,922,800 $258,000 $(598,000) $(3,008,000) $(3,348,000)
========== ======== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-206
<PAGE>
IKONIC INTERACTIVE, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JANUARY 31,
OCTOBER 31, ---------------------
1997 1997 1998
----------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................... $(537,000) $ 33,000 $ 56,000
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operat-
ing activities:
Depreciation.............................. 476,000 123,000 112,000
Changes in assets and liabilities:
Accounts receivable...................... 608,000 310,000 (557,000)
Costs in excess of billings.............. 63,000 122,000 (99,000)
Other current assets..................... 32,000 (70,000) (7,000)
Accounts payable......................... (319,000) (255,000) (78,000)
Accrued expenses......................... 342,000 (52,000) (129,000)
Deferred revenue......................... (198,000) 168,000 425,000
Other assets............................. (15,000) (33,000) --
Other liabilities........................ 32,000 -- --
--------- --------- ---------
Net cash provided by (used in) operating
activities............................. 484,000 346,000 (277,000)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment...... (203,000) (6,000) (19,000)
--------- --------- ---------
Net cash used in investing activities... (203,000) (6,000) (19,000)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obliga-
tions..................................... (178,000) (60,000) (62,000)
Borrowings under line of credit............ 309,000 14,000 --
Proceeds from issuance of Common Stock..... 3,000 -- 1,000
--------- --------- ---------
Net cash provided by (used in) financing
activities............................. 134,000 (46,000) (61,000)
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents................................ 415,000 294,000 (357,000)
Cash and cash equivalents, beginning of pe-
riod....................................... 39,000 39,000 454,000
--------- --------- ---------
Cash and cash equivalents, end of period.... $ 454,000 $ 333,000 $ 97,000
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFOR-
MATION:
Interest paid.............................. $ 142,000 $ 37,000 $ 35,000
========= ========= =========
Accretion of Preferred Stock to redemption
value..................................... $ 261,000 $ 65,000 $ 70,000
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-207
<PAGE>
IKONIC INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
Ikonic Interactive, Inc. (the "Company"), was incorporated in California as
Destinations Video, Inc. in September 1985 and was renamed Ikonic Interactive,
Inc. in May 1994. The Company provides Internet development services. The
Company's activities to date have consisted of user interface design, content
creation, software development and business/technical consulting to customers
located in North America.
Use of estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, as well as revenues and expenses reported for the periods
presented. The Company regularly evaluates these estimates, and while actual
results may differ, management believes that these estimates are reasonable.
Revenue recognition
Revenue on long-term fixed-price contracts is generally recorded using the
percentage-of-completion method. Under the percentage-of-completion method,
revenue on contracts is recognized based on labor hours incurred as the
measure towards completion. Earned but unbilled revenues are classified under
current assets as costs in excess of billings. Billings in excess of revenues
recognized are classified under current liabilities as deferred revenue.
Provisions for losses are recognized on uncompleted contracts when they become
known. Revisions in costs and profit estimates are reflected in the accounting
period in which the facts which require the revisions become known. Under the
time-and-materials contracts, revenue is recognized based on agreed-upon
individual hourly rates for time incurred on the project during the period
plus any materials used and charged against the project. Sales of other
services are recorded as revenue when such services are rendered.
Cash and cash equivalents
Cash and cash equivalents consist of cash and investments in a money market
fund maintained at one financial institution. The Company considers all highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents.
Fair value of financial instruments
The carrying amounts for cash, accounts receivable, accounts payable,
accrued liabilities and loans payable approximate their respective fair values
because of the short term maturity of these items. The carrying value of the
Company's notes payable approximates fair market value.
Concentration of credit risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents
and trade accounts receivable. The Company places its cash primarily in
checking and money market accounts with high quality financial institutions.
F-208
<PAGE>
IKONIC INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company performs ongoing credit evaluations of its customers' financial
condition. The Company has not experienced significant credit losses to date.
The following customers accounted for 10% or more of the Company's total
revenues or accounts receivable for the period indicated:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED JANUARY 31,
OCTOBER 31, ---------------
1997 1997 1998
----------- ------ ------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Customer A.................................... 17% 17% --
Customer B.................................... 10% 13% --
Customer C.................................... 10% -- --
Customer D.................................... -- 16% --
Customer E.................................... -- 15% --
Customer F.................................... -- 12% --
Customer G.................................... -- 11% --
Customer H.................................... -- -- 11%
Customer I.................................... -- -- 10%
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1997 1998
----------- -----------
<S> <C> <C>
Accounts receivable:
Customer C......................................... 11% --
Customer E......................................... 13% 16%
Customer I......................................... -- 19%
</TABLE>
Property and equipment
Property and equipment are recorded at cost. Depreciation is computed on the
straight-line basis over the estimated useful lives of the respective assets
which range from three to seven years.
Income taxes
The Company accounts for income taxes using the asset and liability method.
Under the asset and liability method, deferred income tax assets and
liabilities are determined based on the differences between the financial
reporting and tax bases of assets and liabilities, and are measured using the
currently enacted tax rates and laws, as well as the expected future tax
benefit to be derived from tax loss and tax credit carryforwards. Valuation
allowances are established for deferred tax assets when it is considered more
likely than not that some portion or all of the deferred tax assets will not
be realized.
Stock compensation
The Company accounts for its stock-based compensation plans in accordance
with provisions of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and complies with the disclosure provisions of
Statement of Financial Accounting Standard No. 123, "Accounting for Stock-
Based Compensation," ("FAS 123"). If the accounting recognition provisions of
FAS 123 had been adopted, the effect on the Company's reported net income
(loss) would have been immaterial.
Interim financial information
The accompanying interim financial statements for the three months ended
January 31, 1997 are unaudited. In the opinion of management, the unaudited
interim financial statements have been prepared on
F-209
<PAGE>
IKONIC INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the same basis as the annual financial statements, and reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly the results of the Company's operations and its cash flows for
the three months ended January 31, 1997. The financial data and other
information disclosed in these notes to financial statements related to this
period are unaudited.
NOTE 2--PROPERTY AND EQUIPMENT:
The components of property and equipment are as follows:
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1997 1998
----------- -----------
<S> <C> <C>
Computer hardware and software..................... $1,287,000 $1,299,000
Furniture and fixtures............................. 222,000 222,000
Equipment.......................................... 260,000 267,000
---------- ----------
1,769,000 1,788,000
Less: Accumulated depreciation..................... (940,000) (1,052,000)
---------- ----------
$ 829,000 $ 736,000
========== ==========
</TABLE>
NOTE 3--INCOME TAXES:
No provision (benefit) for income taxes has been recognized for the year
ended October 31, 1997 and three months ended January 31, 1997 (unaudited) and
1998, as the Company incurred net losses for income tax purposes and has no
carryback potential.
Deferred tax assets of approximately $858,000 at January 31, 1998, consist
primarily of federal and state net operating loss carryforwards. Based on a
number of factors, including the lack of a history of profits and the fact
that the Company competes in a developing market that is characterized by
rapidly changing technology, management believes that there is sufficient
uncertainty regarding the realization of deferred tax assets such that a full
valuation allowance has been provided.
At January 31, 1998, the Company had federal and state net operating loss
carryforwards of approximately $774,000 and $84,000, respectively, available
to reduce future taxable income, which expire in varying amounts through 2013.
The Company's ability to utilizes net operating loss carryforwards and tax
credits are subject to limitations as set forth in applicable federal and
state tax laws. As specified in the Internal Revenue Code, an ownership change
of more than 50% by a combination of the Company's significant stockholders
during any three-year period would result in certain limitations on the
Company's ability to utilize its net operating loss and credit carryforwards.
NOTE 4--LINE OF CREDIT
During 1996, the Company secured a credit agreement with a commercial
lending institution. The agreement allows the Company to borrow up to the
lesser of $750,000 or 75% of the Company's domestic accounts receivable plus
50% of foreign accounts receivable at the bank's prime lending rate plus 1%.
At January 31, 1998, the prime rate was 10%. The credit agreement is secured
by the assets of the Company. This agreements requires that the Company comply
with certain financial covenants including minimum tangible net worth and
minimum quick ratio.
As of January 31, 1998, the Company had drawn $575,000 on this credit
agreement. The outstanding balance under this line of credit was repaid by
USWeb Corporation ("USWeb") upon completion of its acquisition of the Company
(Note 9).
F-210
<PAGE>
IKONIC INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5--LEASES AND COMMITMENTS:
Capital lease obligations
The Company is obligated under various non-cancelable operating and capital
leases for office space and certain property and equipment which expire in
2001. Future minimum lease payments under these leases at January 31, 1998 are
as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
---------- --------
<S> <C> <C>
Year ending October 31,
1998.................................................. $ 320,000 $251,000
1999.................................................. 397,000 186,000
2000.................................................. 467,000 40,000
2001.................................................. 311,000 --
---------- --------
Total minimum payments................................ $1,495,000 477,000
==========
Less amount representing interest..................... (60,000)
--------
Present value of minimum lease obligations............ 417,000
Less current portion.................................. 269,000
--------
Lease obligation, long-term........................... $148,000
========
</TABLE>
Rent expense totaled $353,000, $88,000 and $103,000 for the year ended
October 31, 1997 and for three months ended January 31, 1997 (unaudited) and
1998, respectively. At October 31, 1997 and January 31, 1998, fixed assets
recorded by the Company under capital leases totaled $909,000 and $916,000,
respectively.
NOTE 6--MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
The Company has authorized 15,000,000 shares of Mandatorily Redeemable
Convertible Preferred Stock ("Preferred Stock"); 5,000,000 shares are
designated Series A Preferred Stock and 5,000,000 shares are designated Series
B Preferred Stock. As of January 31, 1998, there were 2,694,295 shares of
Series A Preferred Stock and 3,665,960 shares of Series B Preferred Stock
issued and outstanding.
Unless the consent of a majority of the holders of the outstanding shares of
Preferred Stock is obtained, the Company may not pay or declare a cash
dividend, nor may any other distribution be made on any equity security of the
Company.
Holders of Preferred Stock receive one vote for each common share into which
such shares of Preferred Stock are convertible. Each share of Series A and
Series B Preferred Stock has a liquidation preference equal to its original
issue price plus an amount equal to 8% of the original issue price for such
share of Preferred Stock compounded per annum from the date of issue plus any
declared but unpaid dividends. Thereafter, the holders of the Common Stock of
the Company receive all remaining assets of the Company. On April 15, 1998,
the Company reached an agreement to be acquired (Note 9). At that time, the
Company's Mandatorily Redeemable Convertible Preferred Stock was converted
into 6,360,255 shares of Common Stock.
NOTE 7--STOCK OPTION PLAN:
In 1993, the Company adopted the 1993 Equity Incentive Plan (the "Plan").
The Plan provides for the issuance of stock options to purchase 3,166,095
shares of the Company's Common Stock to employees, directors of and
consultants to the Company. The Plan authorizes the grant of incentive stock
options,
F-211
<PAGE>
IKONIC INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
nonstatutory stock options, stock bonuses, and sales of restricted stock. The
exercise price of incentive stock options may not be less than the fair value
of the stock at the date of the grant, as determined by the Board of
Directors. The exercise price for nonstatutory stock options, stock bonuses,
and sale of restricted stock may not be less than 85% of the fair market value
of the stock at the date of the grant, as determined by the Board of
Directors. The vesting provisions of individual options may vary, but at a
minimum provide for vesting at the rate of 20% per year over five years from
the date the stock option is granted. The term of the Plan is for ten years
unless terminated sooner by the Board of Directors as provided for in the Plan
agreement.
The following table summarizes the option activity for the year ended
October 31, 1997 and the three months ended January 31, 1998.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
OCTOBER 31, 1997 JANUARY 31, 1998
--------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
----------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning
of the period.......... 2,149,245 $0.23 2,494,800 $0.25
Granted................. 1,499,500 $0.30 29,500 $0.50
Exercised............... (9,550) $0.30 (5,000) $0.30
Canceled................ (1,144,395) $0.28 (407,250) $0.28
----------- ----------
Outstanding at end of
period................. 2,494,800 $0.25 2,112,050 $0.25
----------- ----------
Weighted-average minimum
value of options grant-
ed..................... $ 0.06 $ 0.11
=========== ==========
</TABLE>
The weighted average remaining contractual life of options outstanding at
January 31, 1998 was 8.8 years. At January 31, 1998, 898,508 options were
exercisable at exercise prices ranging from $0.20-0.30.
NOTE 8--SAVINGS PLAN:
In 1994, the Company began sponsoring a defined contribution 401(k) plan
(the "401(k) Plan") which covers substantially all of its employees after they
have completed six months of service. Under the 401(k) Plan, the Company makes
discretionary matching contributions equal to a percentage of the salary
reduction elected by the employee. The percentage matching contribution is
determined each year by the Company, not to exceed the permissible legal
maximum. During 1997, the Company made no contributions to the 401(k) Plan.
NOTE 9--SUBSEQUENT EVENTS
On April 15, 1998, the Company reached an agreement with USWeb whereby USWeb
will acquire all of the Company's outstanding Common Stock in exchange for
498,457 shares of Common Stock of USWeb.
F-212
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of USWeb San Jose
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholder's equity and of cash flows present fairly, in all
material respects, the financial position of USWeb San Jose at December 31,
1997, and the results of its operations and its cash flows for the year in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1, at December
31, 1997 the Company has negative working capital and cash and available
credit may not be sufficient to fund the company's operations for next year,
which raises substantial doubt about its ability to continue as a going
concern. Management's plans regarding this matter are also described in Note
1. These financial statements do not include any adjustments that might result
from this uncertainty.
PRICE WATERHOUSE LLP
San Jose, California
March 26, 1998
F-213
<PAGE>
USWEB SAN JOSE
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 19,000 $ 2,000
Accounts receivable (net of allowance of
$29,000)........................................ 146,000 118,000
Account receivable--related parties.............. 81,000 80,000
Other current assets............................. 2,000 --
-------- --------
Total current assets........................... 248,000 200,000
Property and equipment, net........................ 119,000 114,000
-------- --------
$367,000 $314,000
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................. $110,000 $ 80,000
Accounts payable--related parties................ 181,000 250,000
Accrued expenses................................. 23,000 24,000
-------- --------
Total current liabilities...................... 314,000 354,000
-------- --------
Commitments (Note 5)
Shareholder's equity:
Common Stock, no par value, 10,000,000 shares au-
thorized;
500,000 shares issued and outstanding........... 50,000 50,000
Retained earnings................................ 3,000 (90,000)
-------- --------
Total shareholder's equity (deficit)........... 53,000 (40,000)
-------- --------
$367,000 $314,000
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-214
<PAGE>
USWEB SAN JOSE
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ------------------
1997 1997 1998
------------ ------------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Third parties............................... $394,000 $ 61,000 $178,000
Related parties............................. 417,000 15,000 58,000
-------- -------- ---------
Total revenues............................ 811,000 76,000 236,000
-------- -------- ---------
Cost of revenues:
Third parties............................... 198,000 38,000 173,000
Related parties............................. 209,000 9,000 57,000
-------- -------- ---------
Total cost of sales....................... 407,000 47,000 230,000
-------- -------- ---------
Gross profit.............................. 404,000 29,000 6,000
Operating expenses:
Selling, general and administrative......... 395,000 24,000 99,000
-------- -------- ---------
Net income (loss)............................. $ 9,000 $ 5,000 $ (93,000)
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-215
<PAGE>
USWEB SAN JOSE
STATEMENT OF SHAREHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
--------------- RETAINED SHAREHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
------- ------- -------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996............ -- $ -- $ (6,000) $ (6,000)
Issuance of Common Stock................ 500,000 50,000 -- 50,000
Net income.............................. -- -- 9,000 9,000
------- ------- -------- --------
Balance at December 31, 1997............ 500,000 50,000 3,000 53,000
Net loss (unaudited).................... -- -- (93,000) (93,000)
------- ------- -------- --------
Balance at March 31, 1998 (unaudited)... 500,000 $50,000 $(90,000) $(40,000)
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-216
<PAGE>
USWEB SAN JOSE
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ------------------
1997 1997 1998
------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................... $ 9,000 $ 5,000 $ (93,000)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization............. 10,000 3,000 5,000
Changes in assets and liabilities:
Accounts receivable...................... (146,000) (50,000) 28,000
Accounts receivable--related parties..... (81,000) -- 1,000
Other current assets..................... (2,000) (2,000) 2,000
Accounts payable......................... 95,000 5,000 (30,000)
Accounts payable--related parties........ 198,000 43,000 69,000
Accrued expenses......................... 16,000 1,000 1,000
--------- -------- ---------
Net cash provided by operating activi-
ties................................... 99,000 5,000 (17,000)
--------- -------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES FOR
THE ACQUISITION OF PROPERTY AND EQUIPMENT... (104,000) (29,000) --
--------- -------- ---------
Net decrease in cash and cash equivalents.... (5,000) (24,000) (17,000)
Cash and cash equivalents, beginning at peri-
od.......................................... 24,000 24,000 19,000
--------- -------- ---------
Cash and cash equivalents, end of period..... $ 19,000 $ -- $ 2,000
========= ======== =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSAC-
TIONS:
Issuance of Common Stock in exchange for net
assets (Note 6)............................ $ 50,000 $ -- $ --
========= ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-217
<PAGE>
USWEB SAN JOSE
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
USWeb San Jose (the "Company") operated as a division of Virtual Valley,
Inc. ("Virtual Valley"), which is a wholly-owned subsidiary of Metro
Publishing, Inc. (the "Parent"), until July 16, 1997, at which date the
Company was incorporated as a separate legal entity in California. The Company
specializes in electronic marketing on the Internet and is a full-service
developer of Internet and intranet sites, offering services in four areas:
website design, hosting, promotion and training.
During June 1996, the Company entered into a franchise agreement with USWeb
Corporation ("USWeb") to be a part of USWeb's Affiliate network. The
relationship with USWeb provided for increased marketing presence, technical
support and centralized hosting facilities.
Use of estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue recognition
The Company derives its revenues from consulting service agreements and
hosting service fees.
Service revenues from fixed-price agreements are recognized over the period
of each engagement under the percentage-of-completion method using labor hours
incurred as the measure of progress towards completion. Provisions for
contract adjustments and losses are recorded in the period such items are
identified. Unearned revenues represent the amount of revenues invoiced in
advance of services being performed. Revenues from time-and-materials
agreements and hosting services are recognized and billed as the services are
provided.
Cash and cash equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Significant customers
During the year ended December 31, 1997, sales to one customer accounted for
43% of third party revenues. At December 31, 1997, approximately 65%, 17% and
10% of third party accounts receivable were due from three customers,
respectively.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally five years.
Advertising Costs
Advertising costs are expensed as incurred in accordance with Statement of
Position 93-7, "Reporting on Advertising Costs." Advertising costs for the
year ended December 31, 1997 totaled $136,000.
F-218
<PAGE>
USWEB SAN JOSE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income taxes
Income taxes are accounted for using an asset and liability approach which
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The measurement of current and deferred tax liabilities and assets is
based on provisions of the enacted tax law; the effects of future changes in
tax laws or rates are not anticipated. The measurement of deferred tax assets
is reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized.
Fair value of financial instruments
The Company's financial instruments, including cash equivalents, accounts
receivable, accounts payable and accrued expenses, have carrying amounts which
approximate fair value due to the relatively short maturity of these
instruments.
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Property and equipment, net:
Computers and equipment........................... $ 97,000 $ 97,000
Furniture and fixtures............................ 35,000 35,000
-------- --------
132,000 132,000
Less: Accumulated depreciation.................... (13,000) (18,000)
-------- --------
$119,000 $114,000
======== ========
</TABLE>
NOTE 3--TRANSACTIONS WITH RELATED PARTIES:
During the year ended December 31, 1997, the Company recorded $417,000 in
revenues from related parties and $209,000 in cost of revenues for services
performed for the Parent and its subsidiaries, of which $81,000 is included in
related party accounts receivable at December 31, 1997. The terms of these
transactions are consistent with those of third parties.
During the year ended December 31, 1997, the Parent charged the Company
$66,000 for its pro rata share of insurance premiums, rent and administrative
costs, such as accounting and legal services. Management believes that the
methodologies used to allocate these charges are reasonable. In addition, the
Parent charged the Company $129,000 in advertisement fees for the year ended
December 31, 1997.
As of December 31, 1997, the Company had $181,000 in accounts payable to
related parties. This amount consists of $139,000 due to Virtual Valley for
payroll related expenses paid by Virtual Valley on the Company's behalf and
$42,000 due to the Parent for costs and services charged to the Company as
described above.
NOTE 4--INCOME TAXES:
Income tax expense for the year ended December 31, 1997 was not material.
The Company had no significant deferred tax assets or liabilities at December
31, 1997.
F-219
<PAGE>
USWEB SAN JOSE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5--COMMITMENTS AND CONTINGENCIES:
Royalties
Under the terms of its franchise agreement with USWeb, the Company is
required to pay royalties to USWeb based upon a stipulated percentage of
adjusted gross revenue, as defined. Royalties for the year ended December 31,
1997 totaled $60,000 and are included in cost of revenues.
Operating leases
The Company leases office space under a noncancelable operating lease which
expires in 1999. Rent expense for the year ended December 31, 1997 totaled
$16,000.
Future minimum lease payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
OPERATING
YEAR ENDED DECEMBER 31, LEASES
----------------------- ---------
<S> <C>
1998.............................................................. $38,000
1999.............................................................. 19,000
-------
Total minimum lease payments.................................... $57,000
=======
</TABLE>
NOTE 6--COMMON STOCK:
The Company's Articles of Incorporation authorize the Company to issue
10,000,000 shares of Common Stock. On July 16, 1997, the Company issued
500,000 shares of Common Stock to Virtual Valley, Inc. in exchange for the net
assets of its USWeb San Jose division, which had a net book value of $50,000
on that date.
F-220
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Gray Peak Technologies, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of Gray Peak
Technologies, Inc. (the "Company") at December 31, 1997 and the results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Stamford, Connecticut
April 17, 1998
F-221
<PAGE>
GRAY PEAK TECHNOLOGIES, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 7,715 $ 5,355
Accounts receivable, net of allowance for doubtful
accounts of $29................................... 1,346 1,717
Prepaid expenses and other assets.................. 136 173
------- -------
Total current assets............................. 9,197 7,245
Fixed assets, net (Note 3)........................... 715 1,200
Officer loans........................................ 36 70
------- -------
$ 9,948 $ 8,515
======= =======
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................... $ 633 $ 540
Accrued expenses................................... 527 572
Deferred revenue................................... -- 136
Income taxes payable............................... 20 --
Current portion of capital leases payable.......... 11 11
------- -------
Total current liabilities........................ 1,191 1,259
Capital leases payable............................... 26 24
------- -------
1,217 1,283
------- -------
Commitments (Note 10)
Mandatorily Redeemable Series B Convertible Preferred
Stock ($0.01 par value; 4,500,000 shares authorized;
4,117,500 shares issued and outstanding;
recorded at liquidation preference) ................ 8,235 8,235
Stockholders' equity:
Series A Convertible Preferred Stock ($0.01 par
value; 2,525,000 shares authorized, issued and
outstanding; liquidation preference of $2,525).... 25 25
Common Stock ($0.01 par value; 16,000,000 shares
authorized,
2,000,000 shares issued and outstanding).......... 20 20
Additional paid-in capital......................... 2,393 2,385
Accumulated deficit................................ (1,942) (3,433)
------- -------
Total stockholders' equity (deficit)............. 496 (1,003)
------- -------
$ 9,948 $ 8,515
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-222
<PAGE>
GRAY PEAK TECHNOLOGIES, INC.
STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ------------
1997 1997 1998
------------ ---- -------
(UNAUDITED)
<S> <C> <C> <C>
Revenues, net........................................ $ 2,532 $138 $ 1,816
Operating expenses:
Professional personnel............................. 1,880 58 1,384
Sales and marketing................................ 559 8 571
General and administrative......................... 1,253 29 803
Other costs........................................ 848 -- 622
------- ---- -------
Total operating costs............................ 4,540 95 3,380
------- ---- -------
(Loss) income from operations........................ (2,008) 43 (1,564)
Interest income and other, net....................... 86 -- 73
------- ---- -------
(Loss) income before income taxes.................... (1,922) 43 (1,491)
Provision for income taxes........................... 20 -- --
------- ---- -------
Net (loss) income.................................... $(1,942) $ 43 $(1,491)
======= ==== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-223
<PAGE>
GRAY PEAK TECHNOLOGIES, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
---------------- ---------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
--------- ------ --------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1997................... -- -- -- -- -- -- --
Issuance of Common
Stock.................. -- -- 2,000,000 $ 20 $ 30 -- $ 50
Issuance of Series A
Convertible Preferred
Stock and warrants, net
of issuance costs...... 2,525,000 $ 25 -- -- 2,448 -- 2,473
Expenses related to
issuance of Series B
Convertible Preferred
Stock.................. -- -- -- -- (85) -- (85)
Net loss................ -- -- -- -- -- $(1,942) (1,942)
--------- ---- --------- ---- ------ ------- -------
Balance at December 31,
1997................... 2,525,000 25 2,000,000 20 2,393 (1,942) 496
Expenses related to
issuance of Series B
Convertible Preferred
Stock (Unaudited)...... -- -- -- -- (8) -- (8)
Net loss (Unaudited).... -- -- -- -- -- (1,491) (1,491)
--------- ---- --------- ---- ------ ------- -------
Balance at March 31,
1998 (Unaudited)....... 2,525,000 $ 25 2,000,000 $ 20 $2,385 $(3,433) $(1,003)
========= ==== ========= ==== ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-224
<PAGE>
GRAY PEAK TECHNOLOGIES, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, -------------------
1997 1997 1998
------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income........................... $(1,942) $ 43 $ (1,491)
Adjustments to reconcile net loss to net
cash
(used in) provided by operating activities:
Depreciation and amortization............. 90 -- 96
Changes in assets and liabilities:
Accounts receivable...................... (1,346) (109) (371)
Prepaid expenses and other current as-
sets.................................... (111) (1) (62)
Accounts payable......................... 633 36 (93)
Accrued expenses......................... 527 52 47
Deferred revenue......................... -- -- 136
Income taxes payable..................... 20 -- (22)
------- -------- ---------
Net cash (used in) provided by operating
activities............................. (2,129) 21 (1,760)
------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of capital equipment.............. (768) (21) (583)
------- -------- ---------
Net cash used for investing activities.. (768) (21) (583)
------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Officer loans............................... (36) (33) (34)
Net proceeds from issuance of convertible
preferred stock............................ 10,598 2,473 17
Net proceeds from issuance of common stock.. 50 50 --
------- -------- ---------
Net cash provided by (used for) financ-
ing activities......................... 10,612 2,490 (17)
------- -------- ---------
Net increase (decrease) in cash.............. 7,715 2,490 (2,360)
Cash and cash equivalents at beginning of pe-
riod........................................ -- -- 7,715
------- -------- ---------
Cash and cash equivalents at end of period... $ 7,715 $2,490 $ 5,355
======= ======== =========
Supplemental information:
Cash paid for interest...................... $ 2 $ -- $ --
======= ======== =========
Cash paid for income taxes.................. $ 2 $ -- $ 20
======= ======== =========
Noncash investing activity:
Capital lease obligations related to pur-
chase of fixed assets...................... $ 37 $ -- $ --
======= ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-225
<PAGE>
GRAY PEAK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
1. THE COMPANY
Gray Peak Technologies, Inc. (the "Company") was incorporated in December
1996 under the laws of the State of Delaware and effectively began operations
in January 1997. The Company is a provider of network integration services for
complex data, voice and video networks. The Company provides services for the
full life cycle of a network, including business assessment, design and
architecture, implementation, integration, operations and optimization and
maintains expertise in the most complex network technologies and multivendor
environments. In addition, the Company develops proprietary technologies which
are used in the deployment of its services. The Company operates in one
industry segment. To date, the Company has provided limited professional
services to certain of its United States based clients in foreign locations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that effect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents consist of short-term, highly liquid investments, with
original maturities of less than three months when purchased and are stated at
cost. Interest is accrued as earned.
Fixed Assets
Fixed assets are stated at cost. Depreciation is computed on a straight-line
basis over the estimated useful lives of the respective assets, generally
ranging form three to five years.
Revenue Recognition
The Company's revenues are derived from network integration professional
services. Services are provided on a "time and expense" basis and through
fixed-price contracts. Revenues under "time and expense" contracts are
recognized as services are performed. Under fixed-priced contracts, revenues
are recognized using the percentage-of-completion method of accounting
requiring milestone achievements prior to invoicing. Payments received in
advance of services performed are recorded as deferred revenue.
Included in accounts receivable at December 31, 1997 are unbilled costs of
approximately $68, and consist primarily of services performed which were not
billed as of that date due to specific contractual terms established with
certain clients.
Income Taxes
The Company provides for income taxes using an asset and liability approach
that recognizes deferred tax assets and liabilities for expected future tax
consequences of temporary differences between the book and tax bases of assets
and liabilities. A valuation allowance is provided if it is more likely than
not that some or all of the deferred tax asset will not be realized.
Interim Financial Data
The unaudited financial data for the three months ended March 31, 1997 and
1998 have been prepared by management and include all adjustments, consisting
only of normal recurring adjustments, necessary to
F-226
<PAGE>
GRAY PEAK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
present fairly the results of operations and cash flows. The results of
operations for the three months ended March 31, 1998 are not necessarily
indicative of the operating results to be expected for the year ending
December 31, 1998.
Fair Value of Financial Instruments
The carrying value of accounts receivable, accounts payable and accrued
expenses approximates their value due to the relatively short maturities of
these instruments.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS
130"), which requires the presentation of the components of comprehensive
income in a company's financial statements for reporting periods beginning
subsequent to December 15, 1997. Comprehensive income is defined as the change
in a company's equity during a financial reporting period from transactions
and other circumstances from nonowner sources (including cumulative
translation adjustments, minimum pension liabilities and unrealized
gains/losses on available-for-sale securities). During the quarter ended March
31, 1998, such amounts were not significant, and the Company's comprehensive
loss approximated its net loss.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("FAS 131"), which establishes standards for the way companies report
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The Company has not yet determined the
impact, if any, of adopting this new standard. The disclosures prescribed by
FAS 131 are effective for fiscal years beginning after December 15, 1997.
3. FIXED ASSETS
Fixed assets are comprised of the following at December 31, 1997 and March
31, 1998:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ---------
<S> <C> <C>
Computer equipment.................................... $747 $1,197
Furniture and fixtures................................ 23 36
Leasehold improvements................................ 35 153
---- ------
805 1,386
Less: accumulated depreciation and amortization....... (90) (186)
---- ------
$715 $1,200
==== ======
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses are comprised of the following at December 31, 1997 and
March 31, 1998:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ---------
<S> <C> <C>
Salaries and wages.................................... $340 $226
Legal expenses........................................ 60 50
Bonus................................................. -- 150
Other................................................. 127 146
---- ----
$527 $572
==== ====
</TABLE>
F-227
<PAGE>
GRAY PEAK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
5. SECURED LINE OF CREDIT
In August 1997, the Company obtained a secured line of credit with a bank
for $750 which expires on August 18, 1998. Borrowings under the line are
secured by substantially all of the assets of the Company and are limited to
the maximum committed line, less outstanding obligations of the Company owed
to the bank, including outstanding letters of credit. The payment of cash
dividends is prohibited under the secured line of credit. At December 31,
1997, there were no borrowings outstanding under this secured line of credit.
Interest is payable monthly at an annual rate equal at the bank's prime
lending rate (9.50% at December 31, 1997) plus one and one half percent.
At December 31, 1997, an irrevocable letter of credit of $68 was issued
under this agreement which is being maintained as security for performance
under a long-term property lease agreement.
At December 31, 1997, amounts available under the secured line of credit
were $682.
6. COMMON STOCK AND CONVERTIBLE PREFERRED STOCK
Common Stock
Each share of common stock entitles the holder to one vote on all matters
submitted to a vote of the Company's common stockholders. Common stockholders
are entitled to receive dividends, if any, as may be declared by the Board of
Directors, subject to any preferential dividend rights of the preferred
stockholders. The Company has reserved a total of 16,000,000 shares of common
stock for the issuance under the Company's stock option plan and for
conversion of preferred stock and the exercise of the stock purchase warrants.
Series A Convertible Preferred Stock
In March 1997, the Company issued 2,525,000 shares of Series A Convertible
Preferred Stock ("Series A Preferred") and warrants at $1.00 per share
providing gross proceeds of $2,525 and net proceeds, after deducting expenses,
of $2,473.
The holders of Series A Preferred have the right to convert such shares into
common stock on a one-for-one basis at an initial conversion price of $1.00
per share, which is subject to adjustment for any security issuances at a per
share price less than $1.00. The Series A Preferred will automatically convert
into common stock upon sale of the Company or the consummation of a public
offering of the Company's common stock with a per share price and gross
proceeds of qualifying amounts.
In connection with this transaction, the Company also issued warrants to the
holders of Series A Preferred for the purchase of 2,525,000 shares of the
Company's common stock, at an initial exercise price of $1.00 per share. Using
the Black-Scholes pricing model, the Company has valued these warrants at
$682, which is included in the carrying value of the Series A Preferred. The
holders of the warrants have the right to purchase shares of the Company's
common stock at any time following the third anniversary of the date of
issuance but prior to the fifth anniversary. In addition, the warrants will
automatically convert into shares of the Company's common stock upon (i) a
sale of or consolidation of the Company with, or merger of the Company into
another corporation or (ii) the consummation of a public offering of the
Company's common stock with a per share price and gross proceeds of specified
amounts.
F-228
<PAGE>
GRAY PEAK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
Series B Convertible Preferred Stock
In September 1997, the Company issued 4,117,500 shares of Series B
Convertible Preferred Stock ("Series B Preferred") at $2.00 per share
providing gross proceeds of $8,235 and net proceeds, after deducting expenses,
of $8,150.
The holders of the Series B Preferred have the right to convert such shares
into shares of the Company's common stock on a one-for-one basis at an initial
conversion value of $2.00 per share, subject to anti-dilution protection (as
defined). In addition to the anti-dilution provisions, the conversion value
for the Series B Preferred shall be adjusted based upon an assumed Company
value determined from the Company's achieving certain revenue and earnings
before interest and taxes ("EBIT") targets during the Company's year ending
December 31, 1998 (as defined). The EBIT targets shall not apply, however, in
the event a public offering of the Company's common stock or sale of the
Company is completed prior to December 31, 1998 with a per share value to the
holders of Series B Preferred of at least $5.00. In addition, in any such
event, if the per share value to the holders of Series B Preferred is at least
$6.50, then the conversion value shall be increased to $2.50 per share.
In addition, (i) such shares will automatically convert into common stock
upon the consummation of a public offering of the Company's common stock or
sale transaction of qualifying size (ii) any time after the fifth anniversary
of the date of issuance of the Series B Preferred, a holder at its option may
sell such shares to the Company at a redemption amount, and (iii) in the event
of a liquidation of the Company the holders of Series B Preferred stock are
entitled to a liquidation preference (each as defined).
No dividends shall be paid on the Series B Preferred, provided that no
dividends or other distributions shall be made on any other class of the
Company's capital stock unless a pro-rata dividend or distribution is made on
the Series B Preferred shares outstanding. The holders of Series B Preferred
shall be entitled to vote on matters which holders of common stock have the
right to vote.
7. EMPLOYEE BENEFIT PLANS
Stock Option Plan
In March 1997, the Company's Board of Directors adopted the 1997 Stock
Option Plan (the "1997 Plan"), whereby incentive and nonqualified options to
purchase up to 2,000,000 shares of the Company's common stock may be granted
to key employees, directors and consultants. The exercise and vesting periods
and the exercise price of the options granted under the 1997 Plan are
determined by a Committee of the Board of Directors. The 1997 Plan stipulates
that no options may be exercisable after ten years from the date of grant. The
fair market value of the Company's common stock is determined by the Board of
Directors. Options granted under the 1997 Plan generally vest in equal
installments over a period of four years commencing after the first year of
the date of grant, with the exception of 1,005,000 options granted to certain
key employees which have the additional vesting conditions that the Company
meets certain revenue targets.
F-229
<PAGE>
GRAY PEAK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
The following table summarizes stock options activity under the Plan for the
year ended December 31, 1997, all of which were granted to employees:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding at beginning of year......................... -- --
Granted.................................................. 1,730,000 $1.38
Forfeited................................................ (100,000) 1.20
--------- -----
Outstanding at end of year............................... 1,630,000 $1.39
========= =====
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------
AVERAGE
REMAINING
CONTRACTUAL AVERAGE
SHARES LIFE EXERCISE
EXERCISE PRICES OUTSTANDING (YEARS) PRICE
--------------- ----------- ----------- --------
<S> <C> <C> <C>
$1.00..................................... 999,500 4.4 $1.00
$2.00..................................... 630,500 4.8 2.00
--------- --- -----
1,630,000 4.5 $1.39
========= === =====
</TABLE>
There were no exercisable options outstanding at December 31, 1997.
The Company has elected to apply Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its Plan. Accordingly, no compensation cost has been recognized
for options granted to employees under the Plan for the year ended December
31, 1997.
Had compensation cost for options granted to employees been determined based
upon the fair value at the date of grant for awards under the Plan consistent
with the methodology prescribed under Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation," the Company's net loss for the year
ended December 31, 1997 and the three months ended March 31, 1998 would have
increased by $48 and $37, respectively.
The fair values of the Company's stock-based awards to employees during the
year ended December 31, 1997 was estimated using the Black-Scholes option-
pricing model based on the following weighted average assumptions:
<TABLE>
<S> <C>
Dividend yield....................................................... None
Weighted average risk free interest rate on the date of grant........ 6.26%
Forfeitures.......................................................... None
Expected life........................................................ 5 years
Volatility........................................................... 0%
</TABLE>
F-230
<PAGE>
GRAY PEAK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
Defined Contribution Plan
The Company has a defined contribution plan (the "Plan"), which qualifies
under Section 401(k) of the Internal Revenue Code, for employees meeting
certain services requirements. Participants may contribute up to 15% of their
gross wages not to exceed, in any given year, a limitation set by Internal
Revenue Service regulations. The Plan provides for discretionary contributions
to be made by the Company as determined by the Board of Directors. The Company
has not made any contributions to the Plan during 1997.
8. INCOME TAXES
The Company has incurred a loss during 1997, which has generated a net
operating loss carryforward of approximately $1,700 at December 31, 1997, for
federal and state income tax purposes. This carryforward is available to
future taxable income and expires in 2012 for federal income tax purposes.
This loss is subject to limitation on future years utilization should certain
ownership changes occur.
The net operating loss carryforward and temporary differences between
carrying amounts of assets and liabilities for financial reporting and income
tax purposes result in a net deferred tax benefit of $783 at December 31,
1997. The Company's operating plans anticipate taxable income in future
periods: however, such plans make significant assumptions which cannot be
reasonably assured including continued market acceptance of the Company's
services by customers. Therefore, in consideration of the Company's current
year loss and the uncertainty of its ability to utilize this deferred tax
benefit in the future, the Company has recorded a valuation allowance in the
amount of $783 at December 31, 1997 to offset the deferred tax benefit amount.
Significant components of the noncurrent deferred tax assets at December 31,
1997 are as follows:
<TABLE>
<S> <C>
Deferred tax assets
Accounts receivable reserves........................................ $ 12
Net operating loss.................................................. 697
Accruals............................................................ 77
-----
Total deferred tax assets......................................... 786
Deferred tax liabilities
Depreciation........................................................ 3
-----
Total deferred tax liabilities.................................... 3
-----
Net deferred tax asset................................................ 783
Less: valuation allowance............................................. (783)
-----
Deferred tax asset, net............................................... $ --
=====
</TABLE>
The components of the provision for income taxes at December 31, 1997 are as
follows:
<TABLE>
<S> <C>
Current taxes
Federal................................................................ --
State and city......................................................... $20
---
Provision for income taxes........................................... $20
===
</TABLE>
F-231
<PAGE>
GRAY PEAK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
9. CONCENTRATION OF RISK AND CUSTOMER INFORMATION
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash, accounts receivable, officer
loans and accounts payable. The Company generally does not require collateral
and the majority of its trade receivables are unsecured. Management of the
Company does not believe that significant credit risk exists at December 31,
1997.
For the year ended December 31, 1997, customers A, B, C and D accounted for
24.9%, 12.5%, 12.1% and 10.3%, respectively, of net revenues. No other
customers accounted for more than 10% of net revenues for the year ended
December 31, 1997.
10. COMMITMENTS
The Company operates in leased facilities. Management believes that leases
currently in effect will be renewed or replaced by other leases of a similar
nature and term. Rent expense under operating leases amounted to $136 for the
year ended December 31, 1997.
During 1997, the Company entered into capital leases for certain computer
equipment totaling $37 of capitalized costs.
The future minimum lease payments under capital leases (including present
value of net minimum lease payments) and operating leases as of December 31,
1997 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1998...................................................... $14 $332
1999...................................................... 14 341
2000...................................................... 14 113
2001...................................................... -- --
2002...................................................... -- --
Thereafter................................................ -- --
--- ----
Total minimum lease payments.............................. 42 $786
====
Less amount representing interest......................... (5)
---
Present value of net minimum lease payments including cur-
rent maturities of $11 with interest rate of 9.4%........ $37
===
</TABLE>
F-232
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
CKS Group, Inc.:
We have audited the accompanying consolidated balance sheets of CKS Group,
Inc. and subsidiaries (the Company) as of November 30, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity, and cash
flows for each of the years in the three-year period ended November 30, 1997.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We did not audit the
financial statements of McKinney & Silver (M&S), which statements reflect
total assets constituting 23% as of November 30, 1996, and total revenues
constituting 40% and 33%, and income before income taxes constituting 65% and
38% in each of the years in the two-year period ended November 30, 1996,
respectively, of the related consolidated totals. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to amounts included for M&S, is based solely on
the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of CKS Group, Inc. and subsidiaries
as of November 30, 1997 and 1996, and the results of their operations and
their cash flows for each of the years in the three-year period ended November
30, 1997, in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
San Jose, California
December 15, 1997
F-233
<PAGE>
INDEPENDENT AUDITORS' REPORT
Partners
McKinney & Silver
We have audited the balance sheets of McKinney & Silver (a Partnership) as
of December 31, 1996 and 1995, and the related statements of income, partners'
capital, and cash flows for the three years then ended (not presented
separately herein). These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require than we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above, present fairly,
in all material respects, the financial position of McKinney & Silver (a
Partnership) at December 31, 1996 and 1995, and the results of its operations
and its cash flows for the three years then ended in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
January 31, 1997
F-234
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOVEMBER 30,
----------------- AUGUST 30,
1997 1996 1998
-------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 18,223 $19,385 $ 29,817
Marketable securities......................... 24,041 37,895 17,323
Accounts receivable, net of allowance of
$1,442, $792 and $2,233 in 1997, 1996, and
1998, respectively........................... 50,049 22,651 42,385
Fees and expenditures in excess of billings... 4,594 2,792 11,640
Prepaid expenses and other current assets..... 1,949 907 2,802
Deferred income taxes......................... 1,400 1,038 1,736
-------- ------- --------
Total current assets........................ 100,256 84,668 105,703
Property and equipment, net..................... 5,849 4,571 5,867
Deferred income taxes........................... 10,140 300 6,472
Goodwill and other assets....................... 30,228 5,937 34,925
-------- ------- --------
Total assets................................ $146,473 $95,476 $152,967
======== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................. $ 38,161 $21,392 $ 36,052
Accrued expenses.............................. 7,515 6,430 5,926
Billings in excess of fees and expenditures... 2,417 3,257 3,485
Current portion of liabilities to related
parties...................................... 2,284 1,955 623
Current portion of notes payable and capital
lease obligations............................ 765 433 161
Income taxes payable.......................... -- 426 1,218
-------- ------- --------
Total current liabilities................... 51,142 33,893 47,465
Liabilities to related parties, less current
portion........................................ -- 223 --
Notes payable and capital lease obligations,
less current portion........................... 739 502 766
-------- ------- --------
Total liabilities........................... 51,881 34,618 48,231
-------- ------- --------
Stockholders' equity:
Preferred stock; $0.001 par value; 5,000,000
shares authorized; none issued and outstand-
ing ......................................... -- -- --
Common stock; $0.001 par value; 30,000,000
shares authorized; 14,865,000, 14,229,000 and
15,450,000 shares issued and
outstanding in 1997, 1996, and 1998, respec-
tively....................................... 15 14 15
Additional paid-in capital.................... 80,103 51,715 82,798
Unrealized gain (loss) on marketable
securities................................... 12 (65) (12)
Notes receivable from stockholders............ (198) (292) (198)
Cumulative translation adjustment............. (62) (6) 11
Retained earnings............................. 14,722 9,492 22,122
-------- ------- --------
Total stockholders' equity.................. 94,592 60,858 104,736
-------- ------- --------
Total liabilities and stockholders' equity.. $146,473 $95,476 $152,967
======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-235
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30, NINE MONTHS ENDED
------------------------ ---------------------
AUGUST 30, AUGUST 31,
1997 1996 1995 1998 1997
-------- ------- ------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues........................ $133,602 $88,248 $58,383 $118,633 $99,980
-------- ------- ------- -------- -------
Operating expenses:
Direct salaries and related ex-
penses........................ 34,714 22,962 15,440 29,689 24,325
Other direct operating ex-
penses........................ 53,952 35,415 24,219 52,575 40,238
General and administrative ex-
penses........................ 27,954 17,014 11,146 21,932 20,749
Depreciation and amortization.. 3,096 1,496 1,000 2,985 2,226
Merger costs................... 2,452 -- -- -- 2,452
-------- ------- ------- -------- -------
Total operating expenses...... 122,168 76,887 51,805 107,181 89,990
-------- ------- ------- -------- -------
Operating income................ 11,434 11,361 6,578 11,452 9,990
Other income, net............... 1,549 2,114 296 1,158 988
-------- ------- ------- -------- -------
Income before income taxes...... 12,983 13,475 6,874 12,610 10,978
Income taxes.................... 5,317 3,026 1,065 5,210 4,527
-------- ------- ------- -------- -------
Net income...................... $ 7,666 $10,449 $ 5,809 $7,400 $ 6,451
======== ======= ======= ======== =======
UNAUDITED PRO FORMA NET INCOME
AND PER SHARE
DATA:
Income before income taxes, as
reported....................... $ 12,983 $13,475 $ 6,874 $10,978
Pro forma income taxes........ 5,635 5,108 2,823 4,845
-------- ------- ------- -------
Pro forma net income............ $ 7,348 $ 8,367 $ 4,051 $ 6,133
======== ======= ======= =======
Basic net income per share...... $ 0.48
========
Pro forma basic net income per
share.......................... $ 0.50 $ 0.61 $ 0.44 $ 0.42
======== ======= ======= =======
Shares used in basic per share
computation.................... 14,633 13,646 9,176 15,345 14,543
======== ======= ======= ======== =======
Diluted net income per share.... $ 0.45
========
Pro forma diluted net income per
share.......................... $ 0.47 $ 0.58 $ 0.36 $ 0.39
======== ======= ======= =======
Shares used in diluted per share
computation.................... 15,590 14,435 11,265 16,335 15,705
======== ======= ======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-236
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
--------------
UNREALIZED NOTES
ADDITIONAL GAIN (LOSS) ON RECEIVABLE CUMULATIVE TOTAL
PAID-IN MARKETABLE FROM TRANSLATION RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL SECURITIES STOCKHOLDERS ADJUSTMENT EARNINGS EQUITY
------ ------ ---------- -------------- ------------ ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, NOVEMBER 30,
1994................... 10,545 $10 $ 948 $ -- $(371) $ -- $ 2,192 $ 2,779
Issuance of Series A
common stock........... 739 1 1,923 -- -- -- -- 1,924
Repurchase of common
stock.................. (31) -- (23) -- 8 -- -- (15)
Issuance of common
stock.................. 68 -- 103 -- -- -- -- 103
Compensation related to
stock option........... -- -- 156 -- -- -- -- 156
Collections on stock-
holder notes
receivable............. -- -- -- -- 71 -- -- 71
Distributions to stock-
holders................ -- -- -- -- -- -- (4,477) (4,477)
Net income.............. -- -- -- -- -- -- 5,809 5,809
------ --- ------- ----- ----- ----- ------- --------
BALANCES, NOVEMBER 30,
1995................... 11,321 11 3,107 -- (292) -- 3,524 6,350
Issuance of common stock
warrants............... -- -- 100 -- -- -- -- 100
Issuance of common
stock.................. 2,991 3 48,060 -- -- -- -- 48,063
Compensation related to
stock options.......... -- -- 130 -- -- -- -- 130
Tax benefit from
disqualifying
dispositions........... -- -- 926 -- -- -- -- 926
Unrealized loss on mar-
ketable securities..... -- -- -- (65) -- -- -- (65)
Distributions to stock-
holders................ -- -- (499) -- -- -- (4,481) (4,980)
Repurchase of common
stock.................. (83) -- (109) -- -- -- -- (109)
Translation adjustment.. -- -- -- -- -- (6) -- (6)
Net income.............. -- -- -- -- -- -- 10,449 10,449
------ --- ------- ----- ----- ----- ------- --------
BALANCES, NOVEMBER 30,
1996................... 14,229 14 51,715 (65) (292) (6) 9,492 60,858
Issuance of common
stock.................. 474 1 5,208 -- -- -- -- 5,209
Compensation related to
stock options.......... -- -- 265 -- -- -- -- 265
Tax benefit from
disqualifying
dispositions........... -- -- 3,343 -- -- -- -- 3,343
Unrealized gain on mar-
ketable
securities ............ -- -- -- 77 -- -- -- 77
Distribution to stock-
holders................ -- -- -- -- -- -- (2,172) (2,172)
Deferred issuance of
common stock related to
business acquisitions.. -- -- 5,582 -- -- -- -- 5,582
Common stock issued for
business acquisitions.. 168 -- 4,738 -- -- -- -- 4,738
Deferred tax asset
recorded in connection
with taxable pooling of
interests.............. -- -- 9,346 -- -- -- -- 9,346
Repurchase of common
stock and cancellation
of note receivable from
stockholder............ (6) -- (94) -- 94 -- -- --
Change in subsidiaries'
fiscal year-ends....... -- -- -- -- -- -- (264) (264)
Translation adjustment.. -- -- -- -- -- (56) -- (56)
Net income.............. -- -- -- -- -- -- 7,666 7,666
------ --- ------- ----- ----- ----- ------- --------
BALANCES, NOVEMBER 30,
1997................... 14,865 15 80,103 12 (198) (62) 14,722 94,592
Issuance of common stock
(unaudited)............ 287 -- 2,633 -- -- -- -- 2,633
Compensation related to
stock options
(unaudited)............ -- -- 87 -- -- -- -- 87
Tax benefit from
disqualifying
dispositions
(unaudited)............ -- -- 111 -- -- -- -- 111
Unrealized loss on
marketable securities
(unaudited)............ -- -- -- (24) -- -- -- (24)
Common stock issued for
business acquisition
(unaudited)............ 298 -- 200 -- -- -- -- 200
Adjustment to original
purchase agreement
related to business
combination
(unaudited)............ -- -- (336) -- -- -- -- (336)
Translation adjustment
(unaudited)............ -- -- -- -- -- 73 -- 73
Net income (unaudited).. -- -- -- -- -- -- 7,400 7,400
------ --- ------- ----- ----- ----- ------- --------
BALANCES, AUGUST 30,
1998 (UNAUDITED)....... 15,450 $15 $82,798 $ (12) $(198) $ 11 $22,122 $104,736
====== === ======= ===== ===== ===== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-237
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30, NINE MONTHS ENDED
--------------------------- ---------------------
AUGUST 30, AUGUST 31,
1997 1996 1995 1998 1997
-------- -------- ------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING AC-
TIVITIES:
Net income................... $ 7,666 $ 10,449 $ 5,809 $ 7,400 $ 6,451
Adjustments to reconcile net
income to net cash (used in)
provided by operating activ-
ities:
Deferred income taxes...... (856) (1,097) (476) 3,332 (859)
Compensation related to
stock options............. 265 130 156 88 91
Tax benefit from disquali-
fying dispositions........ 3,343 926 -- 110 2,502
Depreciation and amortiza-
tion...................... 3,096 1,496 1,000 2,985 2,226
Loss on disposition of
property due to acquisi-
tion...................... 227 -- -- -- 227
Other non-cash items....... 235 (315) -- -- (154)
Changes in operating assets
and liabilities:
Accounts receivable........ (19,103) (8,148) (1,392) 7,737 (519)
Fees and expenditures in
excess of billings........ (323) (1,647) 354 (7,046) (3,744)
Prepaid expenses and other
current assets............ (447) 38 (943) (853) (52)
Accounts payable........... 12,833 12,195 (1,783) (2,109) (5,452)
Accrued expenses........... (516) 3,556 1,553 (1,589) (2,194)
Billings in excess of fees
and expenditures.......... 47 246 (240) 1,068 (702)
Income taxes payable....... (847) (1,253) 1,125 1,218 366
-------- -------- ------- -------- --------
NET CASH PROVIDED BY (USED
IN) OPERATING ACTIVITIES. 5,620 16,576 5,163 12,341 (1,813)
-------- -------- ------- -------- --------
CASH FLOWS FROM INVESTING AC-
TIVITIES:
Purchases of property and
equipment.................. (1,995) (2,011) (1,574) (1,471) (1,244)
Purchases of marketable se-
curities................... (21,175) (39,710) -- (26,403) (17,259)
Sales of marketable securi-
ties....................... 34,934 1,750 -- 33,110 32,620
Business acquired, net of
cash received.............. (13,740) 55 -- (6,485) (13,740)
Other assets................ 70 (586) (6) 303 148
-------- -------- ------- -------- --------
NET CASH (USED IN)
PROVIDED BY INVESTING
ACTIVITIES............... (1,906) (40,502) (1,580) (946) 525
-------- -------- ------- -------- --------
CASH FLOWS FROM FINANCING AC-
TIVITIES:
Net repayments on line of
credit and note payable.... (1,414) (382) (676) (577) (1,659)
Collection (repayment) of
stockholder notes receiv-
able....................... -- (37) 71 -- --
Proceeds from sale of common
stock and warrants......... 5,208 43,154 1,994 2,632 3,637
Repurchase of common stock.. -- (109) (15) -- --
Distributions to stockhold-
ers........................ (2,398) (4,635) (4,444) -- (2,405)
Liabilities to related par-
ties....................... (2,013) 503 (10) (1,856) (1,736)
-------- -------- ------- -------- --------
NET CASH (USED IN)
PROVIDED BY FINANCING
ACTIVITIES............... (617) 38,494 (3,080) 199 (2,163)
-------- -------- ------- -------- --------
Net increase (decrease) in
cash and cash equivalents... 3,097 14,568 503 11,594 (3,451)
Change in subsidiaries' fis-
cal year-ends............... (4,259) -- -- -- (4,259)
Cash and cash equivalents,
beginning of period......... 19,385 4,817 4,314 18,223 19,385
-------- -------- ------- -------- --------
Cash and cash equivalents,
end of period............... $ 18,223 $ 19,385 $ 4,817 $ 29,817 $ 11,675
======== ======== ======= ======== ========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid:
Interest................... $ 187 $ 63 $ 91 $ 72 $ 131
======== ======== ======= ======== ========
Income taxes............... $ 1,386 $ 4,488 $ 647 $ 509 $ 1,121
======== ======== ======= ======== ========
Noncash investing and fi-
nancing activities:
Issuance of common stock in
business acquisition...... $ 6,030 $ 4,997 $ -- $ 200 $ 6,030
======== ======== ======= ======== ========
Exchange of note payable
for common stock.......... $ -- $ 457 $ -- $ -- $ --
======== ======== ======= ======== ========
Businesses acquired for li-
abilities to related par-
ties...................... $ 2,146 $ -- $ -- $ 308 $ 2,146
======== ======== ======= ======== ========
Deferred tax asset recorded
in connection with taxable
pooling of interests...... $ 9,346 $ -- $ -- $ -- $ 9,346
======== ======== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-238
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1997, 1996, AND 1995
(INFORMATION AS OF AUGUST 30, 1998 AND FOR THE NINE MONTHS ENDED AUGUST 30,
1998 AND AUGUST 31, 1997 IS UNAUDITED)
NOTE 1--NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business and Principles of Combination
CKS Group, Inc. (CKS or the Company) is an international integrated
marketing services and technology company specializing in offering a wide
range of integrated marketing communication services and technology solutions
that help companies market their products, services, and messages. The
Company's services include strategic corporate and product positioning,
corporate identity and product branding, new media, systems integration,
environmental design, packaging, collateral systems, advertising, direct
marketing, consumer promotions, trade promotions, and media placement
services.
The Company was formed in January 1995 in a merger of three entities that
were under common control: CKS Partners, Inc.; CKS Interactive, Inc.; and CKS
Pictures, Inc. (collectively, the Former Affiliates). The accompanying
consolidated financial statements have been prepared on the basis that these
entities were combined at the beginning of their existence for financial
reporting purposes. The combined entities have been under common control since
inception and have been included in the consolidated financial statements at
historical cost, in a manner similar to a pooling of interests, since their
respective dates of inception. All transactions and accounts between the
combined entities have been eliminated in the accompanying consolidated
financial statements.
In accordance with the merger of the Former Affiliates, each entity's
capital stock was converted, using a predetermined conversion factor, to give
effect to the merger. All share and per share information has been
retroactively restated to give effect to the merger.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. The
accompanying consolidated financial statements have been restated to reflect
the effect of the mergers accounted for as poolings of interests with McKinney
& Silver (M&S) and SiteSpecific, Inc. (SiteSpecific) discussed in Note 3.
Cash Equivalents and Marketable Securities
The Company considers all highly liquid investments purchased with a
remaining maturity of 90 days or less to be cash equivalents.
The Company classifies its investments in certain debt and equity securities
as "available-for-sale." Such investments are recorded at fair value, with
unrealized gains and losses, net of taxes, reported as a separate component of
stockholders' equity. The cost of securities sold is based upon the specific
identification method.
Fair Value of Financial Instruments and Concentrations of Credit Risk
The carrying value of the Company's financial instruments, including
accounts receivable, approximates fair market value.
Financial instruments, which potentially subject the Company to a
concentration of credit risk, consist principally of marketable securities and
accounts receivable. The Company's services are provided to clients in a
variety of industries. The Company performs ongoing credit evaluations of its
clients, generally does not require collateral, and records allowances for
potential credit losses.
F-239
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 30, 1997, 1996, AND 1995
(INFORMATION AS OF AUGUST 30, 1998 AND FOR THE NINE MONTHS ENDED AUGUST 30,
1998 AND AUGUST 31, 1997 IS UNAUDITED)
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Property and equipment are depreciated on a straight-line
basis over estimated useful lives of three to seven years. Leasehold
improvements are amortized over the lesser of their useful lives or the
remaining term of the related lease.
Goodwill
Goodwill is amortized on a straight-line basis over 20 years. Accumulated
amortization amounted to $1,105,000 as of November 30, 1997.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
On December 1, 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of. SFAS No. 121 requires long-lived
assets to be evaluated for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
Recoverability of property and equipment is measured by comparison of its
carrying amount to future net cash flows the property and equipment are
expected to generate. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the property and equipment exceeds its fair value. To date, the
Company has made no adjustments to the carrying value of its long-lived
assets.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
Revenue Recognition
Revenues generally are derived from fixed fee arrangements and are
recognized on the percentage-of-completion method based on the ratio of costs
incurred to total estimated costs. Fees and expenditures in excess of billings
represent the costs incurred and anticipated profits earned on projects in
progress in excess of amounts billed and are recorded as an asset. Billings in
excess of fees and expenditures represent amounts billed in excess of costs
incurred and estimated profit earned and are recorded as a liability. Such
billings generally are at the beginning of contract periods and are in
accordance with contract provisions. To the extent costs incurred and
anticipated costs to complete projects in progress exceed anticipated
billings, a loss is accrued for the excess.
Commissions earned from advertising placed with media generally are recorded
at the time the advertising appears or is broadcast. Commissions earned for
production expenditures and fees derived from other services are recognized
upon performance of the services.
F-240
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 30, 1997, 1996, AND 1995
(INFORMATION AS OF AUGUST 30, 1998 AND FOR THE NINE MONTHS ENDED AUGUST 30,
1998 AND AUGUST 31, 1997 IS UNAUDITED)
Income Taxes
The Company records income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
As a partnership, M&S's earnings were taxed at the individual partner level,
therefore no provision for income taxes has been made in the accompanying
consolidated financial statements for income attributable to M&S. The
accompanying consolidated statements of income include a provision for income
taxes on an unaudited pro forma basis as if M&S had been a C corporation fully
subject to income taxes, for all periods presented.
Net Income Per Share
On December 1, 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, Earnings Per Share. In accordance with SFAS No.
128, basic net income per share is computed using the weighted average number
of common shares outstanding during the period. Diluted net income per share
is computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period, using the treasury stock
method for options and warrants after giving effect to contingently issuable
shares under acquisition agreements. The Company has restated net income per
share for all periods presented in accordance with SFAS No. 128.
Stock-Based Compensation
The Company accounts for stock-based awards to employees using the intrinsic
value method.
Foreign Currency Translation
The functional currency for the Company's foreign subsidiary is the local
currency. Financial statements for the foreign subsidiary are translated using
the current exchange rate for the balance sheet and the average exchange rate
during the year for the statement of income. Translation adjustments are
included as a separate component of stockholders' equity.
Unaudited Interim Financial Statements
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim consolidated financial information. In the opinion of management, the
accompanying unaudited consolidated financial statements have been prepared on
the same basis as the audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for
the fair statement of the Company's financial position as of August 30, 1998,
and the results of its operations and its cash flows for the nine month
periods ended August 30, 1998 and August 31, 1997.
F-241
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 30, 1997, 1996, AND 1995
(INFORMATION AS OF AUGUST 30, 1998 AND FOR THE NINE MONTHS ENDED AUGUST 30,
1998 AND AUGUST 31, 1997 IS UNAUDITED)
NOTE 2--UNAUDITED PRO FORMA NET INCOME AND PRO FORMA NET INCOME PER SHARE
Pro forma net income gives effect to the pooling-of-interests combination
between the Company and M&S during fiscal 1997. M&S was a general partnership
and, as a result, M&S's historical results of operations prior to the
acquisition by the Company, which have been included with the Company's under
the pooling-of-interests method, do not include a provision for income taxes.
Pro forma net income and net income per share data include a tax provision as
if M&S had been a taxable "C" corporation for all periods.
Reconciliation of basic and diluted net income per share and pro forma net
income per share (in thousands, except per share data):
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
-----------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- ---------------------------
PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA
NET INCOME SHARES EPS NET INCOME SHARES EPS NET INCOME SHARES EPS
---------- ------ --------- ---------- ------ --------- ---------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic net income per
share.................. $7,348 14,633 $0.50 $8,367 13,646 $0.61 $4,051 9,176 $0.44
Effect of dilutive
common equivalent
shares:
Options............... -- 875 -- 577 -- 198
Contingent shares..... -- 82 -- 212 -- 1,891
------ ------ ------ ------ ------ ------
Diluted net income per
share.................. $7,348 15,590 $0.47 $8,367 14,435 $0.58 $4,051 11,265 $0.36
====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------------------------------
AUGUST 30, 1998 AUGUST 31, 1997
----------------------- ---------------------------
PRO FORMA PRO FORMA
NET INCOME SHARES EPS NET INCOME SHARES EPS
---------- ------ ----- ---------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Basic net income per
share.................... $7,400 15,345 $0.48 $6,133 14,543 $0.42
Effect of dilutive common
equivalent shares:
Options................. -- 602 -- 812
Contingent shares....... -- 388 -- 350
------ ------ ------ ------
Diluted net income per
share.................... $7,400 16,335 $0.45 $6,133 15,705 $0.39
====== ====== ====== ======
</TABLE>
Diluted net income per share for the year ended November 30, 1997, does not
include the effect of 416,000 shares issuable under stock options, as the
effect of their inclusion would be antidilutive.
F-242
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 30, 1997, 1996, AND 1995
(INFORMATION AS OF AUGUST 30, 1998 AND FOR THE NINE MONTHS ENDED AUGUST 30,
1998 AND AUGUST 31, 1997 IS UNAUDITED)
NOTE 3--BUSINESS COMBINATIONS
Schell/Mullaney, Inc.
On August 1, 1996, the Company acquired Schell/Mullaney, Inc. (SMI), and its
results of operations have been included in the Company's consolidated
financial statements from that date. Upon the closing of the merger, the
shares of common stock of SMI that were issued and outstanding immediately
prior to the closing were converted into 183,066 shares of the Company's
common stock valued at $5,000,000. Due to the attainment of certain financial
performance goals by SMI during 1997, the Company will issue approximately
$4,500,000 in common stock to the former stockholders of SMI. The former
stockholders also have the right to receive up to an additional $4,500,000 in
common stock of the Company in 1998 upon the attainment of certain financial
performance goals. The number of additional shares to be issued to the former
stockholders of SMI will be determined based on the price of the Company's
common stock during a period prior to the issuance dates of such shares. In
the event additional shares are issued to the former stockholders of SMI, they
will be recorded as additional purchase price. The acquisition was recorded as
a purchase, and, as a result, the Company initially recorded goodwill of
$4,577,000.
The following summary, prepared on an unaudited pro forma basis, combines
the Company's consolidated results of operations for the years ended November
30, 1996 and 1995, with SMI's results of operations for the years ended
November 30, 1996, and December 31, 1995, respectively, as if SMI had been
acquired as of the beginning of the periods presented (in thousands, except
per share data):
<TABLE>
<CAPTION>
YEARS ENDED
NOVEMBER 30,
---------------
1996 1995
------- -------
<S> <C> <C>
Revenues..................................................... $92,536 $63,429
Pro forma net income......................................... 8,440 5,010
Pro forma basic net income per share......................... $ 0.61 $ 0.54
Shares used in pro forma basic per share computation......... 13,768 9,298
Pro forma diluted net income per share....................... $ 0.58 $ 0.44
Shares used in pro forma diluted per share computation....... 14,557 11,387
</TABLE>
The pro forma results are not necessarily indicative of what would have
occurred if the acquisition had been in effect for the periods presented. In
addition, they are not intended to be a projection of future results and do
not reflect any synergies that might be achieved from combined operations.
Donovan & Green, Inc.
On January 3, 1997, the Company acquired the assets and assumed
substantially all the liabilities of Donovan & Green, Inc. (D&G), and its
results of operations have been included in the Company's consolidated
financial statements from that date. The Purchase Agreement provided for
initial payments to D&G of $5,146,000. The Company made guaranteed payments to
D&G consisting of $2,219,000 in cash and 41,259 shares of the Company's common
stock on April 18, 1997 and $1,003,000 in cash and Common Stock of CKS Group
on April 15, 1998. In addition, D&G will be entitled to receive an additional
number of shares of common stock of the Company with a value of $497,000 over
the next fiscal year. D&G also has the right to receive additional payments if
the subsidiary attains certain earnings goals during the 1998, 1999, and 2000
fiscal years. D&G may receive $889,000 in cash and shares of the Company's
common stock with a value of $444,000 in each of 1998 and 1999 if the
subsidiary meets its earnings goals for the 1997 and 1998 fiscal years. To the
extent that the subsidiary exceeds its earnings goals for the 1998, 1999, and
2000 fiscal years by more
F-243
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 30, 1997, 1996, AND 1995
(INFORMATION AS OF AUGUST 30, 1998 AND FOR THE NINE MONTHS ENDED AUGUST 30,
1998 AND AUGUST 31, 1997 IS UNAUDITED)
than 10%, D&G will be entitled to receive cash and common stock of the Company
with a combined value of up to $1,000,000 per year for each of these three
years. D&G did not meet its earnings goals for the year ended November 30,
1997. The acquisition was recorded as a purchase, and, as a result, the
Company initially recorded goodwill of $8,333,000. In the event additional
contingent consideration is issued to the former stockholders of D&G, it will
be recorded as additional purchase price.
The following summary, prepared on an unaudited pro forma basis, combines
the Company's consolidated results of operations for the year ended November
30, 1996, with D&G's results of operations for the year ended December 31,
1996, as if D&G had been acquired as of the beginning of the period presented
(in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30, 1996
-----------------
<S> <C>
Revenue................................................... $93,158
Pro forma net income...................................... $ 7,705
Pro forma basic net income per share...................... $ 0.56
Shares used basic in pro forma basic per share
computation.............................................. 13,724
Pro forma diluted net income per share.................... $ 0.53
Shares used in pro forma diluted per share computation.... 14,513
</TABLE>
The pro forma results are not necessarily indicative of what would have
occurred if the acquisition had been in effect for the periods presented. In
addition, they are not intended to be a projection of future results and do
not reflect any synergies that might be achieved from combined operations.
CKS Holding Deutschland GmbH
On March 10, 1997, the Company acquired all of the capital stock of CKS
Holding (Deutschland) GmbH (formerly Elektronische Publikationen GmbH), a
German corporation (CKS GmbH), and its results of operations have been
included in the Company's consolidated financial statements from that date. In
consideration for the sale of their shares in CKS GmbH, the former
shareholders of CKS GmbH received $2,925,000 in cash and 86,603 shares of CKS
common stock. The acquisition of the capital stock of CKS GmbH was treated as
a purchase and, as a result, the Company initially recorded goodwill of
approximately $5,592,000. Also, under the original purchase agreement, the
Company was required to make a guaranteed payment of $672,000 in cash and
Common Stock of CKS Group in fiscal 1998. In addition, the former shareholders
of CKS GmbH had the right to receive up to an additional $10,000,000 in cash
and additional shares of Common Stock of CKS Group during fiscal 1998, 1999,
and 2000 upon attainment of certain earnings goals by CKS GmbH. On April 27,
1998, the Company and the former shareholders of CKS GmbH terminated the
original purchase agreement with respect to the right of the former
shareholders of CKS GmbH to receive additional cash and Common Stock of CKS
Group in future years and negotiated the terms of a new purchase agreement.
Under the new purchase agreement, the Company paid to the former shareholders
of CKS GmbH $6,241,000 in cash in April 1998 and granted the former
shareholders of CKS GmbH the right to receive an additional cash payment on
September 20, 1998 of up to approximately $308,000 if the subsidiary attains a
certain earnings goal during the six month period ending August 31, 1998. In
the event additional contingent consideration is paid to the former
shareholders of CKS GmbH, it will be recorded as additional purchase price.
Pro forma financial information giving effect to the acquisition of the
capital stock of CKS GmbH has not been presented because such pro forma
results would not have differed materially from the Company's actual results.
F-244
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 30, 1997, 1996, AND 1995
(INFORMATION AS OF AUGUST 30, 1998 AND FOR THE NINE MONTHS ENDED AUGUST 30,
1998 AND AUGUST 31, 1997 IS UNAUDITED)
Gormley & Partners, Inc.
On March 12, 1997, the Company acquired certain assets of Gormley &
Partners, Inc. (Gormley), a Connecticut corporation, and its results of
operations have been included in the Company's consolidated financial
statements from that date. The Purchase Agreement provided for an initial
payment of $3,150,000 in cash and 40,206 shares of CKS common stock to Gormley
and a guaranteed payment to Gormley consisting of $1,500,000 in cash and
Common Stock of CKS Group on April 15, 1998. In addition, Gormley will be
entitled to receive additional payments upon the attainment of certain
performance goals over the next three fiscal years. The acquisition was
accounted for as a purchase, and, as a result, the Company initially recorded
goodwill of $5,793,000. In the event additional consideration is paid to
Gormley, it will be recorded as additional purchase price. Pro forma financial
information giving effect to the acquisition of certain assets of Gormley has
not been presented because pro forma results would not have differed
materially from the Company's consolidated results of operations.
McKinney & Silver
On January 31, 1997, the Company issued 841,291 shares of its common stock
for all of the partnership units and residual partnership interests of M&S.
The merger has been accounted for as a pooling of interests, and, accordingly,
the Company's consolidated financial statements have been restated for all
periods prior to the merger to include the results of operations, financial
position, and cash flows of M&S. In M&S's historical financial statements,
certain direct operating expenses were offset against revenues. Such amounts
have been reclassified in the accompanying consolidated financial statements
to conform to CKS's presentation. The effect of the reclassification was to
increase both revenues and other direct operating expenses by $13,614,000 and
$9,593,000 during 1996 and 1995, respectively.
Prior to the combination, M&S's fiscal year ended on December 31. In
recording the business combination, M&S's financial statements as of and for
each of the years in the two-year period ended December 31, 1996, have been
combined with the Company's consolidated financial statements as of and for
each of the years in the two-year period ended November 30, 1996.
In 1997, M&S changed its fiscal year-end to the Sunday nearest November 30
to conform to CKS's fiscal year-end. M&S's unaudited results of operations for
the month ended December 31, 1996, included revenues of $2,230,000 and net
income of $248,000. An adjustment has been made to stockholders' equity as of
November 30, 1997, to eliminate the effect of including M&S's unaudited
results of operations for the month ended December 31, 1996, in both the years
ended November 30, 1997 and 1996.
In connection with the merger with M&S, the Company recorded a nonrecurring
charge for transaction related costs of $1,593,000 in the first quarter of
fiscal 1997, consisting primarily of fees for attorneys, accountants,
financial printing, and other related costs. In addition, because the merger
is a taxable transaction, in the first quarter of fiscal 1997, CKS recorded a
deferred tax asset and an increase to stockholders' equity of approximately
$9,346,000 for the difference between the financial statement and tax carrying
amounts of M&S's net assets upon the closing of the transaction.
F-245
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 30, 1997, 1996, AND 1995
(INFORMATION AS OF AUGUST 30, 1998 AND FOR THE NINE MONTHS ENDED AUGUST 30,
1998 AND AUGUST 31, 1997 IS UNAUDITED)
SiteSpecific, Inc.
On June 17, 1997, the Company issued 241,108 shares of its common stock for
all of the outstanding capital stock of SiteSpecific, and assumed options to
purchase 18,884 shares of common stock under an option plan. The merger has
been accounted for as a pooling of interests, and, accordingly, the Company's
consolidated financial statements have been restated for all periods prior to
the merger to include the results of operations, financial position, and cash
flows of SiteSpecific.
Prior to the combination, SiteSpecific's fiscal year ended on December 31.
In recording the business combination, SiteSpecific's financial statements as
of December 31, 1996, and for the year ended December 31, 1996, and from
inception to December 31, 1995, have been combined with the Company's
consolidated financial statements as of and for each of the years in the two-
year period ended November 30, 1996.
In 1997, SiteSpecific changed its fiscal year-end to the Sunday nearest
November 30 to conform to CKS's fiscal year-end. SiteSpecific's unaudited
results of operations for the month ended December 31, 1996, included revenues
of $302,000 and net income of $16,000. An adjustment has been made to
stockholders' equity as of November 30, 1997, to eliminate the effect of
including SiteSpecific's unaudited results of operations for the month ended
December 31, 1996, in both the years ended November 30, 1997 and 1996.
In connection with the merger with SiteSpecific, the Company recorded a
nonrecurring charge for transaction related costs of approximately $859,000 in
the third quarter of fiscal 1997, consisting primarily of fees for attorneys,
accountants, financial printing, and other related costs.
Revenues and net income for the individual entities as previously reported
were as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
NOVEMBER 30,
----------------
1996 1995
------- -------
<S> <C> <C>
Revenues:
CKS....................................................... $56,951 $34,792
M&S....................................................... 29,448 23,326
SiteSpecific.............................................. 1,849 265
------- -------
$88,248 $58,383
======= =======
Net income (loss):
CKS....................................................... $ 5,679 $ 1,366
M&S....................................................... 5,079 4,436
SiteSpecific.............................................. (309) 7
------- -------
$10,449 $ 5,809
======= =======
</TABLE>
F-246
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 30, 1997, 1996, AND 1995
(INFORMATION AS OF AUGUST 30, 1998 AND FOR THE NINE MONTHS ENDED AUGUST 30,
1998 AND AUGUST 31, 1997 IS UNAUDITED)
NOTE 4--MARKETABLE SECURITIES
Marketable securities consisted of the following as of November 30, 1997 (in
thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Municipal obligations.................. $24,029 $12 -- $24,041
======= === === =======
</TABLE>
Marketable securities consisted of the following as of November 30, 1996 (in
thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Municipal obligations................. $37,771 $ -- $ -- $37,771
Marketable equity security............ 189 -- 65 124
------- ----- ----- -------
$37,960 $ -- $ 65 $37,895
======= ===== ===== =======
</TABLE>
The contractual maturities of available-for-sale debt securities, regardless
of their balance sheet classification as of November 30, 1997, were as follows
(in thousands):
<TABLE>
<CAPTION>
FAIR
COST VALUE
------- -------
<S> <C> <C>
Due within one year......................................... $11,329 $11,333
Due after one year through five years....................... -- --
Due after five years through ten years...................... 1,900 1,908
Due after ten years......................................... 10,800 10,800
------- -------
$24,029 $24,041
======= =======
</TABLE>
NOTE 5--PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
NOVEMBER 30,
----------------
1997 1996
------- -------
<S> <C> <C>
Computer equipment and software............................ $ 5,628 $ 3,375
Furniture and fixtures..................................... 2,702 2,459
Video production equipment................................. 954 928
Leasehold improvements..................................... 2,386 1,430
------- -------
11,670 8,192
Less accumulated depreciation and amortization............. (5,821) (3,621)
------- -------
$ 5,849 $ 4,571
======= =======
</TABLE>
F-247
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 30, 1997, 1996, AND 1995
(INFORMATION AS OF AUGUST 30, 1998 AND FOR THE NINE MONTHS ENDED AUGUST 30,
1998 AND AUGUST 31, 1997 IS UNAUDITED)
NOTE 6--NOTES PAYABLE
During 1996, the Company entered into a $500,000 line of credit with a bank
bearing interest at the bank's prime rate plus 0.25% (8.75% as of November 30,
1997). Borrowings are unsecured and the line of credit expires on January 31,
1998. As of November 30, 1997, the Company has no amounts outstanding under
the line of credit.
In July 1995, the Company entered into a credit agreement with a bank for
$4,600,000, including a $3,000,000 line of credit, a $1,000,000 equipment line
of credit, and a $600,000 term loan to refinance existing debt. The equipment
line of credit and term loan expired during 1997. The $3,000,000 line of
credit, bearing interest at the bank's prime rate (8.5% as of November 30,
1997), expires on March 31, 1998. Borrowings are secured by all assets of the
Company. As of November 30, 1997, the Company has no amounts outstanding under
the line of credit.
<TABLE>
<CAPTION>
NOVEMBER 30,
-------------
1997 1996
------ -----
(IN
THOUSANDS)
<S> <C> <C>
$600,000 bank line of credit; prime rate plus 1.0% (9.5% as
of November 30, 1997); due March 1998....................... $ 500 $ --
Borrowings under term loan; prime rate plus 1.0% (9.5% as of
November 30, 1997); due March 2002.......................... 260 --
Borrowings under term loan; prime rate plus 1.5%; due Decem-
ber 2000.................................................... -- 163
Borrowings under term loan; prime rate plus 0.75%; due July
1997........................................................ -- 89
Purchase contracts, with interest at 5.7% to 14.0%; expiring
at various dates through December 1, 2000................... 240 190
Other........................................................ 504 493
------ -----
1,504 935
Less current maturities...................................... (765) (433)
------ -----
$ 739 $ 502
====== =====
</TABLE>
Future maturities of notes payable are as follows: $765,000 in fiscal 1998;
$211,000 in fiscal 1999; $178,000 in fiscal 2000; $125,000 in fiscal 2001;
$104,000 in fiscal 2002; and $121,000 thereafter.
As of August 30, 1998, the Company and its subsidiaries had $3,760,000 in
credit facilities available under revolving lines of credit. The credit
facilities were secured by all the assets of the Company and bear interest at
rates of prime to prime plus 1%. At August 30, 1998, there was $221,500 of
indebtedness outstanding under these credit facilities. These credit
agreements are scheduled to expire between October 30, 1998 and November 30,
1998.
NOTE 7--RELATED PARTY TRANSACTIONS
In 1990, M&S redeemed the equity interest of the principal partner.
Consideration provided by the redemption agreement included a contingent
amount of 50% of the M&S adjusted income (as defined by the redemption
agreement), for the years 1991 through 1996, and 33 1/3% of such adjusted
income for the years 1997 through 2000. The redemption agreement also provided
for specific payout terms should the business be sold in years 1 through 10.
As of November 30, 1996, the current portion of liabilities to related parties
included $1,804,000 related to this arrangement. This amount was paid during
the year ended November 30, 1997.
F-248
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 30, 1997, 1996, AND 1995
(INFORMATION AS OF AUGUST 30, 1998 AND FOR THE NINE MONTHS ENDED AUGUST 30,
1998 AND AUGUST 31, 1997 IS UNAUDITED)
M&S reached an agreement with the estate of a deceased partner to redeem all
of her partnership shares for $457,000. The redemption agreement provided for
an initial $100,000 payment in December 1996 with the balance payable in
quarterly installments without interest over four years. The balance was fully
paid as of November 30, 1997.
NOTE 8--OPERATING LEASES
As of November 30, 1997, the Company maintains an executive office and two
operating offices in Northern California as well as operating offices in
Oregon, New York, Washington D.C., Georgia, North Carolina, Connecticut,
Germany, Austria, Switzerland, France and the United Kingdom. The Company
generally is responsible for maintaining public liability and property damage
insurance on the leased property and also is responsible for certain operating
expenses and property taxes. The facilities' leases begin to expire in 1998,
but contain renewal options to extend lease terms for up to six years. The
Company also leases office equipment under various operating leases, which
begin to expire in 1998.
Total rent expense for facilities and office equipment was approximately
$6,443,000, $4,427,000, and $2,935,000 for the years ended November 30, 1997,
1996, and 1995, respectively.
Future minimum operating lease payments for facilities and equipment are as
follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDING NOVEMBER 30,
-------------------------------
<S> <C>
1998.............................................................. $ 3,973
1999.............................................................. 3,506
2000.............................................................. 2,662
2001.............................................................. 1,356
2002.............................................................. 602
-------
$12,099
=======
</TABLE>
NOTE 9--STOCKHOLDERS' EQUITY
Stock Option Plans
As of November 30, 1997, the Company had five stock option plans, which are
described below:
1995 Series B Common Stock Plan
On April 28, 1995, the Company's Board of Directors approved the 1995 Series
B Common Stock Plan (the Plan). Under the Plan, 750,000 shares of Series B
common stock have been reserved for issuance. Options granted under the Plan
may be either incentive stock options or nonstatutory stock options, as
designated by the Company's Board of Directors. The Plan expires 10 years
after adoption.
Series B common stock possessed the same rights and privileges as common
stock except that each share was entitled to one-tenth the dividend, if
declared, on common stock and one-tenth the voting privilege and liquidation
preference as a share of common stock. Series B common stock converted
automatically on a one-for-one basis into common stock upon the closing of the
Company's IPO.
F-249
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 30, 1997, 1996, AND 1995
(INFORMATION AS OF AUGUST 30, 1998 AND FOR THE NINE MONTHS ENDED AUGUST 30,
1998 AND AUGUST 31, 1997 IS UNAUDITED)
The Plan provides that (i) the exercise price per share of an incentive
stock option will be no less than the fair market value of the Company's
common stock at the date of grant; (ii) the option exercise price per share
for a nonstatutory stock option will be no less than 85% of the fair market
value; and (iii) the exercise price of an incentive stock option for an
optionee who possesses more than 10% of the total combined voting power of all
classes of stock shall be no less than 110% of the fair market value; all as
determined by the Company's Board of Directors. Options generally vest 25%
after one year and then ratably over 36 months thereafter.
1995 Stock Plan
In October 1995, the Company's Board of Directors approved the 1995 Stock
Plan. Under the 1995 Stock Plan, options to purchase common stock and rights
to purchase common stock may be granted to eligible employees, officers, and
consultants of the Company. The Company's Board of Directors, or a committee
thereof, has the authority to select the persons to whom awards are granted
and determine the terms of each award. The total number of shares reserved for
issuance under the 1995 Stock Plan is 2,600,000. Options granted under the
1995 Stock Plan generally vest 25% after one year and ratably over 36 months
thereafter and are exercisable for 10 years.
1995 Director Option Plan
Under the 1995 Directors' Option Plan (the Directors' Option Plan), a total
of 100,000 shares are reserved for issuance. The Directors' Option Plan
provides that each nonemployee director will be granted an option to purchase
20,000 shares of common stock on the date on which the optionee first becomes
a director of the Company. Thereafter each nonemployee director will be
granted an option to purchase 5,000 shares of common stock on the first day of
each year after adoption of the Directors' Option Plan. Each option becomes
exercisable as to 25% of the shares subject to such option on each anniversary
of its date of grant and are exercisable for 10 years. The exercise price of
all options granted under the Directors' Option Plan will be equal to the fair
market value of the Company's common stock on the date of grant.
1996 Supplemental Stock Plan
In April 1997, the Company's Board of Directors approved the 1996
Supplemental Stock Plan (the 1996 Stock Plan). Under the 1996 Stock Plan,
options to purchase common stock may be granted to eligible employees and
consultants of the Company. The total number of shares reserved for issuance
under the 1996 Stock Plan is 1,000,000. Options granted under the 1996 Stock
Plan generally vest 25% after one year and then ratably over 36 months
thereafter and are exercisable for 10 years.
SiteSpecific Option Plan
In connection with the SiteSpecific merger discussed in Note 3, options
granted pursuant to the SiteSpecific Option Plan were assumed by the Company,
thereby allowing participants to purchase CKS stock in amounts and at prices
adjusted to reflect the exchange ratio of the merger.
1995 Employee Stock Purchase Plan
The Company's 1995 Employee Stock Purchase Plan (the Purchase Plan) was
approved by the Company's Board of Directors in October 1995 and provides for
the purchase of shares of the Company's
F-250
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 30, 1997, 1996, AND 1995
(INFORMATION AS OF AUGUST 30, 1998 AND FOR THE NINE MONTHS ENDED AUGUST 30,
1998 AND AUGUST 31, 1997 IS UNAUDITED)
common stock by eligible employees. A total of 300,000 shares of common stock
have been reserved for issuance under the Purchase Plan. Eligible employees
may purchase common stock through payroll deductions, which may not exceed 15%
of an employee's compensation. Shares are purchased on the last day of each
purchase period. The price at which stock may be purchased under the Purchase
Plan is equal to 85% of the lower of the fair market value of the Company's
common stock at the beginning of a rolling two-year offering period or the
last day of each semiannual purchase period. During fiscal 1997 and 1996,
shares totaling 128,549 and 100,708, respectively, were issued under the
Purchase Plan at average prices of $13.90 and $14.72 per share, respectively.
Repricings
In November 1996, the Company's Board of Directors authorized the repricing
of outstanding options to purchase the Company's common stock with exercise
prices in excess of $20.00 per share to reduce their exercise price to $20.00
per share.
In December 1997, the Company's Board of Directors authorized the repricing
of outstanding options to purchase the Company's common stock with exercise
prices in excess of $13.5625 per share to reduce their exercise price to
$13.5625 per share.
Fair Value Disclosures
The Company uses the intrinsic value method in accounting for its plans.
Accordingly, no compensation cost has been recognized for its fixed stock
options. Had compensation cost for the Company's stock option plans been
determined consistent with SFAS No. 123, the Company's pro forma net income
and pro forma net income per share would have been reduced to the "as
adjusted" amounts indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
NOVEMBER 30,
--------------
1997 1996
------ ------
<S> <C> <C>
Net income (loss):
As reported--pro forma..................................... $7,348 $8,367
As adjusted................................................ (245) 6,165
Net income (loss) per share:
As reported--pro forma basic............................... 0.50 0.61
As adjusted--basic......................................... (0.02) 0.45
As reported--pro forma diluted............................. 0.47 0.58
As adjusted--diluted....................................... (0.02) 0.43
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants: 1997 -- zero dividend yield, expected volatility
of 80%, risk-free interest rate of 6.18%, and weighted-average expected life
of 3.5 years; 1996 -- zero dividend yield, expected volatility of 80%, risk-
free interest rate of 6.00%, and weighted-average expected life of 3.5 years.
The fair value of purchase rights granted under the Purchase Plan is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions for grants: 1997 -- zero
dividend yield, expected volatility of 80%, risk-free interest rate of 6.77%,
and weighted-average expected
F-251
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 30, 1997, 1996, AND 1995
(INFORMATION AS OF AUGUST 30, 1998 AND FOR THE NINE MONTHS ENDED AUGUST 30,
1998 AND AUGUST 31, 1997 IS UNAUDITED)
life of 1.15 years; 1996 -- zero dividend yield, expected volatility of 80%,
risk-free interest rate of 5.33%, and weighted-average expected life of 1.16
years. The weighted-average fair value of purchase rights granted under the
Purchase Plan during 1997 and 1996 was $17.31 and $8.45 per share,
respectively.
The effects of applying SFAS No. 123 in this pro form disclosure is not
indicative of the effects on reported results for future years. SFAS No. 123
has not been applied to awards prior to 1996 and additional awards in future
years are anticipated.
Stock Option Plan Activity
Activity related to the Company's fixed stock option plans is as follows:
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- ------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 1,529,856 $13.94 634,216 $ 2.30 -- $ --
Granted................. 1,537,556 25.65 1,949,700 23.65 648,022 2.29
Exercised............... (351,412) 8.49 (82,685) 1.24 -- --
Forfeited............... (452,812) 19.45 (971,375) 26.91 (13,806) 1.62
--------- --------- -------
Outstanding at end of
year................... 2,263,188 21.58 1,529,856 13.94 634,216 2.30
========= ========= =======
Exercisable at year-end. 265,628 11.77 211,931 1.65 125,998 0.50
========= ========= =======
Weighted-average fair
value of options
granted during the
year................... 15.22 10.32
</TABLE>
The following table summarizes information about fixed stock options
outstanding as of November 30, 1997:
<TABLE>
<CAPTION>
UNEXERCISED EXERCISABLE
------------------------------------------- --------------------------
WEIGHTED-AVERAGE
NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
OF SHARES CONTRACTUAL LIFE EXERCISE PRICE OF SHARES EXERCISE PRICE
--------- ---------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.50--$12.56 346,855 7.83 years $ 4.48 137,749 $ 2.97
20.00-- 29.75 1,500,326 9.02 22.15 119,129 20.12
31.00-- 42.00 416,007 9.61 33.78 8,750 36.50
--------- -------
$0.50--$42.00 2,263,188 8.95 21.58 265,628 11.77
========= =======
</TABLE>
F-252
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 30, 1997, 1996, AND 1995
(INFORMATION AS OF AUGUST 30, 1998 AND FOR THE NINE MONTHS ENDED AUGUST 30,
1998 AND AUGUST 31, 1997 IS UNAUDITED)
NOTE 10--INCOME TAXES
Historical Income Taxes
The provision for income taxes consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
---------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal........................................ $ 1,562 $ 2,328 $ 1,201
State.......................................... 818 942 340
Foreign........................................ 450 -- --
------- -------- -------
Total Current: 2,830 3,270 1,541
------- -------- -------
Deferred:
Federal........................................ (771) (937) (374)
State.......................................... (85) (233) (102)
------- -------- -------
Total Deferred: (856) (1,170) (476)
------- -------- -------
Charge in lieu of taxes attributable to em-
ployee stock option plans..................... 3,343 926 --
------- -------- -------
$5,317 $ 3,026 $ 1,065
======= ======== =======
</TABLE>
The tax effects of the temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below (in
thousands):
<TABLE>
<CAPTION>
NOVEMBER 30,
---------------
1997 1996
------- ------
<S> <C> <C>
Deferred tax assets:
Accounts receivable allowances............................ $ 533 $ 327
Depreciation.............................................. 230 314
Federal benefit of state taxes............................ -- 266
Basis of assets for tax purposes in excess of book for
taxable pooling.......................................... 10,280 --
Deferred compensation..................................... 206 657
Benefit and other accruals................................ 256 231
Other..................................................... 313 163
------- ------
Total deferred tax assets................................ 11,818 1,958
------- ------
Deferred tax liabilities:
Change from cash to accrual method of accounting for in-
come tax purposes........................................ (278) (620)
------- ------
Total deferred tax liabilities........................... (278) (620)
------- ------
Total deferred tax assets................................ $11,540 $1,338
======= ======
</TABLE>
F-253
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 30, 1997, 1996, AND 1995
(INFORMATION AS OF AUGUST 30, 1998 AND FOR THE NINE MONTHS ENDED AUGUST 30,
1998 AND AUGUST 31, 1997 IS UNAUDITED)
The Company's effective tax rate differs from the statutory federal income
tax rate as shown in the following schedule:
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
---------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Federal tax statutory rate...................... 35.0% 35.0% 34.0%
Partnership benefit............................. (2.4) (12.7) (22.0)
State income taxes, net of federal benefit...... 6.6 3.8 3.5
Tax exempt income............................... (3.1) (3.6) --
Merger costs.................................... 2.3 -- --
Other........................................... 2.7 -- --
------- -------- --------
41.1% 22.5% 15.5%
======= ======== ========
</TABLE>
The Company has net operating loss carryforwards for federal income tax
purposes of approximately $750,000, which expire beginning in 2010 through
2012.
Unaudited Pro Forma Income Taxes
The pro forma provision for income taxes reflects the income tax expense
that would have been reported if M&S (a partnership for income tax reporting
purposes) had been a C corporation for each of the years in the three-year
period ended November 30, 1997. The components of pro forma income taxes are
as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
---------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal....................................... $ 1,771 $ 4,008 $ 2,612
State......................................... 927 1,344 687
Foreign....................................... 450 -- --
------- -------- -------
Total current............................... 3,148 5,352 3,299
------- -------- -------
Deferred:
Federal....................................... (771) (937) (374)
State......................................... (85) (233) (102)
------- -------- -------
Total deferred.............................. (856) (1,170) (476)
------- -------- -------
Charge in lieu of taxes attributable to employee
stock option plans............................. 3,343 926 --
------- -------- -------
Total pro forma provision for income taxes.. $ 5,635 $ 5,108 $ 2,823
======= ======== =======
</TABLE>
The Company's pro forma effective rate differs from statutory federal income
tax rate as follows:
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Federal tax statutory rate..................... 35.0% 35.0% 34.0%
State tax expenses, net of federal benefit..... 7.1 6.4 5.7
Tax exempt income.............................. (3.1) (3.6) --
Merger costs................................... 2.3 -- --
Other.......................................... 2.1 0.1 1.4
-------- -------- --------
Pro forma income tax expense................... 43.4% 37.9% 41.1%
======== ======== ========
</TABLE>
F-254
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 30, 1997, 1996, AND 1995
(INFORMATION AS OF AUGUST 30, 1998 AND FOR THE NINE MONTHS ENDED AUGUST 30,
1998 AND AUGUST 31, 1997 IS UNAUDITED)
On an unaudited pro forma basis, the tax effects of temporary differences
that give rise to the significant portions of the unaudited pro forma deferred
tax assets and liabilities do not differ significantly from the historical
amounts presented above as of November 30, 1997 and 1996. Because the merger
with M&S was a taxable transaction, during the first quarter of fiscal 1997,
CKS recorded a deferred tax asset and an increase in stockholders' equity of
approximately $9,346,000 for the difference between the financial statement
and tax carrying amounts of M&S's net assets upon the closing of the
transaction.
NOTE 11--SIGNIFICANT CUSTOMERS
During the years ended November 30, 1997 and 1996, professional fees from an
automotive manufacturer amounted to approximately $19,442,000 and $12,429,000,
respectively, representing approximately 15% and 14%, respectively, of total
revenues. During the year ended November 30, 1995, professional fees from a
cruise ship operator, the automotive manufacturer, and a major
telecommunications company amounted to approximately $7,608,000, $8,222,000,
and $6,730,000, respectively, representing approximately 13%, 14%, and 12%,
respectively, of total revenues.
The cruise ship operator owed the Company a total of approximately
$6,036,000 and $6,741,000 as of November 30, 1997 and 1996, respectively. The
automotive manufacturer owed the Company approximately $15,344,000 as of
November 30, 1997.
NOTE 12--MERGER WITH USWEB--UNAUDITED
On September 1, 1998, the Company entered into an Agreement and Plan of
Reorganization with USWeb Corporation (USWeb) pursuant to which each of the
outstanding shares of the Company's common stock will be exchanged for 1.5
shares of USWeb common stock and all of the outstanding options to purchase
the Company's common stock will be assumed and converted into options to
acquire shares of USWeb common stock at a ratio of 1.5 shares of USWeb common
stock to one shares of the Company's common stock. The merger is intended to
be accounted for as a pooling of interests.
F-255
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 30, 1997, 1996, AND 1995
(INFORMATION AS OF AUGUST 30, 1998 AND FOR THE NINE MONTHS ENDED AUGUST 30,
1998 AND AUGUST 31, 1997 IS UNAUDITED)
NOTE 13--SUMMARY OF QUARTERLY RESULTS OF OPERATIONS--UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------
MARCH 2, JUNE 1, AUG. 31, NOV. 30,
1997 1997 1997 1997
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues.................................... $24,319 $35,911 $39,750 $33,622
------- ------- ------- -------
Operating expenses:
Direct salaries and related expenses....... 7,110 8,345 8,870 10,389
Other direct operating expenses............ 8,858 14,560 16,820 13,714
General and administrative expenses........ 5,355 7,514 7,880 7,205
Depreciation and amortization.............. 563 851 812 870
Merger costs............................... 1,593 -- 859 --
------- ------- ------- -------
Total operating expenses.................. 23,479 31,270 35,241 32,178
------- ------- ------- -------
Operating income............................ 840 4,641 4,509 1,444
Other income, net........................... 523 267 198 561
------- ------- ------- -------
Income before taxes....................... 1,363 4,908 4,707 2,005
Income taxes................................ 174 2,026 2,327 790
------- ------- ------- -------
Net income................................ $ 1,189 $ 2,882 $ 2,380 $ 1,215
======= ======= ======= =======
Pro forma net income and per share data:
Income before income taxes, as reported..... $ 1,363
Pro forma income taxes...................... 492
-------
Pro forma net income........................ $ 871
=======
Basic net income per share.................. $ 0.20 $ 0.16 $ 0.08
======= ======= =======
Pro forma basic net income per share ....... $ 0.06
=======
Shares used in basic per share computation.. 14,112 14,511 14,732 15,202
======= ======= ======= =======
Diluted net income per share................ $ 0.18 $ 0.15 $ 0.07
======= ======= =======
Pro forma diluted net income per share...... $ 0.06
=======
Shares used in diluted per share computa-
tion....................................... 15,215 15,620 16,072 16,442
======= ======= ======= =======
</TABLE>
F-256
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 30, 1997, 1996, AND 1995
(INFORMATION AS OF AUGUST 30, 1998 AND FOR THE NINE MONTHS ENDED AUGUST 30,
1998 AND AUGUST 31, 1997 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------
FEBRUARY 29, MAY 31, AUGUST 31, NOVEMBER 30,
1996 1996 1996 1996
------------ ------- ---------- ------------
<S> <C> <C> <C> <C>
Revenues.......................... $14,086 $23,244 $24,682 $26,236
------- ------- ------- -------
Operating expenses:
Direct salaries and related ex-
penses.......................... 4,400 5,349 6,009 7,204
Other direct operating expenses.. 5,207 10,302 10,667 9,239
General and administrative ex-
penses.......................... 2,951 4,035 4,461 5,567
Depreciation and amortization.... 285 335 399 477
Merger costs..................... -- -- -- --
------- ------- ------- -------
Total operating expenses........ 12,843 20,021 21,536 22,487
------- ------- ------- -------
Operating income.................. 1,243 3,223 3,146 3,749
Other income, net................. 338 582 445 749
------- ------- ------- -------
Income before income taxes...... 1,581 3,805 3,591 4,498
Income taxes...................... 349 886 819 972
------- ------- ------- -------
Net income...................... $ 1,232 $ 2,919 $ 2,772 $ 3,526
======= ======= ======= =======
Pro forma net income and per share
data:
Income before income taxes, as
reported........................ $ 1,581 $ 3,805 $ 3,591 $ 4,498
Pro forma income taxes........... 595 1,451 1,366 1,696
------- ------- ------- -------
Pro forma net income............. $ 986 $ 2,354 $ 2,225 $ 2,802
======= ======= ======= =======
Pro forma basic net income per
share........................... $ 0.07 $ 0.17 $ 0.16 $ 0.20
======= ======= ======= =======
Shares used in basic per share
computation..................... 13,378 13,794 14,030 14,224
======= ======= ======= =======
Pro forma diluted net income per
share........................... $ 0.07 $ 0.16 $ 0.15 $ 0.19
======= ======= ======= =======
Shares used in diluted per share
computation..................... 14,015 14,434 14,592 14,738
======= ======= ======= =======
</TABLE>
F-257
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other individual has been authorized to give any
information or make any representations not contained in this Prospectus in
connection with the offering covered by this Prospectus. If given or made, such
information or representations must not be relied upon as having been
authorized by the Company. This Prospectus does not constitute an offer to
sell, or a solicitation of any offer to buy, the Common Stock in any
jurisdiction where, or to any person to whom, it is unlawful to make such offer
or solicitation. Except where otherwise indicated, this Prospectus speaks as of
the effective date of the Registration Statement. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
an implication that there has not been any change in the facts set forth in
this Prospectus or in the affairs of the Company since the date hereof.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 2
Prospectus Summary........................................................ 3
Proposed CKS Merger....................................................... 5
Risk Factors.............................................................. 6
Forward Looking Statements................................................ 30
Use of Proceeds........................................................... 30
Market Information........................................................ 30
Dividend Policy........................................................... 30
Capitalization............................................................ 31
Selected Consolidated Financial Data...................................... 32
Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................... 34
Business.................................................................. 47
Information Regarding Proposed Merger with CKS Group...................... 61
Selected Historical and Selected Pro Forma Combined Financial Data........ 73
CKS Group Business........................................................ 76
Comparative Market Price Data............................................. 83
Management................................................................ 84
Certain Transactions...................................................... 97
Principal Stockholders.................................................... 99
Description of Capital Stock.............................................. 101
Plan of Distribution...................................................... 104
Restrictions on Resale.................................................... 104
Legal Matters............................................................. 104
Experts................................................................... 105
Index to Consolidated Financial Statements and Pro Forma Consolidated Fi-
nancial Information...................................................... F-1
</TABLE>
----------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
16,666,667 SHARES
[LOGO OF USWEB]
COMMON STOCK
----------------
PROSPECTUS
----------------
DECEMBER 1, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933.
Reference also is made to the Certificate of Incorporation of the Registrant
filed as Exhibit 3.1; the Bylaws of the Registrant, filed as Exhibit 3.2; and
the form of indemnification agreement filed as Exhibit 10.1 which, among other
things, and subject to certain conditions, authorize the Registrant to
indemnify, or indemnify by their terms, as the case may be, the directors and
officers of the Registrant against certain liabilities and expenses incurred
by such persons in connection with claims made by reason of their being such a
director or officer.
The Registrant has obtained directors and officers insurance providing
indemnification for certain of the Registrant's directors, officers,
affiliates, partners or employees for certain liabilities.
The indemnification provisions in the Bylaws, and the indemnification
agreements entered into between the Registrant and its directors and executive
officers, may be sufficiently broad to permit indemnification of the
Registrant's officers and directors for liabilities arising under the 1933
Act.
The Reorganization Agreement provides that commencing with the effectiveness
of the CKS Merger, the Registrant will indemnify the current officers and
directors of CKS Group for any action or inaction by such person prior to the
CKS Merger.
Reference is made to the following documents listed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
EXHIBIT
DOCUMENT NUMBER
-------- -------
<S> <C>
Amended and Restated Certificate of Incorporation...................... 3.1
Bylaws of Registrant (Delaware)........................................ 3.2
Form of Indemnification Agreement entered into by the Registrant with
each of its directors and executive officers.......................... 10.1
</TABLE>
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
3.1+ Amended and Restated Certificate of Incorporation of the Registrant.
3.2+ Bylaws of the Registrant.
4.1+ Form of Registrant's Common Stock Certificate.
4.2+ Amended and Restated Investors' Rights Agreement dated May 2, 1997
among the Registrant and the other parties named therein.
4.3+ Form of Registrant's Series A Preferred Stock Purchase Warrant.
4.4+ Form of Registrant's Series C Preferred Stock Purchase Warrant.
4.5+ Form of Registrant's Common Stock Purchase Warrant.
4.6+ Form of Registrant's Signing Warrant.
4.7+ Form of Registrant's AGR Warrant.
4.8+ Form of Amended and Restated Investor Rights Agreement dated November
7, 1997 among the Registrant and the other parties named therein.
4.9** Form of Agreement and Plan of Reorganization dated May 13, 1998 among
the Registrant, USWeb Acquisition Corporation 121, Gray Peak Technol-
ogies, Inc. and other individuals and entities named therein.
4.10*** Agreement and Plan of Reorganization dated September 1, 1998 among
the Registrant, USWeb Acquisition Corporation No. 134 and CKS Group,
Inc.
4.11*** Form of USWeb Corporation Holder Agreement among Registrant, CKS
Group, Inc. and certain stockholders of Registrant dated September 1,
1998 (included in Exhibit 10.19).
5.1** Opinion of Wilson Sonsini Goodrich & Rosati regarding legality of the
securities being issued.
10.1+ Form of Indemnification Agreement entered into by the Registrant with
each of its directors and executive officers.
10.2+ 1996 Stock Option Plan and related agreements.
10.3++ 1996 Equity Compensation Plan and related agreements.
10.4++ 1997 Acquisition Stock Option Plan and related agreements.
10.5++ 1997 Employee Stock Purchase Plan.
10.6+ Form of Restricted Stock Purchase Agreement between the Registrant
and certain executive officers.
10.7+ Management Continuity Agreement between the Registrant and Joseph P.
Firmage.
10.8+ Management Continuity Agreement between the Registrant and Tobin Co-
rey.
10.9+ Management Continuity Agreement between the Registrant and Sheldon
Laube.
10.10+ Management Continuity Agreement between the Registrant and James J.
Heffernan.
10.11+ Form of Affiliate Agreement.
10.12+ Loan and Security Agreement dated September 29, 1997 between the Reg-
istrant and Silicon Valley Bank.
10.13+ Amendment, dated November 5, 1997 to Loan and Security Agreement
dated September 29, 1997 between the Registrant and Silicon Valley
Bank.
10.14+ Intel-USWeb Relationship Agreement dated as of November 7, 1997 be-
tween the Registrant and Microsoft Corporation.
10.15** Lease Agreement dated December 16, 1996 by and between the Company
and LAKESIDE DRIVE, INC. for 2880 Lakeside Drive, Santa Clara, CA
95054.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.16** First Amendment to Lease Agreement dated July 23, 1997 by and between
the Company and LAKESIDE DRIVE, INC. for 2880 Lakeside Drive, Santa
Clara, CA 95054.
10.17*** Form of CKS Voting Agreement between Registrant and certain stock-
holders of CKS Group, Inc. dated September 1, 1998.
10.18*** Form of CKS Group, Inc. Holder Agreement among Registrant, CKS Group,
Inc. and certain stockholders of CKS Group, Inc. dated September 1,
1998.
10.19*** Form of USWeb Corporation Holder Agreement among Registrant, CKS
Group, Inc. and certain stockholders of Registrant dated September 1,
1998.
11.1 Statement of computation of pro forma net loss per share.
21.1*** Subsidiaries of the Registrant.
23.1** Consent of Wilson Sonsini Goodrich & Rosati (included in Exhibits
5.1).
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants. (see
page II-7)
23.3 Consent of KPMG Peat Marwick LLP, Independent Accountants (see page
II-8).
23.4 Consent of Ernst & Young LLP, Independent Auditors (see page II-9).
24.1*** Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ---------------------
+ Incorporated by reference from the Company's Registration Statement on Form
S-1 (No. 333-36827).
++ Incorporated by reference from the Company's Registration Statement on Form
S-8 filed on June 3, 1998 (No. 333-55893).
** Previously filed with this Registration Statement.
*** Incorporated by reference from Company's Registration Statement on Form S-
4 (No. 333-63323).
(b) Financial Statement Schedules
None.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
ITEM 22. UNDERTAKINGS
The undersigned Registrant undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933 (the "Securities Act");
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent,
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information in the
Registration Statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;
II-3
<PAGE>
(2) That, for the purpose of determining any liability under the
Securities Act, each post-effective amendment shall be deemed a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That, prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the application
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
(5) That every prospectus (i) that is filed pursuant to paragraph (4)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(6) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(7) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions referenced in Item 20 of this
Registration Statement or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered hereunder, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS OF FILING ON FORM S-4 AND HAS DULY CAUSED THIS AMENDMENT NO. 1 TO
POST EFFECTIVE AMENDMENT NO. 5 TO THE REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE CITY OF SANTA
CLARA, STATE OF CALIFORNIA, ON THE 30TH DAY OF NOVEMBER, 1998.
USWEB CORPORATION
By: /S/ CAROLYN V. AVER
----------------------------------
CAROLYN V. AVER
EXECUTIVE VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 1 TO POST EFFECTIVE AMENDMENT NO. 5 TO THE REGISTRATION STATEMENT HAS BEEN
SIGNED ON THE 30TH DAY OF NOVEMBER, 1998 BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/S/ ROBERT SHAW Chief Executive Officer and Chairman of
____________________________________ the Board of Directors (Principal
ROBERT SHAW Executive Officer)
/S/ CAROLYN AVER Executive Vice President and Chief
____________________________________ Financial Officer (Principal
CAROLYN AVER Financial and Accounting Officer)
* President, Chief Operating Officer and
____________________________________ Director
TOBIN COREY
* Director
____________________________________
JEFFREY BALLOWE
Director
____________________________________
JAMES DALEY
* Director
____________________________________
JOSEPH FIRMAGE
* Director
____________________________________
JAMES HEFFERNAN
* Director
____________________________________
ROBERT HOFF
Director
____________________________________
JOSEPH MARENGI
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
*
____________________________________
GARY RIESCHEL Director
*
____________________________________
BARRY RUBENSTEIN Director
____________________________________
KLAUS SCHWAB Director
</TABLE>
/S/ SHELDON LAUBE
*By: __________________________
SHELDON LAUBE
ATTORNEY IN FACT
II-6
<PAGE>
EXHIBIT 23.2
CONSENT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 (No. 333-38351) of USWeb Corporation of
our reports dated January 20, 1998 relating to the consolidated financial
statements of USWeb Corporation, September 17, 1997 related to the financial
statements of USWeb San Francisco, September 12, 1997 related to the financial
statements of USWeb Milwaukee, September 17, 1997 related to the financial
statements of USWeb LA Metro, September 18, 1997 related to the financial
statements of USWeb Atlanta, September 18, 1997 related to the financial
statements of USWeb DC, September 18, 1997 related to the financial statements
of USWeb Pittsburgh, October 31, 1997 related to the financial statements of
USWeb Chicago Metro, October 31, 1997 related to the financial statements of
USWeb Hollywood (formerly KandH, Inc.), October 29, 1997 related to the
financial statements of USWeb Hollywood (formerly DreamMedia, Inc.),
October 17, 1997 related to the financial statements of USWeb Marin,
October 31, 1997 related to the financial statements of USWeb Long Island,
October 24, 1997 related to the financial statements of USWeb Detroit,
October 15, 1997 related to the financial statements of USWeb San Mateo,
October 31, 1997 related to the financial statements of USWeb LA Central,
November 4, 1997 related to the financial statements of USWeb Houston,
November 5, 1997 related to the financial statements of USWeb New York Central
(formerly Reach Networks, Inc.), March 24, 1998 related to the financial
statements of Inter.logic.studios, inc., March 27, 1998 related to the
financial statements of Quest Interactive Media, Inc., March 27, 1998 related
to the financial statements of Ensemble Corporation, April 15, 1998 related to
the financial statements of Ikonic Interactive, Inc., March 26, 1998 related
to the financial statements of USWeb San Jose, and April 17, 1998 related to
the financial statements of Gray Peak Technologies, Inc., which appear in such
Prospectus. We also consent to the reference to us under the heading "Experts"
in such Prospectus.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Jose, California
November 25, 1998
II-7
<PAGE>
EXHIBIT 23.3
CONSENT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS
The Board of Directors
CKS Group, Inc.:
We consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 (No. 333-38351) of our report dated
December 15, 1997, relating to the consolidated balance sheets of CKS Group,
Inc. and subsidiaries as of November 30, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for
each of the years in the three-year period ended November 30, 1997, and the
related schedule, which reports appear in the November 30, 1997, annual report
on Form 10-K of CKS Group, Inc. We also consent to the reference to our firm
under the heading "Experts" in the Prospectus.
/s/ KPMG Peat Marwick LLP
Mountain View, California
November 24, 1998
II-8
<PAGE>
EXHIBIT 23.4
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors of
CKS Group, Inc.
We consent to the use in the Prospectus constituting part of this Registration
Statement (Form S-4 No. 333-38351) of our report dated January 31, 1997, with
respect to the financial statements of McKinney & Silver included in the
Current Report on Form 8-K/A of CKS Group, Inc. dated January 31, 1997, as
amended March 6, 1997 and May 28, 1997, filed with the Securities and Exchange
Commission.
ERNST & YOUNG LLP
/s/ Ernst & Young LLP
Raleigh, North Carolina
November 24, 1998
II-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1+ Amended and Restated Certificate of Incorporation of the Registrant.
3.2+ Bylaws of the Registrant.
4.1+ Form of Registrant's Common Stock Certificate.
4.2+ Amended and Restated Investors' Rights Agreement dated May 2, 1997
among the Registrant and the other parties named therein.
4.3+ Form of Registrant's Series A Preferred Stock Purchase Warrant.
4.4+ Form of Registrant's Series C Preferred Stock Purchase Warrant.
4.5+ Form of Registrant's Common Stock Purchase Warrant.
4.6+ Form of Registrant's Signing Warrant.
4.7+ Form of Registrant's AGR Warrant.
4.8+ Form of Amended and Restated Investor Rights Agreement dated November
7, 1997 among the Registrant and the other parties named therein.
4.9** Form of Agreement and Plan of Reorganization dated May 13, 1998 among
the Registrant, USWeb Acquisition Corporation 121, Gray Peak Technol-
ogies, Inc. and other individuals and entities named therein.
4.10*** Agreement and Plan of Reorganization dated September 1, 1998 among
the Registrant, USWeb Acquisition Corporation No. 134 and CKS Group,
Inc.
4.11*** Form of USWeb Corporation Holder Agreement among Registrant, CKS
Group, Inc. and certain stockholders of Registrant dated September 1,
1998 (included in Exhibit 10.19).
5.1** Opinion of Wilson Sonsini Goodrich & Rosati regarding legality of the
securities being issued.
10.1+ Form of Indemnification Agreement entered into by the Registrant with
each of its directors and executive officers.
10.2+ 1996 Stock Option Plan and related agreements.
10.3++ 1996 Equity Compensation Plan and related agreements.
10.4++ 1997 Acquisition Stock Option Plan and related agreements.
10.5++ 1997 Employee Stock Purchase Plan.
10.6+ Form of Restricted Stock Purchase Agreement between the Registrant
and certain executive officers.
10.7+ Management Continuity Agreement between the Registrant and Joseph P.
Firmage.
10.8+ Management Continuity Agreement between the Registrant and Tobin Co-
rey.
10.9+ Management Continuity Agreement between the Registrant and Sheldon
Laube.
10.10+ Management Continuity Agreement between the Registrant and James J.
Heffernan.
10.11+ Form of Affiliate Agreement.
10.12+ Loan and Security Agreement dated September 29, 1997 between the Reg-
istrant and Silicon Valley Bank.
10.13+ Amendment, dated November 5, 1997 to Loan and Security Agreement
dated September 29, 1997 between the Registrant and Silicon Valley
Bank.
10.14+ Intel-USWeb Relationship Agreement dated as of November 7, 1997 be-
tween the Registrant and Microsoft Corporation.
10.15** Lease Agreement dated December 16, 1996 by and between the Company
and LAKESIDE DRIVE, INC. for 2880 Lakeside Drive, Santa Clara, CA
95054.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.16** First Amendment to Lease Agreement dated July 23, 1997 by and between
the Company and LAKESIDE DRIVE, INC. for 2880 Lakeside Drive, Santa
Clara, CA 95054.
10.17*** Form of CKS Voting Agreement between Registrant and certain stock-
holders of CKS Group, Inc. dated September 1, 1998.
10.18*** Form of CKS Group, Inc. Holder Agreement among Registrant, CKS Group,
Inc. and certain stockholders of CKS Group, Inc. dated September 1,
1998.
10.19*** Form of USWeb Corporation Holder Agreement among Registrant, CKS
Group, Inc. and certain stockholders of Registrant dated September 1,
1998.
11.1 Statement of computation of net loss per share.
21.1*** Subsidiaries of the Registrant.
23.1** Consent of Wilson Sonsini Goodrich & Rosati (included in Exhibits
5.1).
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants (see
page II-7).
23.3 Consent of KPMG Peat Marwick LLP, Independent Accountants (see page
II-8).
23.4 Consent of Ernst & Young LLP, Independent Auditors (see page II-9).
24.1*** Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ---------------------
+ Incorporated by reference from the Company's Registration Statement on Form
S-1 (No. 333-36827).
++ Incorporated by reference from the Company's Registration Statement on Form
S-8 filed on June 3, 1998 (No. 333-55893).
** Previously filed with this Registration Statement.
*** Incorporated by reference from Company's Registration Statement on Form S-
4 (No. 333-63323).
<PAGE>
EXHIBIT 11.1
USWEB CORPORATION
CALCULATION OF NET LOSS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL (1) PRO FORMA (2)
--------------------------------------- ------------------
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
------------------ ------------------- ------------------
1996 1997 1997 1998 1996 1997
-------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net loss................ $(13,808) $(58,336) $(39,270) $(111,532) $(57,069) $(84,939)
-------- -------- -------- --------- -------- --------
Weighted average common
shares outstanding..... 1,334 6,814 4,684 33,486 4,725 8,913
Shares deemed
outstanding under stock
bonus arrangements for
employees of acquired
companies.............. - 498 161 1,035 1,450 1,658
-------- -------- -------- --------- -------- --------
Total weighted average
common shares
outstanding............ 1,334 7,312 4,845 34,521 6,175 10,571
======== ======== ======== ========= ======== ========
Basic and diluted net
loss per share......... $ (10.35) $ (7.98) $ (8.10) $ (3.23) $ (9.24) $ (8.04)
======== ======== ======== ========= ======== ========
</TABLE>
- ---------------------
(1) See computation of historical net loss per share in Note 4 to the Condensed
Consolidated Financial Statements.
(2) See computation of pro forma net loss per share in Note 1 to the Condensed
Consolidated Financial Statements.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1996 JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1997 DEC-31-1996 SEP-30-1998 SEP-30-1997
<CASH> 44,145 3,220 23,810 0
<SECURITIES> 0 0 29,842 0
<RECEIVABLES> 8,722 137 38,759 0
<ALLOWANCES> 819 0 4,398 0
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 52,705 3,411 93,756 0
<PP&E> 7,929 1,347 16,518 0
<DEPRECIATION> 1,727 263 4,894 0
<TOTAL-ASSETS> 79,250 7,482 254,420 0
<CURRENT-LIABILITIES> 12,189 3,338 29,191 0
<BONDS> 0 0 0 0
0 16,200 0 0
0 0 0 0
<COMMON> 29 2 41 0
<OTHER-SE> 66,660 (12,494) 223,224 0
<TOTAL-LIABILITY-AND-EQUITY> 79,250 7,482 254,420 0
<SALES> 0 0 0 0
<TOTAL-REVENUES> 19,278 1,820 73,086 8,676
<CGS> 0 0 0 0
<TOTAL-COSTS> 17,182 208 58,914 8,342
<OTHER-EXPENSES> 56,589 15,577 127,603 35,693
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 76 58 331 76
<INCOME-PRETAX> (58,336) (13,808) (111,532) (39,270)
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> (58,336) (13,808) (111,532) (39,270)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (58,336) (13,808) (111,532) (39,270)
<EPS-PRIMARY> (7.98) (10.35) (3.23) (8.10)
<EPS-DILUTED> (7.98) (10.35) (3.23) (8.10)
</TABLE>
